Nestle has announced that it will change the names of its "Red Skins" and "Chicos" lollies.

The company, which makes the lollies under the Allen's Lollies brand, explained the reason for the change, saying that "the names have overtones which are out of step with Nestle's values, which are rooted in respect."

"This decision acknowledges the need to ensure that nothing we do marginalises our friends, neighbours and colleagues," Nestle said in a statement on Tuesday.

Redskin has been used as a derogative term for Native Americans and Chico is a derogative Spanish word meaning "boys, kids or guys".

A Nestle spokeswoman said that new names have not been finalised and rebranded packaging will take months to hit stores.

Despite the products being sold in Australia and New Zealand, she didn't know why the products had been given those particular names.

"The products are really old so we don't know the background," she said.

"This is just part of looking at where we want to be as a company and making sure we don't do and say things that marginalise people."

Packaging for the "Red Skins" lollies previously featured a photo and cartoon of Native Americans, which was removed in the 1990s.

Photo credits: Woolworths