Wrapup 1: Consumer giants are winners as shoppers swallow price hikes

Construction Partners

19/10/2022 16:35

* 
      Food prices help drive record inflation 
    

        * 
      Nestle, P&G beat sales estimates
    

        * 
      Nestle raises full-year guidance
    

        * 
      Analysts warn consumers may grow tired of price hikes
    

  
    By Richa Naidu, Jessica DiNapoli and John Revill
       ZURICH/LONDON, Oct 19 (Reuters) - Nestle  NESN.S  and
Procter & Gamble  PG.N , the world's two biggest consumer firms,
reported better-than-expected sales on Wednesday, as shoppers
continued to pay more for goods like Nescafe coffee and Gillette
razors despite record inflation. 
    Nestle, which also makes Cheerios cereal and KitKat
chocolate bars, reported better-than-expected sales results,
successfully passing higher costs on to shoppers as rocketing
food prices around the world drive record inflation.
    Similarly, Tide detergent maker P&G beat estimates for
quarterly sales and profit, helped by price hikes on everything
from Head & Shoulders shampoo to Gillette razors, even as a
stronger dollar weighed on its revenue from overseas markets.
    Consumer companies - many of which thrived during COVID-19
as people stockpiled their products - are once again emerging as
winners in a time of global crisis, maintaining double-digit
margins as people are forced to pay more for everyday products.
    People are also eating at home more as the cost-of-living
crisis discourages them from going to restaurants. Demand for
food and household consumer goods has so far fallen at a slower
pace than discretionary products like apparel and electronics,
as consumers prioritise spending on essential items.
    "We are also seeing consumers moving to two different price
points," said P&G finance chief Andre Schulten. 
    "A group of consumers is looking for value by trading into
higher transaction sizes to find lower cost per use, or lower
cost per unit. And we see other consumers who are more
cash-conscious, and they are very focused on cash outlay."
    The sector has faced margin pressure over the past 18 months
due to rising costs, but Nestle reiterated its target for a
trading operating profit margin of around 17%.
    Britain's consumer price index increased by 10.1% in
September, driven by the biggest jump in food prices since 1980.
Euro zone inflation also zoomed past forecasts in September to
nearly 10%. Prices meanwhile increased by 8.2% in the United
States, stretching the pockets of consumers already spending
more on fuel bills and mortgage payments.
    Nestle posted its strongest nine-month sales growth in 14
years and raised its full-year guidance. Organic sales, which
cut out the impact of currency movements and acquisitions, rose
by 8.5% in the nine months to end-September. It was the highest
nine-month rise since 2008 and was driven by higher prices aimed
at offsetting rising costs.
    "We delivered strong organic growth as we continued to
adjust prices responsibly to reflect inflation," the company's
chief executive Mark Schneider said.
    P&G said average prices across its product lines rose 9% in
the first quarter ended Sept. 30, while sales volumes fell 3%.
    "We've priced in the last fiscal year on all 10 of our
product categories," CFO Schulten said.
    Shares in Nestle were up 0.2%, while P&G rose 2%.
    Their results bode well for rival food giant Unilever
 ULVR.L  and Dettol maker Reckitt  RKT.L , which both report
results next week.
    But despite the strong sales, some analysts worried price
rises could soon push consumers too far, potentially pricing
some of its products out of their reach amid a cost of living
crisis that is seeing sales volumes across the industry decline.
    "You do worry about the pricing power category by category
particularly for discretionary food – nobody really needs a
KitKat or an ice cream," said Chris Beckett, head of equity
research at Quilter Cheviot. 
    "Sales volumes have held up well so far but we are a way
from peak cost-of-living squeeze."  
    Nestle's Schneider raised concerns about the "challenging"
economic environment, which he said was hurting the purchasing
power of many customers.
    ($1 = 0.9953 Swiss francs)
 (Reporting by Richa Naidu, Uday Sampath Kumar, John Revill and
Jessica DiNapoli; Editing by Miranda Murray, Josephine Mason,
Matt Scuffham, Jan Harvey and Catherine Evans)
 ((John.Revill@thomsonreuters.com; +41 41 528 36 37; Reuters
Messaging: john.revill.thomsonreuters.com@reuters.net))