Nestlé posted a larger than expected rise in third-quarter sales this morning, adding weight to the theory that the coronavirus crisis is playing into the hands of the global consumer giants.
The world’s largest food group this morning posted third-quarter organic growth of 4.9% driven by booming demand for petfood, its at-home coffee portfolio and dairy products.
That 4.9% growth is well above its previously guided 2%-3% organic growth target for 2020 and enabled the Swiss consumer giant to firm up its guidance to 3% growth for the full year.
The coronavirus period has not been without its challenges for huge global players like Nestlé, many of which are exposed to the plunge of the food-to-go market. However, the sheer size of these businesses and diversity of their portfolios means that when one growth driver splutters to a stop, another can kick into gear.
In Nestlé’s case, its confectionery and water businesses have come under pressure due to their exposure to out-of-home sales channels and on-the-go consumption. So far this year, its water sales have plunged 12.9% and confectionery sales are down 12% (organic decline is a more modest 1.8%) – although the company said performance was improving as life began to return to normal in the third quarter.
However, while out-of-home consumption is sagging, in-home consumption is booming – and the breadth of Nestlé’s portfolio means it has been well-placed to take advantage.
Its largest contributor to growth was its Purina PetCare business, as consumers continued to treat their pets during lockdown. As proof of the sector’s strength, Nestlé even expanded its petfood business during the crisis with the £100m acquisition of premium UK player Lily’s Kitchen in April.
Dairy grew at a high single-digit rate, based on increased demand for fortified milks and home-baking products as consumers shifted to at-home meal preparation.
Meanwhile, coffee posted mid-single-digit growth, fuelled by strong consumer demand for Starbucks products, Nespresso and Nescafé as workers ditched their coffee shop coffees in favour of preparing their own hot drinks at home.
It all serves to highlight the benefit of being a big name at this time. While plenty of traditional grocery suppliers are finding their sales booming during the coronavirus period, only the bigger players have the manufacturing power to scale up their production to keep shelves stocked during times of increased demand – and the deep pockets to fund moves into other areas of high demand, such as Nestlé’s push into vegetarian and plant-based food, which delivered “strong” double-digit growth in the quarter.
The bigger players are also benefiting from the rapid growth of online grocery: their brands are better known by the consumer and the nature of e-commerce can make categories harder for smaller challenger brands to disrupt.
Consumers are gravitating towards bigger and better known brands in-store, too, as they find it harder to browse. That’s been amplified by the retailers, who have gravitated towards the faster-moving, higher-volume lines of these fmcg giants as they look to keep the shelves stocked and SKU counts down.
Even when post-Covid normality returns, the major food and drink players will likely continue to see beneficial effects due to the long-lasting changes ushered in by the pandemic.
The fmcg giants’ global breadth doesn’t hurt, either, as they can benefit from normality returning to some of their markets even as others still face lockdowns and consumer restrictions.
As Hargreaves Lansdown’s Sophie Lund-Yates notes, Nestlé’s improved trading in China bodes well for its fellow consumer giants. “Trading in China turned positive in the third quarter, which is an important milestone and a good indicator for what we could expect from other consumer giants. While it’s too early to say how robust the recovery is, we think things are moving in the right direction.”
Despite wider market chaos this year, Nestlé’s shares have barely moved and are currently up about 2.5% in 2020.
With organic growth of just 2% needed in the fourth quarter to hit full-year targets, few would bet against that price increasing as the global food giants look set to emerge from the pandemic in stronger shape than they entered it.