LyrArc Article Gist
Nestle's strategy to meet increases in commodity costs going into its products is to steadily but gradually increase prices. Nestle has detected the rise in commodity costs early from its close contact with 600,000 farmers around the world. This goes back to 2007, when it steadily increased the prices of milk powder and did not lower prices as commodity costs temporarily decreased. Nestle relied on the expectation of rising prices as demand in developing countries surged. Even when prices of milk powder declined from $5500 a ton in 2007, Nestle did not lower prices. The commodity price increases will add $3 billion to Nestle's costs. The other part of the strategy is to lower packaging and other costs- savings in this area reached $1.5 billion in 2010- so that price increases on food products can be kept at 8-10% a year. Without these savings Nestle says the increases would have to be be higher, approaching 12%. Nestle is also developing new products that command higher prices. An example is the single serve capsules for its Nespresso coffee machines.