Nestlé brews strong coffee growth as COVID serves ‘improved’ category dynamics
When Swiss food giant Nestlé reported its first-half results last week, the company said its organic growth – which stood at 8.1% - was fuelled by coffee, its ‘largest contributor’ to like-for-like gains.
Nestlé’s three power brands - Nescafé, Nespresso and Starbucks – saw ‘strong demand’ with Starbucks sales increasing 16.7% and Nespresso booking 14.6% LFL growth. Powdered and liquid beverages – which includes the group’s coffee brands - gained 11% organically.
“Within powdered and liquid beverages, coffee grew at a double-digit rate supported by Nescafé, Nespresso and Starbucks products. Coffee at-home continued to grow strongly, while out-of-home and on-the-go channels improved,” Chief Financial Officer François-Xavier Roger detailed.
Coffee retail sales see COVID uplift
Innovation has proven an important element of the company’s growth in coffee. “New products included a new range of ice coffees, and Kahawa ya Congo, the first organic coffee in the Reviving Origins range. Nespresso also rolled out Momento, a versatile touchless machine that creates specialty coffees with fresh milk for out-of-home channels,” Roger highlighted.
But a big boost for the company’s coffee brands came in the structural changes ushered in by COVID-19.
Nestlé’s coffee business has gained ground in channels that have flourished since the onset of the global coronavirus pandemic. First-half organic growth in retail was 7.3% - ‘moderating’ as the company lapped a high base of comparison in 2020 when COVID-19 prompted consumers to pantry load en masse. Within retail, e-commerce has seen particular strength with growth standing at 19.2%, now accounting for a sizeable 14.6% of group sales.
Chief Executive Mark Schneider observed it is ‘very clear’ that ‘in the aftermath of COVID’ coffee – which was high growth to begin with – saw ‘improved dynamics’.
Retail consumption of coffee spiked during the pandemic as the out-of-home channel was decimated across a number of markets. In the UK, for instance, data from the World Coffee Portal showed the branded café segment saw negative sales in 2020 - the first time in 20 years. Revenue was cut by -39% and the researchers predict it will take 'at least' three years for the sector to bounce back to pre-pandemic levels.
Nevertheless, Nestlé’s results already point to improved trends in OOH. “Sales growth in out-of-home channels accelerated to 21.3%, helped by a low base of comparison and the easing of movement restrictions in some geographies. Going forward, we expect a continued recovery in out-of-home channels. Growth in retail is expected to moderate,” the company’s finance chief noted during a conference call.
'We stand to benefit with cups consumed at home'
As OOH - where Nestlé’s coffee brands are less strong - rebounds, what will this mean for the company’s outlook moving forward?
Roger insisted he expects some of the trends that have bolstered at-home coffee sales to have sticking power. “We believe that some changes in consumer behaviour are here to stay, such as increased working from home,” he predicted.
“While we're seeing a strong recovery in out-of-home, we're not back yet to pre-COVID levels. Either because of remaining fears over COVID or because simply people are enjoying that new more flexible remote working style, people still spend more time at home. Hence, they consume more at home. Our market shares across the various products we sell in-home and out-of-home are always larger for the in-home part. There's no question about that. And hence, we stand to benefit from that trend.
“In coffee, I think it's fair to assume, as most of you look at your own work-life arrangements, that we will spend a larger part of our time going forward, even after the pandemic, working remotely. And remote for most people means working from home. And hence, this is exactly our wheelhouse, the at-home consumption of coffee. This is where we're strongest. And so, we stand to benefit with cups consumed at home.”
While Nestlé does expect growth in retail to moderate, management suggested it will remain higher than pre-COVID levels in 2019, given ‘structural changes in consumer behaviour’.
Structural changes support sustainable growth
According to Roger’s assessment, the three big structural changes are increased home working, ‘pet parenting’ and the search for health and immunity benefits. This means that other areas of Nestlé’s business are also poised to capitalise.
On pet food, Purina PetCare saw double-digit growth led by science-based and premium brands Purina Pro Plan, Purina ONE and Felix, as well as veterinary products. Schneider said this was supported by the ‘higher rate of pet adoptions that we have seen all throughout the COVID crisis’.
Again, he believes this trend will have a lasting impact on the category’s outlook. “Everyone has to work from their own assumptions [on] how long these pets will stay with their owners, how many of them will actually like having a pet and go for a follow-up pet as well. But there's going to be a long, long positive tail to this, and we'll benefit from it.”
On health and immunity, the work Nestlé is doing within the supplement space is delivering clear results. Sales in Nestlé Health Science grew at a double-digit rate, reflecting strong demand for vitamins, minerals and supplements and healthy-aging products, the company revealed. Schneider said this unit has seen ‘tremendous growth’ in recent years and the company is backing it with investments including the recent Bountiful Company acquisition.
But beyond nutraceuticals, some of Nestlé brands within prepared dishes – which saw ‘high single digit growth’ – are also poised to tap the health mega-trend. Plant-based, for instance, continued to see strong double-digit growth, led by Garden Gourmet.
All of this means that the Swiss food giant is well-placed to hold the ground it gained as a result of the consumer-level changes ushered in by COVID, Stifel analyst Pascal Boll believes. “Nestlé remains a top pick among our coverage due to its sustainable growth potential, which sets the company clearly apart from pure Corona winners,” he said.
Nestlé by the numbers
Highlights from Nestlé’s first-half trading update include:
- Organic growth reached 8.1%, with real internal growth (RIG) of 6.8% and pricing of 1.3%.
- Total reported sales increased by 1.5% to CHF41.8bn.
- Underlying trading operating profit margin was ‘unchanged’ at 17.4%.
- Updated full-year organic sales growth guidance of between 5% and 6%. Previously the company had said it was looking towards a mid-single digit rate.
- Underlying trading operating profit margin is now expected around 17.5%, which implies a 20bps year-on-year decline.