Zurich: Nestle SA forecast the slowest full-year sales growth in more than a decade as food companies worldwide struggle against consumer resistance to price increases.
Revenue will gain about 3.5 per cent on an organic basis in 2016, the Vevey, Switzerland-based maker of Nespresso coffee said in a statement Thursday, abandoning a goal for an increase of about 4.2 per cent. Growth in the consumer goods industry is “relatively fragile,” Chief Financial Officer Francois-Xavier Roger said. The stock fell as much as 2 per cent in Zurich.
Food companies have found recently that higher prices have backfired amid lacklustre consumer demand across both developed and emerging markets. Like at Unilever, Nestle’s recent attempts in Brazil have cut into volume, even as the country’s weak currency raises the cost of raw materials. The volatile markets are heaping pressure on Ulf Mark Schneider, who replaces Chief Executive Officer Paul Bulcke on January 1.
“It may get worse before it gets better,” wrote Robert Waldschmidt, an analyst at Liberum Capital. “Investors can hold out hope that the worse it gets, the more likely incoming CEO Schneider will take aggressive actions.”
After Nestle’s pricing growth fell to a record low in the first half, the company said it’s more important for the company to keep boosting shipments rather than lifting prices. Volume rose 2.5 per cent in the first nine months of the year. While commodities have probably touched bottom, Nestle’s hedging reduces the need to pass recent increases on to consumers, Roger said.
“Consumer demand was really much softer than expected” in the third quarter, the CFO said, naming markets such as Europe, the US, Brazil and China.
Price increases probably won’t be necessary in developed markets until next year if raw material prices “really” pick up, Roger said. Nestle may pass on higher costs in Latin America and eastern Europe in 2017, though probably more in the latter part of the year, he also said.
The shares fell 0.9 per cent to 74 francs (Dh275) as of 11:18am in Zurich. Nestle, with a market value of 230 billion francs ($232 billion), recently lost its rank as Europe’s biggest company on that basis to Anheuser-Busch InBev SA, whose SABMiller Plc acquisition gave it the top spot with a value equivalent to $257 billion (Dh944 billion).
This week, Danone announced its slowest third-quarter sales growth in a decade and Reckitt Benckiser Group Plc narrowed its revenue growth outlook to the bottom of its forecast on waning demand in Russia.
Nestle said it’s not resorting to immediate prices increases in the UK to adjust for the pound’s slump after the country voted to leave the European Union. The company is planning efficiency measures to deal with rising costs for imported cocoa and coffee. Nestle produces about 90 per cent of the UK portfolio locally, which also reduces the currency exposure, Bulcke said.
“Let’s first let the dust settle,” he said, adding the company plans to react “wisely,” not just passing on costs.
The KitKat maker’s chocolate business was one of the worst performers in the nine months, with shipments dropping 1.4 per cent. Competition has risen in the US, where the Swiss company has a “relatively weak” position, Roger said. Nestle has been “disengaging” on smaller brands as it focuses on the stronger ones, such as KitKat, Bulcke said in a Bloomberg Television interview.
“What we lack with confectionery is global brands beyond KitKat,” Roger said. “We can roll out one brand on a global scale. We need to do more of that.”
While Bulcke said he wants to be more ambitious in chocolate, Nestle has faced calls to sell the business as it increasingly concentrates on nutrition and health.
“This division is ripe for disposal,” wrote James Edwardes Jones, an analyst at RBC Capital Markets.
Total sales gained 3.3 per cent on an organic basis in the first nine months of the year, missing analysts’ estimate for a 3.6 per cent increase. Nestle’s defines organic sales growth as the increase in revenue excluding acquisitions, divestments and currency shifts.
_ Bloomberg
