The world’s biggest food group Nestle will raise prices further this 12 months, Chief Executive Mark Schneider said on Thursday, after costlier ingredients contributed to full-year net profit missing analyst expectations.
He declined to comment on the planned level of price increases, which he said were needed to offset the damage brought on by commodity price rises.
For consumers, whose spending power has already been cut by inflation at multi-decade highs, they’re more likely to add to concerns about strained household budgets and weakened economies.
The maker of Nescafe easy coffee and KitKat chocolate bars raised prices by 8.2% last 12 months, but that didn’t fully offset the impact of increased costs for ingredients on margins.
“Our gross margin is down about 260 basis points – that is huge. That’s in any case the pricing we have now done in 2022,” Schneider told reporters.
Price adjustments are more likely to vary depending on markets. The U.S. and U.K. are seeing strong continued inflation while it has turn into more muted in markets resembling China and Europe, he said.
In an interview with CNBC’s Julianna Tatelbaum in Switzerland, Schneider said: “We’re watching with interest in quite just a few markets whether the inflation that was largely energy and commodity-led, whether that may translate right into a wage-driven inflation. Many countries negotiate their annual contracts in the beginning of the 12 months, in order that’s something we watch with interest, like everyone else.”
Europe was the corporate’s predominant drag on margins last 12 months, with Nestle taking a roughly 190 basis point margin hit.
Schneider told CNBC: “It had so much to do with inflation hitting North America earlier, in 2021, and for various reasons. Europe saw a spike in inflation, in energy costs, especially after the invasion of Ukraine. And so, clearly, a few of the annual negotiations were already done, and it was harder to initiate pricing motion after that.”
The remainder of the packaged goods industry has also increased prices to address surging costs for just about all raw materials after Russia’s invasion of Ukraine compounded the impact of pandemic-related supply chain logjams.
‘Mixed emotions’ after rare miss
Schneider said inflationary pressures from logistics and costlier arabica coffee and dairy products have eased, but remained high.
Real internal growth – an organization indicator for sales volumes – rose only 0.1% for the 12 months, weighed down by North America and the Nespresso business.
Barclays analyst Warren Ackerman said he expected “just about all” of the lower-than-estimated volumes can be the results of Nestle rethinking the variability of products it makes and provide chain constraints.
The query shall be how much of the quantity weakness persists from these aspects into the primary half of the 12 months, Ackerman added.
Nestle said it targeted organic sales growth – which cuts out the impact of currency moves and acquisitions – in a spread of 6-8% in 2023.
During 2022 the corporate’s reported sales increased 8.4% to 94.4 billion Swiss francs ($102.31 billion).
Schneider told CNBC that demand remained strong despite price rises, and consumers were in a position to swap to cheaper products in various categories while still buying its brands.
Coffee and pet care, the corporate’s “growth locomotives,” are “holding up extremely well,” he said. “We also see continued trends toward pet food premiumization in all advanced markets, and frequently those trends don’t decelerate or stop during times of economic uncertainty,” he added.
Shareholders’ net profit fell to 9.27 billion Swiss francs, missing expectations for 11.58 billion francs, although the consensus forecast didn’t account for the impairment at Nestle’s Aimmune subsidiary last 12 months, analysts said.
“Nestle’s fourth-quarter and second-half results will cause some mixed emotions,” Bernstein analyst Bruno Monteyne said, adding that Nestle’s water, confectionary and health science businesses contributed.
“Nestle rarely misses and that was a miss,” he said.
Shares in Nestle were marginally down on Thursday.
CNBC contributed to this report.
