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Nestle SA, the world's biggest food company, needs to reignite sales that have disappointed investors for four straight quarters. One solution: Get smaller.
The maker of Nescafe coffee and DiGiorno pizza said August 8 that it's "actively looking" at its 8,000 brands and is seeking to identify the laggards after posting its weakest quarterly revenue growth in four years. Nestle has said it will struggle this year to meet its long-term forecast for annual sales growth of five per cent to six per cent, hurt by a deceleration in emerging markets, European weakness and sluggish performances from its diet products, water and frozen entrees.
The slowdown increases the urgency for Chief Executive Officer Paul Bulcke to tackle underperforming areas, especially as his peers get leaner. Unilever, whose ice creams and soups compete with Nestle's, has raised more than $1 billion selling assets this year to focus on faster-growing shampoos and deodorants, and CEO Paul Polman has said there is more to come. Kraft Foods Inc and Sara Lee Corp have both split in two, and Campbell Soup Co is in talks to sell much of its European unit.
"We're talking surgery, not amputation," Thomas Russo, a partner at Gardner Russo & Gardner and a Nestle investor since 1987, said in a phone interview. "They allocate capital to businesses with high-return prospects, and you would think that those starved of capital would end up being potentially available for sale. I would support that."
Aura slipping
Nestle's slowing growth has presented an uncommon quandary for investors, who for much of the past decade have bought the shares at a premium to food-and-beverage peers on a price-to-earnings basis. Now, the stock trades at a discount, according to data compiled by Bloomberg. The shares were unchanged at 62.10 Swiss francs at 9:02 am in Zurich, and have risen 4.2 per cent this year.
The "air of invincibility and reliability" of the Vevey, Switzerland-based company has been eroded, Andrew Wood, an analyst at Sanford C Bernstein, said in an August 9 note.
Selling a large food business would be a departure for Nestle. This year's enforced sale of infant-nutrition licenses in Australia and Africa was its biggest publicly disclosed divestment of a food-related asset since the 1997 sale of a canned tomato business to Del Monte Foods Co for $197 million, according to data compiled by Bloomberg. In contrast, Unilever has sold Skippy peanut butter for $700 million and Wish-Bone salad dressings for $580 million this year alone.
Unilever, the British-Dutch maker of Magnum ice cream, has sought to sell businesses whose sales are concentrated in Europe and the US Nestle possesses similar assets, such as Jenny Craig diet centres, Lean Cuisine frozen meals, PowerBar snacks, and some of its bottled waters in North America.
