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

Financial Times USA - - COMPANIES & MARKETS - RALPH ATKINS

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.”

— Anna Gor­don

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

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