The Maggi issue aside, investors have been concerned about excessive price hikes and lack of innovation, and the resultant impact on volumes.
The Maggi issue aside, investors have been concerned about excessive price hikes and lack of innovation, and the resultant impact on volumes. While it is hard to establish causality in a slowing market, we believe these concerns are now behind us.
Price increases in the past three years have been reasonable, while the pace of product launches has remained steady. We believe Nestle is now well positioned for an eventual recovery in urban spends. Maintain buy.
Nestle grew at its slowest pace ever in the past three years, with revenue growth at c9% p.a. in CY11-14 against a historical average of c14% p.a. Volume trends look even worse, with most of its segments registering a decline as opposed to 7-19% p.a. growth. The market has largely attributed this to Nestle’s pricing strategy and excessive focus on margins. While it is hard to establish causality, given the broader weakness in consumption particularly in urban discretionary categories, we believe these concerns are now largely behind us.
Nestle’s price increases in the past four years are at par with other companies and in line with the broader consumer price inflation trends. Recent pricing action in dairy likely indicates the company’s willingness to pass on commodity benefits.
The market has also been concerned about lack of innovation in recent years. This is partly true, as Nestle has had no new brands, except the premium chocolate brand Alpino in 2013. However, the company has maintained a steady stream of product launches in recent years, no different from its 10-year track record.