Financial results H1

Nestlé faces ‘tough trading conditions’ for confectionery in US and Brazil

By Oliver Nieburg contact

- Last updated on GMT

Analyst questions Nestlé US confectionery presence as it faces ‘intense competition’ and it cannot sell key brand KitKat in the market Photo: Nestlé
Analyst questions Nestlé US confectionery presence as it faces ‘intense competition’ and it cannot sell key brand KitKat in the market Photo: Nestlé

Related tags: Confectionery, Us

Nestlé has described confectionery as a ‘difficult category’ in its first-half results as it was hit by weak Easter demand in Brazil and increasing competition in the US.

The number three global confectioner also plans to up its confectionery pricing in some markets, such as the UK.

The company yesterday posted its results for January to June 2016.

Organic growth slowdown in confectionery

Organic growth in confectionery was 3.1% for the period, but this was slower than the 8.5% growth the KitKat maker achieved for the category in H1 2015.

 “It’s a difficult category,”​ said Nestlé CFO François Roger. “Organic growth is indeed below where we were last year."

Nestlé in confectionery

nestle confectionery brands canada -robtek
©iStock/robtek

Confectionery was the second smallest of Nestlé's eight operating categories by revenue in H1. Confectionery is is slightly larger by revenue than Nestlé's waters segment, but is  roughly a third of the size of its largest category, powdered and liquid beverages. The company’s H1 trading operating profit in confectionery was CHF 383m ($400m) compared to CHF 432m ($451m) in H1 2015.

Nestlé’s confectionery revenues for H1 2016 stood at CHF 3.73bn ($3.9bn), compared to CHF 3.9bn ($4.07bn) in January to June last year.

Analyst questions US confectionery presence

Jean-Philippe Bertschy, an analyst at Bank Vontobel, told ConfectioneryNews that Nestlé's H1 confectionery sales had likely declined around 10-15%, with a further drop in profitability.

“The market in the US will remain very challenging in my view,”​ he said, for all confectionery players.

“Sugar prices increased significantly, so I do not exclude another round of pricing that will dampen the already weak volume growth. “

He questioned whether Nestlé should continue to compete in US confectionery as it is a distant number four player with a market share of around 5%. It licenses its key brand KitKat to Hershey in the US.

Nestlé’s US confectionery business posted double-digit decline, based on Nielsen data, while the overall market recorded flat value sales and slightly lower volumes.

Intense US competition

Roger said there had been “intense competition in the mainstream segment” ​in US confectionery.

Nestlé was leapfrogged as the number three US confectioner by Lindt in 2014 when the Lindor maker snapped up boxed chocolate specialist Russell Stover.

Lindt has been outperforming its competitors​ for at least the past year. Its organic growth in the NAFTA region in H1 – which makes up 49% of its sales – was up 0.8%. But excluding Russell Stover, the region posted 6.6% organic growth for Lindt, as it renovates the RS portfolio.

Brazil’s tough climate

Nestlé’s CFO added: “[In]Confectionery, we are experiencing tough trading conditions, both in the US and in some emerging markets, Brazil is one of them."

He said there has been a confectionery category slowdown and subdued demand over Easter in Brazil due to economic crisis and difficult political conditions.

Nestlé recently upped its confectionery pricing in Brazil, where it competes mainly with its Garoto and KitKat brands.

Price increases in the UK

The Swiss firm has also recently altered confectionery pricing in Russia and expects further price changes in some markets such as the UK.

Roger said the British pound had devalued 15% since the nation’s vote to leave the EU, so the company intends to up prices in light of increasing raw material costs so that consumers absorb the currency impact.

But the CFO said Nestlé remained positive for confectionery globally as KitKat remains the world’s second largest confectionery brand.

“Outside of the Americas, we did well, well in Russia and ASEAN. Western Europe was positive. We did well in Germany, Iberia, Italy [in confectionery],”​ said Roger.

See HERE​ for Nestlé’s group performance in all categories.

China’s confectionery market

KitKat china

Nestlé said its overall business in China was challenged by a significant slowdown in the country’s food and beverage market. It said it had outperformed the market with its renovated Shark wafers, but said Hsu Fu Chi – it’s 60%-owned confectionery joint venture – had been soft. It expects the business will pick up in the second half as the firm benefits from China’s festive seasons. Nestlé brought KitKat to China​ last December and the brand is currently distributed in hundreds of Walmart stores nationwide. The Swiss firm also signed a deal with China’s e-commerce outlet Alibaba​ in June this year so Chinese consumers can purchase imported confectionery brands such as Baci and Damak online.

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