Nestlé USA may consider raising prices of some of the products it sells in 2019 as the world's largest food manufacturer faces rising expenses and a consumer who may now be more willing to absorb an increase, the company's CEO told Food Dive.
Steve Presley, who took the helm of Nestlé's U.S. operations in April 2018, said escalating raw material prices and increases in costs such as trucking are forcing manufacturers to look for ways to offset them. He added that improving economic sentiment among consumers, low unemployment and rising household income could make shoppers more willing to pay extra for their favorite products.
"I think we're looking at it like everybody else," Presley said from the company's U.S. headquarters near Washington, D.C. "Clearly, we are looking at price, and always have. We just have to do it in a way that the consumer can afford it and we can move it into the marketplace."
Any price increases, Presley said, would be assessed after determining the input costs for each product or category and examining how a change would impact its competitive position in the market place. The Switzerland-based company's U.S. portfolio includes everything from Lean Cuisine frozen meals and Coffee-mate creamers to Edy's ice cream and S. Pellegrino sparkling water.
"We think some inflation returning to our category is good. We think it's good for us. It's good for our retail partners, as the consumer gets (financially) healthier and healthier," Presley said.
Nestlé reported last week that organic sales in North America rose 1.4% during the last nine months. In its most recent quarter, prices increased 0.6% in the Americas. Much of the price hike came in its water business, reflecting inflation in packaging and distribution costs.
Food prices are showing signs of increasing after several years of declines. According to data from the U.S. Agriculture Department, prices fell 1.3% in 2016 and declined 0.2% in 2017, respectively, — well below the 20-year average of up 2.1%. The USDA projects an increase of 0.5% this year, before rising 1.5% in 2019.
Annemarie Kuhns, an economist with USDA's Economic Research Service who compiles the monthly retail food cost report for the department, told Food Dive that prices for meats, eggs and dairy, which declined in 2016 and 2017 as high production levels suppressed prices, are starting to rebound. This increase, coupled with rising transportation and energy costs, production expenses and the impact of the dollar on commodity imports and exports around the globe that affects supply, could give food manufactures the impetus to raise prices in some areas.
"Those factors will definitely put upward pressure on prices as they do make up a portion of the retail food dollar for those items," Kuhns said. "We expect consumers to pay slightly more on average for food at the grocery store in 2019."
The world's largest food company has been active in repositioning its business for much of the last year in an effort to stoke growth. Capital spending efforts have focused on high-growth categories such as coffee, pet care, infant nutrition and bottled water. All this comes as Nestlé faces pressure from activist investor Daniel Loeb, who has criticized the company and accused it of employing a “muddled strategic approach” that doesn't do enough to address changes in food consumption patterns among shoppers.
Nestlé has been tweaking its portfolio by investing in an accelerator program to support emerging food and agriculture startups. It's rolled out a pair of new products — a frozen food line called Wildscape and Outsiders pizza that pays tribute to under-respected regional styles — to market in less than nine months, much faster than the usual development time.
The Swiss company also sold its American candy business, took a stake in Blue Bottle Coffee, purchased Chameleon Cold-Brew and paid $7.15 billion to Starbucks to sell the chain's coffee beans and drinks in grocery stores and other outlets around the world, further cementing its footing in a segment where it already had popular brands such as Taster's Choice, Nescafe and Nespresso.
Morningstar analyst Ioannis Pontikis praised the company's recent moves, including the divestiture of its slow-growing U.S. confections business and the Starbucks deal, which Nestlé can tap into its supply chain to increase the product's global reach. He told Food Dive that the company has been slow to introduce new products, an obstacle CEO Mark Schneider has been working to fix since he took over at the beginning of 2017.
"The business has been through a period of underperformance in the last couple years, and the new CEO has recognized the reasons for that," Pontikis said. "The disconnect between research and development and the introduction of new products was the main reason behind this underperformance. Nestle missed out on some very important consumer trends during those couple of years."
"Growth can happen on the big brands. If you become consumer obsessed and drive that relevance, whatever the relevance is that the consumer wants into your base products, consumers will buy them at a faster rate than they do today. And that's what we're committed to."
Chief executive officer, Nestlé USA
Presley said Nestlé has focused on building a broad portfolio of products that meet the changing and varying needs of the consumer. In its creamers business, he said the company has added new flavors through its non-dairy creamer Coffee-mate, rolled out more plant-based options made with coconut or almonds, and introduced a clean-label variety called Natural Bliss made with real milk and no artificial ingredients or GMOs.
A similar strategy has occurred in coffee. Nestlé's coffee platform has been tailored to give consumers more choices throughout the day — from a hot cup of Taster's Choice or Nespresso brewed at home in the morning to a bottle of Chameleon Cold-Brew later in the day.
Presley conceded that large food companies such as his were slow to bring new trends to their portfolio at the same pace as the smaller, more nimble startups — leading the bigger players to cede market share. But as bigger companies have done more to invigorate their offerings through internal innovation, venture partnerships and acquisitions, they have made themselves more relevant.
"Growth can happen on the big brands," Presley said. "If you become consumer obsessed and drive that relevance, whatever the relevance is that the consumer wants into your base products, consumers will buy them at a faster rate than they do today. And that's what we're committed to."