Nestlé bows to investor and sector pressures with strategic shift

Mark Schneider speaks during Nestlé's general meeting in Switzerland earlier this year Keystone

Nestlé has for the first time set a target for increasing profit margins, marking a significant shift from its traditional sales-focused model as the Swiss company reacts to competitive pressures facing big consumer goods groups.

The world’s largest food and drinks company said it would aim for underlying trading operating profit margins of between 17.5 per cent and 18.5 per cent by 2020 – up from 16 per cent last year.

Tuesday’s announcement is a strategic switch for Nestlé, which has historically relied on leveraging its size to power sales growth. It was part of a strategy update unveiled in London by Mark Schneider, the former head of German healthcare group Fresenius, who became chief executive in January. 

Mr Schneider, however, also reconfirmed Nestlé’s target of “mid-single digit” like-for-like sales growth by 2020, and said the margin target was unlikely to be raised after 2020. “I’ve watched this margins arms race in this industry with apprehension. If you maximise margins, you don’t have a sustainable business model – bad things will happen,” he told investors.

The company said margin improvements could come through cost savings, mainly from manufacturing, procurement and administration.

Into the spotlight

Nestlé was thrown into the spotlight in June when Daniel Loeb, founder and chief executive of Third Point, the US activist hedge fund, disclosed he had taken a 1.25 per cent stake in Nestlé, worth $3.5 billion (SFr3.4 billion). He called on the group to shake up “its old ways” and proposed a margin target of 18-20 per cent by 2020.

Third Point did not comment on Tuesday but Mr Loeb praised finance director François-Xavier Roger at the presentation. “You put a lot of work into this today. You did a great job,” he said.

However, one investor at the conference said Mr Schneider had “given in” to Third Point and “thrown a bone to the wolves”.

Compared with rival Unilever’s 20 per cent profit margin goal, Nestlé’s target “does not look impressive but it sets the trend for the company”, said Jean-Philippe Bertschy, analyst at Vontobel. UBS analysts described the targets as “sensible” and “likely to reassure the sceptics that change is under way”.

L’Oréal stake

Separately, Mr Schneider announced Nestlé had no immediate plans to either increase or sell its 23 per cent stake in French cosmetics group L’Oréal. Speculation about its stake, which is worth SFr26 billion and is in effect held as a financial holding, had grown after the death last week of Liliane Bettencourt, the billionaire daughter of the company’s founder whose family is also a large shareholder.

The stake had been a “fabulous” investment but “our approach is currently not changing”, the Nestlé boss said.

Nestlé also said it would accelerate a share buyback programme worth up to SFr20 billion, announced in June, while still pursuing acquisitions in “targeted categories and geographies”.

Mr Schneider expected about 10 per cent of the company’s portfolio to be affected by acquisitions and divestments. Nestlé is quitting the US confectionery market – but Mr Schneider ruled out also withdrawing from US frozen food, which he said fitted modern lifestyles.

Like other consumer goods companies, Nestlé has faced a backlash against “big food” and processed products, as well as a slowdown in emerging markets on which it depends for 42 per cent of its SFr89.5 billion annual sales. Its products include KitKat chocolate bars, Nescafé and Nespresso coffee, and Perrier water.

Industry trends

Against the backdrop of lacklustre growth, the emphasis in the industry has been on cost-cutting to boost profits.

Leading the way has been Kraft Heinz, controlled by Warren Buffett’s Berkshire Hathaway investment group and 3G Capital. Kraft Heinz’s operating profit margin of 23 per cent is significantly higher than Nestlé’s.

Unilever was the target of a $143 billion takeover approach from Kraft Heinz in February despite the US company being half the size of Unilever in terms of revenues. Although the bid was aborted, it left Unilever – and rivals including Nestlé – looking vulnerable.

Revenue growth of the 50 biggest consumer goods companies has fallen steadily over the past five years from 7 per cent to minus 1 per cent last year, according to data from OC&C, the consultancy.

Nestlé’s organic sales growth slowed from 6 per cent in 2012 to 3.2 per cent last year, its lowest rate in two decades. However, Mr Schneider revealed growth would have been 3.4 per cent if its struggling skincare division had been excluded. The unit was being “aggressively right sized” by a new management team, he said.

Mr Schneider identified coffee, petcare, infant nutrition and bottled water as future high-growth sectors. Nestlé would also build on its strong position in emerging markets and pursue growth in consumer healthcare. Another investor in London said: “I agree with his approach far more than that of Kraft Heinz.”

Nestlé’s share price ended the day 1.8 per cent higher at SFr82.55.

Copyright The Financial Times Limited 2017