Nestlé, Diageo, Anheuser-Busch InBev, and Danone all said Thursday that sales were rising as key markets rebound from the pandemic, but that the recovery was also leading to rapidly increasing costs for ingredients, packaging and transport.
Nestlé said its ice creams had gotten more expensive, spirits giant Diageo has raised prices on brands like Baileys and Casamigos tequila, and Budweiser brewer AB InBev is exploring higher prices for its beers. Meanwhile, Danone, which makes Activia yogurt and Evian water, said it would increase prices across all of its categories to try preserve its profitability.
Swiss food giant Nestle CEO Ulf Mark Schneider addresses the annual general shareholders meeting on April 11, 2019 in Lausanne. (FABRICE COFFRINI/AFP via Getty Images / Getty Images)
"We do expect price increases to accelerate from what you saw in the first half," said Nestlé Chief Executive Mark Schneider. "After several years of low inflation, all of a sudden it accelerated very strongly starting in March and is continuing to accelerate."
Companies across many sectors are contending with rising costs from coffee to aluminum and shipping as the recovery from Covid-19 gains steam. That is leading to higher prices for many goods, pushing U.S. inflation to rise at the fastest pace for more than a decade.
Nestlé said it had raised prices by an average of 1.3% globally in the first six months of the year, driven by North America and Latin America. Prices of its milk-based products and ice cream were up by an average of 3.5%, while its water brands rose 1.6%.
In the U.S., Mr. Schneider said costs for transportation, commodities and packaging were all rising. He also said that labor costs were up significantly, with a tight labor market leading to staff turnover and salary increases. Overall, the company expects input costs to be 4% higher this year.
Nestlé said those costs would weigh on profitability this year, despite the company reporting its strongest first-half growth in years. Nestlé said organic sales grew 8.1% in the period, boosted by demand for Nespresso coffee, pet food and health products. That prompted it to raise sales guidance for the full year.
Competitors Unilever PLC and Reckitt Benckiser Group PLC also flagged pressure on margins in recent days. That is partly because of the lag between having to cover higher input costs and being able to raise prices of their products.
AB InBev painted a similar picture Thursday, with second-quarter sales rising almost 28% to $13.54 billion—back to pre-pandemic levels—as drinkers returned to bars across the Americas and Europe. However, the brewer flagged more expensive barley and freight, and said that surging demand for cans in the U.S. had forced the company to import them from elsewhere, further adding to its costs.
Chief Executive Michel Doukeris said hedging had protected the company from some of these higher costs so far and that it was now assessing ways to mitigate them as they come through, including by raising prices.
Concerns about the impact of higher costs on the company’s profitability sent shares down as much as 8%.
Diageo also said Thursday that it was benefiting from bars reopening as it reported an 8.3% rise in full-year sales, while similarly warning of higher prices for corn, aluminum and logistics.
The owner of Smirnoff vodka and Johnnie Walker scotch said its operating margin in North America had declined by 1.24 percentage point, partly reflecting rising costs of agave—a key ingredient in making tequila.
"What we’re seeing is about a couple of points higher inflation coming through now," said Diageo Chief Financial Officer Lavanya Chandrashekar. She said the company had largely been able to offset rising costs through higher sales of its more expensive spirits and internal cost cutting.
Danone, meanwhile, beat analysts’ forecasts with a 6.6% rise in comparable second-quarter sales but flagged rising prices for milk, plastic, packaging and transportation.
To protect profitability, the yogurt maker said it had increased prices in places such as Latin America, Russia and Turkey where it sells many of its products to independent stores. In North America and Europe, however, raising prices takes more time because more of its products are sold through long-term contracts with major retailers. That means price rises negotiated now will come through in the coming months.
While executives Thursday said the bout of higher costs and rising product prices would likely persist into 2022, they said it was hard to predict whether the recent jump in inflation was transitory as the Federal Reserve forecasts, or here to stay for longer.
"Frankly, that’s the $64,000 question at this point," said Nestlé’s Mr. Schneider.