What's going on?
Nestlé, the world’s largest listed food company, ate Unilever for breakfast on Friday, reporting better second-quarter earnings than its Anglo-Dutch rival.
What does this mean?
Just like in its first quarter, Nestlé continued raising prices in its second, which helped sales grow at their fastest clip since 2016. And because the price of products matters more to a company’s profit than the number sold, Nestlé’s profit beat estimates in the first half of the year.
Unilever actually increased its own product prices by more than Nestlé last quarter, but a slow start to the summer took a bite out of its ice cream sales. Sun-seekers might not mind paying high prices to cool down when it’s hot out, but those price tags may look a lot less reasonable under cloudy skies. And since ice cream comprises 10% of Unilever’s sales, this summer’s slowdown may have had a big impact on the company’s profit, which missed investors’ expectations. Still, it’s hotter now…
Why should I care?
For markets: The real cost of pricing.
“Consumer staples” companies had struggled to grow their profits in the last few years, given sluggish wage growth and stubbornly low inflation. Now that wages have picked up, raising prices has proven easier. But companies that don’t turn those price hikes into higher profits have been shunned by investors: while Nestle’s stock rose 2% after its report, Unilever’s stock fell by the same amount.
The bigger picture: Currency matters.
For American companies with major international sales – like Colgate-Palmolive and Coca-Cola – a strong US dollar makes overseas earnings worth less. But European firms may have a bigger problem: if Brexit leads to a downward swing in the value of the British pound, shoppers might face paying more for the same products – which could mean fewer sales for European consumer companies. Unless those companies decide to take the hit and cut their hard-won higher prices…