Unilever, Nestle price rises boost outlook as demand plunges

Higher commodity costs, inflation in Brazil and the fall in the pound are contributing to the upward pressure for both Unilever and Nestle


Food companies like Unilever and Nestle are under pressure to lift costs in order to boost profit margins as potential predators like Kraft Heinz look for consolidation opportunities. Photo: Reuters
Food companies like Unilever and Nestle are under pressure to lift costs in order to boost profit margins as potential predators like Kraft Heinz look for consolidation opportunities. Photo: Reuters

Zurich/ London: Nestle SA and Unilever reported sales that beat estimates as the European food giants pushed through cost increases to combat slowing purchases by pickier consumers opting for quality over quantity.

KitKat maker Nestle said organic revenue rose 2.3% in the first quarter, compared with the 2% median estimate.

Unilever’s sales growth of 2.9% exceeded analyst predictions of 1.9% as the Hellmann’s mayonnaise provider issued its first results announcement since rebuffing a takeover approach from Kraft Heinz Co.

Improved pricing power at both companies provided an early sign of recovery for the food and beverage market after years of deflationary pressure in Europe, slowing sales in China and economic crises in Brazil and Russia.

Higher commodity costs, inflation in Brazil and the fall in the pound since the UK’s vote to leave the European Union are contributing to the upward pressure.

“Pricing was better than expected,” Jon Cox, an analyst at Kepler Cheuvreux, said in an interview on Bloomberg TV. “Everybody has to increase prices, and generally that’ll be sticky.”

Nestle and Unilever are joining apparel makers Burberry Group Plc and Ralph Lauren, which are trying to wean themselves off discounting, especially in the US Alcoholic beverage companies such as Diageo Plc are also trying to ride a trend of “premiumization” as consumers shift to fewer but more expensive purchases.

Food companies are under pressure to lift costs in order to boost profit margins as potential predators like Kraft Heinz look for consolidation opportunities. The US company is backed by private equity firm 3G Capital Inc., known for its pursuit of aggressive profit targets.

The challenge facing the industry is that some cost increases are provoking consumers to reduce purchases: Nestle said higher pricing weighed on shipments in Europe and also at its baby-food unit.

Nestle’s quarterly revenue growth was the slowest this century, according to Andrew Wood, an analyst at Sanford C. Bernstein. A later Easter in 2017 pushed chocolate orders into the second quarter from the first this year.

Nestle shares rose as much as 1.1% in Zurich, while Unilever gained as much as 1.6% in Amsterdam.

Unilever was more aggressive than Nestle in raising food prices in the quarter, with a 3.4% increase, led by more expensive versions of Magnum and Ben & Jerry’s ice cream.

Nestle, which increased prices 1%, was prompted to raise the cost of Nescafe after robusta coffee futures have gained 38% in the past year. Each company’s increases were above analyst estimates.

“We’re starting to see some inflationary pressures in the U.K. from the depreciation of the pound,” Unilever chief financial officer Graeme Pitkethly said in a phone interview, adding that the company’s competitors are also raising prices in the country.

UK grocer Tesco Plc last year briefly removed some Unilever items from its online store after a dispute over pricing. Distiller Pernod Ricard SA in March lifted the cost of some spirits and wines in the U.K.

Positive aspects of the period for Nestle, the maker of Lean Cuisine meals, included accelerating sales in Europe and Asia, Kepler’s Cox said. In contrast, growth slowed to a near halt in the Americas region, hurt by declines in US confectionery and pet care.Unilever cited gains in its home- and personal-care businesses, while sales were unchanged in the food division.

The ice-cream unit was helped by new products such as chocolate-coated Magnum pints in a tub. The refreshment unit, which includes ice cream, increased prices by 5%.

The Anglo-Dutch company didn’t provide any immediate update on plans to divest its spreads unit, which includes the Flora brand. After fending off Kraft Heinz in February, Chief Executive Officer Paul Polman said Unilever will deliver on promises to increase shareholder returns via buybacks and lift profitability goals.

In a first move toward that, the company raised the quarterly dividend by 12% to 36 euro cents a share. Unilever said it’s on track for 2017 underlying sales growth of 3% to 5% and sees an improvement in underlying operating margin of at least 80 basis points. Bloomberg

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