Nestlé’s chief digests size of turnround task
New chief digests scale of task facing him after slowest organic growth for at least two decades
Nestlé reported like-for-like sales growth of just 3.2% in 2016, the slowest for at least two decades, highlighting the challenge faced by Mark Schneider, the Swiss food and drinks group’s new chief executive, in an era of deflation and economic turbulence.
Sales growth at Nestlé has not fallen quite as precipitously as the mountain slopes surrounding the Swiss group’s headquarters on Lake Geneva. However, t he s l owdown l ast year was still breathtaking — especially for
Mark Schneider, its new chief executive. The largest food and drinks company achieved organic growth of just 3.2 per cent in 2016, the slowest for at least two decades.
Largely the result of deflation and sluggish global economies, the unexpectedly sharp deceleration highlighted the challenge Nestlé’s new boss faces in overhauling a supersized company whose products include baby milk, petfood, Nespresso coffee and KitKat chocolate bars.
Mr Schneider said organic growth last year was at the high end of the industry but “there is no beating around the bush, i t came in l ower t han we expected”. Pre-tax profits were also weaker than expected at SFr12.5bn in 2016, up from SFr11.8bn in 2015.
The deceleration mattered because the “Nestlé model” has long relied on relentless sales growth and leveraging the group’s size. However, the model has become hard to sustain in an era of deflation and economic turbulence, and as consumers switch from processed foods to healthier alternatives.
Nevertheless, Mr Schneider — a lanky, chocolate-munching German who joined Nestlé from healthcare group
Fresenius — was adamant at his first public appearance since starting in the role yesterday that organic growth would be the yardstick against which his leadership would be judged.
“Organic growth does a whole lot of good things to a company.”
Business history showed that “sooner or later, the guys that persistently expanded the business came out ahead”, he said.
“The guys that go for the slash and burn model, sooner or later they have to walk,” Mr Schneider added, citing the example of drugs company Valeant.
For this year, Nestlé expected organic growth between 2 and 4 per cent, which Mr Schneider saw as “prudent” given global macroeconomic volatility and “a still somewhat deflationary environment”.
Longer term, its target was “midsingle digit organic growth” by 2020, which was more or less a restatement of Nestlé’s historic ambition of annual like-for-like sales growth between 5 and 6 per cent.
At the same time, Nestlé would pursue efficiency savings to boost profitability and expected SFr500m in restructuring costs this year, up from SFr300m in 2016.
Mr Schneider’s caution at least provides investors with reassurance, says Celine Pannuti, analyst at JPMorgan.
“If you work on operating efficiency and growth, and then, when the time is right, you do a big acquisition, that seems a sensible strategy.”
A particular focus, Mr Schneider said, would be the global coffee market — which offers fast growth and rising demand for “premium” products such as Nestlé’s Nespresso coffee system. While Nestlé dominates coffee globally, it is weak in the US and faces stiff competition from JAB, the investment group of Germany’s billionaire Reimann family, which has spent $30bn over the past few years building up a coffee empire. Coffee accounts for almost a fifth of Nestlé revenues.
More broadly, Mr Schneider expects to boost the “medical profile” of Nestlé products, expanding its skin care and nascent “health science” division, which has pushed the Swiss company closer towards becoming a pharmaceutical company.
“This is an age of consumer-driven healthcare. People understand they have to take responsibility for their own health,” he said.
But Mr Schneider scotched suggestions that the company could move into the drugs business.
Nestlé did not know “a whole lot about fighting cancer . . . We’re essentially a consumer company”. Moreover, the company’s sheer scale — sales last year were almost SFr90bn — meant “even if I bought the world’s largest pharma company, compared to that core in food and beverages, I would still not be a pharma company”.
Mr Schneider oversaw an acquisition spree in his last job at Fresenius, which encouraged speculation among analysts that he would pursue large purchases at Nestlé — possibly funding deals by selling the company’s 23 per cent stake in French cosmetics group L’Oréal.
Yesterday, however, he said the time was not right for “big-ticket” acquisitions, though smaller deals were possible. “I think you’re seeing very lofty valuations,” Mr Schneider added.
Moreover, it was also too early in his career at Nestlé for radical steps. At Fresenius, his first big deal was not until more than two years after he joined.
“It is much better to . . . be sure that we have built consensus about where we all want to go, and then, at the right time, make the right move as opportunities present themselves.”
Hot seat: coffee accounts for nearly a fifth of revenues at Nestlé, whose products include Nespresso, but the group faces fierce competition in the US from JAB