Good afternoon, and good morning to everyone. Welcome to Nestle's First Quarter Sales Conference Call and Webcast. I am Luca Borlini, Head of Nestle's Investor Relations. Today, I am joined by our Chief Executive Officer, Mark Schneider and our Chief Financial Officer, Francois Rouje. Marc will start with the key messages.
Francois will follow with a review of the Q1 2021 sales performance. We will then open the lines for your questions. Before we begin, please take note of our disclaimer. And now I hand over to Marc.
Thank you, Luca, and a warm welcome to our conference call participants today. As always, we appreciate your interest in our company. We are pleased to report an exceptionally strong quarter to you today. In a nutshell, we saw a rebounding level of business in China Based on a very low level of comparison last year, gradual recovery in our out of home business and continued strong demand for retail and in home consumption around the world. I was particularly encouraged by our progress in pricing As many of our input costs are increasing, it was reassuring to see that these pricing steps did not stand in the way of a positive market share development.
In line with our expectations, e commerce continued to thrive with a growth rate of 39.6%, bringing our e commerce sales to 14.5 percent of total Nestle sales in Q1. My sincere thanks go to the entire Nestle team. The challenges related to COVID-nineteen and global supply chain pressures are daunting, And the team navigated the situation in an outstanding manner to deliver this exceptional growth. Just like in operations and sales, we did not miss a beat in our strategic projects from research and development To digitalization, to portfolio management. Regarding portfolio management in particular, I would like to point your attention to the new strategic direction of our Nestle Waters business, which is becoming quite visible now.
With the sale of Nestle Waters North America and the acquisition of Essentia, The sharpened focus on international premium brands, local natural mineral waters and differentiated healthy hydration products, Such as functional water is taking shape. From a smaller and more focused base, our Nestle Waters business is now well positioned Regarding financial metrics, We are confirming our 2021 guidance today. In light of the exceptional growth in Q1, our guidance may appear to be conservative to you. Our confidence level of getting to an organic sales growth rate of more than 4% has certainly increased on the back of our Q1 performance. We are not aware of any material items that might stand in the way.
Our cautious revenue growth guidance at this point is mainly based on two reasons. First, the level of comparison for the second half of the year is going to be significantly higher. And second, We wanted to have one more quarter of visibility with regards to the COVID recovery before we revisit our 2021 growth guidance. While we will not discuss cost and margin items in this Q1 conference call, I would like to caution against excessive margin growth expectations Based on this strong sales growth, we now see product based inflation across our various commodities, packaging materials and transportation costs. Not all of these items can be hedged, and our hedging cover for a number of commodities will run out over time.
We are raising prices where appropriate, but usually, there's a time lag associated with pricing. We are on top of situation and my raising this issue should not give you alarm. I just wanted to caution against excessive expectations on the margin front. So please stay close to our guidance level during this turbulent time. Before turning it over to Francois, I would like to comment on how Nestle is supporting COVID-nineteen vaccination efforts.
As you know, community support has been a key priority for us From the beginning of this crisis, right next to keeping our workplace safe and maintaining business continuity. From the onset of the pandemic, We have provided community support around the world in many different ways. The focus of this work has now shifted There is an urgent need to advance equitable access to vaccines, particularly in low income countries. We're not a medical firm, but we have unparalleled logistics and geographical reach to offer in addition to direct financial contributions and donations. Needless to say, all of this has been and will be in strict compliance with all applicable health care regulations and in close coordination with government authorities.
Widespread vaccinations are the best way to overcome this pandemic, And we advocate for everyone getting vaccinated in line with public health priorities. With this, let me hand it over to Francois for a detailed review of our Q1 results.
Thank you, Marc, and good morning or good afternoon to all. Let me start with the highlights for the Q1 of 2021. Organic growth was 7.7% with increases from all three components, volume, mix and pricing. Real internal growth was strong at 6.4%. Pricing contributed 1.2%, strengthening significantly versus the prior year.
Net acquisition reduced growth by 1%. This largely relates to the divestments of Erta Charcuterie, Yinlu and U. S. Ice Cream, which were partly offset by the acquisitions of Freshly, Vital Protein, Lilly's Kitchen and Essentia Water to name a few. Foreign exchange had a negative impact of 5.3%, reflecting the continued appreciation of the Swiss francs against most currencies.
The exchange rate dynamic improved during the quarter with the impact turning neutral in the month of March. Sales for the 1st 3 months were CHF 21,100,000,000, A 1.3% increase versus last year on a reported basis. Overall, the acceleration in organic growth in the Q1 was driven by 4 main reasons: early signs of recovery in out of home channels increased contribution from pricing, Reflecting input cost inflation, further market share gains across most categories, particularly in coffee and pet food And finally, a rebounding level of business in China due to a low base of comparison last year. This slide illustrates the development of our sales by geography and includes both our zones as well as our globally managed businesses. Organic growth was strong in all geographies.
Growth in AOA was helped by low base of comparison in China. Pricing was positive, particularly in the Americas and EMEA, reflecting our ability to offset currency appreciation and input cost increases. Turning to the distribution of growth between developed and emerging markets. We returned to a more typical pattern compared to last year with significantly higher growth in emerging markets. Organic growth in developed markets increased to 5%, Reflecting strong rig across all regions, pricing turned positive.
