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March 31, 2011

CAGE: Nestle CEO Bulcke sanguine about commodities

Nestle CEO Paul Bulcke has said that a long-term rise in commodity prices would be "no bad thing" and suggested it would drive investment into the agriculture sector.

By Dean Best

Nestle CEO Paul Bulcke has said that a long-term rise in commodity prices would be “no bad thing” and suggested it would drive investment into the agriculture sector.

Bulcke told an analyst event in London yesterday (30 March) that beneath the recent volatility in commodity costs was an “underlying trend” of rising raw-material prices due, in part, to the growing world’s population.

Food manufacturers have faced a growing raw materials bill in recent months and have looked to up the price of their products. However, with consumer confidence in some western markets remaining fragile, there has been some resistance from retailers.

Manufacturer forecasts on their commodity bills have been closely watched by analysts and investors for the potential impact on company margins but, speaking at the Consumer Analyst Group Europe (CAGE) investment conference in London, the Nestle chief pointed to one benefit of the underlying trend – it would, he argued, lead to a “renewed interest in agriculture”.

Bulcke said: “It’s going to be the heart and base of rural development and the heart and base of wealth creation worldwide.”

Nevertheless, the Nestle CEO told analysts that the Swiss food giant would look to tackle the company’s own rising commodity costs. He explained Nestle had upped prices but said the rising costs could not be met with “back to back pricing”. Bulcke noted strategies including innovation and moves to “rewire” the company’s cost structure.

Bulcke pointed to Nestle’s “continuous excellence” programme – a set of initiatives designed in part to “drive waste out of the system” – as a way of keeping costs down. He insisted, however, that it was a “holistic” programme to increase efficiency and effectiveness, as well as create “competitive gaps” throughout the “value chain”.

Nestle, he said, plans to “accelerate” the roll out of the programme in 2011. Only a third of the company’s employees had so far taken part in the initiatives but Bulcke said: “Once we have 100%, this is going to be a permanent way of working.”

Andy Smith, head of global consumer equity at analysts MF Global, said Nestle was “marginally less exposed to input cost inflation” when compared to its nearest rivals. Smith said the company should benefit this year from CHF1.5bn in savings and “positive price/mix”.

However, the analyst added: “[Nestle’s] input cost guidance [is] now at the ‘top-end’ of the CHF2.5-3.0bn range. Nestle believes it has pricing power and restructuring gains to offset this. [The] group has already taken selective unspecified price increases in the first quarter of 2011. There were some hints that price increases are being more fiercely resisted in the US & Europe than at the same stage when cost of goods sold inflation hit the group in the fourth quarter of 2007 and the first quarter of 2008.”

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