Nestle plans price hikes after inflation eats into profits

Company expect organic growth of 6-8% in 2023

The world's biggest food group Nestle will push through further price increases this year, Chief Executive Mark Schneider said on Thursday, after more expensive ingredients contributed to lower 2022 profits.

He declined to comment on the planned level of price increases, which he said were necessary to offset the damage caused by commodity price rises.

For consumers, whose spending power has already been cut by inflation at multi-decade highs, they are likely to add to concerns about strained household budgets and weakened economies.

Also Read | Nestle to hike food prices further in 2023, CEO says

The maker of Nescafe instant coffee and KitKat chocolate bars raised prices by 8.2 per cent last year.

But the measures did not fully offset the increased cost of ingredients such as coffee and dairy products, meaning profit margins dwindled.

"Our gross margin is down about 260 basis points - that is massive. That is after all the pricing we have done in 2022," Schneider told reporters.

Also Read | Nestle to pay ex-manager $2.2 million over bullying case: Report

Price adjustments are likely to vary depending on markets.

"We have some markets, like the US and UK, where we see strong continued inflation, and other markets like China and like here in Europe …where inflation is more muted," Schneider said.

The packaged goods industry has also increased prices to cope with surging costs for almost all raw materials.

Already, it had been disrupted by supply-chain bottlenecks caused by the pandemic when Russia's invasion of Ukraine almost a year ago added to rising costs for energy and other commodities.

Schneider said inflationary pressures from logistics and more expensive arabica coffee and dairy products have eased, but remained high.

Sales volumes and mix were resilient, he added, rising by 0.1 per cent during 2022. Together with the 8.2 per cent increase in pricing, this brought Nestle's full-year organic sales growth to 8.3 per cent.

Nestle said it targeted organic sales growth - which cuts out the impact of currency moves and acquisitions - in a range of 6-8 per cent in 2023.

During 2022, the company's reported sales increased 8.4 per cent to 94.4 billion Swiss francs ($102.31 billion).

Shareholders' net profit fell to 9.27 billion Swiss francs, missing expectations for 11.58 billion francs, although the consensus forecast did not account for the impairment at Nestle's Aimmune subsidiary last year, analysts said.

"The big positive news is the outlook – the 6-8 per cent organic sales guidance is far better than consensus currently, which is just 5 per cent," Jon Cox, analyst at Kepler Cheuvreux said:

"I continue to believe Nestle and the food sector are in for a multi-year period of high top line growth as we get pricing back following the deflation in the five years to Covid, which was the aberration."

($1 = 0.9227 Swiss francs)