Nestlé says rising cost of raw materials to persist

MANILA, Philippines - Nestlé, the world’s largest food group, expects the upward trend in raw material prices to persist, and its global operations provide a natural hedge against the strength of the Swiss franc, its chief executive said Saturday.

Swiss-based Nestlé, which has factories in 81 countries making products such as KitKat chocolates, milk products and pet food, is working to improve efficiencies and reduce costs as the prices of its inputs and packaging rise.

“It is clear that the upward trend, in our eyes, is going to be there to stay,” chief executive Paul Bulcke told reporters in Manila, where he was marking the 100th anniversary of Nestlé’s Philippine unit.

“Which is not a bad thing, if you put it in context of the fact that agricultural raw material prices went down for so many years to a level that agriculture was not an interesting activity, or there was no R&D investment, or there was no political impulse,” Bulcke added.

Nestlé, which makes Nescafe, Milo, Maggi soups and Gerber baby food, has said it expects to meet its goal of five to six-percent sales growth in 2011 and higher margins, although higher raw material costs and a strong Swiss franc would dampen first-half results.

It had projected rises in input costs to be at the top end of its guidance of eight to 10 percent in 2011, with pricing expected to tick up during the year.

That guidance on input costs remained, even after some moderation in global commodity prices in recent months after a sharp surge earlier in 2011, Bulcke said.

“When we speak, we don’t speak on the cost-on-the-day cost, we speak on the trend we see,” he said, saying Nestlé tried to read trends and set prices that could be stable amid market volatility.

“We never calculate our cost price on the peaks of every raw material,” he said. Nestlé, whose shares have fallen four percent this year, expects emerging markets to account for 45 percent of turnover by 2020, from 35 percent, or 39 billion Swiss francs ($46 billion) now.

“I do see the growth of the emerging markets double, give and take, the growth of the developed markets,” Bulcke said.

Nestlé keeps Milo, coffee prices

Nestlé said it will keep the prices of some of its products like Milo and coffee steady despite the external pressures like the increasing cost of raw materials worldwide.

 Nestlé Philippines Inc. chairman and chief executive John Miller said that there has already been some movements in prices especially for their milk brands but they are doing their best to keep the prices stable. He has specifically identified coffee and Milo as some products that will maintain their prices even if costs are going up.

 Bulcke however, stressed that the rising costs of food raw material is not all negative because this now makes it attractive for firms to invest in research and development and develop a more efficient procurement program.

 He said higher raw material costs do not necessarily translate to higher food costs. Currently, he said the thrust of Nestlé is to be more localized and to source raw materials locally whenever possible.

 For the Philippines, over 60 percent of the raw materials used in the four running factories are imported but it is important to note that 95 percent of products sold by Nestlé Philippines is produced here.

 Bulcke met with President Aquino in Malacanang Friday. During the hour long visit, Bulcke re-affirmed the Nestlé Group’s commitment to the Philippines as the company celebrates its centennial here. Nestlé is currently building its P4.8 billion manufacturing facility in Tanauan Batangas. The site will be producing Coffee Mate.

“The global Nestle family proudly congratulates Nestlé Philippines on its centennial. This is a remarkable milestone in its enduring mission to provide generations of Filipino families with tasty food and beverage products that promote nutrition, health and wellness. We are deeply grateful for the trust that Filipinos have put in Nestlé brands through the years,” Bulcke said.

 Sales of Nestlé Philippines totaled P92 billion in 2010. Its four factories in the country produce coffee, milks, chocolate energy drinks, cereals, infant nutrition products, ice cream and chilled dairy products.