Growth in emerging markets accelerated to 11.4% Supported by broad based improvements with brake markets on Mexico individually and collectively growing at a double digit rate. Let's now look at the breakdown of sales by channel. Organic growth for retail sales was strong at 9.2%, Reflecting sustained demand for at home consumption, going forward, retail sales are expected to moderate But remain at higher levels than in 2019. We believe that some changes in consumer behavior are here to stay, Such as increased working from home, pet parenting and the search for health and immunity benefits. Within retail, e commerce saw sustained growth of 39.6%.
E commerce now accounts for 14.5% of total sales. This growth is built on solid foundation and investments over the course of several years. The recent acceleration in e commerce penetration Reflects our ability to adapt to rapidly evolving consumer needs. Sales declines in out of home channels moderated With significant improvements in Asia and Latin America, a recovery of out of home back to 2019 levels is expected at the earliest in 2022. Let's now look at the results of our operating segments beginning with Zone AMS where we saw high single digit growth with a high base of comparison.
Sales were CHF 8,200,000,000 With organic growth at 7.2 percent based on strong RIG of 4.8% and an increased pricing contribution of 2.4%. This strong growth reflected broad based market share gains led by pet food, coffee and dairy. North America grew at a mid single digit rate supported by strong rig in most product categories with solid pricing. Frozen food, coffee and creamers all grew at a double digit rate. The newly acquired Freshly business also delivered Strong double digit growth based on distribution expansion and increased consumer loyalty.
Purina Pet Care delivered mid single digit growth With continued momentum in e commerce and premium brands, particularly in wet cat, snacks and veterinary products. Latin America delivered double digit growth, supported by increased pricing and positive contribution across geographies, Particularly Brazil and Mexico. By product category, the key growth platforms were dairy, Purina Pet Care and coffee. Our performance in pet care was robust with particular strengths for dog share. The region also benefited From new production capacity coming online in Mexico, Nestle Professional saw slightly positive growth based on significant improvements in Brazil and Mexico.
Turning to Zone M and A. Sales were CHF 5,200,000,000. Organic growth was 4.4% based on strong rig supported by both volume and mix. Pricing turned positive contributing 0.6%. ZOOM continued to see broad based market share gains led by coffee, pet food, plant based food products, infant nutrition and water.
Each region posted positive growth with strong momentum in Russia, Turkey, the United Kingdom and Italy. The key growth drivers were coffee, Purina Pet Care and culinary products fueled by continued momentum in e commerce and new product launches. Sales of ambient dairy in the Middle East and North Africa grew at a double digit rate supported by strong growth in Nido. Infant nutrition posted negative growth due to consumer stockpiling in March of last year and lower birth rate in the context of the pandemic. Water on Nestle Professional reported negative growth with an improving trend towards the end of the quarter.
Moving next to Zone AOA with sales of CHF 5,100,000,000. Organic growth reached 9.1% led by China, which was helped by a low base of comparison. Outside of China, the zone grew at a mid single digit rate. Pricing increased by 0.3%. China posted double digit growth supported by a recovery in out of channels and the timing of Chinese New Year.
Most product categories saw strong growth with continued momentum in e commerce on the robust innovation pipeline. Nestle Professional saw a strong rebound in sales with broad based contribution across categories, particularly dairy. Growth in infant nutrition turned positive helped by a low base of comparison for YOS and positive growth in NAN. The rollout of new products focused on lower tier cities is on track. In addition, we have expanded distribution for Illumina A2 and Illumina Organic.
Southeast Asia posted low single digit growth in a difficult economic environment. Positive sales development for most product categories were partially offset by sales decreases in out of home channels and infant nutrition. SAINCE Asia recorded double digit growth with positive contributions from Maggie, Nescafe and KitKat. Sub Saharan Africa grew at a double digit rate based on strong sales development for Maggi, Mylo and Nescafe. Japan posted mid single digit growth led by KitKat and Starbucks products.
Sales in South Korea grew at a strong double digit rate driven by COFIC. Oceania reported low single digit negative growth due to a high base of comparison. Overall for the Zone, the largest growth contributors by product category were culinary, dairy and coffee. Infant Nutrition posted slightly negative growth, but gained market share in South Asia and Africa. Growth in Nestle Professional turned positive led by China and Japan.
From this quarter onwards, we are reporting Nespresso and Health Science separately to provide you with better transparency. Nespresso saw sales of CHF 1,600,000,000. Organic growth reached 17.1% based on strong RIG of 16 point 3% and pricing of 0.8%. Growth was based on strong momentum for e commerce, continued expansion of the virtual system and strong demand for original line capsules. By geography, the Americas, MENA and AOA All contributed positively to growth.
North America was a standout with continued double digit growth and market share gains. After this strong start to the year, we expect growth to moderate as we cycle a higher base of comparison in the second half of twenty twenty one. During the quarter, we announced an investment of CHF 117,000,000 in our AVANCH facility On top of the CHF160 1,000,000 investment for our Romain facility communicated in July 2020. Finishing with Nestle Health Science, which reported sales of CHF 0.9 billion. The business grew at a high single digit rate, driven largely by RIG of 9.4%.
