Strapped for cash
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This year, sales growth at Milo maker Nestlé SA will be the weakest in at least two decades. “Big Manufacturing” — the Unilevers, P&GS, Krafts and Danones of the world — are in a spot of bother.
Revenue growth in major categories is increasingly hard to come by as consumer preferences shift towards more natural products. Also, when people are spending, they’re turning to start-ups and small companies for niche products.
The result has been consolidation in the largely fragmented sector. If Kraft Heinz’s failed bid for Anglodutch group Unilever earlier this year proved anything, it was this: even the industry’s largest companies can become prey. We’ve not seen the last of big, fat consumer goods deals.
Other than buying “things” to survive, companies are cutting costs and pursuing economies of scale.
For Nestlé, whose margins are at the low end of its peer group, the added pressure of an activist investor (one Dan Loeb) has added urgency to its restructuring plans. Greater detail will be revealed in about two months by boss Mark Schneider — the firm’s first outside leader in nearly a century — but we already know that its US chocolate business is going. This includes Butterfinger, Baby Ruth and Crunch chocolate, but not Kitkat bars.
If you didn’t know, Nestlé only makes Kitkat bars outside North America. In the US, they are sold by Our retailers are in “Keep calm and carry on” mode. There isn’t a player that hasn’t been affected by the slowdown in household spending — it’s pronounced and ruinous.
If you look at the latest figures, retail sales are largely driven by two categories: “food, beverages and tobacco in specialised stores” and “pharmaceuticals, medical goods, cosmetics and toiletries”. Spending has shifted from big-ticket items and apparel to the things people need — mostly grudge purchases, such as toilet paper and Gaviscon.
We know that spending tapers off following the first four days after payday, that consumers are doing weekly “shops” and that grocers are outperforming other retailers.
Retail sales growth is likely to ease in the coming months as underlying conditions remain weak. We already have the admission of shopping centre bosses that trading densities (sales growth per m²) are under pressure. Retailers stopped using the words “cautiously optimistic” from about February — a giveaway that the proverbial brown stuff has hit the fan.
In a few weeks, when most SA retailers deliver annual results, we will see further manifestations of this economic malaise.
There are many who feel that this is a good time to get out of retail. I, however, would argue that a market downturn is an excellent opportunity to pick up shares.