Nestle Lowers Sales Guidance as Shoppers Seek Cheaper Goods — Update

By Dominic Chopping

Nestle cut its full-year sales guidance after it slowed the pace of price hikes as cash-strapped shoppers continue to seek cheaper alternatives to branded products.

The Swiss maker of KitKat chocolate bars and Nescafe coffee said Thursday that pricing is being pressured by increased promotional activity, among other things, and that it now expects to report organic sales growth of at least 3% this year, from around 4% previously.

"We have seen pricing come down faster than expected. Therefore, we consider it prudent to adjust our guidance for the year," Chief Executive Mark Schneider said.

Shares fell 4.5% in early European trade.

Like many other packaged food producers, Nestle has raised its prices over the last couple of years to pass on the higher costs of everything from ingredients to logistics, all of which surged amid a period of unprecedented inflation.

It lifted prices by an average of 7.5% last year, but began easing the pace of price hikes earlier this year as inflation pressures eased and after acknowledging that hard-pressed shoppers had fled to cheaper brands.

It raised prices by 2.0% in the first half on average, a smaller hike than the 3.0% expected by analysts.

"With this inflation weight now moderating very quickly we are in a transition period from pricing-led growth to RIG-led growth," Schneider told journalists Thursday.

RIG, or real internal growth, is the company's key measure of sales volume. It grew by 0.1% in the first half of the year after seeing a sharp acceleration in the second quarter. Analysts in a company consensus had expected a drop of 0.5%.

"A bull could argue that it is all about volumes and mix in this business, but pricing matters as well," analysts at Bernstein said in a note to clients.

The highest RIG and the lowest pricing was seen in Nestle's coffee and petfood businesses, typically the company's growth power houses, which suggests that Nestle had to use promotional pricing tactics to drive volume in the quarter, the analysts said.

After the volume rebound during the second quarter Nestle is now targeting further volume growth with new product launches and by growing its larger significant brands, but cautioned that consumers in several regions of the world are still shopping on a budget.

The company has seen significant pressure from lower income consumers in the U.S., where price increases over the last two years and a reduction in U.S. food purchasing assistance payments have significantly reduced consumer's purchasing power, prompting "value seeking behavior," CEO Schneider said.

The value-seeking approach is something that Nestle is also seeing in large European markets, as well as in China where there is a lot of price competition that is leading to deflation.

"It's a period right now where consumer mood is kind of muted," he said.

However, the U.S., like many other large economies, benefit from strong labor markets with continued wage increases, so the company hopes consumer purchasing power will soon return.

The company reported net profit of 5.64 billion Swiss francs ($6.37 billion) as sales fell 2.7% to CHF46.29 billion.

Net profit was expected at CHF5.76 billion with sales of CHF45.31 billion, according to a company-compiled consensus forecast.

Nestle backed guidance for a modest increase in underlying operating profit margin from the 17.3% it recorded in 2023. However, underlying earnings per share in constant currency is now expected to increase at a mid single-digit rate, from between 6% and 10% previously.

Write to Dominic Chopping at dominic.chopping@wsj.com

(END) Dow Jones Newswires

July 25, 2024 04:54 ET (08:54 GMT)

Copyright (c) 2024 Dow Jones & Company, Inc.