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Nestle - higher prices give sales a boost

Nestle reported 9-month organic sales growth of 8.5% to CHF 69.1bn, driven by higher prices...

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Nestlé reported 9-month organic sales growth of 8.5% to CHF 69.1bn, driven by higher prices which contributed 7.5% and volumes remained resilient rising 1.0%. Growth was broad-based across most geographies and categories.

The group now expects full year organic sales growth of around 8%, with an underlying operating profit margin of 17.0%.

The shares were broadly flat following the announcement.

View the latest Nestlé share price and how to deal

Our view

With input costs on the rise, Nestlé's had to resort to price increases to keep things ticking along. That's contrary to the group's usual, volume led, strategy (more on that later) - but no one's immune to the wider inflationary pressures so it's a necessary flex.

The good news is that so far volumes are still managing to edge higher thanks to a strong range of products and price hikes mean overall sales growth is strong.

More broadly, the underlying performance has been very impressive. A global footprint and varied product base mean the group's been able to move with the market over the past couple of years. Exposure to pet care, health and at-home coffee products in particular helped in lockdown conditions. They're also exactly the kind of thing people buy over and over again in normal times.

We also admire the operating model, which focuses on volume instead of price increases. That's helped deliver underlying sales growth of at least 2% for over 20 years. And, despite obvious challenges to the model, sales are expected to keep moving in the right direction over the medium-term.

Mounting pressures from inflation are starting to take their toll on margins that are trying their best to hold firm. For now, price hikes are pushing revenue high enough to offset lower margins. Though, there's a limit to how long that'll last.

Nestlé relies on a research & development spend of more than 1.5bn Swiss Francs (CHF) a year to provide fuel for volume growth. 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.

That virtuous cycle has seen the group increase the dividend every year for 29 years - although remember all dividends are variable and not guaranteed.

The group has been doing a bit of housekeeping recently, clearing out low potential brands and stocking up in growth areas such as The Bountiful Company's nutrition and supplements business. A higher growth portfolio can only be a good thing, and the group's been trimming its stake in L'Oréal which stood at 20.1% last we heard.

Nestlé's not a company likely to deliver dizzying levels of growth from here. It's more steady-eddie than stellar growth stock. However, Nestlé's not immune to wider pressures and the valuation has come down this year. Trading back in line with the longer-term average is still a reflection of the group's strengths, but also means there's pressure for sales to keep moving forwards.

Nestlé key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

9 Month Sales (organic)

North America reported 11.2% sales growth to CHF 19.1bn, driven almost entirely by pricing. There was strong momentum in e-commerce and further recovery of out-of-home channels (shops). Nestlé gained market share in the region, led by pet food and coffee.

Europe reported 7.1% sales growth to CHF 14.0bn. Pricing, continued momentum of out-of-home channels and innovation supported growth. The region saw market share gains in coffee, Infant Nutrition and plant-based food.

Asia, Oceania and Africa saw sales up 8.1% to CHF 13.9bn, driven by pricing, portfolio optimization and a further recovery of out-of-home channels. The region saw market share gains in culinary, ready-to-drink and portioned coffee, as well as Infant Nutrition.

In Latin America, sales grew 12.9% to CHF 8.6bn, with growth supported by pricing and resilient volumes. The region saw market share gains in Infant Nutrition, pet food and coffee creamers.

Greater China reported 4.7% sales growth to CHF 3.8bn, with a fairly even split across pricing and volume growth.

Nespresso saw sales growth of 3.0% to CHF 4.7bn, as the benefits of 4.9% growth from pricing was somewhat offset by volume declines of 1.9% as the group lapped double digit growth last year.

Nestlé Health Science saw sales growth of 4.5% to CHF 4.8bn, with acquisitions pushing reported sales up by 42.5%, largely related to the acquisitions of the Bountiful Company and Orgain.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 19th October 2022