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Nestle lifts prices as consumers bear the brunt of inflation

KitKat chocolate bars, manufactured by Nestle outside of the U.S., are arranged in London, on July 26, 2021.   (Bloomberg )
By Deirdre Hipwell Bloomberg

Nestle pushed another round of price increases on consumers during the second quarter, with the cost of many of the products it sells rising amid rampant inflation.

The world’s largest food maker now expects organic sales growth between 7% to 8% this fiscal year, boosted by price inflation, up from previous guidance of growth of around 5%, the company said in a statement Thursday.

Nestle indicated, however, its profitability could decline for a second year, with an underlying operating profit margin of about 17%.

In 2021, it was 17.4%. Nestle stock fell about 1.5% in early trading.

The Swiss food giant joins rivals Unilever, Danone and Reckitt Benckiser Group, which have all raised their sales forecasts this week as demand for pricier branded goods holds up.

The maker of KitKat chocolate and Perrier bottled water has previously said it would increase prices to mitigate its own costs as everything from fuel to packaging and labor soars.

The war in Ukraine, rising fuel and energy bills and continued supply chain problems are driving the worst inflation in decades.

In April, Nestle hit consumers with its steepest increase in first-quarter pricing in more than a decade, lifting product prices by 5.2%. For the first half overall, prices rose by 6.5%.

Chief Executive Officer Mark Schneider said the company was implementing price increases in a “responsible manner” to help it manage “significant and unprecedented cost inflation.”

“Pricing is taking over this year with inflation being so strong,” said Schneider on a media call. “Of course we are doing everything we can to protect consumers from rising prices, but we have to protect our company, too.”

Shoppers in North America were hit with the largest increase in pricing at 9.8% during the first half, while prices in Europe rose by about 5%.

Even though prices have been rising, Nestle said volumes remained “resilient.”

The food sector currently is weathering inflation better than retailers selling big-ticket items, as food and drinks are basic necessities.

However, with inflation yet to peak in many markets, there is a risk that consumers will start to switch to cheaper brands.

Unilever said this week that private-label manufacturers in Europe were starting to gain market share in food, ice cream and household goods.

Schneider said there is some evidence of consumers “trading down” but it’s limited to certain categories and geographies and “it’s quite modest.”

However, he said this doesn’t mean that it won’t increase as the year progresses if consumers’ budgets come under further strain.

Nestle said its growth was broad-based across geographies and categories.

The star performer among its large stable of brands was Purina PetCare, as consumers protect spending on pets even when cutting back on themselves.

Sales in coffee grew at a high single-digit rate while confectionery reported double-digit growth, helped by demand for KitKat.

Infant nutrition also grew, led by a rebound in China, while water and dairy sales also gained.

Schneider said the reduction in margin is temporary.

In April he warned that its margin forecast has become more challenging to meet since Russia invaded Ukraine and as inflationary pressures mount.