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April 21, 2022updated 22 Apr 2022 8:35am

Nestlé expects fresh price hikes to impact consumer demand

The world’s largest food maker says it hasn’t seen elasticity yet but cautions it is on the horizon.

By Dean Best

Nestlé plans to raise product prices again – which it expects to affect consumer demand this year.

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The Swiss giant, owner of brands including KitKat chocolate and Maggi noodles, is lining up “further price increases over the course of the year to reflect significant cost inflation”, CFO François-Xavier Roger said today (21 April).

Roger said the world’s largest food maker had “stepped up” its moves to increase prices in the first quarter of the year. This morning, Nestlé published its sales for the opening three months of 2022, which hit CHF22.24bn (US$23.33bn).

On an organic basis, sales were up 7.6%, with the impact of Nestlé’s moves on prices contributing 5.2 percentage points to that growth. Those efforts on price, made amid higher energy and commodity costs. equated to the largest increase in first-quarter pricing the company had made for a decade.

Speaking to analysts after Nestlé reported the numbers, Roger said the company had not seen “any material impact” on its underlying sales, which it describes as “real internal growth”, or RIG. However, he cautioned the business is expecting to see changes in consumer behaviour during the rest of 2022.

“We expect further price increases over the course of the year to reflect significant cost inflation,” Roger said. “Increases will continue to be implemented in a progressive and responsible manner. The impact from cost inflation is expected to be significantly higher in 2022 versus 2021. Compared to when we talked to you in February, we now expect an even greater inflationary impact as a result of the war in Ukraine. So far, we have not seen any material evidence of negative RIG elasticity linked to price increases. We expect to see some going forward as we increase pricing further following [a] higher level of inflation.”

CEO Mark Schneider added: “I think, so far, the punchline is that consumer demand has proven to be resilient and then obviously, we do expect now some elasticity later in the year because of the fact that, simply when you stack all these price increases on top of each other, it does have some impact on what the consumer has to pay for the basket.”

Nestlé has maintained its forecasts for annual sales growth and for its “underlying trading operating profit margin”.

The Carnation milk owner still expects its sales to rise 5% in 2022 on an organic basis and for that margin metric to fall between 17% and 17.5%. In 2021, Nestlé’s organic sales grew 7.5% and its underlying trading operating profit margin (UTOP) stood at 17.4%.

Schneider said: “Our start into the year was stronger than expected and we believe that our organic sales growth guidance is conservative at this point. At the same time, inflationary pressures have increased a lot since then and in ways that were not foreseeable at that time. As a result of this changing context, our guidance range of 17-17.5% for the underlying trading operating profit margin has become more challenging than before, when we described it as conservative.”

Kepler Chevreux analyst Jon Cox asked Nestlé’s management why it is now describing its margin guidance as “challenging”. He asked whether the company is thinking about the time it takes to push through price increases, particularly in Europe, or about the potential impact of price increases on volumes and capacity utilisation.

Schneider replied: “Different markets, different environments, have different timetables for when you can review pricing. I think by now everyone has understood that there is such a significant surge underway starting from last year that clearly price stability is simply not in the cards.

“When you compare full-year margins, we’re defending our margins here. We’re not expanding our margins and we’re doing the pricing as responsibly as possible but, clearly, the situation has become worse. That’s what we’re trying to signal because we had to express a larger degree of conservatism when it comes to the UTOP margin as part of the full-year guidance.”

Danone mulling further pricing actions as inflationary pressures bite

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  • Consumer Trends
  • Ingredients in Food & Drink
  • Ingredients in Beauty & Grooming
  • Ingredients in Household Care
Take a look now to understand which ingredients are impressing consumers, and make them work for your brand.
by GlobalData
Enter your details here to receive your free Report.

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