Nestle’s portfolio shift pays off, avoids margin pressure seen at peers

Nestle’s corporate strategy the past several years has prepared it for the highly inflationary environment we now find ourselves in. The main thing that stood out to me in Nestle’s full-year 2021 results, which were reported Thursday, was the stability in the company’s margins, which was highly impressive considering the tremendous margin pressure that many other CPG companies have reported. Nestle’s underlying operating profit margin declined just 30 basis points to 17.4%, which the company attributes to a timing difference between rising costs and pricing. In contrast, most other CPG companies have reported several hundred basis points of margin pressure in recent quarters for the same reason.

On Thursday, the company cited progress on efficiency improvement initiatives when explaining its relatively stable margins, but the recent shift in the company’s product portfolio may have been the biggest driver. Since 2017, the company has completed more than 85 corporate transactions, including frequent acquisitions and divestitures, with a combined size that totaled about 20% of the company’s sales. The objective was to rebalance its portfolio to areas that are higher-growth, higher-margin and where the company can deliver a differentiated product offering. Product lines that meet that description include the health/wellness, vitamins, pet foods and coffee segments. All of those segments posted double-digit organic revenue growth in 2021, outperforming the 7.5% organic revenue growth for the company as a whole. In the current inflationary environment, it has become clearer Nestle’s investments in those areas were not just about inching up its corporate revenue growth rate. Intuitively, consumers who shop in the premium categories change their behavior less in response to rising prices than consumers in the midpriced categories do. Following the recent portfolio rebalancing, Nestle now has 35% of its total sales in premium product categories.  

Elsewhere, supply chain challenges are impairing sales of both national CPG brands and private-label brands. Kraft Heinz and TreeHouse Foods (a manufacturer of private-label food brands) attack the CPG industry from very different angles, but both companies are sharing some similar challenges. During its earnings presentation, Kraft Heinz said that its market share of certain products, such as Heinz gravy, was impaired by insufficient manufacturing capacity. Similarly, TreeHouse said that its supply chain struggles are impairing its ability to take on new business. In addition to manufacturing capacity, Kraft Heinz cited the availability of packaging as a factor that impaired the market share for Philadelphia Cream Cheese. Kraft Heinz expects the impact of those particular supply chain challenges to be mitigated by the end of the first half of 2022. 

Finally, here is a SONAR dashboard showing, at a glance, how shipping reefer has become more costly in the past year. Reefer tender rejections came down from 50% last year at this time to a still highly elevated 33.2%. The lower rate of load rejection versus one year ago is related to reefer contract rates rising ~10%. Meanwhile, reefer spot rates show that the cost of covering loads that fall through the routing guide and onto the spot market has risen about 30% in the past year.     

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