Nestlé and Unilever in tasty sales
By Corinne Gretler and Thomas Buckley - Apr 21st 2017, 10:11
Improved pricing power experienced at both companies provides an early sign of recovery for the food-and-beverage market.
Zurich/London — Nestlé and Unilever reported sales that beat estimates as the European food giants pushed through cost increases to combat slowing purchases by pickier consumers opting for quality over quantity.
Nestlé said organic revenue rose 2.3% in the first quarter, compared with the 2% median estimate. Unilever’s sales growth of 2.9% exceeded analyst predictions of 1.9% as it issued its first results announcement since rebuffing a takeover approach from Kraft Heinz.
Improved pricing power at both companies provided an early sign of recovery for the food-and-beverage market after years of deflationary pressure in Europe, slowing sales in China and economic crises in Brazil and Russia. Higher commodity costs, inflation in Brazil and the fall in the pound since the UK’s vote to leave the EU are contributing to the pressure.
"Pricing was better than expected," Jon Cox, an analyst at Kepler Cheuvreux, said. "Everybody has to increase prices, and generally that’ll be sticky."
Nestlé and Unilever are joining apparel makers Burberry Group and Ralph Lauren, which are trying to wean themselves off discounting, especially in the US. Alcoholic beverage companies such as Diageo are also trying to ride a trend of "premiumisation" as consumers shift to fewer but more expensive purchases.
Food companies are under pressure to lift costs to boost profit margins as potential predators such as Kraft Heinz look for consolidation opportunities. The US company is backed by private equity firm 3G Capital, known for its pursuit of aggressive profit targets.
The challenge facing the industry is some cost increases are provoking consumers to reduce purchases: Nestlé said higher pricing weighed on shipments in Europe and at its baby-food unit.
Nestlé’s quarterly revenue growth was the slowest this century, according to Andrew Wood, an analyst at Sanford C Bernstein. A later Easter in 2017 pushed chocolate orders into the second quarter from the first this year.
Nestlé shares rose up to 1.1% in Zurich, while Unilever gained as much as 1.6% in Amsterdam.
Unilever was more aggressive than Nestlé in raising food prices in the quarter, with a 3.4% increase, led by more expensive versions of Magnum and Ben & Jerry’s ice cream. Nestlé, which increased prices 1%, was prompted to raise the cost of Nescafe after robusta coffee futures gained 38% in the past year. Each company’s increases were above analyst estimates.
"We’re starting to see some inflationary pressures in the UK from the depreciation of the pound," Unilever chief financial officer Graeme Pitkethly said, adding that the company’s competitors were also raising prices in the country.
UK grocer Tesco briefly removed some Unilever items from its online store in 2016 after a dispute over pricing.
Distiller Pernod Ricard lifted the cost of some spirits and wines in the UK in March.
Positive aspects of the period for Nestlé included accelerating sales in Europe and Asia, Kepler’s Cox said. In contrast, growth slowed to a near halt in the Americas region, hurt by declines in US confectionery and pet care. Unilever cited gains in its home and personal-care businesses, while sales were unchanged in the food division. The ice-cream unit was helped by new products such as chocolate-coated Magnum pints in a tub. The refreshment unit, which includes ice cream, increased prices 5%.
The company did not provide any immediate update on plans to divest its spreads unit, which includes the Flora brand. After fending off Kraft Heinz in February, CEO Paul Polman said Unilever would deliver on promises to increase shareholder returns via buybacks and lift profitability goals.
In a first move toward that, the company raised the quarterly dividend by 12% to 36euro cents a share. Unilever said it was on track for 2017 underlying sales growth of 3%-5% and forecast an improvement in underlying operating margin of at least 80 basis points.© BusinessLIVE MMXVII
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