Cost cuts to balance high input prices, Nestlé says

By Ahmed ElAmin

- Last updated on GMT

Related tags: Cent, Cost

Prices for raw materials and energy are forecast to rise by around
five to 10 per cent this year, but Nestlé believes cost cuts will
balance the equation out, the company's chief executive said
yesterday.

The forecast tallies with an analysis by Standard & Poor's, which predicted in a recent report that most of Europe's consumer goods companies, including food processors, will likely succeed in cutting enough costs out of their operations to offset the impact of the high energy prices.

In a press conference at the World Economic Forum in Davos yesterday, Nestlé's chief executive and chairman Peter Brabeck-Letmathe said he expects the price increases to be less steep than last year.

"In general, I would forecast an increase somewhere between five and 10 per cent on all raw material, packaging and energy costs,"​ Brabeck-Letmathe is reported to have said by Forbes magazine. "But on the other hand we will have the possibility with our rationalisation programmes ... that we will again balance part of this increase out."

One way in which Nestlé is cutting costs is through a water saving programme. In a published interview on the World Economic Forum site, Brabeck-Letmathe said the company has reduced its water consumption per ton of production by more than 40 per cent since 2000.

He stated the figure as part of a discussion on the growing problem of water use and shortage in the world.

"The growing water shortage in many regions of the world is a major challenge for us as a company - and for governments all over the world,"​ he said. "With falling ground water tables, agricultural production is put at risk - farming, by the way, is the main cause of water overuse. These risks to agricultural production are a concern for us because we do not produce food directly, but rather add value to what originally comes from farms."

Nestle, the world's largest food company, depended on its pet business, beverages and ice creams to keep overall sales growth humming at 5.2 per cent during the first half of 2005, although Europe remained sluggish at 1.5 per cent growth.

Nestle kept overall margins up by raising prices. The 5.2 per cent organic growth was made up of 1.8 per cent of price increases, and 3.4 per cent of what the company calls "real" growth.

The company reported overall margins on sales rose to 12 per cent in the first half of 2005 compared to 11.9 per cent in the first half Europe accounts for one-third of the company's sales, with the US another 31 per cent. Asia, Oceania and Africa, water sales and pharmaceutical products make up the rest of 2004.

The company will release its full year results on 23 February.

According to a report this week by the Confederation of British Industry (CBI) food and drink producers were among those who cited big cost increases.

Dairy processor Arla UK, a subsidiary of Scandinavian firm Arla Foods, said prices for its main packaging material, HDPE resin, had risen 30 per cent since July to more than £850 per tonne.

The group added that diesel fuel costs were likely to be up £2m this year, while it expected gas and electricity bills to be 40 or 50 per cent higher for the same units it used last year.

Arla predicted Tuesday that a delay in passing on the increased costs would damage its first-half figures, even though sales had been in-line with expectations since the end of November.

Another report published by Standard and Poor's predicted that consumer goods companies, including food processors, would succeed in passing on higher input costs.

The report said cost-cutting measures would continue to absorb the impact.

"Although the actual cost increase may be significant and the ability to pass this on to customers remains very limited in Europe, cost-reduction efforts already being implemented should offset most of the negative effects,"​ S&P stated.

Related topics: Markets, Pricing Pressures

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