Big price hikes prove profitable for Nestle

Nestle SA, the world's largest food company, said first-quarter sales rose 6 percent after increasing prices by the most in a decade for products from Nescafe coffee to KitKat chocolate bars.

Revenue climbed to 25.72 billion Swiss francs ($25 billion) in the three months ended March 31 from 24.25 billion francs a year earlier, the Vevey, Switzerland-based company said yesterday.

Nestle raised its prices on average by about 3 percent last year to cover increasing costs of coffee, cocoa and sugar. About 70 percent of food and beverage revenue is derived from 30 brands that each have sales of 1 billion francs or more, giving Nestle scope to increase prices even as consumer spending wanes.

"They've got the strong brands, so even if you increase prices a couple of points, people are still going to buy the stuff," said Jon Cox, an analyst at Landsbanki Kepler with a "buy" recommendation on Nestle stock. "In this kind of environment, those who have pricing power love it."

The revenue from Nestle's top 30 brands is almost double total sales of Kraft Foods Inc, the company's largest rival.

Nestle fell 5 francs, or 1 percent, to 508.5 francs at 8:02 am in Zurich trading. The shares have risen 3.7 percent in the past year, compared with Kraft's 2.6 percent decline.

'Rather impressive'

Rising commodity prices have put pressure on food-company margins. Robusta coffee has gained 48 percent in the past year, while cocoa has gained 42 percent. Sugar is up 33 percent.

Nestle accelerated its price increases in the first quarter to an average rate of about 5.3 percent. The average price increase of 3 percent last year was the company's biggest since 1997.

"The group expects raw material cost pressures to abate somewhat in the course of 2008," Nestle said yesterday. The company added that it expects to improve its operating margin in 2008.

Sales excluding acquisitions, divestments and currency swings rose 9.8 percent in the quarter, Nestle said.

The Swiss company has said revenue on that basis will gain about 7 percent to 7.5 percent this year, beating its long-range targets for a fourth year. Excluding price increases, revenue rose 4.5 percent.

"Nestle is the strongest and most balanced company in the European food group," wrote Andrew Wood, an analyst at Sanford C. Bernstein with an "outperform" recommendation on the stock. "It is rather impressive that Nestle has been able to move its entire business forward together simultaneously, despite the sheer size and breadth of the company."

Operating margin

Sales of every business division rose in the first quarter, with the exception of bottled water. Revenue of Nestle Waters fell 6.8 percent to 2.16 billion francs. Excluding acquisitions, divestments and currency swings, water sales dropped 0.6 percent.

"These figures reflect the tough comparison with an excellent first quarter in 2007, as well as softer market conditions in the developed world," Nestle said. Water sales rose 9.7 percent in the first quarter of last year.

Nestle expects "mid single-digit growth" in water revenue this year, Roddy Child-Villiers, head of investor relations, said on a conference call with analysts. The US, French and Italian markets contributed to the decline in the first quarter, he said.

Chairman Peter Brabeck-Letmathe told shareholders at the food producer's April 10 annual meeting that he's "highly optimistic" for the coming years.

Nestle's operating margin may improve by 0.3 percentage point this year, Chief Financial Officer Jim Singh has said.

Groupe Danone SA, the world's largest yogurt maker, said April 14 first-quarter revenue rose 19 percent on sales of Activia and the purchase of baby-food maker Royal Numico NV.

Nestle said yesterday it expects to complete its planned 10-for-1 share split and cancel 10 million shares it has bought back under a stock repurchase program by the end of June.

Agencies

(China Daily 04/22/2008 page16)