Almost all food giants and large beer brewers pass on their higher costs directly to the consumer. He sees the groceries in the shopping cart quickly become more expensive. Meanwhile, the companies are seeing significant revenue increases, according to the half-year figures they published over the past two weeks.
Consumers seem to be meekly accepting the price increases: Nestlé sold more coffee and water, Heineken and AB InBev more beer, Coca-Cola more soft drinks and Danone more yogurt. Although Unilever sold somewhat less (a contraction in sales volume of 1.6 percent), according to CEO Alan Jope, that is entirely due to the ongoing corona lockdowns in China. “If we disregard that, the sales volume is comparable to the previous quarter.”
According to analyst at ING Reginald Watson, the fact that consumers continue to buy despite the higher prices has to do with the past corona years: people are now spending the money they could not spend during the lockdowns. “That saved corona money in combination with the low unemployment means that people are not going to cut back yet.”
:format(jpeg):fill(f8f8f8,true)/s3/static.nrc.nl/images/gn4/stripped/data89111179-6e3d8c.png)
Despite the high turnover, a number of companies saw a slight – and sometimes strong – profit decline, mainly due to increasing production costs. Unilever’s profit fell from 3.4 billion euros to 3.2 billion euros (turnover increased by 15 percent to 29.6 billion euros). Coca-Cola even saw its profit drop by 28 percent to 1.9 billion euros, despite a 12 percent increase in turnover (11.2 billion). Coca-Cola’s sharp decline in profits, in its own words, is partly due to large marketing expenditures and an unfavorable exchange rate (the dollar is almost equal to the euro). Heineken and Unilever also spent more on marketing. Once again a result of the end of the pandemic, Watson says: “During the lockdowns, people appeared to stick to brands they already knew, advertising was pointless. That is now over.”
Read alsoPrices up, wages up. But what if that makes everything more expensive?
People are now spending the money they couldn’t spend during the lockdowns
Kraft Heinz did it the other way around: turnover fell by 3.2 percent, from 12.9 billion euros in the first half of 2021 to 12.4 billion euros in the first half of this year. This is partly due to disappointing sales figures: the company sold 2.3 percentage points less ketchup, soup and other foods. At the same time, profits almost doubled, from 530 million euros last year to more than a billion this year. According to Kraft, this is due to tax and interest benefits. The company raised its revenue growth targets from the previously expected 5 percent to just below 10 percent.
These are also – or above all – a golden age for beer brewers: Heineken saw its profit increase by 22 percent to EUR 1.3 billion (turnover 16.4 billion), AB InBev’s profit rose by 7.5 percent to 9 percent. .4 billion euros (turnover 27.5 billion). But other companies also did good business: dairy company Danone saw a profit growth of 5.1 percent to 1.05 billion euros on a turnover of 13.3 billion euros (an increase of 12.6 percent), Nestlé’s profit increased by 6 percent to 7.9 billion euros (turnover growth 9.2 percent, to 46.5 billion). Both Heineken and AB InBev (brewer of Stella Artois, Budweiser and Corona) and Nestlé (coffee and water) mainly benefited from the reopening of the catering industry.
Companies would do well to have a plan for a change in behaviour
Unilever leads the way in price increases, with an increase of 11.2 percent. By comparison, Nestlé’s prices rose by 6.5 percent, Danone’s by 6.8 percent. Heineken raised prices by 8.9 percent.
Although the company made the highest price increase, Unilever says it is only passing 70 percent of the rising costs and inflation on to consumers. The rest is taking care of itself with budget cuts and lower margins. Thus, the company says it takes “social responsibility”.
‘Paying on euros for euros’
General manager of Heineken Dolf van den Brink says he will pass on the rising costs “euro for euro”. According to him, that does not mean that the company itself does not absorb anything. “Our profit margin is under pressure.” If costs rise, turnover also rises and the profit that the company gets from one beer sold remains the same, but the margin is smaller. According to its own calculations, the brewer indeed lost 0.35 percentage point on the margin and was forced to scrap the profit target of 17 percent margin for next year. The company is aiming for a profit growth of 5 to 9 percent, as a new target. Competitor AB InBev lost 1.2 percentage points.
The food groups also saw their margins narrow, also according to their own calculations: Nestlé lost 0.5 percentage point profit margin, Unilever 2 percentage points and Danone 1 percentage point.
A lower or unstable margin is detrimental to a company because it can deter investors, analyst Watson said. A high margin is usually an indication of future growth. “A low margin can mean that a company is out of control of spending.”
The results of food companies partly reflect the end of the pandemic, with corona lockdowns released or reduced: more is being consumed outdoors. Nestlé sold more coffee and water in cafes, Heineken (also brewer of Birra Moretti, Desperados and Affligem, among others) moved more beers over the bar. The brewer also sold more ‘premium’ beers (beers from the more expensive segment, including the green Heineken beers). Unilever had some competition from cheaper private labels in ice cream, yoghurt and coffee, but saw no evidence of ‘downward trade’, with consumers switching to cheaper products on a large scale.
‘Low unemployment and now want to enjoy’
So it is not yet necessary for companies to bet on bulk packaging or cheaper products to retain the consumer, Watson also says. “You might expect that consumers are now looking for bargains, but the psychology is different these days than in standard situations. We just got through a pandemic – people now want to enjoy themselves. Moreover, there is hardly any unemployment. People make money and spend it.”
The concerns are therefore even more likely to upgrade their products – also known as ‘premiumisation‘ – whereby consumers pay more for a product of a ‘better’ brand, with a more luxurious appearance. Heineken did it with the ‘summer beer’ Heineken Silver, which was introduced this year. “Affordable luxuries”, Heineken CEO Van den Brink calls his premium products, which, according to him, people also allow themselves in financially difficult times.
Still, companies would do well to have a plan for a change in consumer behaviour, Watson says. After all: at some point the saved “corona money” will run out and rising prices and inflation – which, according to Watson, will go up further and thus cause even more “pain” – will lead to more bargain hunting. Although AB InBev’s Buds and Coronas are still in great demand among beer drinkers, the brewer is preparing for such a situation, says a spokesperson. For example, by already working more large packaging and smaller – cheaper – sizes, such as the already existing ‘Coronita’ (a small Corona bottle).
Despite higher production costs and shrinking margins, the results of the food businesses were generally better than expected. Many companies therefore also raised their previously set expectations for the rest of the year: Nestlé expects sales growth of 7 to 8 percent (previously 5 percent), Danone from 5 to 6 percent (previously 3 to 5) and Coca-Cola from 12 to 5 percent. 13 percent (previously 7 to 8). Not surprising, given the ongoing inflation: this will result in even higher production costs, and therefore even more price increases. Another more expensive shopping basket, and again more turnover for the major players in the food and drink market.
A version of this article also appeared in the newspaper of August 6, 2022