How Big Food aims to fill Europe's shelves as gas crisis deepens

LONDON - Nestle and its rivals spent two years grappling with pandemic-related disruptions. Now the world's biggest food companies are bracing themselves for the next threat: a winter with too little gas to power their factories.

In response, the food makers are pleading their case to policymakers, cutting back on energy use and converting gas-fired plants to oil to keep Europe's shelves filled with staples like cereal, bread and yogurt - even if natural gas supplies dry up.

"Some companies will be lobbying governments on where in the hierarchy of energy users they sit," said Mr Will Hayllar, global managing partner at OC&C Strategy Consultants. "They will also take action to guarantee supply, installing their own generators for example", and stockpiling fuel.

Russian President Vladimir Putin shook European industry when he slashed gas exports in response to sanctions over the invasion of Ukraine, with Austria, Germany and Italy the most vulnerable to a halt in supplies. That has led not only to fears of winter shortages, but also to soaring prices, driving up costs for the makers of everything from chemicals to cars to baked goods.

Multinational food companies have been installing burners that can switch sites to oil from gas, including McDonald's bun-maker Aryzta, whose freezers and bakeries are energy intensive. Germany's family-owned Dr. Oetker, whose products range from frozen pizzas to baking powder, has also reduced energy consumption and added the option of using oil, where possible.

At Nestle, the cost of goods sold rose 14 per cent in the first half, and the company expects a similar rate of growth for the full year. Prices of ingredients like palm oil and wheat have fallen from highs reached earlier this year, but gas remains more than twice as expensive as it was before Russia's February invasion of Ukraine.

Higher energy costs will also reduce how much consumers have to spend.

To be sure, the threat to Big Food is not as existential as to some industries, such as chemical, glass and metal manufacturers. But any increase in costs could squeeze profit margins, given that consumer-goods companies are getting pushback from retailers on raising prices.

Longer-term green-energy programmes at companies like Nestle, Unilever and Danone have bolstered their resilience to gas shortages.

Most of Nestle's and Danone's sites in Europe already purchase electricity from renewable generators, and carbon-cutting goals have pushed both away from gas for heating.

Unilever uses 100 per cent renewable grid electricity and is working towards fully renewable self-generated electricity and heat too.

Nestle, which says 5 per cent of its plants could be at risk from a gas shortage, has been converting whenever possible to oil, chief financial officer Francois-Xavier Roger said at a Barclays conference in September.

The Swiss maker of Haagen-Dazs ice cream and Nespresso coffee is also adding stock and lining up suppliers outside of Europe, in case existing ones are affected by gas cuts.

While governments will probably prioritise food makers above most other industries, producers of ancillary goods such as packaging could face shortages. "If you have a momentary gas interruption, it would instantly disrupt supply chains," said Mr Steve Freeman, director of energy and environmental issues at the Confederation of Paper Industries, a trade group.

"There are a number of mills that supply to food manufacturers, and no cardboard boxes or paper packaging could mean no food being shipped."

Agricultural producers such as farmers and processors of goods like starch and sugar are also concerned. They have been switching from natural gas to other energy sources, and some raw material processors are starting production earlier in the year to reduce demand in the peak months of January and February, according to industry group FoodDrinkEurope. BLOOMBERG