This growth was fueled by continued momentum in e commerce, New product launches and distribution expansion. Consumer Care posted double digit growth with strong contribution from Garden of Life, Vital protein and personnel. Growth was supported by innovation and sustained momentum in e commerce. Garden of Life and Vital Protein continued to expand internationally and are now sold in 30 13 markets respectively. Healthy aging products grew at a double digit rate led by boost in North America, Nutrane in Brazil and Asia as well as maritime in Europe.
Medical Nutrition saw mid single digit growth with robust sales development for acute and adult medical care products, particularly Peptamin and Complete. By geography, the Americas grew at a double digit rate. EMEA and AOA reported mid single digit growth. Looking now at product categories. We saw strong growth in all segments With the exception of infant nutrition and water, most categories saw market share gains with particular strength in coffee, pet food and dairy.
Within powdered and liquid beverages, coffee grew at a double digit rate supported by Nespresso, Nescafe and Starbucks products. Coffee at home continued to see double digit growth. Out of home and on the go channels were still negatively impacted With some improvement in the quarter, sales of the total Nespresso system, including Starbucks by Nespresso, Grew by more than 20%. The month of March marks the 2 year anniversary of the launch of the first Starbucks products outside of North America. Total sales from Starbucks products reached CHF 716,000,000 In 70 countries in the Q1 with a 15% CAGR over the last 2 years.
We are not done yet and we see further significant growth opportunities. Cocoa and Malt Beverages grew at a mid single digit rate. Pet Care continued to see outstanding growth supported by e commerce, strong demand for science based products And the expansion of innovative business models with teles.com, Lily's Kitchen and Terrakanis. In Prepared Dishes and Cooking Heads, growth was broad based by region and brand, backed by new product launches and increased digital engagements with consumers. Frozen and chilled food combined grew at a double digit rate Driven by Starfers, Lean Cuisine and the recently acquired D2C businesses Freshly and Mindful Chef.
Vegetarian and plant based food products continued to deliver strong double digit growth. Ambient culinary grew at a high single digit rate based on strong sales development for Maggi across geographies. Nutrition and Health Science saw slightly negative growth. Organic growth for infant nutrition was minus 4.4%. The return to positive growth in China was more than offset by sales declines in other markets due to consumer stockpiling in March last year and lower birth rates in the context of the pandemic.
We continue to roll out new products in all segments. Key highlights include the launch of NAN Supreme Pro in Mexico, The first infant formula with a combination of 5 HMOs and new pediatric and maternal supplements. Within baby food, Cerelac delivered robust growth and we have already discussed Nestle Health Science. Milk products on ice creams grew in double digits supported by sustained demand for home baking products and fortified milks. Growth was helped by higher pricing, particularly in the Americas.
Ice cream saw very strong growth supported by premiumization and a focus on key brands. Confectionery recovered to double digit growth driven by chocolate. Momentum in baking products and tablets continued. The improved contribution from gifting and impulse products Was helped by the timing of Easter and Chinese New Year as well as early sign of recovery in out of home channels. Waters saw negative growth, reflecting continued disruption to out of home channels and on the go conception.
We are focusing on differentiation through our international brands and functional waters as evidenced by the recent acquisition of Essentia Waters and the launch of products such as Perrier Energize, a caffeinated sparkling water. Waters saw market share gains. Let me now hand over to Luca for the Q and A session.
Thank you, Francois. With that, we move to the Q and A session. We open the lines for questions from financial analysts and investors. Please limit yourself to no more than 2 questions. The first question is from Guillaume Delmas at UBS.
Please go ahead, Guillaume.
Thank you. Good afternoon, Marc, Francois and Luca. My first question is on prepared dishes and cooking eggs because in Q1, you 9.9% rig against what I thought was an incredibly challenging comparator. And I think in Q1 last year, you probably benefited in that division from some stockpiling. So trying to understand how your rig Came in almost in double digits in that Q1.
Is it down to share gain, category growth accelerating, maybe you expanding into new segments and probably more importantly, how should we think about the next quarters for this business? And then my second question is on the Nestle capsules for Nestle machine. I think you started this Innovation initially in Australia last year. You're now rolling it out in Spain. So my two questions on this.
Could this initiative become properly global or is it more about some markets where you have identified some gaps in your offering? And secondly, What cannibalization effect do you expect, if any, from this? I'm thinking in particular potential risk to Nestle, Dolce Gusto or maybe the Starbucks capsules? Thank you.
Okay. Good afternoon. Guillermo will take the first question and Marc will take the second one. On Prepared dishes and Cooking Aid, so indeed we had a strong performance. We grew at a double digit rate based essentially on rig.
In spite of the fact that we had some decline in the Out of Home channel, growth was broad based by region and product segment. It was helped by Continued strong demand for increased home cooking and the shift from out of home to in home consumption. It was the case last year. As you said, in Q1, it was the case again this year. So it is true that it is growth on growth to a certain extent, but I mean we still have some certainly some positive impact from COVID there.
