P&G/Nestlé: pet food gives Swiss group an edge

Brand loyalty has its limits. Amid soaring input costs, multinational consumer goods groups are passing on higher prices to end consumers. Results on Wednesday from Procter & Gamble suggest shoppers have had enough.

So much for devoted customers. The maker of Tide detergent, Bounty paper towels and Pampers nappies warned that full-year earnings would be at the low end of its forecast. Expect more downgrades in the sector as inflation bites into household budgets.

Headline figures at P&G flatter to deceive. While organic sales rose 7 per cent in the fiscal first quarter, price increases of 9 per cent made the real difference. Volumes fell in all P&G product categories except grooming, which was flat. A stronger dollar has also hurt. P&G generates more than half its sales from overseas. Indeed, little of the price increases fell through to the bottom line once currency headwinds were factored in, crunching margins. Overall earnings dropped 4 per cent during the quarter despite revenue rising 1 per cent.

Nestlé has a similar story to tell. Analysts reckon sales volume stalled at the Swiss maker of KitKats and Nespresso capsules during the third quarter. Unlike P&G, it has the benefit of a currency tailwind. The greenback has gained 9 per cent against the Swiss franc this year. Both Nestlé and P&G gain credit from investors for their defensive qualities. They trade at about 22 times forward earnings, in line with their five-year average.

But Nestlé may be a better choice. The Swiss group gets about 18 per cent of its sales from petcare. Penny-pinching shoppers may trade down to generic brands for household staples such as paper towels. But they are more reluctant to do so for their pets.

In the US, JM Smucker and General Mills both have large pet food businesses and have outperformed the wider market. Pets can be finicky eaters. Investors could be equally picky about big consumer groups.