Nestlé falters on path towards a healthier future

December 1, 2013 12:50 pm

Nestlé falters on path towards a healthier future

By Scheherazade Daneshkhu and James Shotter in Vevey

Like the Swiss mountains overlooking its headquarters in Vevey, a small town on the shores of Lake Geneva, Nestlé’s reputation is for solidity and consistency. It is the archetypal consumer staple, churning out infant cereal for the past 146 years, Nescafé coffee for 75 years and Maggi stock cubes for more than 65 years; even the KitKat chocolate wafer it has owned since 1988 has a heritage of more than 70 years.Investors have been used to Nestlé’s above-average performance, driven by its pledge of annual organic sales growth of 5-6 per cent – last year it achieved 5.9 per cent.

Yet the Nestlé model has come under strain this year. Sales have slowed and profit margins have been in line with, rather than above, the industry average of about 16 per cent.

“A succession of underwhelming quarters [this year] led to widespread concern that fundamental problems were brewing in Nestlé businesses,” warned Jeremy Fialko, analyst at Redburn.

Markets have reflected this change. Three years ago, Nestlé traded at a 10 per cent premium to arch-rival Unilever, now they are evenly matched, with both valued at about 18 times next year’s earnings.

In an interview with the Financial Times, Paul Bulcke, the group’s polyglot Belgian chief executive, acknowledged that the gap had narrowed. But he insisted this owed more to rivals doing “a better job” than flaws in Nestlé’s model.

Nestlé’s size makes its sales growth target harder to achieve. It is 1.5 times bigger than Pepsi and twice the size of Coca-Cola – respectively, the world’s second and third largest food and beverage companies, based on Nestle’s sales last year of SFr92bn.

Some analysts say that to regain its edge, Nestlé needs to intensify its focus on higher-margin opportunities.

“Over the past 10 years, Nestlé’s success has come from driving up efficiency, and from geographic expansion,” says David Hayes, an analyst at Nomura. “But they are coming to a more limited point of what they can achieve on both these fronts, and so it makes sense for them to diversify into other areas.”

Mr Bulcke tacitly acknowledged Nestlé’s underperformance in August, saying he would sell off struggling businesses and sweat Nestlé’s assets harder.

The first straggler was sold – at a loss – in November to a US private equity group. Yet ironically, the Jenny Craig weight-loss unit should have fallen squarely into the corporate mantra of “nutrition, health and wellness”, as should the underperforming Lean Cuisine reduced-calorie ready meals business and the Power Bar sports energy franchise.

Food groups look to make products leaner

As waistlines in the west expand ever outwards, food companies are under growing pressure to make their products healthier, write James Shotter and Scheherazade Daneshkhu.

That might sound like something that could be achieved in a kitchen, rather than a laboratory.

But Nestlé needs the lab to devise ways of reducing fat and sugar in the ice cream, chocolate, frozen pizzas and ready meals on which it relies for much of its sales.

Continue reading

Mr Bulcke says weight loss is not in the group’s “DNA”, but defends its purchase seven years ago. “So many new products that we are trying, that’s the strength of a company like ours. We’re not backing off trying things out.”

He is keen to push Nestle’s experiment in health science, a business he envisages as its “second leg” alongside food.

As part of this vision, Nestlé is investing SFr500m over 10 years in its Institute of Health Sciences which opened last year in Lausanne, 20km up the lake shore. Its research focuses on developing products suitable for tackling problems such as diabetes, obesity and cardiovascular diseases.

“We are building this other part and over time if we do it right, it’s going to be something that is going to be important,” the 59-year-old Mr Bulcke said, seated at the head of a large conference table in his offices overlooking the lake’s waters.

“How big? I don’t know. We’re 150 years old, we’re building things for [another 150 years].”

Precisely how large the opportunities are in this area is hard to gauge, says Mr Hayes, as it is a relatively new field. However, moving into higher margin activities makes sense, he adds.

Robert Dickinson, an analyst at Citi, takes a similar view. “If anyone is well placed to do this, it is Nestlé, given their size and resources.

“Although the likes of Fresenius and Danone have some businesses, the medical foods market is very fragmented. So there is a lot of room to grow, and the margins are also going to be good.”

Mr Bulcke is loquacious when it comes to defending Nestlé against accusations of disingenuity in portraying itself as a health and wellness company, given its reliance on sales of chocolate, pizza, coffee and ready-meals.

“We believe in offering people tastier and healthier choices in food and beverages. We know that people eat chocolate, sometimes a pizza . . . A company like ours with the R&D can really be meaningful at giving answers to how to take the trans fatty acids out, how to take the sodium dimension of salt out. Then I am really positively part of people’s lives.”

He describes reports that Nestlé tried to buy Ferrero, the family-owned Italian chocolate maker, as “so much talk. I’m sometimes amazed at the creativity”.

And he is similarly tight-lipped on Nestlé’s intentions regarding its 29 per cent stake in France’s L’Oréal. “When there is some new dimension, we will say whatever we have to say.”

For now, Nestlé looks likely to miss its 5-6 per cent sales growth target this year – which would be the first time since 2009, in the depths of the recession.

“We’re not getting into that nervousness of each quarter and all that,” says Mr Bulcke, who has stuck to “around” 5 per cent after the 4.4 per cent rise in sales in the first nine months. “You don’t run a company of 340,000 people all over the world on a decimal or two, so I’m totally relaxed on this.

“We have a consistency over time . . . I’m quite sure and secure that over time, again, we’re going to continue on that slope of 5-6 per cent.”