Dive Brief:
- Nestle posted an 8.9% decline in first-half profit to 4.1 billion Swiss francs ($4.3 billion), down from 4.5 billion francs last year, per its earnings report released Thursday. The company attributed the decline to a one-time 400-million franc deferred tax adjustment.
- First-half revenue came in at 43.2 billion francs ($45 billion) for a 3.5% increase in organic growth, which missed analysts' estimates. Weak pricing, particularly in emerging markets, and slowing demand in key markets, like China, contributed to the slower growth.
- Nestle reaffirmed its full-year outlook for organic growth, predicting similar results to last year's 4.2% organic revenue growth.
Dive Insight:
To reach that goal, Nestle will have to post about 5% organic growth in the second half of the year. Nestle CEO Paul Bulcke said in a statement that he believes pricing will "recover somewhat in the coming months" after hitting "historically low levels" in the first half of 2016. But even if Nestle does break even with last year's growth rate, that would be the company's fourth consecutive year of missing its 5% to 6% full-year organic revenue growth target.
But pricing is only part of the challenge Nestle faces. The company still relies on a variety of commodities for its wide-ranging brands, such as coffee, cocoa and milk. Low costs for these commodities won't last forever, so Nestle may have to transition its focus to other branding initiatives or pricing efforts to offset future losses.
Nestle remains focused on its chocolate and confectionery brands, with international debuts of premium brands like Cailler and Damak in North America and elsewhere. However, Nestle's pursuit of premium products in this segment could interfere with the company's pricing strategy as a way to boost revenue. Higher prices for premium products can increase profitability, but they could also drive away consumers who are more focused on the lower prices major companies can deliver.
Nestle continues to face steep competition in the chocolate and confectionery segments, particularly from Mars, Mondelez, Hershey and Ferrero Rocher. Analysts have speculated in the past that Nestle might take over a competitor, especially someone like Hershey, who is already firmly established in the North American market. However, that speculation hasn't turned into an offer just yet as Nestle focuses its efforts instead on being a health and wellness-centric company.