By Saabira Chaudhuri
Shoppers around the world are spending more cautiously, Nestlé warned Thursday, prompting the packaged-food giant to increase promotions to convince consumers to open their wallets.
"The perception of consumers everywhere but especially in the U.S. is that food prices are high," Chief Executive Laurent Freixe said in an interview, adding that many shoppers feel stretched after a period of surging inflation.
Having repeatedly raised prices to offset higher costs in recent years, Freixe indicated that Nestlé would offer more discounts and cut prices to attract shoppers to its products, which include KitKat chocolate, Nescafe coffee and Purina pet food. "We are out of a period of high inflation," he said. "The environment is now more intense."
The comments came as Nestlé reported weaker-than-expected third-quarter results and slashed its full-year sales forecast, warning that consumers around the world are pulling back on spending even as price rises ease.
Nestlé reported a 1.9% rise in third-quarter organic sales growth, which strips out currency and M&A impacts, below analysts' forecasts of a 3.1% rise. The figure consists of a 0.6% rise in prices and a 1.3% gain in sales volumes. The company cut its sales guidance for the full year to 2%, down from a previous target of at least 3%.
The results are the first since Freixe replaced longtime CEO Mark Schneider, who was unexpectedly ousted in the summer after sales growth slowed and as Nestlé's share price fell.
"Consumer demand has weakened in recent months, and we expect the demand environment to remain soft," Freixe said Thursday.
A particularly notable area of slowing growth has been Nestlé's huge petcare business -- a category that includes brands like Purina and Fancy Feast -- and for years had been one of its strongest. Petcare reported organic sales growth of 1.3% in the most recent quarter. Prices declined following a flurry of promotions by retailers, marking a big shift away from price rises that have helped Nestlé over the past few years.
Nestlé Chief Financial Officer Anna Manz said pet owners in the U.S. are trading down to cheaper brands, some within the company's own stable. "Short term, people are constrained on price," she said. "Retailers are wanting to promote more."
Frozen food in the U.S., a category that typically draws much of its sales from lower-income consumers, has also struggled. Nestlé said competition was particularly intense in the pizza aisle, and that more people are cooking from scratch rather than buying prepared meals.
Manz said Nestlé had been carefully using analytics to optimize promotions, pricing products at a level low enough to woo shoppers to its brands while allowing the company to levy the highest price it could.
Over the past two years, Americans have spent more of their income on food than they have in three decades. Food prices have also become a hot-button issue on the campaign trail ahead of the U.S. presidential election in November.
Nestlé said overall prices had declined 1.1% in North America in the third quarter, and that discounts had ramped up after a period of "enormous" price rises in some categories.
The company also said it was seeing consumer weakness elsewhere in the world.
In Europe, some of Nestlé's coffee products have been delisted by retailers who have resisted the company's attempts to raise prices. This coupled with soft demand from consumers translated into a 0.3% decline in third-quarter volumes in the region although prices rose 1.4%.
In its Asia, Africa and Middle East zone, Nestlé said many consumers are continuing to avoid global brands. Multinational companies have faced boycotts in Muslim-majority countries from people angry at what they see as Western brands' support for Israel following the country's invasion of Gaza.
In a bid to revive Nestlé's fortunes, Freixe has said he would focus on winning market share, investing more in brands and pushing fewer, bigger product innovations -- a tactical shift also emphasized by rivals like Unilever.
Freixe also Thursday announced a restructuring aimed at increasing agility and accountability. Nestlé's five zone heads will be narrowed to three, all of whom will be located at the company's headquarters in Vevey, Switzerland.
Still, investors remain cautious. Shares in Nestlé have slumped roughly 8% since Freixe took over as CEO at the start of September and were down 2% in early trading in Europe on Thursday.
Jefferies analyst David Hayes expects the company to face questions over its medium-term guidance of 4% to 6% sales growth at a capital markets day next month. Nestlé's existing guidance looks about 10 years out of date, he said, adding that Nestlé and other consumer-products companies are facing deteriorating conditions after two years of price increases.
Write to Saabira Chaudhuri at Saabira.Chaudhuri@wsj.com
(END) Dow Jones Newswires
October 17, 2024 06:23 ET (10:23 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
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