Nestle, the world’s largest food and beverage company said input cost inflation would slightly squeeze margins this year even as strong demand for coffee boosted organic sales in the first half, allowing the world’s biggest food group to raise its full-year growth guidance.
As of June, inflation in the United States reached a year-over-year rate of 5.4%. Businesses and consumers are therefore seeking to retain their margins in the face of the diminishing purchasing power offered by the dollar.
Food groups are grappling with surging commodity costs that are hitting margins, and Nestle, with well-known brands like Nescafe coffee and Purina pet food, said price increases could only be implemented with a time lag.
Its underlying trading operating profit margin is expected to slip to around 17.5% this year from 17.7% in 2020, and then improve again from 2022, Nestle said in a statement on Thursday.
“(On the margin), we’re taking a bit more of a cautious view to the full year because we see continued inflation in the system,” Chief Executive Mark Schneider told reporters on a call. He said the company could hedge against some increases — such as coffee prices that spiked this week — but not against higher transportation costs.
“Inflation has been virtually absent for several years and then pointed up very sharply. It hit us directly,” Schneider said, adding the problem was transitory.
According to CNN Business reports:
Schneider said he believes that inflation is transitory. But the owner of brands including Nescafe, Gerber, and Cheerios said it would need to raise prices by roughly 2% to offset cost increases of 4%. Nestlé hiked prices by 1.3% in the first half of 2021.
The company can hedge against some cost increases, such as rising coffee prices, said Schneider. But it can’t avoid the rising cost of things like transportation, which puts pressure on the company’s margins.
Nestlé is not the only company to raise prices. CNN Business adds that General Electric, Unilever, and other large firms in a variety of industries are seeking to hedge against increasingly salient inflation risk.
Peer Unilever said last week it expected cost inflation to be in the high-teens in the second half of the year, while Danone also on Thursday reported a lower operating margin for the first half.
Shares in Nestle, up almost 10% so far this year, were 0.9% lower at 0721 GMT, outperforming a 1.1% weaker sector (.SX3P).
Kepler Cheuvreux analyst Jon Cox said “the market probably did not want to hear about a delay in passing through prices”, while the strong top-line and increased growth guidance had been expected.
Nestle raised its organic growth guidance for the year to 5-6%, versus “above 3.6%” previously, after strong demand for coffee and a rebound in the out-of-home business and China lifted sales by 8.1% in the first half and 8.6% in the second quarter.
Meanwhile, many businesses are selling their items in smaller packages while maintaining the same price, a phenomenon known as “shrinkflation.” For instance, Walmart’s Great Value Paper Towels did not alter prices while reducing the number of sheets per roll from 168 to 120; Frito-Lay cut the typical bag of Doritos from 9.75 ounces to 9.25 ounces; General Mills shrank its “family size” boxes from 19.3 ounces to 18.1 ounces.
A recent CNBC survey of leading CFOs revealed that at least one-third will be forced to raise prices if inflation continues. No financial executive said that they trust the Federal Reserve to effectively manage inflation over the next year.
Consumers are likewise feeling the effects of rising prices.
A survey forecast shows that Americans are expecting a 9% year-over-year increase in their back-to-school spending. Last year, they anticipated spending $247; this year, they anticipate spending $268.
Despite a strong economic recovery from COVID-19 and the lockdown-induced recession, inflation is counteracting a hike in Americans’ wages. The Bureau of Labor Statistics found that “average hourly earnings” rose by 3.6% over the past year. After considering inflation, however, “real average hourly earnings” have diminished by 1.7%.