A Balancing Act
Nestlé (NSRGY) is one of the biggest food and beverage companies in the world. It owns popular brands like Gerber baby products and Purina pet food. Because it sells so many products across a wide variety of intended uses, Nestlé is extra sensitive to price inflation.
If Nestle’s costs increase too quickly, as they have over the past year, then its profits will take a hit just as rapidly. To compensate, Nestlé can continue to raise the prices of its products — the brand’s prices are already 9.5% more expensive than they were last year — but raising prices too quickly could mean running the risk of alienating consumers, who will opt for cheaper brands.
So far, Nestlé has done a good job of handling this balancing act. On Wednesday, it reported its highest quarterly growth in 14 years, while also raising guidance for the rest of the year.
Winter is Coming
As an international brand, about 20% of Nestlé’s business comes from Europe, which is currently facing an energy crisis.
European electricity prices are nearly double their 2021 average. The rising cost of energy is a combination of many factors, but the bulk of the issue stems from Russia cutting off the flow of natural gas to many European countries.
There is no telling how these soaring energy prices will impact consumer behavior. But, as energy usage rises with the coming winter, an impact is likely. For a major conglomerate like Nestlé, it’s definitely a concern.
Situations like Nestlé’s show how complicated running a multifaceted, international business can be. There are thousands of factors to consider when making decisions for the company. Almost all of them come down to trying to predict how you, the consumer, will act.
In Europe, Nestlé has only increased prices by 5.7% to date. This is just half the current rate of inflation in the area. Over time, the company may feel the need to increase prices more rapidly. But, for now, they’re playing it safe.
This scenario serves as a reminder of the power that consumers have. If your spending habits are impacting a company as large as Nestlé, rest assured, they’re not alone. In fact, similar decisions are happening at every single company across the world — and Wall Street is studying the results.
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