Innovation and increased digital consumer connection has certainly helped to elevate the role of home cooking and provided certainly their share Your contribution. By segment, so we had a high single digit growth on frozen, which essentially came from staffers meals and lean cuisine in retail. And frozen grew close to double digits. So it is true that this was a very strong momentum. The momentum that we had last year was actually more in the month of March, This year, I mean, it was for the full quarter.
Chill Culinary grew in strong double digit growth as well and onion culinary grew in strong high single digits.
Thank you, Omid. Let me comment on the Nescafe capsules. You're right. So we tested this in Australia And also in the Netherlands. And then we proceeded to roll out in Spain.
So far, the results are very, very encouraging. One of the reasons why we wanted to test extensively is exactly what you mentioned. We wanted to be sure that there is no excessive cannibalization. So in that regards, the result were incredibly encouraging. I think the beauty of our brand architecture is that we have very defined target groups here between the original Nespresso brand, the Starbucks brand and now Nescafe.
And so yes, based on what we know today, we're Certainly eager to also look at other markets where there might be an opportunity.
Next question is from Celine Panuti at JPMorgan. Please go ahead, Celine.
Yes. Good afternoon, everyone. Thank you for taking my questions. My first question is on the guide on the margin front. You are guiding for moderate margin increase.
I was wondering whether the top line performance And the operational delivery from a volume standpoint would lead to further EBIT. And in that case, are you going To reinvest, is that what you are trying to say when you are talking about moderate? Or is it just a question of not yet having the visibility on How long this strong performance will be and maybe looking at the margin performance guide later on in the year? And my second question is on your strong performance in the retail environment. I don't know if you have mentioned it, sorry, On the call, but are you able to say what is the growth rate of the category and how you think You performed in terms of market share.
Thank you.
So on the margin, I don't have We're trying to be helpful, but I don't have very much to add to my prepared remarks. And that is, clearly, we saw that Some of you may come to the conclusion that based on the strong sales growth that there is also an excessive margin upside in place. But It is important here to look at the inflationary environment out there on commodities, on packaging materials, On transportation costs, this is a very volatile environment right now, very low visibility, lots of surprises happening. And again, we will take pricing action. As you've seen, we have taken some pricing action already, but it's important to stay very close to the margin guidance that we have given you for the year in February.
Good afternoon, Seville. On retail performance, we had very strong one, indeed 9.3% in Q1, which saw further acceleration from where we were last year in any quarter. So the difficult to say exactly what is the growth of the market. But that being said, we saw certain improvement In our market share and just to give you a little bit more color, we have been gaining market share in about 63% of what we call our business sales. Sales is a combination of the geography and the category.
So 63% is one of the best level that we have since basically since 2013. We have been holding market share in about 6% of the sales. And as a consequence, we have been losing market share in 37%. So once again, this is Certainly a strong improvement versus what we have seen over the last couple of years. If we talk geography, we saw a clear improvement and acceleration in market share gains In M and R and in AMS, I would say across categories.
And if we look at it by category, we see clear market share gains in coffee, In pet care, in dairy, ice cream, water even even in water if we have a declining business, but because of the COVID related situation, We saw market share gains as well in confectionery and Nestle Science. So it's relatively across the board both by geography and category.
Next question is from Bruno Montaigne at Bernstein. Please go ahead, Bruno.
Hi, good afternoon. I'm a little bit confused about the pricing information. And on the one hand, I can see the acceleration of pricing impact. We've gone by 50 basis points to 1.2% this year. So it looks like pricing is coming through.
And then when I look at the DM versus EM split, it looks like all the pricing sits in emerging markets. So I would imagine that most of the pricing is offset of currencies in emerging markets. The reason I'm asking is to what extent are you also seeing pricing coming through With the higher input costs, whether that's packaging, plastics, food commodity cost of transport, is that starting to come through? Or is that too early? And if it still has to come through, would it be fair to expect another 15, another 100 basis points as we see the full impact All these more input cost and prices price in developed markets.
My second question is on infant nutrition. Just as China is going positive again and the rest of the world goes negative, it feels like hard work to catch. Now if you were to step out the impact of the stockpiling last year, Is there still enough momentum outside China to return to positive growth? Or is the impact of lower birth rate so big that actually we might see negative growth for the rest
Let me take, Bruno, the first question. On the source of inflation, first of all, It is true that there is one item contributing to ING, which is currency depreciation in emerging market because we had significant currency depreciation last year and there is always a time delay TV fits our P and L. But it goes beyond that. We clearly see input cost inflation, which is back with price increases for commodities, Packaging material and transportation cost. We are hedging and forward buying to cover some of this exposure, But it only delays the impact for a few months.
And in addition, hedging is mainly available for key agricultural commodities, but it does not really apply for packaging, whose price fluctuations goes immediately to the P and L. So obviously, the main way to address input cost inflation is through price increases and Our strategy has been the same over the last couple of years is to offset over time the input cost inflation that we receive through price increases Even if we are absorbing some of the inflations for productivity gains, industrial efficiencies and product mix and innovation, Clearly, I mean, the we will see more probably coming from the input cost inflation as we progress into the year, Maybe a little bit less currency depreciation because we start seeing things stabilizing. But the contribution from input Cost inflation is significant including in the developed world. If we see for example in M and A, we start having positive Pricing, well, we had been in negative territories for a few years. So we still you clearly see some traction there in MENA as well as in the U.
