Nestlé stands firm on climate investment despite cost squeeze: ‘This is something that we want to ring-fence’
The Swiss food giant has committed to invest a total of CHF3.2 billion over the next five years to accelerate its path towards net zero emissions. Nestlé aims to halve its carbon emissions by 2030 and reach net zero by 2050, in line with the ambition of the Paris Climate Change Agreement.
The company is focusing its efforts on initiatives in green energy and regenerative agriculture to restore soil health and address the two-thirds of emissions that lie in the agricultural supply chain.
Rather than taking a top-down approach, chief executive Mark Schneider stressed the need to deliver a ‘just transition’ for all stakeholders. “It will not be sufficient to just raise the environmental specifications of the commodities we buy. This will be unfair to many farmers who do not have the know-how or the resources to comply. We provide first-hand technical assistance and help to arrange financial support,” he explained.
Speaking during a conference call to discuss the company’s third quarter results this week, Schneider was up-beat on the group’s progress on GHG emissions.
“Reducing them is no longer just a future plan for us. It is a reality, and I'm proud to say that we have left peak carbon behind us,” the chief executive stressed. “Since 2019, our greenhouse gas emissions are decreasing, even though Nestlé keeps growing. We are on our glide path down and fully on track for our first intermediate target, a 20% reduction in greenhouse gas emissions by 2025.”
Continued progress is, of course, dependent on continued investment to support change. Is the company’s climate investment a moveable part that can be leveraged to offset rising costs?
Finance chief François-Xavier Roger dismissed this possibility.
“If we include ESG at large and sustainability at large, [our investment commitment is] about CHF1 billion a year over the next 5 years, between '21 and '25. This is something that we want to ring-fence,” he stressed. “Because we see input cost inflation in commodities, packaging, transportation and so forth we are [not] going to start saving on the climate commitment and climate investment that we want to do.”
Roger compared the decision to protect Nestlé’s climate and ESG spend to the 2016 move that saw the group safeguard its R&D investments against any cuts as part of the then newly launched efficiency programme. “I think it was very wise to do it. We can add to the list to a very large extent climate and ESG. We have made commitments. We need to get there.”
Innovation investment paying dividends... For now
Nestlé’s move to maintain its R&D investment levels – which stand at close to CHF2bn a year – would appear to have paid off in the resilient sales performance the company delivered in the face of headwinds from COVID-19 to input price inflation.
Group sales in the first nine-months of the year hit CHF63.3 billion. Organic growth stood at 7.6%, including pricing of 1.6%. The company has been able to grow its market share across ‘most categories’. “The latest available data show that we were gaining or holding share in more than 60% of business cells,” Roger revealed.
This performance promoted Nestlé to raise its full year organic sales outlook 6-7%. The group's underlying operating profit margin forecast was maintained at 17.5%.
Investment in innovation and marketing behind its brands has created something of a virtuous cycle for Nestlé, with sales growth largely driven by volumes rather than pricing and its brands enjoying some price elasticity when increased costs need to be passed on.
As Nicholas Hyett, an equity analyst at Hargreaves Lansdown noted: “New varieties and formats of existing popular brands benefit from the much larger marketing and admin budgets, ensuring they're front and centre of consumers' minds. That in turn encourages reliable revenues. Extra sales boost profits, and profits can be paid out as dividends or reinvested in next year's products.”
But will pricing take its toll?
The price part of this equation is going to come under rising pressure in the escalating inflationary environment. Roger revealed that cost inflation is expected to be around 4% of cost of goods sold for fiscal 2021.
In the first nine months of the year, Nestlé passed pricing of 1.6% along to consumers ‘a level not seen for the last six years’.
“We expect to progressively increase pricing in a responsible manner over the remainder of 2021 and 2022,” Roger confirmed. The company expects higher cost inflation in 2022, he added.
Roger noted that the Kit Kat-to-Maggi manufacturer is developing products that deliver value, while also pulling other levers to protect margin. “Beyond pricing, we continue to strengthen the development of affordable offerings, particularly those that meet nutritional needs in emerging markets. These efforts helped to soften the effect of inflation for those most impacted. In addition, we are using other levers such as product mix, disciplined cost management and the further rollout of strategic revenue management tools. We have also benefited from increased centralized procurement.”
The finance chief was reassuring on the outlook for volumes and price elasticity, referring to the ‘strong’ real internal growth, which strips out pricing impact and is ‘largely’ volume led.
“Volume remains very positive and very attractive. Part of it is linked to some tailwind that we had in the context of the pandemic, with higher consumption at home. So we see volume growth slowing down a little bit as we progress over time but remaining very attractive. Is it linked to pricing? There is no evidence of it.”
Nevertheless, when prices go up on shelf, consumer confidence is likely to take a hit. According to the latest IGD shopper confidence index in the UK, for instance, shopper confidence was down nine points in September, its largest recorded monthly decline.
Overall financial confidence has also fallen sharply in the last month with 31% of shoppers expecting to be worse off in the year ahead, IGD revealed. Confidence has declined across all shopper demographics, but more so among lower income households.
Describing the Index as a ‘sobering read’, Simon Wainwright, Director of Global Insight at IGD, predicted shoppers are likely to become more budget focused in the months ahead. “Shopper focus will be on value for money… with many switching to private label products, motivated by seeking out savings.”
The discount channel – an area where Nesté brands are under-represented - is forecast to be the fastest-growing grocery channel over the next five years. “We will see many shoppers shift their shopping behaviour to make cost-savings from this channel,” Wainwright suggested.
“Shopper confidence will remain very fragile for the foreseeable future so retailers and suppliers will need to focus on building loyalty by supporting their customers’ needs by offering value for money.”
In the EMENA region, to date Nestlé's price hikes stand at just 0.8%. Schneider said this was largely the result of 'contractual relationships to retailers in Europe' meaning manufacturers don't have the same flex on pricing as elsewhere in the world.
In Western Europe, price increases are going to accelerate. "Going forward, of course, we will have to take pricing there as well. We've taken some already, but it doesn't go as fast as it goes in some other geographies," Schneider revealed.
Is this expected to weigh on volumes?
Nestlé's Roger conceded that the group could see volumes coming off the boil in the months to come. But he reiterated this was more the consequence of shifting consumption habits as the world reopens after COVID lockdowns and associated constraints on out-of-home consumption.
"There is a certain likelihood that volume growth will slow down while remaining positive and probably higher than what it was pre-pandemic," the CFO predicted. "We are very optimistic still on volume. And the volume growth slowdown is not necessarily linked to pricing. We believe that it is much more linked to the fact that we are exiting the pandemic step by step. And as a consequence of that, we are comparing against a high level of comps... which is a higher level of at-home consumption. And this is probably what is going to slow down our volume growth more than the pricing."