Nestlé results dragged down by confectionery

By Lorraine Heller

- Last updated on GMT

Related tags Cent Milk Currency Nestlé

Food giant Nestlé is being squeezed by tough international
confectionery markets, its modest overall half-year sales dragged
down by disappointing performances from its chocolate,
confectionery and biscuit categories.

Swiss-based Nestlé yesterday reported a 0.5 per cent increase in sales of these products, pushed up to 2 per cent without the negative impact of currencies and one-off divestitures, marking the category as its worst performing.

The division's margins are also the company's lowest, but have improved to 7.8 per cent from 6.6 per cent last year. The division contributes 10.4 per cent to total sales.

Though the European chocolate market is feeling the pressure of a continent-wide drive to combat obesity and diet-related health problems, Nestlé particularly suffered from poor chocolate and confectionery sales in Russia.

"The main issues in Russia have been problems with our distribution system,"​ a company spokesman told He would not reveal any further information, adding only that the company was addressing the problem.

A leading player in the international confectionery market, Nestlé has operated in Russia since 1995. It currently holds a 22 per cent majority in the increasingly competitive Russian chocolate market, according to data published by Business Analytika.

The company would not reveal future plans for boosting confectionery sales, commenting that "our general approach in this category, as in all categories, is innovation and renovation."

Nestlé 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 of 2004. When currency exchange rates and the effects of divestitures are taken into consideration, sales growth expressed in Swiss francs was 2.4 per cent in the first half.

"Trading conditions will continue to be challenging in a number of markets, whilst commodity costs and currencies are likely to remain volatile,"​ the company stated in its outlook for the rest of the year.

Europe, which accounts for one-third of the company's sales, is proving a tough market. Like its competitors, Nestlé has struggled to boost sales as consumers rein in spending on the continent. Europe's supermarkets have been cutting prices to meet the challenge of discounters, forcing producers to provide goods for less, at a time when input and commodity and fuel costs have been rising.

The cost pressures are unlikely to abate anytime soon, with oil costs reaching new records. Many like Nestlé have depended on diversification into developing and emerging markets, particularly in Eastern Europe and Asia, to drive sales growth and preserve margins.

European margins fell to 10.8 per cent from 11.3 per cent achieved in the first half of 2004. Nestlé said it would focus on defending or improving its market share positions. The company also said it expects to save Sfr1.2bn (€774m) in costs to offset rising input costs and improve margins.

By segment, sales growth was led by the company's high margin beverages division (6.4 per cent), milk, nutrition and ice cream (5.2 per cent), and by pet care (5.3 per cent). Beverages account for 26 per cent of the company's sales, while milk products, nutrition and ice cream make up 28 per cent.

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