S. Same story.
And Bruno, if I could build on that, I think you are seeing as you look at various quarterly updates, a very consistent picture here from our peers as well. And obviously, that is not lost on the public consumers and retail partners. So I think that's giving us hope here that pricing action, where appropriate and where warranted by the cost increases, is possible. Look, on China Nutrition, we didn't get into specific guidance here. The key messages are, I think we are seeing initial signs of progress On the work that we have described to you as part of our February conference call, the one picture we saw in China, but also many other key geographies It's simply depressed birth rates.
At the beginning of this pandemic, there was this question, was the pandemic going to lead to A baby boom or a baby bust. And it's very clear that in most geographies, birth rates have been coming down. You can imagine with economic uncertainty and health related uncertainty, for many potential parents, this may not have been the best time to either start or And their families. So some of this will relieve itself. Again, as you know, we are a long term player here.
We have seen in key geographies Good market share development, which I think is giving us hope. But obviously, this category has its ups and downs. And
Next question is from Warren Ackerman at Barclays. Please go ahead, Warren.
Good afternoon, Marc, Francois, Luca. Warren here at Barclays. 2 for me as well. First one Pet Food. I mean, I think almost 9% growth in the quarter.
That was up against a 14% comp In Q1 last year, can you tell us what the growth was in the U. S, Europe, LatAm? I mean, you said LatAm is very strong. And maybe give us some color on what kind of e commerce growth you're seeing. I'm just trying to get a sense of how big the share gains are And what benefits you're getting from, say, personalization in pet food and maybe even the IBC investment in pet clinics because that number is pretty exceptional in pet food and how we should think about it for the year.
And then the second one is just around channel mix. I mean, one of the things that I'm a bit confused by is that you're seeing Retail sales stepping up quite markedly in the Q1 compared to the full year, but you also see any out of home decline Stepping up as well. So it looks like just consumption is going up or calories are going up, people just eating more. Is that the right way to read it? And is that something that you think as a trend can sustain for any kind of prolonged period of time?
Or do you just think it's a timing effect? Just be interested in any kind of color on this kind of channel mix because it seems a bit odd from the outside. Thank you.
Or maybe I can start with Second one and then hand it to Francois for the first one. Just to be clear, with out of home, year over year, we're down, Okay. The reduction is just less pronounced than it was in some quarters last year, most notably the Q2 last year. And it's certainly better than the full year, but year over year, nonetheless, we're down. So I think what we're seeing still is a world that
Maureen, good afternoon. On Pet Care, so we posted high single digit growth with strong performance across Markets and segment. On the top, as you say, of a strong quarter into Q1 in 2020, so it was across market The growth was supported by continued focus on premiumization, personalization and innovation very much what we have been doing as well over the last couple of years. Our digital ecosystem and the expansion of innovative business model, I would mention the hotels.com, Lily's Kitchen, Tera Canis, They have remained an important growth driver as well. You talked of market share.
Where we have been gaining market share is especially through e commerce across geographies there. Talking of the category dynamics, we stay with an attractive category dynamics with the market growing at a strong mid single digit rate. It was the case before COVID-nineteen and certainly the pandemic has led to increase the pet parenting and this is certainly helping as well. As you know, in developed markets, this is very much about innovation, while in emerging market, it's much more about calorific conversion. And we expect that to continue in both cases.
We are obviously investing significantly to support that as well. You may have seen that we are putting a significant CapEx to support the growth and the needs there. North America, just because I think you wanted to get some color. So we grew mid single digit, Which was on a very high base of comparison already last year and we were in double digit elsewhere.
Okay. Thank you.
Next question is from John Cox at Kepler. Please go ahead, John.
Yes, good afternoon, guys, and congrats on that Q1 figure. It looks, I think, the best in about 10 years, so well done. A couple of questions for you. Just on the inflation side of the equation again. I wonder if you can sort of give us an idea, excuse me, How much you find you think your agri or agri logistics basket will rise this year Compared to last year, just to give us a ballpark figure.
And then just on the gross margin for this year, do Do you think that a mixture of pricing and also the ongoing efficiency programs you have will be enough to offset the higher inflation costs? Or do you think that actually the gross margin will actually be lower this year? And then just an add on to really your comments about you I guess more elevated levels of in home consumption to last indefinitely. I wonder where you sort of get that idea from, what you think you're looking Yes, in particular. And then just an add on to that.
What does that mean for you, say, baby food business? I'm not talking about forming. I'm talking about baby food It seems like when people are home, they spend a lot more time maybe making baby food rather than buying it off the shelf. Any thoughts you have on that? Thank you.
John, let me start perhaps on the second one, and I'll share with Francois the answer to the first one. So when you look at at home consumption now, remember this pandemic is not over yet. And so many people, As a precautionary measure, are still spending a lot of time at home or do a mix between the time they spend at home and time The workplace, so this is not a full return to normal yet with very few exceptions. And so I think it is natural that elevated consumption trends Continuing. And as you look at forecast for the rest of the year, I mean, this pandemic has surprised us a few times.
