High costs squeeze Nestlé’s margins

Price increases for coffee and chocolate boosted sales at Nestlé over the past six months, but profitability suffered from higher costs. The company is increasing marketing investments and reviewing its brand portfolio.

Margins under pressure

First-half sales were down 1.8 % to 44.2 billion Swiss francs (47 billion euros), a result of negative currency effects caused by the strong Swiss franc. Organic growth was 2.9 %, mainly due to price increases for Nespresso and KitKat, among others. Volumes increased by only 0.2 %.

High raw material prices for coffee and cocoa, increased marketing expenses and unfavourable currency effects put more pressure on margins. Operating profit fell 7 % to 7.29 billion francs and net profit fell 10 % to 5.07 billion francs.

Investing in category growth

CEO Laurent Freixe announced further price increases for certain products in individual markets, but said the company had already implemented most price increases in the first half of the year. Marketing investments also continue to increase: “Where we are investing to accelerate category growth, we are growing four times faster than the group.”

In the vitamins, minerals and supplements business, Nestlé has launched a strategic review of underperforming brands. These brands – including Nature’s Bounty, Osteo Bi-Flex, and Puritan’s Pride – may end up being divested.