Nestle, the world’s largest food company, is set to release its full-year results, and analysts are eager to understand the effects of the company’s decision to raise prices. Nestle has been increasing its prices to offset inflationary pressures and higher ingredient costs, but there are concerns about the impact on its customer base.
Analysts anticipate that these price hikes may lead to a slight decrease in Nestle’s revenues as price-conscious customers switch to cheaper alternatives. However, they also expect that the price increases will drive an increase in the company’s operating profits. Nestle’s shares have seen a 9% decline in the past year, but analysts predict a 22.7% surge in operating profits for the company.
Despite the expected drop in revenues, Nestle aims to increase its margins from 45.2% in 2022 to 45.9% in 2023. The company plans to achieve this by pushing its prices even higher, with the long-term goal of reaching margins of 50%. Nestle has faced challenges due to a surge in ingredient prices, including cocoa, caused by the Ukraine war and the economic impacts of COVID-19.
However, there is a risk that Nestle’s price hikes could drive away customers, especially as downtrading becomes more prevalent worldwide. Downtrading refers to consumers switching to cheaper private-label products. In the nine months leading up to October 2023, Nestle reported a 0.4% drop in sales as customers purchased cheaper alternatives. Negative foreign exchange impacts and a slowdown in the U.S. food market, which generates 35% of Nestle’s revenues, could further worsen this situation.
Analysts are particularly interested in Nestle’s real internal growth (RIG), which measures the volume of products sold. It will provide insight into whether Nestle is still able to sell more products despite higher prices. According to Berenberg analysts, Nestle may be somewhat protected from downtrading compared to its competitors due to its product mix and positioning in the premium market. Categories such as infant formula, baby food, pet food, health supplements, and coffee, which account for about 60% of Nestle’s sales, have relatively low risk from private-label competition, and some, like infant formula and pet food, exhibit high brand loyalty.
Another area of focus for analysts is Nestle’s pet food segment. There have been online rumors about safety concerns surrounding its Purina pet food brands, but Nestle has dismissed these rumors as false and spread by individuals working for rival companies. Analysts will closely examine the segment’s sales figures to see if there has been any impact.
In conclusion, Nestle’s decision to raise prices is expected to lead to a slight dip in revenues as price-conscious customers look for cheaper alternatives. However, the company is also projected to experience an increase in operating profits. The long-term goal is to raise margins back up to 50%. While there are risks associated with downtrading and negative foreign exchange impacts, Nestle may be somewhat insulated due to its product mix and premium market positioning. Analysts will closely monitor the company’s RIG metric and the performance of its pet food segment.