But If we're assuming a steady recovery here, then it would mean that even for the balance of this year, people will have spent more time at home Then say in 2019. So that's a fact, and that's pretty much pandemic driven. Beyond that, You have the whole notion of future at work, which you know gets discussed now a lot and more flexibility Already signaled now by many employers post pandemic when it comes to allowing remote work styles and At least a fraction of the work being then completed from home or remotely, not at the normal workplace. And so you pick your assumption of what that It's going to be and for how many people. But clearly, I mean, the 2020s, when it comes to our places of work and commuting habits After this pandemic, we'll probably look different to the decade before.
And then, of course, there's a third aspect At work, which has started last year with the onset of the pandemic, and that is a consumer and retailer trend towards trusted And large brands. And of course, with our well established brands, we benefited from that. And here again, you will have to pick your own assumptions, How long that will last and what it will develop into after the pandemic. But as for now, we're still in the middle of this pandemic, and hence, It's not surprising that the same trends that helped us in 2020 are also at work in 2021.
John, on inflation, so the increases are taking place across the board, but it's more specifically on dairy, On dairy, cereals and packaging, I would add to that obviously transportation cost, which is sea freight, air freight, trucking costs, you name it. Obviously, on the part that has to do with agricultural commodities, as I said earlier, we have hedging in place And we have forward buying as well in place, which delays a little bit the impact. So we will get some of this impact later in 2021. We will get some as well in 2022. So this is not just something for this year.
It will certainly be carried forward to next year as well. So growth in terms of impact on our gross margin, as you know, we value gross margin as an indicator of the quality of our portfolio and our capacity To price and our capacity to manage our industrial base efficiently as well, gross margin is impacted by a variety of factor, which include the mix, Pricing, cost efficiencies and what we just discussed commodities, packaging, material price movement as well. And we are acting on the levers individually in order to improve our gross Margin or stabilize it over time. We always try to offset the input cost increases commodities and packaging material to start with Through pricing and it has worked over the last couple of years, so we are confident that we can do it as well. It may not necessarily work by quarter Exactly by semester because as Marc said in his opening remark, there might be a time delay as well, which may lead to some specific Pressure or benefit in a given quarter and in a given semester.
But globally, so this is our strategy is to offset Whatever we receive through pricing.
And let me build on that just very quickly. So what Francois described, I mean, from what we can see now, It's very much a 2021 and to some aspect also 2022 phenomenon. To what extent it will Reached longer than that, we don't know yet. So it is about 2021, 2022 for now, and then we'll watch with you how input costs Developed. The other thing, building on what Francois said last, that's very important to me, We're in a period now which started last year with the onset of the pandemic and which will probably last another year or so where you will have pretty strong gyrations from 1 quarter to another, top line, gross margin, Bottom line, so this will not be your normal year over year steady comparison situation that maybe Was offered in 2019 over 2018 or 2018 over 2017.
And that's just one thing where it's important not to over interpret the latest
Next question is from Tom Sykes at Deutsche Bank. Please go ahead, Tom.
Yes. Thanks, Luca. Good afternoon, everybody. I just wondered on Coffee, please. Could you give a little bit more detail on the share gains by geography and where these have been Strongest, please.
Then on the Nespresso where the food service And also in out of home coffee for Starbucks. Could you maybe just Talk about the growth outlook there and whether there's been any restocking benefit at all ahead of a more broader Opening up in later quarters, please. And then also just on those geographies where there has been a bit more Opening up, I guess, following on from one of the earlier commentaries around the sort of double benefit of out of home improving and Retail consumption being high, what are you seeing specifically in coffee In those countries which are opening up and do you still get the same premiumization trends at home when that's been occurring, please?
And Tom, maybe if I could start on that reopening part. I guess the one market that we look at very closely is China. And there, you're seeing a nice restart of the out of home activities, including, of course, coffee. And so that's going really well. It doesn't lead to major problems on the at home side.
But then again, as you know, China is a market that still has very low per capita consumption of coffee. And so it's a little hard to Draw conclusions from that for the rest of the world. From what we've seen, in particular, Starbucks out of home, it bodes well for other markets. It's hard for us to tell to what extent restocking goes on or it's true pass through consumption. That's pretty hard for us to guess.
And Tom, on your question on market share gains in coffee, that's relatively simple to answer. It happened across geographies, Across brands and across segments, by segments I mean portion coffee soluble, Boston ground. So I mean and it happened in the Americas, Across Europe and in Asia and cross brand, I mean, the 3 main brands that we have, Nespresso, Nescafe and Starbucks. So no differentiation there and very happy with that.
Next question is from Jeremy Fialko at HSBC. Jeremy, please go ahead with your question.
Hi, good afternoon. So my two questions. First one is, the growth in Emerging Markets was pretty strong this quarter. Now clearly, there was the China Given the base there, but also markets like India, Latin America did very well too. Yet the I guess, The health conditions in those markets are very, very serious at the moment.
So I suppose the question is kind of how worried are you The worsening health situation then that then sort of manifests itself in a worsening kind of consumption and economic situation over the balance of the year? Or has what you've seen in the second half of twenty twenty told you that these health and economic factors are perhaps going a little bit more sort of separate Than they might have been a year ago. And then second, just a very quick question. Within the 6% rig that you delivered, Can you roughly split that out between the volume components and the mix? And which was the larger of the 2?
