Nestlé aims to blunt sweet tooth
• Swiss giant set to cut down production of sugary snack foods
Nestlé plans to switch in or out of businesses with combined sales of almost Sf10bn ($10bn) as CEO Mark Schneider focuses on coffee, bottled water and pet care to prioritise profitability over scale.
Selective acquisitions and divestments could affect about 10% of total revenue, Schneider said as he unveiled his new strategy to investors at a conference in London on Tuesday. Nestlé is already trying to sell its US chocolate business, its first major retreat from sugar snacks, as it embarks on its biggest revamp in at least a decade.
“We’ll need to trade out of some product areas and into others,” he said. “We’ll act decisively, and the US confectionery is a good example of that.”
For the first time, the Swiss owner of Nespresso coffee and Perrier water set a fixed profitability target, aiming for an underlying trading margin in 2020 that’s as much as 2.5 percentage points higher than what it achieved last year. That’s still shy of the level sought by activist investor Dan Loeb, whose hedge fund firm Third Point bought a $3.5bn stake in Nestlé earlier this year.
Loeb, who was attending the London presentation, declined to comment on Nestlé’s plans. The shares traded 0.9% higher as of 11:12am in Zurich.
“The target is certainly attainable,” said Jean-Philippe Bertschy, an analyst at Bank Vontobel. “While it will please some investors, others like Loeb may be a bit disappointed.”
BROADER SHIFT
The adoption of a profit target by Nestlé, which has about Sf90bn in sales, marks a broader shift among the world’s biggest food companies. With many massmarket brands facing scepticism from consumers seeking healthier and hipper alternatives, sales growth is slowing and consumer-goods giants are under pressure from investors to cut costs and move into more profitable niches.
Schneider has announced a share buyback worth as much as $21bn, the planned disposal of Nestlé’s US confectionery unit and acquisitions of coffee and fresh-food businesses. The company has also been cutting jobs at its skincare unit.
Schneider said Nestlé was not immediately changing its stance on its stake in French cosmetics maker L’Oreal, which he described as a “fabulous” investment, contributing 9% of the Swiss company’s earnings per share over the past decade. The death of L’Oreal heiress Liliane Bettencourt last week prompted speculation about the future of Nestlé’s 23% holding in the French cosmetics company.
Nestlé plans to keep its US frozen unit, and the ailing skinhealth business has a strategic fit, according to the CEO.
He also said the company was trying to revamp its Gerber baby nutrition division in the US and Yinlu food in China.
Nestlé has faced calls for a shake-up from Third Point, whose stake is equal to about 1%, while rival Unilever fended off a takeover bid earlier this year from Kraft Heinz, backed by buyout firm 3G Capital.
Unilever is targeting an underlying operating margin of 20% by 2020, while Danone aims to exceed 16% in the same year. That compares with Nestlé’s new goal for an underlying trading margin of 17.5%, to 18.5% by 2020.
Last year, Nestlé announced plans to improve its margin by at least 2 percentage points by 2019 or 2020 through cost savings. The Nescafe maker’s unadjusted trading operating margin has hovered between 15% and 15.3% during the past six years.
In July, Schneider said Nestlé might expand restructuring beyond its original plan.
“Virtually all of you underestimate the will to win at this company,” Schneider said. “It’s hell-bent on not losing its leadership position.”