Nespresso reveals to food giant Nestlé what a bad shape it is in. Even price increases are backfiring.
For some time now, the Swiss food giant has been reporting the Nespresso coffee business separately, which makes an astonishing development visible to outsiders.
Boom through growth
We are talking about the interplay between price increases and declines in demand, a topic that business students learn about in their first semester.
A look at the Nestlé Group’s half-year results shows that organic growth in the first half of 2021 was an impressive 14.6 percent compared to the same period of the previous year.
At the height of the coronavirus pandemic, people apparently drank a lot of Nespresso capsule coffee in their own homes.
Around 26 percent margin
The price increases in the same period were only 0.8 percent.
A small surcharge that people did not resent, as sales with Nespresso alone rose by almost 400 million Swiss francs, or 14.3 percent, to 3.2 billion Swiss francs within just six months.
The Vevey-based food group reported an operating profit margin of 26 percent at the time, making Nespresso the Group’s most profitable product.
Decline after price increases
One year later, Nestlé stated in the 2022 half-year report that it had increased prices in the Nespresso segment by 4.2 percent.
However, organic growth fell from double-digit figures to just 2.6 percent.
Sales increased by just 1.0 percent to 3.2 billion Swiss francs despite substantial price increases. And the operating profit margin fell by 1.7 percentage points to 24.3 percent.
Profit keeps falling
In the first half of 2023, Nestlé reported price increases of 3.7 percent. So this was another sharp rise.
Of course, inflation had skyrocketed in many places following the coronavirus pandemic and the food company accordingly wanted to tighten the price screw.
However, sales in the first six months of 2023 fell by 2 percent to 3.1 billion Swiss francs.
The operating profit margin fell by a further 2.6 percentage points to 21.7 percent despite those price increases.
Investments in advertising
For the first six months of 2024, the company known for Kit Kat, Nesquik & Co. stated that it had only ‘moderately increased prices’ for Nespresso by a mere 0.7 percent.
Overall, however, turnover at the coffee division fell by a further 1 percent to just 3.09 billion Swiss francs. The operating profit margin fell again by 20 basis points to 21.5 percent.
A few days ago, Nestlé explained that profits had fallen due to higher investments in advertising and marketing to support future growth.
Going to the competition
In summary, it can be said that the Swiss food giant increased Nespresso prices by around 10 percent within just a few 6-month periods. But Nestlé lost 100 million Swiss francs in sales and almost 5 percentage points in profit margin in the process.
The iconic company is now trying to win back lost customers with a great deal of marketing effort.
But anyone who has found alternative capsules to be a good alternative is unlikely to return to Nespresso.
With its price increases, the Nestlé Group has virtually driven consumers straight into the arms of the competition. So, those nice growth figures of 2021 are down the drain.
Growth through innovation
“Growth was driven by the Vertuo system, with continued broad-based sales momentum,” the latest communiqué stated.
The introduction of new products, including the expansion of compostable capsules in seven European markets, supported growth, it continued.
The same has been true over the past few years.
In addition, the media release mentions the newly launched Momento, a touchless machine that prepares coffee specialties with fresh milk for out-of-home coffee lovers in 44 countries.
President and CEO need strong coffee
So, the growth dynamic is all about innovation. These extend all the way to successful summer collections.
However, Nestlé management – around Chairman of the Board Paul Bulcke and CEO Mark Schneider – does not seem to recognize these connections.
It is well known that economics students learn in their first semester that demand for a product normally falls when prices rise.
A lot of effort for nothing
If companies increase their prices too much, they have to use expensive persuasion to win back lost customers. However, this causes profit margins to shrink.
All of this can be clearly seen in Nestlé’s segment reporting since the Swiss company has resorted to reporting the Nespresso division separately.
30.07.2024/kut./ena.
