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Nestle raises growth outlook, eyes consumer reaction to price hikes

Nestle (NESN.S) warned on Thursday that price hikes could eventually weigh on sales volumes for the maker of Cheerios cereals, Kit Kat bars and Nescafe as it raised its full-year sales growth forecast to 7-8% and trimmed its margin guidance.

Cost inflation hurt the world’s biggest food group less than expected in the second quarter and price increases boosted first-half organic sales growth.

Consumer goods businesses are facing soaring costs for raw materials, energy and transportation, and though many consumers so far seem to accept the resulting price increases, delays in implementing them are squeezing companies’ margins.

“So far, the evidence we’ve seen about consumers trading down is very limited to certain categories and geographies,” Chief Executive Mark Schneider told a media call.

“But that doesn’t mean it couldn’t happen down the road, and that’s something that we need to watch in the second half.”

Nestle shares, down almost 8% this year, were 1.4% lower at 0817 GMT, lagging the European food sector index (.SX3P).

Nestle raised its full-year sales growth forecast, just like Rivals Reckitt Benckiser (RKT.L), Unilever (ULVR.L) and Danone (DANO.PA) earlier this week, after steep price increases helped all four companies beat second-quarter sales expectations.

Schneider said it was easier to raise prices for household products or cosmetics than for food, but pricing would catch up over time so margin pressure would be temporary.

Nestle, whose products range from pet food to gourmet coffee, said its underlying trading operating profit margin dropped to 16.9% in the first half of 2022 from 17.4% a year earlier. It now targets around 17.0% for the full year, the bottom of an earlier 17.0%-17.5% range.

Bernstein analyst Bruno Monteyne said the new margin guidance was “still a very strong margin, with a much smaller year-on-year margin decline than most of its European peers”.

Hit by higher impairments and taxes, Nestle’s first-half net profit of 5.2 billion Swiss francs ($5.42 billion) missed expectations in a company-compiled poll of analysts.

Organic sales growth, which strips out currency swings and acquisitions, accelerated to 8.7% in the second quarter from 7.6% in the first three months, beating forecasts thanks to price increases of 7.7% and strong demand for Purina petcare products.

Sales of confectionery, notably KitKat chocolate bars, and coffee, including Nescafe and Starbucks brands, increased but consumers bought fewer premium Nespresso capsules in Europe.

Vontobel analyst Jean-Philippe Bertschy attributed the lower Nespresso volumes to tough comparables and “unprecedented” price hikes. Kepler Cheuvreux’s Jon Cox said: “High prices are bound to impact volume at some point, with under pressure consumers probably looking at cheaper alternatives in some cases.”

($1 = 0.9589 Swiss francs)