Danone and Nestle face cost challenge head on

By Lindsey Partos

- Last updated on GMT

Related tags Food Switzerland

Food makers have faced a doubling of raw material and packaging
costs in five years, but a recent report reveals the manufacturers
are facing the challenge head on, with underlying business
remaining resilient.

Margin 'headwind' from raw materials has been huge, estimated at a considerable 5 to 10 per cent from 2003 to 2008, writes investment bank Credit Suisse.

But the ability of large food firms to hike up their prices and focus on methods to make savings has mitigated the impact of input cost inflation.

"To date the large packaged food companies, in particular Cadbury, Danone, Nestlé, and Unilever, have enjoyed reasonable success in passing on at least some of their higher input costs through raising prices," say the report authors.

Higher prices have also softened the blow of lower volume growth, making up for the shortfall in volume sales.

Indeed, resilience has been the leitmotiv of food firms during challenging economic times.

The report, for example, highlights the fact that in the last 30 years "sector heavyweights Unilever and Nestlé have only once reported a decline in underlying volume growth."

Citing the emerging market crises from 1997 to 2002, the report adds that businesses held up remarkably well - local currency profits and margins were at least maintained, and underlying sales did not decline.

Further, despite the strident growth in food commodity costs, and the considerable impact on margins of price rises, the Credit Suisse report adds that "is it actually pretty impressive that the aggregate margins for the four large food companies - Unilever, Danone, Nestle and Cadbury - have remained relatively flat."

In fact, three out of the four food firms have seen margin increases.

Still, the authors warn they do not wish to imply that the giant food makers are recession-proof, "but rather that the recent hysteria is misplaced."

In contrast, mushrooming out from the food giants to the UK food manufacturing industry in general, a new report from Plimsoll Analysis suggests that over 28 000 jobs could be lost as the UK food manufacturing industry consolidates over the next 12 months due to the UK economy experiencing a " prolonged and bumpy landing ".

Of the 1000 firms assessed in their report, as many as three quarters of the firms analysed ' will need to reduce their head count' , and more than a quarter of the companies surveyed are already running at a loss, they claim.

" Companies need to aim for at least £152,000 sales per employee in order to stay competitive," highlights the Plimsoll Analysis.

On a more optimistic note, their figures reveal that 414 companies - nearly half the firms surveyed - are currently leading the market with sales per employee figures of well over £202,000.

Apparently, these "super-productive firms are generating over £9,000 worth of profit per employee" and are "well-equipped to see out the next 12 months in good shape".

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