Rising costs squeeze Nestle

Kit-Kat to Haagen Dazs firm Nestle today turned in a weaker underlying performance for 2010 as soaring commodity prices ate into profit margins.

The world’s biggest food business warned the cost of raw materials – corn, wheat, cocoa – is set to continue rising in 2011 and price increases and cost savings will have to be introduced.

Nestle is the latest consumer goods giant to flag up the impact of rising raw material costs, following similar admissions from rivals Unilever, Danone and Procter & Gamble.

After stripping out the sale of its stake in eyecare firm Alcon, the Vevey, Switzerland-based group saw profits dip 7% to 9.7 billion Swiss francs (€7.3bn) last year. After the Alcon disposal, net profits tripled to 34.2 billion Swiss francs (€26bn).

But rising prices failed to dent sales, which lifted in line with expectations by 6.2% to 109.7 billion Swiss francs (€83bn) in 2010.

The company said sales in Europe grew by 2.5% last year, driven by growth in the UK and France, with sales of household favourites such as Nescafe and Kit-Kat among those to stand out.

But the company, which also makes Perrier, said almost a third of its sales - some 34.3 billion Swiss francs (€26bn) – came from food and drinks in the Americas region.

Nestle said the sale of its remaining 52% stake in Alcon to drug maker Novartis allowed it to launch new products, cut its debt, buy back shares and build new factories around the world last year.

Paul Bulcke, Nestle chief executive, said the company continued to outperform the market in 2010 and was well positioned to deal with soaring costs.

He said: “We are starting 2011 with continued momentum, well placed to face uncertainties ahead, including volatile raw material prices.”

Nestle, which has a market value of 180 billion Swiss francs (€1237.7bn), said it expected sales to continue to grow this year. Excluding acquisitions, disposals and currency moves, it predicts growth rates of between 5% and 6% in 2011.

Chris Wickham, analyst at investment bank Matrix, said underlying margins were below expectations, but added the strong growth “was consistent with a food sector that accelerated in the final quarter of 2010”.