Nestlé has revealed it has plans to deal with the ongoing gas crisis in Europe as rising prices contribute to double-digit cost inflation.
Speaking at an investor event, CFO François-Xavier Roger said input-cost inflation will probably pan out at 14-15% for the full fiscal year, compared with the actual 14% in the opening six months.
Roger told the annual Barclays Consumer Staples Conference cost pressures are more significant in dairy and coffee in food and drink terms, and further afield in transport, logistics and energy.
While Roger acknowledged Nestlé is not a “heavy user of gas”, the world’s largest food company does have a plan in place, particularly in Europe.
“We have identified about 5% of our global industrial footprint which is potentially at risk – this means around 15 to 16 plants, predominantly in Europe and predominantly in Germany and Switzerland,” he told the audience.
“We have set up a contingency plan and business continuity plans. There are two main things that we can do: the first one is to convert whenever possible the source of energy from gas to oil; whenever it’s not possible, we will pile up inventory ahead of the winter to make sure that we can supply our customers.”
He added counter-measures may also spin out to the supply chain as suppliers grapple with rising energy bills and other costs too.
“Some of our suppliers may be affected as well. In that case, we are really working on adding a little bit more inventory or looking at alternative suppliers, mainly outside of Europe because outside of Europe the situation should be okay.”
Nestlé’s cost pressures
Roger was asked to spell out where the main supply and price challenges still rest as some commodities, and even oil, start to retreat from highs on the wholesale markets, albeit the near-term outlook still remains uncertain. He cited raw materials, packaging, logistics and labour shortages.
“From time to time, it’s very simple ingredients that we have difficulties to get and we can’t necessarily reformulate our products immediately. It is still going on although it is reducing a little bit as we progress over time,” Roger explained.
In terms of logistics and transport, the Nestlé CFO added the situation on trucks and driver availability had been “very tight” in the US, and similar in Europe, especially during the recent heatwave.
“It’s improving a bit in the US. It was the same case in Europe. We had, as you could imagine, because of the heatwave, very significant demand for water for example, and we had extreme difficulties to find trucks and truck drivers, so this is complicated.”
And the labour shortages that have plagued the food industry, and others, for some time are not likely to be resolved quickly, he said.
“That one may be structural by the way. It’s not necessarily something that is going to be sorted out in the short term. We could see this problem going on for some time, especially in western countries,” Roger argued, adding Nestlé does not suffer from “big resignations, but we’ve never had as many open positions as today”.
Plans for investment
Nestlé plans to invest in capex, especially in pet care and coffee, where capacity “constraints” restricted its ability to service pandemic-related demand. And, as Roger expects to retain “most” of that business, increased marketing will feature, too.
“We are raising the bar, investing significantly more today than we were in the past. We are investing big time in digitalisation, we are investing significantly as well in capex, really investing for growth in the future,” he explained.
“That applies to marketing except in H1. [That] was a special case because we had some capacity constraints for some of our products, more specifically pet care in the US, in Europe, coffee to a certain extent, [and] food as well. So since we didn’t have the capacity to supply the market, there was no point to advertise on promotional activities for products we could not sell.
“We expect to increase our level of marketing investments in H2 because some of these issues will go, so we expect to increase, as a percentage of sales in absolute value, in H2 over H1.”
Pet food enjoyed a boom during the pandemic as people sought a companion during the isolation from lockdowns. But, as the cost-of-living crisis bites more heavily into household food budgets, there is speculation growth will slow.
However, Roger pointed to the prospect of Nestlé seeing a third consecutive year of double-digit growth for the category, although he admitted it may not be feasible.
“We may not be able to sustain, necessarily, double-digit growth again, but we clearly have the ambition to maintain a high-single-digit growth level,” he said.
Nevertheless, he highlighted developments panning out in pet care in both emerging and developed markets, what Roger called the “two main drivers of growth”.
He elaborated: “One is the calorific conversion in emerging markets, which is the number of dogs and cats which are taking processed food instead of food leftover from the family table, and this rate keeps on increasing year after year.”
The other, pertaining to developed countries, “is very much about premiumisation”, Roger added.
“Moving into the business of providing solutions to pet parents…addressing some of the issues they are facing, like obesity for dogs and cats, or cat allergies or dogs barking too much. Some parents are very happy to get them and they’re willing to pay a premium for it.”
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