Nestle reaps benefits from higher prices

Nestle raised its full-year sales target on Wednesday after the world’s largest food group reaped the benefits of price hikes on its products ranging from pet food to bottled water with a forecast-beating third quarter.

The Switzerland-based firm has moved ahead of other consumer companies in passing on higher input costs to consumers, leveraging the strength of its brands such as Purina pet food and Perrier water.

The maker of KitKat bars and Nescafe will increase prices further in the final quarter and in 2022 when input costs are expected to increase even more than the 4 per cent rise seen in 2021, Chief Financial Officer Francois-Xavier Roger told investors.

Its rivals are set to follow. Procter & Gamble, has said it will raise prices in the US and Danone has warned of price pressures next year, adding to a global inflationary threat testing the resolve of central banks.

“Our industry, in general, is not an industry that is in normal times pinched by inflation,” Chief Executive Mark Schneider said, adding the industry should be able to maintain its financial performance even if the inflationary cycle extended beyond 2022.

Like its peers, Nestle is grappling with supply chain constraints as the world economy roars out of a COVID-19 slump. The company said in a statement price increases should help keep its margin steady at about 17.5% this year, followed by a moderate margin improvement in the mid term.

But Schneider played down prospects for an improvement as early as next year, citing rising input costs since the summer. “There is no guidance or commitment for 2022 to increase margins,” he said.

Nestle raised its full-year organic growth guidance to 6-7 per cent from 5-6 per cent previously, after organic sales rose 6.5 per cent in the third quarter, composed of 2.1 per cent price hikes and 4.4 per cent volume growth, and beating forecasts.

Roger said volume growth was expected to slow somewhat as the pandemic-related boost to at-home consumption waned.

“The company knocked it out of the park for the third quarter,” Kepler Cheuvreux analyst Jon Cox said, saying price rises for Nestle products were the highest since 2015.

“Most companies with strong brands will be able to pass on prices and I think the market still does not get that,” he said.

Nestle said growth at its Purina petcare business was fuelled by its higher priced premium ranges and veterinary products. Vontobel analyst Jean-Philippe Bertschy said Purina was Nestle’s “star performer”.

Bernstein’s Bruno Monteyne said the benefits of higher volumes and pricing would only fully show in 2022.

Strong coffee sales were also a driver for Nestle, with its Starbucks-branded products posting 15.5 per cent growth in the first nine months. Out-of-home consumption of food and drinks, which took a hit during the pandemic, recovered further, Nestle said.