Business | Markets

Rising food prices unsettle Nestle

Company's revenue grows 9.8% as it was able to pass costs on to customers.

  • By Jenny Wiggins, Financial Times
  • Published: 00:35 April 26, 2008
  • Gulf News

London: Nestle, the maker of Nescafe coffee and Maggi instant noodles, highlighted the strain food companies are facing because of food price inflation and environmental campaigns, including those aimed at reducing demand for bottled water.

The food company Thursday said revenue grew 9.8 per cent to 25.7 billion Swiss francs ($25.4 billion) in the first quarter, mostly because the company was able to pass on the rising cost of food to customers but warned that rising food prices made it tougher to sell packaged foods in emerging markets.
Prices went up most sharply on ice cream and dairy products, due to unprecedented increases in the cost of milk powder last year, as well as on pet foods, which are made with corn and soya.

Prices rose an average of 5.6 per cent in the first quarter, compared to 1.8 per cent a year earlier, but Nestle said it was likely to reduce the rate of increases in the remainder of the year.

Roddy Child-Villiers, head of investor relations at Nestle, said, "The company could not continue to keep raising prices at current rates, particularly in emerging markets such as Asia and Africa where people are struggling to afford basic foodstuffs such as wheat and rice. There's only so much money in these people's pockets. we need to be competing very aggressively for our share of their spend." Nestle also said it had been changing the ingredients in some products, such as swapping local grains for wheat in some of its instant cereals.

Biggest increases

Other companies have been taking similar measures, with brewers replacing imported malting barley with locally grown sorghum in beverages in Africa. All large European food companies have been pushing through price increases over the past year, led by Nestle, Danone and Cadbury Schweppes. The biggest price increases have been in dairy products like cheese, ice cream and yoghurt, as well as in edible oils, margarine, cereals and crackers, according to Bernstein Research.

Nestle reported sales growth in all core categories except bottled water, where sales revenues dropped 0.6 per cent. The group attributed some of the decline to tough comparisons with the first quarter of last year, when sales were up 10 per cent, but also said an environmental backlash against bottled water was hurting sales in Italy, France and the US.

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"It would be naive to deny there's any impact from this issue," Child-Villiers said. Nestle said it was working with other companies in Europe to bring "reason" to the debate, and that it was planning a marketing campaign in the US to communicate health benefits of water.

In the US, the world's biggest market for bottled water, city governments have been banning bottled water dispensers from their offices, with some switching to filtered water systems amid concerns over the environmental impact of packaging water in plastic. In the UK, restaurateurs have been signing up to a Water on Tap campaign run by the Evening Standard newspaper, which encourages business to offer free tap water.

Richard Hall, chairman of beverage research group Zenith International, said that while concerns over the environmental impact of bottled water were "legitimate", it remained the fastest-growing major beverage category worldwide with sales growth of 6 per cent forecast for this year. Nestle shares fell 1.7 per cent to 505 Swiss francs as the strength of the franc against other currencies lowered group sales, and analysts worried about a slowdown.

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