Nestle is planning price increases after costs eat into profits

ZURICH, Feb. 16 (Reuters) – The world’s largest food group Nestle (NESN.S) will raise prices further this year, CEO Mark Schneider said on Thursday, after more expensive ingredients contributed to full-year net profit falling short of expectations from analysts.

He declined to comment on the planned level of price increases, which he said were necessary to offset the damage caused by commodity price increases.

For consumers, whose purchasing power has already shrunk due to inflation that has been high for decades, they are likely to increase concerns about strained household budgets and weakened economies.

The maker of Nescafe instant coffee and KitKat chocolate bars raised prices by 8.2% last year, but that didn’t fully offset the impact of increased ingredient costs on margins.

“Our gross margin is down about 260 basis points — that’s huge. That’s after all the prices we’ve been running in 2022,” Schneider told reporters.

“We have some markets, like the US and the UK, where we see strong sustained inflation, and other markets like China and like here in Europe…where inflation is more subdued,” Schneider said.

The rest of the packaged goods industry has also raised prices to cope with rising costs for almost all raw materials after the Russian invasion of Ukraine exacerbated the impact of pandemic-related supply chain blockades.

‘MIXED EMOTIONS’ AFTER RARE MISS

Real organic growth – a business indicator of sales volumes – was up just 0.1% for the year, weighed down by North America and the Nespresso business.

Barclays analyst Warren Ackerman said he expected “almost all” lower-than-estimated volumes would result from Nestlé’s rethinking of product variety and supply chain constraints.

The question will be how much of the volume weakness from these factors persists in the first half of the year, Ackerman added.

Schneider said the impact on volumes in most cases did not indicate that consumers were switching to cheaper private label products.

Shareholders’ net profit fell to CHF 9.27 billion, beating expectations of CHF 11.58 billion, though the consensus forecast did not take into account the impairment at Nestle’s subsidiary Aimmune last year, analysts said.

“Nestle’s fourth quarter and second half results will cause mixed feelings,” said Bernstein analyst Bruno Monteyne, adding that Nestle’s water, confectionery and health sciences businesses contributed.

“Nestlé rarely misses and that was a miss,” he said.

Shares in Nestlé were slightly lower on Thursday.

Nestle said it is targeting organic sales growth – which removes the impact of currency movements and acquisitions – in a range of 6-8% by 2023.

In 2022, the company’s reported revenue rose 8.4% to 94.4 billion Swiss francs ($102.31 billion).

($1 = 0.9227 Swiss Francs)

Reporting by John Revill. Additional reporting by Richa Naidu in London; Edited by Rachel More and Barbara Lewis

Our Standards: The Thomson Reuters Principles of Trust.