Nestle in talks to end supermarket row as pricing pressures build

By Martinne Geller and Silke Koltrowitz

LONDON/ZURICH (Reuters) - Nestle is in talks to end a pricing stand-off with several European supermarkets, including Belgium's Colruyt and Switzerland's Coop, which have dropped some of the Swiss group's products in the latest sign of growing pressures on the retail industry.

Nestle, the world's biggest packaged food maker, is facing off with AgeCore, a Geneva-based group representing six European retailers, which is seeking better supply terms. Nestle, which just reported its weakest annual sales growth in at least two decades, is under heavy shareholder pressure to boost sales and profit margins.

Swiss chain Coop said it had stopped orders on more than 150 Nestle products, including Cailler Perle chocolate, Nescafe Azera coffee and pizza brand Buitoni La Fina, demanding better supply conditions.

Nestle said on Wednesday it regretted consumers could not currently access its products in some stores in Europe. It said it continued to negotiate in good faith and hoped to find an amicable solution soon.

The spat is the latest sign of tension between retailers and suppliers.

Manufacturers like Nestle, Unilever and Procter & Gamble are grappling with changing consumer tastes towards healthier food and independent brands. They try to offset that by selling more higher-priced items, but the retailers are reluctant to put up prices as they face their own battle with changing shopping habits and online players like Amazon.com .

Nestle is also under pressure from activist shareholder Daniel Loeb, whose hedge fund Third Point took a $3.5 billion stake last year and has pushed for higher margins, something Nestle has also embraced.

"They need to drive the margin, they've been very clear about that," said Liberum analyst Robert Waldschmidt. "This is a line in the sand and they're going to stand their ground a bit more on price. These retailers are calling them out on it and testing them."

REACHING A DEAL

Waldschmidt predicts the two sides will compromise soon, but also estimated that in the worst case - if Nestle permanently lost all sales to AgeCore - it would cost it 2 or 3 percentage points of group sales.

Colruyt, known for its no-frills, low-cost strategy, confirmed on Wednesday it was a member of the AgeCore buying group and that talks were ongoing between AgeCore and Nestle.

"We are convinced that both parties, just as always, will reach an agreement," it said in a statement, declining to provide further details.

Italian supermarket chain Conad said AgeCore companies had reduced their purchases of Nestle products by around 20 percent, with negotiations underway over prices.

Geneva-based AgeCore could not immediately be reached for comment.

According to its LinkedIn page, it represents Edeka in Germany, Eroski in Spain and Intermarche in France, as well as Colruyt, Conad and Swiss Coop. Edeka, Eroski and Intermarche declined to comment.

Disagreements between manufacturers and retailers over price are commonplace and usually get worked out privately, though occasionally products get "delisted" temporarily.

In March last year, Britain's Tesco stopped selling several Heineken beers, and in October 2016, Unilever and Tesco had a row dubbed "Marmitegate" by the British press after the nation's iconic spread disappeared from some shelves.

It is easier for manufacturers to push through price rises when they can show their own ingredient costs have gone up. Prices for many commodities have been stable in recent quarters but are now rising. That has led some companies, like Reckitt Benckiser and Unilever, to predict price increases this year.

Nestle had a 900 million Swiss franc ($962.05 million) increase in its commodity costs last year, it said when reporting earnings earlier this month. But it only managed a 0.8 percentage point increase in its pricing.

"Ultimately innovation by Nestle is key - if they have consumer relevant products and concepts that others don't, retailers can't afford to turn Nestle away," said Kepler Cheuvreux analyst Jon Cox. "This is obviously part of (CEO Mark) Schneider's challenge to accelerate innovation."

($1 = 0.9355 Swiss francs)

(Additional reporting by Samantha Koester in Brussels, Elisa Anzolin in Milan, Angelika Gruber in Zurich and Matthias Inverardi in Duesseldorf; Editing by Philip Blenkinsop, Georgina Prodhan, Mark Potter and Jane Merriman)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)