Nestlé’s margins eaten by inflation as price hikes fail to offset cost increases

16 Feb 2023 --- Amid historic inflation, Nestlé has posted its highest sales growth in 14 years. However, historically high commodity prices have punished the company’s volume growth, which has remained flat from a year ago.

The Swiss food and beverage giant managed to increase its sales by 8.4% in 2022 to CHF 94.4 billion (US$102.42 billion), driven by price increases of 8.2% and the recovery of out-of-home channels.

However, the company profit margin decreased by 2.6%, a “massive” amount according to CEO Mark Schneider. 

“Last year brought many challenges and tough choices for families, communities and businesses. Inflation surged to unprecedented levels, cost of living pressures intensified, and the effects of geopolitical tensions were felt around the world,” he highlights.

According to the business, the impact of cost inflation increased in the second half of the year, reflecting higher costs for dairy, cereals and energy. Nonetheless, the company reached the growth it predicted late last year as pricing, growth leverage and efficiencies helped to offset the impact of cost inflation partly.

Among its sections, Nestlé Health Science, which specializes in nutritional science, grew at the fastest pace, reporting 36.9% sales growth for the full year.

Navigating headwinds
The company managed to perform at a similar rate than during the previous food inflation crisis in 2008.

“The entire Nestlé team demonstrated dependability, as we navigated this difficult environment. Organic growth was solid, margins continued to be resilient, and our underlying earnings per share development was strong. At the same time, we ensured access to nutritious products and affordable offerings globally,” explains Schneider.

Starbucks products lead Nestlé's Coffee category.Schneider details that during last year, the company continued with its nutrition strategy of Good for You, Good for the Planet. 

“We took important actions to further strengthen our industry-leading responsible marketing practices and to provide transparency on the nutritional value of our global portfolio. At the same time, we also advanced the implementation of our climate roadmap,” he notes.

“Looking to 2023, we expect another year of robust organic growth, with a focus on restoring our gross margin, stepping up marketing investments and increasing free cash flow. Nestlé’s value creation model puts us in a strong position to achieve our 2025 targets and to generate reliable, sustainable shareholder returns,” he continues.

Biggest winners
Among its brands, the most significant contributor to organic growth was is Purina PetCare. Sales in coffee also grew, led by its Starbucks products, which accelerated by 12.9%.

Infant nutrition also saw double-digit growth, while confectionery posted high single-digit growth, with the company highlighting Kitkat’s strength.

Dairy saw mid-single-digit growth, with continued momentum for coffee creamers, affordable fortified milks and home-baking products. Water had a better year with double-digit growth, however the category struggled in the fourth quarter due to “temporary capacity constraints.”

Prepared dishes and cooking aid posted slower growth than other categories, but the company flags there was a strong demand for its Maggi brand. Similarly, sales in vegetarian and plant-based food grew at a mid single-digits.

Portfolio moves
After a calm first half of the year, where Nestlé only realized one acquisition – the acquisition of a majority stake in Orgain, a player in plant-based nutrition in April – the company accelerated its strategic investment and divestments during the second half of the year.According to the business, the impact of cost inflation increased in the second half of the year, reflecting higher costs for dairy, cereals and energy.

In September, Nestlé completed the acquisition of Puravida and The Better Health Company. Puravida is a nutrition and health lifestyle brand set to boost the company’s portfolio in Latin America. The Better Health Company, is a New Zealand supplement brand that manufactures vitamins, minerals and supplements.

One month later it moved to acquire Seattle’s Best Coffee from Starbucks, seeking to strengthen further its coffee portfolio. The transaction was completed in January this year. 

In addition to Starbucks packaged coffees distributed by Nestlé under the Global Coffee Alliance, Seattle’s Best Coffee joins Nestlé’s roster of coffee brands in the US, including Nescafé, Nespresso and Blue Bottle.

In November, Nestlé completed the sale of its Gateway formula plant in the US and of its rights to the Canadian Gerber Good Start infant formula.

Later in the year, Nestlé announced that it was exploring strategic options for Palforzia peanut allergy treatment, with the review expected to be completed in the first half of this year.

By Marc Cervera