Thanks.
Thanks, Jeremy. Let me address the emerging markets first. So you're right. I think the rebounding of China is a big component of that. You're also right.
We're watching with some concern the development of the pandemic In another large emerging markets, I think as long as you're able to operate And supply your products. The at home strength is a strong net plus for us. And China stood In that, we had one of the most developed professional and out of home markets there, and hence, the hit there was harder at the time of the lockdown. In other emerging markets, the relative weight of the out of home business for us is not quite as strong. And hence, we believe as long as we can operate and deliver our goods that we could still come out with very good growth numbers there.
Now having said that, as you know, later in the year, as we start to lap some very strong quarters in those markets, The pace of comparison there is going up as well.
Jeremy, on your question on the three components of our growth, Actually, I'm glad you had the question because we have a very well balanced growth in terms of between the three factors. If you look at it against the full year 2020, so we are comparing 1 quarter against a full year. As you can see, we have accelerated our growth by a factor of 2x. If you compare on pricing, you have it anyway, it's 2x as well. On volume, it's around 2x.
So we had a strong volume growth and acceleration there. But the beauty of it is as well is that we continue to see mix improving again in Q1 as it did last year as well during the pandemic. So It's a very, very healthy growth profile as well with the 3 components of organic growth contributing to it.
Next question is from John Henness at Goldman Sachs. Please go ahead, John.
Yes. Hello. Thanks for taking my question. I wanted to ask on coffee first. The 17% sales growth in Nespresso was, of course, a positive surprise.
Can you help quantify how much of this was driven by New customer recruitment versus a higher frequency of usage per customer. As we progress through the year, do you think frequency of usage can persist? And then my second question is a quite a broad one on the full year guidance.
What would you need
to see in order to raise the guidance? Is it simply a Strong 2Q and visibility on reopening more broadly? Or is there something specific that you are worried about or being cautious about with regards to certain categories or countries that you can highlight. Thanks.
Thanks, John. Let me start with the second one and then hand it to Francois, the first one. And I think you summarized it well. I'd like to see how Q2 is going and what we know in July about how the world is climbing out from this pandemic crisis. And so those are to me the 2 major things to watch.
And then I mentioned the fact that we have a steeper base of comparison in the second half, that's a fact. We know that. So it's not changing very much. So as those 2 that we're watching and as I mentioned in my prepared remarks, there's no Specific material bad news item that we are aware of here that we're trying to watch other than these 2 unknowns about the second quarter And how exactly we get out of the pandemic.
John, on your question for of The drivers of the 17% organic growth for Nespresso, it's a combination of increased frequency and increased penetration. So it's not one or the other. It's Clearly, a combination of both. I would mention as well that it came, as you could see, across geographies because we had a strong sales development very strong Development in the U. S, but I mean Europe grew very nicely and so did Asia.
So we're very happy with that. And we gained market share Basically across geographies as well as far as Nespresso is concerned as a consequence of this increase of both frequency and penetration.
Next question is from James Targett at Derenberg. Please go ahead, James.
Thank you. Good afternoon. A couple of questions for me. Firstly, just on the out of home consumption, so the 11.6% decline in Q1, can you talk about some color on how that trended through the quarter? And also maybe what kind of the range of declines was On a sort of broader regional basis, where some regions are back in positive territory, where some significantly more negative?
Any color on that would be great. And then secondly, just on Waters following the U. S. Disposal. Could you give some color on what is the split of the business now between the premium, the sparkling and the functional products that you're focusing on going forward versus More mainstream products and should we expect further M and A to boost those areas as well?
Thanks.
If I could just start with the second one, James. So on Waters U. S, the split now is very much All in, either premium or functional. As you know, we have a thriving business there with our international brands, Pellegrino, Perrier In Aquapana, and then we added Essentia to it, and we disposed of the rest. So that's pretty much a pure play in that regard.
James, as far as out of home is concerned, so we do not want to comment by months. What I can tell you is that We should not be overexcited by it either because I mean the rate of decline has reduced by half because we were at around minus 25% in H2 last year We are at around minus 11% now. That being said, if you look at it in absolute value, it's not significantly better. So the improvement is, to a large extent, coming from A better an easier comps to a certain extent. But we are hopeful that the situation will improve because we start seeing some signs of improvement, To be more specific, in countries like China or Japan, for example, we start seeing some interesting development.
We are not exactly at the level where we Pre COVID, but we will get there probably one of these days. The situation remains under significant pressure in Europe As well as to a large extent in North America. Latin America is doing not okay, but it could be worse. So it could be better as well.
Next question is from Pinar Ergun at Morgan Stanley. Please go ahead, Pinar.
Hi, thank you for taking my question. You were recently cited in the media around your M and A ambitions. I appreciate you cannot disclose too much about this, but When should we realistically expect acquisitions to become a more meaningful driver of Nestle's growth? And would you please remind us So the areas of interest for Nestle when you think about external growth. Thank
you. Yes. Pina, yes, you're right. There's probably a limit as to how much detail we can provide here, I think the key messaging was that we are coming out of a period with pretty sizable divestments. As you know, our interest in meaningful and well fitting acquisitions had always been undiminished, and we've done some in the past.
