Q3 season and winter is coming
We are in the middle of the Q3 results season, and for this quarter there will be extra attention to the fast moving consumer goods companies and the retailers, as they will give a strong indication for the economy as a whole and also how consumers have been reacting over the last couple of months, and what they expect for the future. The market is nervous with the latest inflationary pressures and interest rate increases, and negative news will have a much higher weighting than neutral/positive signals. Some key issues investors and analysts will be looking at:
Are the consumers trading down and to what extent?
How is the balance between in-home and out-of home spending?
Which product categories have the biggest negative impact?
For consumer electronics and sports apparel, what will in particular be the effect on big ticket items? And how will the Christmas trading play out after Black Friday, and what about January and February?
How is the market share development for each company and for which categories? Losing or gaining shares?
Which companies can manage the short-term cost agenda and the longer-term market share and innovation agenda?
And what kind of structural moves are possible during these special times with less capital available?
Last week, 19 October, Nestlé came out with their Q3 figures. The Group CEO, Mark Schneider, is known for "always delivering". It has almost become his brand in the market. Nestlé reported 8.5% organic growth to the market, of which 7.5% was price increases. The well reputed analyst, Bruno Monteyne at Bernstein, was positive to this increase, as it showed strong pricing power in Nestlé’s brands, and was not worried about the volume dimension as such.
However, the market reacted negatively 19 October and since then in money terms approximately 7 billion US dollars of value are gone. On the surface, a guiding of 8% organic growth for the full year, driven by price increases, and a 17% profit margin seems very strong, but there are some interesting observations when Scilla digs deeper into the figures:
In Europe, firstly, the price increase is only 5.7%, perhaps indicating not that impressive pricing power and resistance from the consolidated retailers. Second, the organic growth of 1.5% might be impressive, but it´s only driven by out-of-home growth against easy comparables. Grocery volume is down. Quite a lot since out-of-home growth overall for the Group is 20.2%. Consumers are spending less even for low ticket items.
In other words, as my firm is now saying: Winter is coming.
Be prepared for cost measures, but also make sure to take a long-term view to gain shares. Balancing both is demanding and challenging. But also, exciting.
