By Dominic Chopping


Nestle's organic sales growth slowed sharply in the first months of the year as consumer demand remained weak, particularly in North America, while supply-chain disruptions continued to hold back volumes.

The Swiss maker of KitKat chocolate bars and Nescafe coffee said Thursday that organic sales rose 1.4% in the first-quarter, missing a company-compiled consensus of 2.9% and compared to 9.3% in the same quarter last year.

Overall reported sales fell 5.9% to 22.09 billion Swiss francs ($24.14 billion), just shy of a company consensus of CHF22.37 billion, but it maintained full-year guidance ahead of an expected improvement in volumes.

The company began easing the pace of price hikes in the quarter after it acknowledged earlier this year that the unprecedented inflation seen over the last couple of years had turned many consumers away and hit demand.

Like many other packaged food producers, Nestle has raised its prices to pass on higher costs, lifting them by an average of 7.5% last year, which pushed some shoppers to move to cheaper store brands or remove certain goods from their shopping list altogether.

It raised prices by 3.4% in the first quarter on average.

Nestle said Thursday it is seeing significant pressure from lower income consumers in the U.S., where price increases over the last two years and the reduction in the U.S. supplemental nutrition assistance payments from the second quarter last year significantly reduced consumer's purchasing power.

"That resulted in some weakness all throughout the second half of last year and we saw that continued weakness now in the first quarter of this year," Chief Executive Mark Schneider told journalists Thursday.

However, the U.S. benefits from a very strong jobs market with continued income increases, so as inflation continues to ease people will essentially "restore and recover" when it comes to their purchasing power and the company's premium segment continues to do well, he added.

As prices have risen, sales volumes have fallen, and Nestle has made a recovery in volume growth one of its priorities this year.

These efforts were hampered in the quarter by soft consumer demand and supply disruptions in its vitamins business, that has been plagued by an IT system integration problem. The IT issue is being resolved and Nestle expects a turning point in the business during the second quarter followed by strong growth.

Real internal growth--the company's key measure of sales volume--fell 2% in the quarter. Analysts in a company consensus had expected a drop of 0.5%.

"It seems things are going worse than expected," Bernstein analysts said in a note, highlighting that there is enough in the release to make long-term investors worry after organic sales and volumes both missed expectations.

Growth in Nespresso and petcare both missed expectations by a wide margin, which matters because they are meant to be the long-term growth drivers of the business and should be less impacted by price conscious U.S. consumers, the analysts said.

Schneider said the company has seen a volatile delivery of RIG where some quarters it has been better and some quarters it has been worse, but there has been no steady normalization underway. However, he expects that is about to change.

"I think we've turned that corner now and are now literally spring loaded for a strong rebound in our real internal growth delivery from the second quarter and thereafter," he said on a media call.

Nestle backed guidance for full-year organic sales growth of around 4% and a modest increase in underlying operating profit margin from the 17.3% it recorded in 2023. A company-consensus forecasts 2024 organic growth of 4.0%, a margin of 17.6% and RIG of 1.8%.


Write to Dominic Chopping at dominic.chopping@wsj.com


(END) Dow Jones Newswires

04-25-24 0318ET