How much inflation can consumers take? Ask Nestle
The world’s largest food maker has been able to pass on rising prices to shoppers willing to pay for its popular brands. But the clock may be ticking
The world's largest food maker Nestle SA has become the latest company to join the "whisper it, inflation isn't all bad" club.
On Wednesday, the Swiss consumer giant said it expected full-year underlying sales growth of 8%, at the top of its previous range, and left its operating margin outlook unchanged at around 17%.
While that's not quite as impressive as PepsiCo Inc., which last week upgraded both its forecast of full-year sales and profit growth, Nestle has avoided the problem that hit consumer goods earlier in the year, when companies were able to upgrade their sales forecasts, but little fell through to the bottom line. Nestle even trimmed its margin forecast in July. On Wednesday, Procter & Gamble Co. maintained its outlook for fiscal full-year underlying sales growth of 3%-5%, but cautioned that the strong dollar would mean earnings per share towards the lower end of its range.
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Nestle's more recent performance underlines the power that companies with strong brands have when it comes to persuading consumers to pay more. But as I said about PepsiCo last week, as price hikes continue, there is a question over how long this can last.
For now, shoppers are still buying Purina pet food and Starbucks coffee to brew at home. Nestle raised its prices by 7.5% in the nine months to Sept. 30, while volumes rose 1%.
Nestle is fortunate in that it sells many of the things that people prioritize, such as pet food and coffee, which together account for about 40% of sales. That puts it in a stronger position than companies selling items that can be more easily substituted, such as everyday food items and dairy.
Nevertheless, there are some factors to watch.
Price increases stepped up in the third quarter, to reach 9.5%. The volume of goods sold slipped slightly, by 0.2%. This is still impressive, particularly as it compares with the same period a year ago, when sales were bolstered by stay-at-home habits and prices beginning to move higher. This year, Nestle also suffered some supply constraints, for example in pet food.
But how much more inflation can consumers can take?
Prices are set to increase further as there has been no improvement in commodity costs; in fact, with energy becoming more expensive, the situation has deteriorated. The escalation won't be as much as the hikes already passed through — Nestle has effectively gone from zero to 10% price increases in two years — but any further uptick comes as the consumer outlook grows darker, particularly in Europe.
UK inflation rose by 10.1% in September, with food a big driver of the increase, although the country is a relatively small part of Nestle's business, accounting for 3.9% of sales in 2021.
Close to the Peak?
Nestle has effectively gone from zero to 10% price increases over the past two years
Many European shoppers are already turning to supermarket private labels. The German discounters, Aldi and Lidl, which sell primarily in-house brands, are also capturing more customers. Down-trading could accelerate early next year, as a winter surge in household energy bills takes a toll on spending power.
Sales also decelerated at Nestle's Nespresso unit. Although prices rose 4.9% in the first nine months, volumes fell 1.9%. This could reflect a slowdown from the pandemic boom, which drove growth rates of 11%-12% — more than twice the level of expansion prior to the outbreak. Stuck at home, people became their own baristas. Now that many are back in the office, they are purchasing their caffeine hit at a coffee shop.
The greater worry is if Nespresso's slowdown reflects a squeezed middle class cutting back. In the US, consumer discomfort has spread from the poorest to more affluent households. Across the pond, soaring mortgage rates, combined with a reversal of planned tax cuts in the UK, could hurt just the type of shopper who had become accustomed to a Nespresso coffee.
Right now, though, consumers are keeping calm and carrying on spending.
Dogs Trump Dove
Nestle's pet care business is helping it to weather inflation
Nestle shares were little changed on Wednesday. But on a forward price to earnings ratio, they trade at a premium to Unilever Plc and Danone SA, and are on a par with one of the world's most powerful consumer goods groups, Procter & Gamble.
So consumers aren't the only ones paying up for the resilience born of all those pandemic pets and caffeine additions.
Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry. Previously, she was a reporter for the Financial Times.
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.
