Cocoa costs rip into Nestlé confectionery operating profits

The company posted 3.4% organic growth in H1 confectionery sales to reach CHF 4.2bn ($4.6bn). However, confectionery operating profit margins fell 210 basis points to 10.6% and H1 operating profit for the segment was CHF 443m ($488m), a 24% decline.

Pressure from cocoa prices​

“In terms of confectionery the trading operating profit margin is impacted by higher input costs. The decrease is due to chocolate impacted by cocoa butter and also an intense competitive environment, most notably in Western Europe…,”​ said Nestle CFO Wan Ling Martello during today’s earnings call.

“Cocoa prices are putting pressure on all confectionery players’ margins and we are no exception.”​

Average daily cocoa prices for July 2014 were 38% higher than the same month last year at $3,196, according to the International Cocoa Organization (ICCO)

Impact of wholesale price hikes​

Nestlé’s confectionery business had seen an average 6% organic sales growth over the last five years, but growth has since slowed and the company implemented price increases​ in the last quarter in response.

Nestlé’s competitor Mondelēz yesterday reported that it had experienced resistance from retailers​, particularly in France, after raising its own wholesale chocolate prices. Nestlé raised its prices shortly after Mondelēz and Martello hinted that Nestlé was facing similar issues. “It’s not easy all around, but this is part of doing business,”​ she said.

Emerging market focus​

“Our focus is to continue to grow our confectionery business in emerging markets. It’s very exciting to see a global brand like KitKat has very good growth even in emerging markets,”​ the CFO continued.

Latin America is among Nestlé key emerging markets, particularly Brazil, its largest global confectionery market. The company also leads China’s sugar confectionery segment after acquiring a 60% stake in Hsu Fu Chi for around $1.5bn in 2011.

Confectionery is Nestlé sixth largest category out of its seven operating areas. Its largest category is powdered and liquid beverages followed by milk products and ice cream.

The overall group posted total H1 sales of CHF 43bn ($48.3bn), down 4.8% on last year, while net profit fell 9% to CHF 4.6bn ($5.2bn). Nestlé reaffirmed its full-year outlook of organic growth around 5%.