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Global Economy

How Nestlé benefits from inflation

Due to high inflation and supply chain problems, purchasing and raw material prices are increasing worldwide: In addition to energy and transport, packaging and foodstuffs such as cereals, milk and coffee are also becoming more expensive. The rising food prices are particularly noticeable. Because the manufacturers pass on the higher costs at least partially to the customers. The British group Unilever, for example, raised prices by 9.8 percent in the first half of 2022, and Nestlé, probably the best-known food multinational, by an average of 6.5 percent worldwide.

"The entire food sector is facing cost increases," said a Nestlé spokesman at the company's headquarters in Vevey on Lake Geneva: "This includes farmers and medium-sized companies that supply us and depend on them to cover their costs." That is why the industry giant does not rule out further price increases, because the prices would adjust to the increased costs. "Our teams in the markets have implemented price adjustments in a responsible manner," CEO Mark Schneider is quoted as saying in the press release accompanying the half-year report.

Almost ten percent more sales

Whether it's Nescafé, Kitkat chocolate bars, Maggi soup or Vittel mineral water: Nestlé sells groceries in almost every country in the world. And despite rising prices, branded products remain in demand, with Nestlé's sales up 9.2 percent in the first half of 2022 compared to the same period last year.

When asked if consumers around the world will accept even greater price increases, the spokesman replies: "The priority is and will remain to ensure that our products and brands can still be purchased at affordable prices. Our significantly reduced gross margin also shows that that we have not fully passed on unprecedented cost inflation to our consumers." The group is doing everything it can to mitigate further cost increases for its customers: "For example, through the further harmonization of recipes and packaging or the use of new technologies in production."

"Price increases are generally justified"

Josianne Walpen, Head of Nutrition at the Swiss Foundation for Consumer Protection, says that it is difficult for customers to judge which price increases are justified: "Purchasing prices, supply contracts and margins are not transparent. Whether only increased costs are passed on or simply the margin is increased , can therefore hardly be estimated in everyday shopping." The foundation fears that the situation will be used in some places to maintain or even increase margins.

Stefan Michel, Professor of Strategy and Marketing at the IMD Business School in Lausanne, classifies the Nestlé example as follows: "In the half-year report, Nestlé shows that sales have also increased due to price increases, while margins have fallen. On the one hand, according to the group not all cost increases are passed on, on the other hand, price adjustments are often delayed. Without having studied each product individually: the price increases in 2022 are generally justified."

Euro has lost value

The trade expert Michel also addresses a Swiss peculiarity in customer behavior: "One would assume that after Corona, the Swiss would increasingly shop in neighboring countries again, precisely because the euro has continued to lose value against the Swiss franc. However, inflation in Germany about twice as high as in Switzerland, which reduces the attractiveness of shopping trips when petrol prices are high."

According to consumer advocate Walpen, the demand for food will not drop significantly even if prices continue to rise: "However, shifts in demand towards cheaper food are conceivable." Whether this trend prevails also depends on how prices in areas such as energy and other consumer goods develop in the future.

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