Nestle feeling the effects of worst inflation in decades

VEVEY, SWITZERLAND — A softening of food demand was to be expected in 2023 given the magnitude of food price inflation experienced over the past two years, said Ulf Mark Schneider, chief executive officer of Nestle SA.

Schneider commented Feb. 22 on challenges experienced by Nestle and other food companies in connection with the release of the company’s financial results for last year.

“We’re literally seeing a 50-year event when it comes to the spiking of food price inflation, not only when it comes to the sheer size of the amplitude but also the steepness and unexpectedness that we’ve seen in ‘22 and then continuing in ’23,” Schneider said in a call with investment analysts. “And I think against that backdrop, it was not surprising that you’ve seen a volume reaction with quite a few companies in our sector. And Nestle, of course, as the world’s leading food and beverage company, was no exception.”

The soft consumer demand together with capacity constraints weighed on underlying demand for Zone North America in 2023, according to Nestle SA. Still, business improved in the fourth quarter and profit margins widened during the year, the company said.

Operating profit of the North America business in 2023 was 5.8 billion Swiss francs ($6.6 billion), up 5% from 5.5 billion Swiss francs in 2022. Net sales were 26 billion Swiss francs ($29.5 billion), down 1.3% from 26.3 billion in 2022. The division’s operating profit margins during the year widened to 22.2% from 21% in 2022.

Adjusted for currency changes, sales growth was 7.3%, of which pricing accounted for 7.6%, and real internal growth was down 0.3%.

In addition to soft consumer demand and capacity issues, the decrease was attributed to the winding down of the company’s frozen meals and pizza business in Canada. 

“Net divestitures reduced sales by 1.7% as a result of the divestment of a majority stake in Freshly as well as the disposal of the Gerber Good Start infant formula brand in 2022,” Nestle said. “Foreign exchange had a negative impact of 6.8%.”

In addition to pricing, Nestle said North America sales were boosted by continued strong momentum for e-commerce and out-of-home channels. Nestle gained market share in pet food, coffee and frozen meals.

“The beverages category, including Starbucks products, Coffee mate and Nescafé, posted mid single-digit growth,” Nestle said. “Nido growing-up milks posted strong double-digit growth. Confectionery in Canada recorded high single-digit growth, driven by KitKat and Aero. Water saw low single-digit growth, based on a strong sales development in the fourth quarter. S.Pellegrino and Acqua Panna posted double-digit growth, which more than offset the impact of capacity constraints for Perrier.

“Growth in frozen food was negative, impacted by soft consumer demand and the winding down of the frozen meals and pizza business in Canada. In the US, growth in frozen food was close to flat, supported by Stouffer’s, Jack’s and Tombstone.”

Improved margins were attributed by Nestle to its divestment of a majority stake in Freshly and “portfolio optimization actions.”

“Pricing and mix also helped to offset cost inflation and a significant increase in advertising and marketing expenses,” the company said.

From Nestle’s perspective, the food price inflation resulted in a “bifurcated consumer,” Schneider said, with weakness evident at lower income levels and greater resilience among those with higher incomes. He said Nestle and its competitors appear to have been caught off guard by the effects of ending emergency Supplemental Nutrition Assistance Program (SNAP) benefits.

“In hindsight, all of us, the entire industry, kind of underestimated the importance of some of these SNAP support payments running out as from the second quarter last year,” he said. “It clearly led to a slowing of food industry growth in the second half in the US, and I think what you saw is all of the elements of what was discussed in other conference calls in the industry as the bifurcated consumer. So clearly, at the premium end, things were going quite well. But at the lower end of the buy spectrum and at the low end of the socioeconomic spectrum, you did see quite some significant stress on US consumers. And with these support payments running out, I clearly think that led to some down-trading in food, either from more expensive brands to more affordable ones or from branded products to private label or, for example, from prepared foods to some of the components and then scratch cooking. But clearly, there was some issue.”

Schneider also connected developments in the food business to rising levels of consumer debt in the United States.

“Everything that’s somewhat durable, everything that you can pay for in installments went reasonably well,” he said. “But when you really have to either pay cash or when you have to pay it on your existing credit card limits and debit cards, then those things were under quite some stress. And food, of course, is one of those. And hence, at the lower end of the spectrum, I think there is some continued weakness. I think until the lapping now of some of these SNAP payments slowdowns in the second quarter, it will continue. And this is part of our assumption here that the situation then at least will normalize to the extent that some of the other underlying growth trends will shine through to a stronger extent.”

Schneider was asked about rumors spread earlier this year on the social media platform TikTok that the company’s Purina Plan petfood was causing illnesses in dogs. At the time, the company denied the rumors, said their products are safe to eat and that the company has no current or pending recalls.

“Regarding the TikTok situation in January, there was a very short-lived spiking up and it came down,” Schneider said. “And so we have not seen any material impact from that. And I think we made it very clear that some of these allegations were completely groundless. And I think we very staunchly addressed that. But I think this is one of these situations where in this new social media world, you just have to live with that, occasionally, situations like that do spike up. All the more, it’s important to say clearly what the facts are, which I think Purina did. And the situation has already calmed down.”

Company-wide, Nestle adjusted earnings per share in 2023 rose 8% in constant currency and 0.1% without the currency adjustments. Nestle earnings per share rose 24% as fully reported, mostly because of special charges taken in 2022. Net sales in 2023 were 93 billion Swiss francs ($105 billion), down 1.5% from 2022. Excluding the effects of foreign exchange, organic growth was 7.2%, mostly reflecting pricing.

Noting the “unprecedented inflation,” Schneider said Nestle’s results “did come in within our guided range both on organic growth and profitability. We did show, as we had indicated before, positive real internal growth in Q4.”

For the year 2024, Schneider said Nestle anticipates 4% sales growth.

During the presentation to analysts, Schneider spent time once again discussing the ripple effects on the food industry of surging demand for GLP-1 drugs among consumers seeking to lose weight.

“I think it has brought the whole topic of dieting and weight loss back to the top of the agenda,” he said. “To put it in slightly flippant terms, diets are cool again. It’s something that people used to do quietly on the side, uncertain about their outcomes.”

He again discussed complementary products offered by Nestle and others that  “might be a good fit” for those taking GLP-1 drugs to lose weight, emphasizing “three key areas” — muscle mass preservation, micronutrient deficiencies and gastrointestinal health.

Such products account for annual sales of 1.5 billion Swiss francs ($1.7 billion) today at Nestle, Schneider said.

“In addition to what we have on offer today, we’re, of course, working very hard inside our R&D area to come up with new and even more helpful companion products that will be important for GLP-1 patients during and after their treatment. in addition to GLP-1 alone, there’s other ways to achieve weight loss. And it’s important that we also have a competitive offering in those areas.”