EVEN as Nestle (M) Bhd operates in an environment with multiple uncertainties, it continues to see solid demand for its brands.

       Food commodity prices have been increasing since last year, which has certainly led to cost pressures.

       Nestle (Malaysia) Bhd CEO Juan Aranols

       Nestle is doing its best to manage margin tensions, via its hedging policies and efforts to keep costs manageable.

       “We have taken steps to mitigate the impact of commodity headwinds, and have had to implement some moderate price increases.

       “The global commodity situation remains fluid; we will continue adapting and taking action as needed,’’ said Nestle CEO Juan Aranols.

       Nestle is working to gain Malaysians’ endorsement by providing healthy, nutritious and great-tasting products that meet their expectations.

       The group is venturing into a new category of opportunities such as plant-based foods and beverages.

       Amid all this, it remains convinced that the most effective weapon to protect margins is a deep understanding of consumer value translating into relevant value propositions.

       At the same time, the group is driving multiple initiatives to increase efficiency in its ways of working.

       Through its hedging strategy, Nestle strives to protect its bottom line from escalating input costs.

       The group has also been absorbing raw material price volatility by working with suppliers and distributors as well as through driving cost efficiencies.

       Prices of most key commodities are affected – sugar, dairy, coffee and palm oil – are among those recording the highest price hikes in 2021.

       The increase in energy prices and escalation in ocean freight costs have also contributed to cost pressures.

       Commodity prices have increased across the world on the back of Covid 19-related disruptions and the global impact on food supply chains.

       “As part of sustainable long-term solutions, efforts must be amplified to improve the nation’s food security, including supporting a more secure and sustainable local supply of agricultural raw materials,’’ said Aranols.

       Nestle’s contract farming enables the group to cultivate a stable supply of high-quality and affordable ingredients.

       At the same time, it is enhancing responsible sourcing within its supply chain and supporting rural development among the local farming community.

       Further price hikes are a last resort, said CGS-CIMB Research, but Nestle may explore increasing selling prices, in the event that it is unable to withstand the margin pressure from further increases in input prices.

       Nestle had expected rising commodity prices to lead to an increase in operating costs from the fourth quarter of 2021.

       The group aims to partly mitigate this impact through higher sales and had raised selling prices of certain product ranges to pass on the higher input costs.

       As part of its growth plans, Nestle will continue to launch new products including plant-based meal solutions as well as other categories.

       Within its product innovation, the group takes emerging consumer trends into account, to ensure that its new products gain positive response from today’s consumers.

       Despite higher commodity prices, Nestle’s operating profit for the nine months of 2021, rose 8.2% year-on-year (y-o-y), on higher economies of scale and lower marketing expenses during the lockdowns.

       Nestle had incurred RM65mil in Covid 19-related expenses during that period, compared with RM100mil in 2020.

       Based on higher demand from retail food and beverages as well as new product launches, Nestle had notched a 5.6% y-o-y growth in sales in the same period.

       CGS-CIMB Research believes Nestle’s valuations will be supported by the defensive nature of its business in consumer staples, its strong global name and product innovation.

       Potential downside risks include weaker-than-expected sales volume and a sharp increase in raw material prices.

       Meanwhile, Fraser & Neave Holdings Bhd (F&N) had incurred RM150mil in additional costs for financial year ended Sept 30, 2021, due to the rise in prices of raw materials including milk, palm oil and sugar.

       Against the uptrend in raw material prices, F&N plans to mitigate the impact via active hedging activities, lower trade discounts and better overall cost controls.

       Higher sales volume was supported by the recovery in sales to the hotel, restaurant and cafe (Horeca) segment.

       As a last resort, F&N will continue to gradually raise its selling prices in phases, taking into account consumer affordability amidst current uncertainties.

       F&N continues to gain traction in new markets and sees higher demand for its key original equipment manufacturing business.

       CGS-CIMB Research understands that F&N is still on an acquisition trail, looking for suitable land to build an integrated dairy farm.

       The research house is positive on F&N based on its strong balance sheet with a net cash of RM554mil, and ongoing recovery in Horeca sales which makes up about 30% of total sales.

       Downside risks include further surge in raw materials prices, weaker-than-expected sales in Thailand and Malaysia and lower sales from the Horeca segment due to rising Covid-19 cases.

       Rising commodity and raw material prices is a headache for manufacturers who strive to control costs via various strategies.

       Amidst the recovery in sales, let us pray for a reprieve in the rising Covid-19 infections. Yap Leng Kuen is a former StarBiz editor. The views expressed here are the writer’s own.