Like Think about Starbucks that we talked about today. We struck that deal 3 years ago, and then 2 years ago, we launched the products. So it's not so much anything new on the acquisition side. It was more to signal that this period of large scale divestments that were also taking the toll on the top line that, that's over. There will be continued adjusting on the portfolio, But not to the same extent as you've seen specifically in the years 2019 2020.
And look, when it comes to the areas of interest, obviously, the high growth categories are of strong interest. But we've also said repeatedly That across the full spectrum, if something is a good fit and strengthens us, yes, we are open. I mean, if you start ruling out In the category you're in, you're basically saying you don't want to be in that category anymore. And so in the categories we're in, If something well fitting comes along that really makes sense and advances our position there, yes, we'd be interested in open.
Next question is from David Hayes at Societe Generale.
Thanks, Luca. Good afternoon all. So it's here for me. First is I'm going to come back to Nespresso if I can. So just on the one offs, I guess there's 3 that maybe stand out.
Some people thought about supply chain issues In the U. S, you don't seem to have seen any problems with that at all given the numbers, but I just wonder whether there was any dynamics there in the Q1. Then there was the leap year effect. And then I guess there was the China New Year timing. I think you put that at 50 basis points when you talked about In the Q4, what was the impact around that level that you expected?
And the second question on Nespresso, Can you just talk about the 4th quarter machine base dynamic? Have you got numbers for us at all in terms of was there a machine Adoption boom because of the lockdowns that we've seen, is that a big driver of the 17%? And I'm surprised or I guess it's a question. You talked about it slowing because of tougher comps. But according to our records, you talked mid single digit for Nespresso all the way through last year.
So Is that wrong? Or is there a definite dynamic that means that 17% will slow through the year? Thanks so much.
David, I will take the first question, and I think Marc will take the other one. There were no one offs really in the quarter. Okay. We had different some topics on comparison base, as you know, mainly for China, but no one offs per se. Supply chain in the U.
S, it's a difficult topic. It's a daily fight. And I mean, our teams are really fighting in order to Make sure that we can supply the product, but no major disruption that we can refer to. The leap year on Chinese New Year, okay, there were some impact there, but you can consider that All of it was evening out between one factor on the other. So you got to consider that between that and the timing of Chinese New Year, the timing of Easter A leap year, it's more or less a wash, so no impact net.
Then look on espresso, we're trying to be helpful, but I also ask for your understanding that we can't go into more detail here when it comes to competitive signaling. I think as you saw from our step that we announced in February, we are already increasing the transparency around Nespresso very much, And we would like to leave it at that.
Unfortunately, we are getting close to the end of our call, but we still have time for one last question. Please, Jean Philippe Bertschier, Vontobel. Please go ahead.
Thanks. Good afternoon, gentlemen. I had as well one on espresso, but more at the group level probably with the consumer behaving behaviors here to stay probably. Are you thinking of redeploying your capital and your resources in a different manner? And if yes, how do you see the picture going forward?
And the second one is to see if the premiumization of premium segments continued to outperform the rest of the business in Q1. And if you just if can give us a number, please.
Yes. And Jean Philippe, I think on the second one, What we're seeing for Q1 is a continuation of the theme we've seen for last year in that premium is doing extremely well. But the extremely affordable segment is also doing well and is probably more necessary than ever. And let's not forget, I mean, this crisis has led To enormous economic hardship around the world, especially in emerging and lower income markets. And unfortunately, when it comes to some of the Income gains and wealth gains that have happened in the previous decade, this pandemic has wiped out a lot of that progress.
And so it sets us back several years. So I think both of these ends are going to be were very important, are going to be very important going forward. And I think one of the hallmarks of Nestle Under various brands, of course, is that it can really, in a meaningful way, serve both of these. Very much in line with Previous downturns, we've seen that's more like the mainstream mid price segments that have seen some pressure. But premium continues to do well and extremely affordable does well too.
On espresso, maybe Francois, you can help out on capital allocation. Maybe Jean Philippe could give us a bit more detail on what you're after.
Yes. On espresso, basically, probably you'll have more Home working, working from home. The shops is probably as well an issue. So how do you see the capital allocation, resource allocation between professional Shops and all of it digital.
Okay. Now I get it. And look, on that one, there's not much of a shift between professional and the rest of the business Because we assume that when the crisis is over, Professional will also have a thriving future there. But even before the pandemic struck, we've seen a steady acceleration on digital. And so the strategy of Nespresso has been pivoting more and more to that.
That doesn't mean you don't need boutiques anymore. You still need them for activation, for customer service and advice and sampling. But what you don't need is a deep and dense network to cover geography. Over time, most people migrate to digital, and I think the pandemic has only accelerated that trend. So Bayer is clearly tilting towards digital.
With that, we come to an end of our session today. So we thank you all for the interest that you have in Nestle. And don't hesitate to call us If you still have outstanding questions, IR is always available. Maybe, Marc, you want to conclude? Thank you.
See you next quarter.