Consumer titans have Covid-era issue, in reverse
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By George Hay
LONDON, July 26 (Reuters Breakingviews) -Consumer goods giants can’t seem to catch a break. During the pandemic, the likes of $260 billion Nestlé NESN.S and $150 billion Unilever ULVR.L hiked their prices to offset rocketing input inflation, only to find they were selling fewer chocolatey and sugary treats. First-half results from both on Thursday suggest they’re solving their volume problem, but at the expense of prices – and that’s before factoring in a more intractable, and longer-term, headache.
At first sight, Nestlé’s 0.1% year-on-year volume growth in the first six months of the year is hardly grounds for wolfing down a celebratory KitKat. But it comes after two years of near-constant quarterly declines, and in the second quarter volumes were up 2.2%, helped by a swing in the North America market from a 5.8% fall to a 2.8% rise. That’s not miles off the 2.6% volume growth seen in the first half by Unilever, which from the third quarter of 2021 saw two years of flat or falling quarterly volumes.
All things being equal, Unilever boss Hein Schumacher wants prices to grow 3% and volumes to grow 2%, reflected in his 3% to 5% annual sales growth figure. Now that Unilever is not hiking prices year-on-year by 13%, as it did in the fourth quarter of 2022, it’s easier to sell more Marmite and Hellmann’s mayonnaise. But Schumacher and Nestlé boss Mark Schneider could only muster price growth of 1.6% and 2% in the first half respectively, largely due to the need to attract cash-strapped consumers.
The difference between the two companies is that Unilever’s lower prices were in line with what it had expected, whereas Nestlé’s weren’t. That explains why Schumacher maintained his annual sales growth target, while Schneider cut his from 4% to 3%. Unilever’s valuation seems to be factoring in its relatively better performance: it recently overtook Nestlé on a price-earnings basis, and investors may have more confidence that Schumacher can execute his strategy of focusing on better-performing brands.
That said, all consumer goods companies share the same problem. It’s hard to regain customers when your high prices have made them decamp to non-branded alternatives. It’s even harder if they progressively decide that what you’re selling is insufficiently healthy, as may be the case for a third of Nestlé’s main products. Even if both Schumacher and Schneider do their job of focusing on the right items, marketing them smartly and devising new ones, that cloud will hover over their valuations.
Follow @gfhay on X
CONTEXT NEWS
Unilever on July 25 posted a 3.9% rise in second-quarter underlying sales, below the 4.2% increase expected by analysts in a company-compiled consensus.
The UK-listed consumer goods group maintained its full-year underlying sales growth forecast of 3% to 5%, mostly driven by volume, while its forecast for an underlying operating margin of at least 18% was stronger than the market view.
Shares in the maker of Dove soap and Hellmann’s condiments rose 6.2% on July 25.
Nestlé now expects full-year organic sales to climb at least 3%, down from about 4% previously, the company said on July 25. First-half sales also came in slightly under analysts’ expectations, increasing 2.1% compared with an average estimate of 2.5% growth in a company-provided consensus. Its shares fell 5.1% on July 25, and as of 0813 GMT on July 26 were down another 1.8%.
Graphic: Unilever recently erased its discount to Nestlé https://reut.rs/3WClCWK
Editing by Francesco Guerrera and Oliver Taslic
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