Away from the G20 summit last month the CEO of Nestlé, the worlds largest food company gave some revealing insights into his thoughts on recent commodity price movements affecting their business.
In the interview with the Wall Street Journal (WSJ) the CEO Paul Bulcke was asked whether Nestlé had benefitted from the recent drop in coffee, cocoa, sugar and milk prices and whether the savings had been passed onto its customers.
“We don’t price our products on the peaks. Four years ago, milk all the sudden went from $1,800 a ton to $5,500. We didn’t multiply the price of our products by four. We said $1,800 was definitely too low [and] saw a sustainable [range] of $3,000 and $3,500. And guess what, we are down to $3,500. Part of our job is to try to read through these turbulences and not create the same nervousness on [retail] prices as [our] raw materials.”
It should be noted that the fact that key raw ingredients only comprise 12% of sales is a big factor in why changes in commodity prices are not fully reflected in retail prices.
When asked what the outlook for commodity prices Bulcke answered
“The underlying trend is definitely going up and I’ve found it even positive [for us]. When demand and supply are tense you start to have higher volatility, which is normal…so now that prices are going up it starts to be something that is of interest [to governments]. Remember, we have to prepare ourselves to feed nine to 10 billion in a few years. The technologies, the practice and new ways of going about agriculture are all there. We have to embrace it.”
When asked if there is anything Nestlé can do to help alleviate food shortages in developing countries responded by saying that more efficient supply chains can help, reducing food wastage in particular.
“There must be access for farmers to the market; 30-40% of all that is produced in the fields is not really consumed. In the developing world, it is because it doesn’t get to the market because of infrastructure…We are setting up new kinds of factories that are closer to the consumer. That creates faster and shorter supply chains.”
While better infrastructure will help farmers in developing countries by reducing wastage it clearly helps Nestlé too by ensuring that the raw ingredients are consistently higher quality and delivered on schedule.
Nestlé has set up commodity research teams to identify trends, while the company uses futures contracts, hedging to lessen its exposure to price swings and by buying directly from farmers with whom the firm has a long-term relationship.
Kevin Petrie, Nestlé’s head of procurement, in a separate WSJ interview last year highlighted how far ahead they look when managing commodity price risk.
“We are always managing 18 months ahead. Because of the volume of these commodities it is crucial for our managers to understand the prices of the commodities.”