Dive Brief:
- Nestlé said its sales volume dipped 2.6% in the fourth quarter as price increases of 10.1% during the period led consumers to curtail their spending on the company’s products.
- The maker of Lean Cuisine, Essentia water and Coffee mate noted it plans to hike prices again in 2023 as the company has so far not been able to sufficiently offset the impact of inflation on its business. “Most categories saw a margin decline as pricing, growth leverage and efficiencies did not fully offset input cost inflation,” Francois-Xavier Roger, Nestlé’s CFO, told analysts.
- After a year of raising prices, food and beverage companies are struggling to determine how much more they can raise prices to offset higher commodity, shipping, wage and other costs without affecting consumers’ purchasing habits.
Dive Insight:
Few companies have a pulse on the global food and beverage market as Nestlé. With operations around the world, including the U.S. where it generates more than 25% of its sales, the food and water company is finding the current business environment a difficult one to navigate.
Similar to other competitors, Nestlé is facing higher expenses that are decimating margins. In many cases, price hikes have not been enough to offset what food makers spend to purchase ingredients and packaging, manufacture and ship their products.
“It’s very clear, and I think you see the same picture borne out with our peers, that inflation has left its mark on gross margins and profit margins,” Mark Schneider, CEO of Nestlé, told analysts. “And clearly, some repairing still need to be done.”
The challenge for CPGs becomes how much room for raising prices they have left with weary consumers who are paying more for nearly everything they buy. In addition, executives are left guessing what the future might hold when it comes to their own costs as well as whether a recession emerges, which could further alter shopping habits.
Snack and soda giant PepsiCo and CPG giant Kraft Heinz recently said they will stop raising prices. This pronouncement follows declarations by other businesses, including Unilever and Proctor & Gamble, that higher prices had cut into demand for their products. “I have no regrets about the pricing action that we have taken,” Schneider said.
Nestlé’s top executive said there has been a minimal impact to volumes from consumers trading down to private labels. Volumes at the company also are being hit by a conscious decision to cut products that are less lucrative from its portfolio.
What started out during the pandemic as a way to focus its resources on higher demand products amid disruptions in the supply chain has become a standard course of business for Nestlé.
The strategy, the company noted, creates cost efficiencies in the near term and increases organic growth over the longer term by focusing on the items that are most popular. Nestlé recently decided to exit frozen foods in Canada and some dairy lines in Brazil.
It “will have benefits then down the line because you will free up capacities, you will free up supply chain, you will free up resources to focus on the proven winners and to make the most of those,” Schneider added.
In the coming year, Nestlé forecast organic sales growth of between 6% and 8%, which the Switzerland-based firm said would likely come in the form of price increases.
