Nestlé sees moderate growth despite inflationary pressures on cocoa, coffee and cost of living
July 26, 2024
Nestlé announced its results for the first half of 2024. Nestlé saw moderate growth across most regions and categories, but coffee was a particular success story, expanding into new markets.
Inflation and the cost of living crisis continue to play a role, leading to an increase in "promotional intensities" aimed at satisfying consumer demand for lower prices.
Coffee is a success
Nestlé saw its organic growth largely driven by growth in the coffee segment.
Nespresso's organic growth was 1.8%, largely driven by its Vertuo system. Nestlé CEO Mark Schneider said Nespresso's "price opportunity" and "price need" were less significant because the company was using Arabica beans. Nespresso's price increased by 0.7%.
Nestlé is also enjoying success in China and India. Both countries are embracing coffee. Schneider said the "China of coffee" is happening now, but has been tempered somewhat by the country's "general caution about economics." Nestlé says it is one of its main competitors in the market. India is following suit but is slightly behind China.
Coffee prices remain high. Just like cocoaNestlé is under increasing pressure from rising prices. So far, hedging has protected Nestlé from these increases. However, they could have an even greater impact on Nestlé's costs in the second half of the year.
We will continue to see commodity prices for coffee and cocoa increase. Nestlé COO Anna Manz said Nestlé would focus on pricing.
Overview
Europe and emerging market economies drove the company's organic growth by 2.1 1TP3Q. Real internal growth (RIG), which was -0.81TP3Q at the half-year 2023 results, now comes back to 0.11TP3Q. RIG, an internal Nestlé measure, calculates the impact of volume changes on sales, based on relative values per unit.
Europe has both the highest organic growth (4.5 1TP3Q) and the second highest real growth (1.3 1TP3Q), after Greater China. Pet food and confectionery were the main drivers of growth in Europe.
Cost of living
The cost of living is affected by inflation in many ways, not just for coffee or cocoa. Nestlé has adopted a strategy of "promotional intensity" in some markets such as North America, as consumers continue to face cost-of-living pressures.
Schneider, representing Schneider investors, said: "We are seeing some consumer behavior that is looking for value." Schneider told investors that consumers are looking for value, which is why promotional activity was particularly strong. Prices increased by just 1.4 % in North America, compared to 3.1 % in Europe.
Birth rates are falling
Nestlé has been affected by global trends that have affected some of its most popular categories. Nestlé's nutrition category (through which they sell baby food) is not a high growth category due to the declining birth rate.
Mark Schneider said: "In recent years, you may know that with lower birth rates, this activity contributed less to growth."
The growth of this category is driven by Human milk oligosaccharide (HMO) products.
Schneider believes that inflation has slowed growth in the past, but is now starting to stabilise, allowing Nestlé to return to higher levels of growth.
As we now come out of this major inflation spike, the coming year should see an organic growth rate of at least 3 percent. We are likely to be a little bit below that. The portfolio is capable of delivering that. "We are confident."
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