Nestle reduces sales targets following backlash over price increases

Nestle counts the costs of pushing the prices of its bestselling brands out of reach of increasingly squeezed consumers. KitKat and Nescafe are among the 31 “mega brands” of the world’s biggest foodmaker. Purina, the pet food brand, is also included. The company cut its guidance on Thursday, after the underlying sales rose by a lower-than-expected 2% in the first nine-month period.

The company now expects to see sales rise by around 2 percent over the course of the year. This is lower than the previous guidance, which was for at least a 3 percent increase, and it’s the lowest growth rate since the turn-of-the century. In July, the company also reduced its sales forecast from an earlier estimate that it would grow by about 4%.

Jean-Philippe Bertschy is an analyst at Vontobel. He said that for a supertanker such as Nestle, “the miss in only a few month’s time is enormous.” Bertschy added that it would be a massive task to return Nestle back to its roots, and that this would take a long time.

The sales slump came despite the giant Swiss consumer products group slowing down price increases after signs showed that high prices had sent consumers searching for cheaper alternatives. Laurent Freixe is the new CEO. He said, “Consumer demands have weakened over the past few months and we expect that the demand environment will remain soft.”

The group has also revised its forecast for the operating profit margin in 2024 to around 17 per cent, compared with previous guidance that indicated a slight increase from last year’s 17,3 per cent. Nestle continues to increase prices globally but at a slower rate of 1.6%, down from 2.1% in the first six months, after “unprecedented” increases the previous two years.

Nestle continues to increase prices but at a lower pace after two years “unprecedented” increases

The group also attributed the pressure on sales to “consumer hesitation towards global brands linked to geopolitical conflict” in certain markets. The group has warned before of “consumer hesitation” in the Middle East, Asia and Africa due to the “tragic” events of the Israel/Hamas conflict.

Freixe is a 62-year-old veteran of the company who was appointed CEO in September after Mark Schneider resigned abruptly following several quarters with weak trading. Freixe also announced a major restructuring of the company’s leadership and structure.

Nestle plans to reduce the size of its executive board and merge its Latin America, North America, Greater China, Asia, Oceania, and Africa units.

Chris Beckett is the head of equity research for Quilter Cheviot. He said, “Nestle is a good business, but it’s going through a difficult period.” It was perhaps a bit too inward looking and a reset would be a good idea.

Analysts blamed Nestle for the lack of sales, blaming its decision to not ease up on price increases quickly enough as inflation slowed down. Many of Nestle’s competitors took this approach.

Nestle, however, has lagged behind rivals like Unilever and Danone during this period of high inflation. Unilever is expected to report an increase of 1% in third-quarter prices and 3.2% in underlying sales volume when it reports its results next week.

Nestle also made some operational mistakes. In 2010, the 2020 acquisition of Palforzia (a peanut-allergy drug) led to an impairment of $2.1 billion. It was sold last year. Investors were also scared by the failed integration of a French water purification system, and an IT scandal that caused a shortage for several months.

Nestle shares, which are down 13 percent this year, had a turbulent day before they closed up SwFr2.1 or 2.5 percent at SwFr86.