U.S. Markets close in 1 hr 29 mins

Inflation Is Back—and Unilever, Nestlé Are Taking Advantage

Saabira Chaudhuri
Kit Kat chocolate covered wafer bars manufactured by Nestle are seen in London, Britain, July 25, 2018. REUTERS/Hannah McKay/Photo Illustration

Two of the world’s largest consumer-goods companies, Unilever PLC and Nestlé SA, reported stronger sales as a wave of inflation in many markets emboldened them to raise prices.

The new pricing power gives a boost of confidence to the entire industry, which has struggled in recent years with fierce competition and rapidly changing consumer tastes.

Unilever, the maker of Hellmann’s mayonnaise and Dove soap, on Thursday said third-quarter sales climbed 3.8% on an underlying basis, with prices up 1.4%. Nestlé, which makes Kit Kat chocolate and Nescafe coffee, reported organic sales up 2.9% for the quarter, saying prices grew by 0.9%.

Both companies’ figures exclude the impact of currency changes and acquisitions and disposals. Neither reported profits figures.

The companies said they were raising prices to offset higher costs, while also trading consumers up to more expensive items.

Unilever said it was charging more for its beauty and personal-care products because of higher oil and chemical prices. It also benefited from pricier new items like a Dove-branded hair mousse. Nestlé said it raised prices for bottled water in the U.S. to reflect higher packaging and distribution costs. Its prices overall were also buoyed by new sparkling water products.

Many consumer-goods makers have in recent quarters struggled to raise prices amid weak inflation, Amazon.com Inc.’s growing prowess in selling more household staples and a decline in brand loyalty as consumers use the internet to shop around. A shift to discount retailers, from dollar stores across the U.S. to European discounters like Germany’s Aldi, has further pushed down prices.

But inflation is changing the picture.

“The combination of underlying commodity increases but also the stronger U.S. dollar is really putting a lot of inflation into our market,” said Unilever Chief Financial Officer Graeme Pitkethly. “I see pricing being a key feature of the entire sector through the balance of the year and in 2019.”

After years of falling or stagnant consumer prices, inflation in some major markets has moved closer to a sweet spot where companies can raise prices, without it being so high that interest rates rise rapidly, hurting consumers.

Annual U.S. inflation is running at 2.3%, after approaching 3% over the summer, slightly above the 2% rate many central banks consider optimal. The Federal Reserve has gradually raised interest rates, bolstering the dollar. Official Chinese data showed annual inflation at 2.5% last month, a seven-month high, while eurozone inflation was 2.1% last month.

“There’s some inflationary tendencies that will help us” and last “for 2019 and beyond,” Nestlé Chief Executive Mark Schneider said in an analyst call.

Strong U.S. consumer confidence, rising wages and low unemployment are also bolstering executives’ confidence that consumers will continue spending despite higher prices.

Procter & Gamble Co. reports fiscal first-quarter results Friday. It said in July it would start boosting prices on some of its biggest brands later in the year. That decision marked a strategic U-turn from a monthslong attempt to combat weak demand with lower prices on staples like Tide detergent and Gillette razors.

Kimberly-Clark Corp., which makes Huggies diapers and Kleenex tissues, in August said it was raising prices in North America to offset higher commodity costs. It reports third-quarter results next week.

Average prices in the U.S. for household goods tracked by data provider Nielsen rose 2.7% in the four weeks ended Sept. 29, while health and beauty items rose 1.9%.

Unilever and Nestlé both raised prices in the U.S. during the last quarter, although gains were strongest in emerging markets. However, both companies cut prices in Western Europe.

In developed markets, Unilever said underlying third-quarter sales climbed by 1.3%, driven mostly by volume gains. Emerging-market sales jumped 5.6% as Unilever was able to raise prices by 2.1%. The results exclude pricing in Argentina, which is going through a period of hyperinflation. Unilever said it was able to raise prices in Brazil for the first time in the last three quarters. Other markets like Mexico and Indonesia also saw price increases.

Overall, Unilever’s third-quarter sales came in at €12.5 billion ($14.4 billion).

Finance chief Mr. Pitkethly said investing in brands was key in an inflationary environment to ensure that volumes continue to grow even as the company raises prices.

“We got to get the price moving but keep volume first,” he said. “The true test of the strength of a brand is the ability to price and give a degree of inflation protection.”

Switzerland-based Nestlé said third-quarter sales came in at 22.5 billion Swiss francs. Revenues were held back in part by the strength of the Swiss franc against emerging-market currencies, which weakened foreign sales when they were translated into francs.

Jefferies analyst Martin Deboo said Nestlé’s third-quarter pricing was ahead of forecasts and a sharp improvement from the 0.2% growth it reported in the first half, which he said bodes well for profit margins.

Brian Blackstone contributed to this article.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com



More From The Wall Street Journal