To hike or not to hike? Nestle results to reveal impacts of raising prices

By Louis Goss

As Nestle, the world's largest food company, prepares to publish its full-year results on Thursday, analysts will be seeking to work out the real impacts of the Nescafe coffee owner's push to raise its prices while also keeping hold of hard hit customers.

Analysts polled by Nestle itself expect the company will report price hikes of 7.5% across 2023 - following hikes of 8.2% in 2022 - as the food seller pushes ahead with efforts to increase its margins, by offsetting inflationary pressures and passing on higher ingredient costs to customers.

Company watchers are anticipating these price rises will lead to a slight dip in the Kit Kat maker's revenues, caused in part by price conscious customers switching over to cheaper alternatives to Nestle's products.

Yet analysts are also expecting that Nestle's price hikes will successfully drive an uptick in its operating profits.

Nestle's (CH:NESN) Switzerland listed shares were little changed on Wednesday after falling 9% over the previous 12 months.

A selection of 21 analysts polled by Nestle itself, are now expecting the company will report a 22.7% surge in its operating profits, to 15.13 billion Swiss francs ($17.36 billion), caused by an uptick in its margins from rates of 45.2% in 2022 to 45.9% in 2023.

The increase in Nestle's operating profits is expected to be achieved in the face of a 1% drop in the company's revenues, to 93.68 billion francs, caused by downtrading as customers switch to cheaper products and negative foreign exchange impacts, consensus forecasts show.

In the long term, Nestle is aiming to push its margins back up to rates 50%, after they were suppressed following a surge in the price of ingredients including cocoa caused by the outbreak of the Ukraine war and the economic impacts of COVID-19.

Nestle's price hiking strategy, however, carries the risk of driving away the cereal seller's customers amid a spate of widespread downtrading that has hit major companies worldwide as hard hit consumers switch to cheaper private-label products.

Notably, Nestle previously reported a 0.4% drop in its sales, year-on-year, to 68.8 billion francs, in the nine months ending in October 2023, as customers bought cheaper products.

Analysts said any dip in revenues could be made worse by negative foreign exchange impacts, caused by a surge in the value of the Swiss franc, as well as a slowdown in the U.S. food market which generates 35% of Nestle's revenues. Foreign exchange rate shifts previously had a 7.4% negative impact on Nestle's sales in the first three quarters of 2023.

For analysts at Barclays, the focus will now be on what Nestle says about its key metric, real internal growth (RIG). The metric, which measures the volume of products sold, will give an indication as to whether Nestle is continuing to actually sell more products in the face of higher prices.

Berenberg analysts, led by Timo Lüllau-Mortensen, suggested that Nestle may be somewhat protected against downtrading, in comparison to its rivals, due to its current product mix and its positioning in the premium market.

"Nestlé is not immune to downtrading or inflationary pressures, but its categories - such as infant formula, baby food, pet food, health supplements and coffee (together about 60% sales) - all provide relatively low risk from private label, while infant formula and pet food exhibit relatively high brand loyalty," Berenberg's analysts said.

Analysts will also be looking closely at figures surrounding Nestle's pet food segment, to see whether online rumors surrounding its Purina pet food brands have impacted the segment's sales.

In a statement, Nestle previously responded to rumors relating to alleged safety concerns surrounding its Purina pet food brands, as the company described the online rumors - that were shared on the TikTok social media platform - as "false" and spread by those working for rival companies.

-Louis Goss

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02-21-24 0555ET

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