Nestlé embraces weakest sales in 20 years

ZURICH • Nestlé SA warned that sales growth this year will be the weakest in at least two decades, giving activist investor Dan Loeb ammunition for his campaign to overhaul the world’s largest food company.

Organic revenue growth will be at the lower half of its 2% to 4% forecast, the maker of Nespresso capsules and Perrier bottled water said yesterday. Sales increased 2.3% in the first six months of 2017, missing analysts’ estimates. The shares fell as much as 2.5%, the steepest decline in three months.

It was “a semester to forget”, wrote Jean-Philippe Bertschy, an analyst at Bank Vontobel AG who added that all the key numbers worsened. “Nestlé will have to convince investors at the investor day in September that it will be able to accelerate growth and deliver on profitability.”

CEO Mark Schneider is under pressure to turn around the maker of Gerber baby food and Purina dog chow after Loeb revealed a US$3.5 billion (RM15.05 billion) stake last month, demanding asset sales and higher shareholder returns. First-half (1H) revenue growth missed Nestlé’s expectations and pricing has been soft, said Schneider, who is in his first year on the job and is set to unveil his strategy in two months.

The food industry has suffered recently as consumers shun packaged food they perceive as unhealthy. French yogurt maker Danone also reported that sales barely grew in the second-quarter (2Q) as a revamp of the Activia brand flopped. Last week Unilever reported it had no volume growth in 2Q. The approach by Loeb’s

Third Point plus Kraft Heinz Co’s abandoned bid for Unilever highlight the difficulties big food has had in reigniting their businesses.

“Food companies will need to reinvent themselves, and a lot will have to change in the sector, especially in the developed markets like Japan, Europe and North America,” said Patrik Lang, head of equity research at Julius Baer Group Ltd. “That’s what we’re starting to see: Nestlé wants to invest more in the health trend, Unilever is developing more and more into a company that commits to personal hygiene and Danone is searching for its own identity.”

In response, some of these companies plan to focus on areas where they see stronger growth prospects. Schneider has started an overhaul by reviewing Nestlé’s US confectionery unit for a possible sale, as well as announcing a buyback of as much as 20 billion francs (RM89.1 billion) in shares.

Both Nestlé and Danone reported facing commodity cost headwinds yesterday, which may crimp profitability. Danone said it expects a steep rise in milk prices in the 2H, along with increases in costs of plastic packaging and other materials. Nestlé said it paid more for raw materials for the first time in two years.

Nestlé suffered from sluggish demand in western Europe as consumers shirked higher prices for products such as Nescafe soluble coffee. The company also had a drop in infant nutrition shipments, while its skin health unit faced increasing competition from generic prescription brands.

“The pricing weakness clearly shows the need to ditch the complacent approach that has stemmed from oligopolistic positions,” Pierre Tegner, an analyst at Natixis, wrote. — Bloomberg