Boxes of cereal manufactured by Nestle SA sit on shelves amongst other goods inside an Essen hypermarket operated by ZAO Essen Production AG, in Naberezhnye Chelny, Russia. (Photographer: Andrey Rudakov/Bloomberg)

Nestle, Unilever Price Rises Boost Outlook as Demand Wanes

(Bloomberg) -- Nestle SA and Unilever reported sales that beat estimates as the European food giants pushed through cost increases to combat slowing purchases by pickier consumers opting for quality over quantity.

KitKat maker Nestle said organic revenue rose 2.3 percent in the first quarter, compared with the 2 percent median estimate. Unilever’s sales growth of 2.9 percent exceeded analyst predictions of 1.9 percent as the owner of Hellmann’s mayonnaise issued its first results announcement since rebuffing a takeover approach from Kraft Heinz Co.

Improved pricing power at both companies, as well as yogurt maker Danone, provided an early sign of recovery for the food and beverage market after years of deflationary pressure in Europe, slowing sales in China and economic crises in Brazil and Russia. Higher commodity costs and the fall in the pound since the U.K.’s vote to leave the European Union are contributing to the upward pressure.

“Pricing was better than expected,” Jon Cox, an analyst at Kepler Cheuvreux, said in an interview on Bloomberg TV. “Everybody has to increase prices, and generally that’ll be sticky.”

Nestle and Unilever are joining apparel makers Burberry Group Plc and Ralph Lauren Corp., which are trying to wean themselves off discounting, especially in the U.S. They’re also trying to ride a trend of “premiumization” as consumers shift to fewer but more expensive purchases. Unilever said Thursday it agreed to buy hipster condiment brand Sir Kensington’s, a maker of organic mayonnaise.

Volume Soft

Food companies are under pressure to lift prices and cut costs in order to boost profit margins as potential predators like Kraft Heinz look for consolidation opportunities. The U.S. company is backed by private equity firm 3G Capital Inc., known for its pursuit of aggressive profit targets.

The challenge facing the industry is that some cost increases are provoking consumers to reduce purchases: Nestle said higher pricing weighed on shipments in Europe and also at its baby-food unit.

Nestle’s quarterly revenue growth was the slowest this century, according to Andrew Wood, an analyst at Sanford C. Bernstein. A later Easter in 2017 pushed chocolate orders into the second quarter from the first this year. Danone, which upgraded its profit growth forecast after the close of European markets, said the value of sales rose 3.3 percent in the first quarter even as volume declined 2.6 percent, reflecting higher prices.

Nestle shares rose as much as 1.1 percent in Zurich, while Unilever gained as much as 1.6 percent in Amsterdam.

Unilever was more aggressive than Nestle in raising food prices in the quarter, with a 3.4 percent increase, led by more expensive versions of Magnum and Ben & Jerry’s ice cream. Nestle, which increased prices 1 percent, was prompted to raise the cost of Nescafe after robusta coffee futures have gained 38 percent in the past year.

Both companies cited Brexit as a stimulus for cost pressure, with Nestle saying it raised prices on most of its portfolio in the U.K. to deal with the weaker pound. U.K. grocer Tesco Plc last year briefly removed some Unilever items from its online store after a dispute over pricing. Distiller Pernod Ricard SA in March lifted the cost of some spirits and wines in the U.K.

“We’re starting to see some inflationary pressures in the U.K. from the depreciation of the pound,” Unilever Chief Financial Officer Graeme Pitkethly said in a phone interview.

Unilever cited gains in its home- and personal-care businesses, while sales were unchanged in the food division. The refreshment unit, which includes ice cream, increased prices by 5 percent.

Spreads Sale

The Anglo-Dutch company didn’t provide any immediate update on plans to divest its spreads unit, which includes the Flora brand. After fending off Kraft Heinz in February, Chief Executive Officer Paul Polman said Unilever will deliver on promises to increase shareholder returns via buybacks and lift profitability goals.

In a first move toward that, the company raised the quarterly dividend by 12 percent to 36 euro cents a share. Unilever said it’s on track for 2017 underlying sales growth of 3 percent to 5 percent and sees an improvement in underlying operating margin of at least 80 basis points.

Positive aspects of the period for Nestle, the maker of Lean Cuisine meals, included accelerating sales in Europe and Asia, Kepler’s Cox said. In contrast, growth slowed to a near halt in the Americas region, hurt by declines in U.S. confectionery and pet care.

In the U.S., tough competition among retailers is making it hard to negotiate increases, Chief Executive Officer Mark Schneider said on a conference call.

“We’ll work with all of those in a very constructive fashion so that everyone meets their objectives,” he said.

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