Nestlé is set to announce its full-year 2024 results on 13 February, and all eyes are on the global food giant after it reported worse-than-expected nine-month organic sales growth last October.
At the time, the company cut its full-year sales outlook and announced a revamp of its senior leadership and operating structure.
Analysts at Barclays noted that while there are many moving parts at Nestlé, pet food is crucial for the company, as it is one of two key categories, alongside coffee.
The focus on coffee’s and cocoa’s cost of goods sold (COGS) pressure and cost-saving details has prevented pet food from being at the front and centre of investor conversations.
Pet food accounts for 20% of group revenues, and even more of EBIT (27%), with US pet food the single-biggest country/category cell globally at Nestlé, accounting for 12% of group sales.
Keeping in mind the aforementioned, here are a couple of factors that could impact on the performance of Nestlé’s pet food business.
Normalisation
After seeing a period of growth, the pet food segment has started to normalise, with recent commentary around the category being ‘somewhat downbeat’, according to Barclays.
In its most recent quarter, Colgate reported a flat performance for its pet food business, but it was optimistic of an inflection in the second half of the year.
The company also flagged weakness in the performance of the category in Europe.
According to NielsenIQ scanner data, Nestlé’s European pet food volumes have fallen by 5% in the past couple of months. However, it does not include faster-growing channels, such as e-commerce.
Colgate indicated higher ambitions in the cat category, which is Nestlé’s most important one, comprising around 60% of its pet portfolio.
While Colgate’s pet portfolio is very different, Barclays cautioned that it could be something to keep an eye on.
It is interesting to note that Nestlé Purina PetCare announced plans to expand its pyramid-shaped wet cat food in Europe and the US, as part of Nestlé’s focus on ‘fewer, bigger and better’ innovations for a greater business impact.
Pricing
In the third quarter of 2024, pricing at General Mills went down by 5%, and Nestlé’s pricing was also negative, as promotions stepped up.
According to CFO Anna Manz, it reflected normalisation after a 25% price increase over the last couple of years.
Moreover, a greater range of SKUs have entered the market, driven by increased production capacity.
Estimates from Barclays suggest that up to 25% new capacity has been added in the US, and in a simultaneous manner, creating downward pressure on prices.
Nestlé will have spent an extra CHF 3 billion on pet food capex between 2022 and 2025, to build new plants, the financial expert noted and added, ‘Whilst Nestlé US scanner pet volumes picked up this month [February], pricing could be a sting in the tail. Clearly, if Nestlé want Pet to deliver mid-single-digit (MSD) growth, it would be much easier to achieve if pricing were positive.’
