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Nestlé Bolsters Advertising and Promotions to Accelerate Volumes, Margins, and Growth

Nestlé Bolsters Advertising and Promotions to Accelerate Volumes, Margins, and Growth Food and Beverage Business

Nestlé, a leading player in the food and beverage industry, is strategically investing more in advertising and marketing efforts to regain lost volumes and gross margin due to pricing-led inflation. Outgoing CFO François-Xavier Roger shared this plan during his speech at the Barclays Global Consumer Staples Conference in the US. The company aims to increase its advertising and promotion (A&P) investment by about 100 basis points in the second half of the year, with the goal of returning the key real internal growth (RIG) metric to positive territory.

Last year, Nestlé’s A&P spend was at a low level of 6.9%, as there were supply chain constraints that made advertising ineffective. However, the company has now decided to disclose this metric moving forward. The focus of Nestlé’s strategy is on brand building and innovation, while also optimizing the product portfolio to prioritize high-margin and high-volume lines.

Roger emphasized the importance of growing the business by redirecting resources to support high-margin products rather than cutting low-performing ones. Nestlé plans to increase its A&P investment even further in 2024. The total consideration for A&P and trend spend is currently close to SKr30m ($33.6m), with a greater emphasis on trend spend due to last year’s 8% increase in pricing after a long period of no price adjustments.

In addition to A&P investment, Nestlé is also focused on recovering its gross margin. The company faced significant cost pressures last year, including raw materials, packaging, transportation, energy, and wages. These additional costs had a negative impact on the gross margin, which has declined by 400 basis points over the past two years. Nestlé aims to increase its gross margin back to 50%, although no specific timeframe was provided during the Barclays presentation.

Roger highlighted that Nestlé expects to have more pricing than input-cost inflation this year, resulting in an increase in gross margin. In the first half of 2023, the company already witnessed a 120 basis points increase in gross margin compared to the second half of the previous year. Roger cautioned against expecting price decreases due to the significant decrease in gross margin caused by commodity inflation. While agricultural commodity prices have slightly decreased from their peak in the previous year, they still remain higher than the five-year average and the pre-pandemic levels of 2019.

Nestlé anticipates a return to positive RIG in the second half of the year, most likely in the fourth quarter. The metric, which reflects changes in volumes by excluding the effect of pricing, declined by 0.8% in the first six months of 2023. Roger expressed confidence in reaching the company’s previous growth model of mid-single-digit growth, although the exact timeline for achieving this is uncertain. Nestlé aims to regain its pre-Covid growth levels of around 1% to 1.5%.

At the Barclays event, Steven Presley, the executive vice president and CEO of Nestlé’s North America business division, provided insights into the trajectory of the plant-based category. While meat-analogues experienced significant growth rates in the past, they have recently faced a slowdown. Presley believes that there will always be a market for meat-analogues, but Nestlé’s portfolio has shown stronger growth in plant-based beverages, particularly plant-based creamers. He expects the meat-analogue segment to stabilize at some point.

Nestlé is taking strategic steps to recover lost volumes and gross margin by increasing its A&P investment and focusing on high-margin products. The company aims to improve its gross margin and return to its previous growth model. Additionally, Nestlé continues to navigate the plant-based category, with a focus on plant-based beverages.

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