Nestle’s ‘exceptionally strong organic sales growth’ may not be enough to buoy margins amid rising inflation

21-Oct-2021 - Last updated on 21-Oct-2021 at 17:53 GMT

Source: Getty/ sefa ozel

Nestle boosted its full year sales guidance this week after raising prices once again to account for climbing costs, but leadership cautioned those increases may not be enough to fully counter worsening inflation – suggesting more hikes likely are necessary and full-year profits may be suppressed.

The Swiss company raised its expected full-year organic sales growth to between 6% and 7%, after “exceptionally strong organic sales growth” in Q3 that reached 6.5%, which CEO Mark Schnieder described was “no small feat” considering the strong comparable 4.9% growth in the same quarter last year.

While Schnieder said he expects “continued good prospects for the remainder of the year,” he stopped short of increasing the company’s expected profit margins for the year – leaving it at 17.5%.

“It will be tempting for some to translate the higher sales growth expectations into higher expectations for our underlying trading operating profit margin,” he acknowledged. However, he said, “I would like to caution against that in the current cost inflation environment where input costs are rising faster than we can roll forward through pricing.”

His comment aligns with those he made in April, but were delivered with a bit more gravity this time as he noted the inflationary situation has not improved since the spring and summer.

“If anything,” he said, “we’re seeing further downsides compared to what we told you in the summer.”

Nestle estimates that the impact of inflation on the cost of goods for 2021 will come in around 4% over the prior year, with a significant portion during the first half of the year coming from commodities and packaging, which have since stabilized, thanks in part to forward buying, explained CFO Francois-Xavier Roger.

Since July, the company has tracked higher costs mainly with energy and transportation and, to a lesser extent, salaries and social costs, all of which play directly into Nestles profits and losses, he said.

He added that inflation likely will continue to worsen this year and into next, but did not offer an estimate given the volatility of the current environment.

Nestle continues to raise prices in 'responsible manner'

Like many CPG players, Nestle is managing inflation in part through price increases, which Roger said the company expects to “progressively increase … in a responsible manner over the remainder of 2021 and into 2022, with different trends by geography and category.”

In the third quarter, the company raised prices 2.1% on top of a 1.3% in the first half of 2021, a 05% increase in the back half of 2020 and 0.2% in the two quarters before that.

Roger anticipates that additional increases will not negatively impact sales as volume so far “remains very positive and very attractive.”

Part of the elasticity likely is due to ongoing higher consumption at home, which Roger anticipates will remain elevated over pre-pandemic levels in the near and medium-range future. He explained that while volume may erode slightly as people return to work, most people will maintain a hybrid approach and therefore will continue to need more food at home than before the outbreak when they worked almost exclusively out of home.

While Nestle expects prices to continue to rise in the near term, Schnieder noted that longer term the industry as a whole should be able to adjust and better maintain financial performance.

“Our industry, in general, is not an industry that is in normal times is pinched by inflation. So, when you are in a regular inflationary rhythm, you roughly know what is going to be happening next and this industry can adjust and basically maintain,” he said.

Until the current environment stabilizes, however, Nestle will continue to use price and other levers to “make the best of it,” he said.