Indian consumers are not buying as much of coffee or milk products from Nestle were earlier. The company's sales in the first quarter of calendar 2013 have disappointed analysts again. In 2012, Nescafe volumes declined five per cent and milk products fell nine per cent. This trend seems to be continuing in the current year as well, claim analysts, as the company's first quarter sales have largely been driven by higher realisations. The company says domestic sales grew 7.7 per cent to Rs 2,095 crore, on "net realisations and product mix".
Undoubtedly, Nestle is battling slowing consumption like many other consumer companies but the company's volumes have been hit more than others. Other than Maggi Noodles, the company's seen volumes take a hit in most categories. Analysts blame the company's collapsing volumes on its aggressive price hikes over the last couple of years, as milk prices increased. Nestle passed on all the increase to consumers through a series of price hikes and is now paying a price for it.
Nestle's performance in the first quarter suggests the company is decidedly not willing to cut prices to push volumes. In the March 2013 quarter, the company's operating margins were up 60 basis points to 22.3 per cent, compared to last year. Sanjay Manyal of ICICIDirect says: "Last year, most of Nestle's revenue growth was driven by higher realisations as volumes declined and this trend continues even in 2013. As volumes have declined, margins have moved up in the first quarter of calendar year 2013, too. If the company has to revive volumes it will either have to cut prices or increase the noise around its brands."
Unlike other consumer brands, Nestle's portfolio is largely urban and discretionary in nature. So, it isn't surprising that it is suffering more than other consumer companies. What analysts find surprising is the company's refusal to budge on margins. Nestle is not willing to cut prices to boost volume growth and as a result, the outlook on the stock looks challenging in the near term. The company isn't increasing advertising spends to prop up volumes either. Analysts say the company's ad spends have also remained flat year-on-year despite slowing (in some cases, declining) volumes. Though the company has taken some measures to improve penetration, analysts believe it needs to do a lot more. Emkay Global says: "We like Nestle, with its strong brand equity and remain positive on the long term prospects of the company. However, the short term is challenging, considering the discretionary nature of portfolio."