London, Aug 7 - Rising raw material costs are a headache for consumer product groups Nestle and Unilever, yet latest figures show the Swiss group sees the worst is over -- making its short-term outlook start to look brighter.
Nestle, the world's largest food company, is seeing one of its biggest input costs, milk, fall and together with declines in coffee and cocoa its commodity cost outlook suddenly looks a lot better than Unilever's, locked into high edible oil prices.
The better outlook at the Swiss-based maker of Nescafe coffee and KitKat chocolate bars is emphasised by the higher rating on its shares over rival Unilever, and that gap that could well get wider, analysts said.
Nestle shares trade on 15.5 times 2008 forecast earnings, well above Unilever on 13.7 times, according to Reuters data.
Commodity cost rises hit Nestle first with the rise in dairy prices early in 2007, while Unilever which is more exposed to edible oil and also mineral oil through its detergents and soaps business saw its costs rise later in 2007 and into 2008.
Nestle, one of the world's biggest milk buyers for products like Nesquik and CoffeeMate, is now seeing costs come down, led by milk, and says most of its 2008 price rises are in place.
By contrast, Unilever is still locked into high forward prices for its edible oils such as palm oil and sunflower oil for its spreads business, even though spot prices are falling, and will need more price rises in the second-half, analysts said.
"Nestle's pattern of exposure to commodity costs is coming off quicker than Unilever, which is locked into higher edible oil prices for most of 2008," said one analyst.
IN PLACE
Nestle on Thursday hinted that the worst of its price rises to recover commodity price rises were over for this year, saying the 2.2 billion Swiss Francs ($2.1 billion) of expected extra commodity costs in 2008 were weighted largely to the first half.
"Most of our pricing actions are today in place," Nestle Chief Financial Officer James Singh told a results briefing.
Analysts said with fewer price rises in prospect in the second-half, Vevey-based Nestle may be able to show a recovery in volume growth and rely less on pricing for its sales growth.
With consumer spending weak in western Europe and North America, the world's top consumer groups have had to balance price increases to offset commodity and oil price rises while being careful not to damage already fragile demand.
The maker of Buitoni pasta and Maggi soups reported underlying first-half sales growth of 8.9 percent, with its higher volumes, or what Nestle calls real internal growth (RIG), accounting for 3.5 percentage points of the growth and higher prices accounting for the remaining 5.4 points.
Analysts say rising volumes are a more reliable indication of long-term growth prospects for these groups, rather than relying on short-term price hike and risk cost-conscious shoppers making a knee-jerk reaction towards cheaper products.
Knorr soups and Hellmann's mayonnaise maker Unilever hiked its prices 7.4 percent in the second-quarter and only saw underlying sales rise 6.8 percent as it suffered volume declines with consumers downtrading away from its array of top brands. So while Unilever still has significant price rises to push through in the second half, Nestle should be able to focus on volume growth with limited price increases -- boosting its overall performance against its rival.