Food products from Nestlé SA: Cheerios, Nescafe, Nesquik, KitKat, Milkybar and Purina pet food.
Holly Adams/Bloomberg
The world’s largest food company is once again focusing on the essentials: It wants to feed a growing planet whose consumers are becoming increasingly savvy and less financially well off.
Nestlé SA, the maker of DiGiorno pizza and Purina pet food, has replaced CEO Mark Schneider with Laurent Freixe, transforming an outsider who previously ran a healthcare company into an insider who has climbed the Swiss group’s executive ranks in several regions and focused on core functions such as marketing and sales.
The abrupt move has raised doubts about the extent of Nestlé’s problems after the company missed sales expectations for several quarters and investors fear it may soon cut its profitability targets. It also suggests the company is likely to scale back its more experimental investments after Schneider pushed Nestlé into new areas between nutrition and health.
Companies like Nestlé are struggling with sluggish demand as inflation-hit shoppers tighten their belts. Many are looking to save money, while e-commerce is increasing competition and making it harder to build big global brands. Profitability is becoming more important to secure investor returns. But aggressive cost-cutting risks brands not making investments.
Freixe and CEO Paul Bulcke declined on Friday to confirm the medium-term forecast – the target was an operating margin of at least 17.5 percent – or even the annual forecast, referring to an investor event planned for November.
Capital Markets Day
“We will return to these issues in detail on Capital Markets Day,” Freixe said in a conference call with analysts and investors, adding that productivity was a priority.
The uncertainty of those targets and the shock of the announcement help explain the markets’ pessimistic reaction: Nestlé shares fell as much as 4.1 percent on Friday, a sharp contrast to the enthusiastic reaction when Starbucks Corp. announced a new chief last week. Although Schneider’s departure came as a surprise externally, low morale appears to have built up within the company: “The first thing we have to do is rally the troops,” Bulcke said.
The company cut its revenue forecast in July but reiterated its expectation of a modest increase in underlying profitability this year. In considering whether to cut margin guidance at the Nov. 19 event, Freixe is likely to draw on the experience of former Unilever Plc boss Alan Jope. The Scotsman lamented maintaining the margin target set by his predecessor Paul Polman when he became boss in 2019. That target was widely blamed for underinvestment in his brands and played a role in his eventual departure.
“In the long term, you can be profitable and have high growth, but in the short term you have to invest to get to that promised land,” said Bernstein analyst Bruno Monteyne, adding that this tends to squeeze margins. “I find it surprising that so many CEOs always want to deny it. And it always comes back to haunt them.”
Nestlé could learn more from Unilever’s recent tactics. The Anglo-Dutch group’s restructuring under Jope’s successor Hein Schumacher has so far included cutting 7,500 jobs worldwide and rolling back some of its environmental and social pledges, although mayonnaise maker Hellmann’s says the latter will not bring any cost benefits. Nestlé has so far been cautious about job cuts, preferring to move quietly from market to market rather than announcing large-scale programs.
Unilever is also in the process of spinning off or selling its ice cream business, something which Nestlé has already partially done by putting its Häagen-Dazs business into a joint venture with private equity fund PAI.
Health bets
Freixe, who has been at Nestlé for nearly four decades, may also move away from more radical investments – particularly in the healthcare sector, where Schneider has expertise from his previous stint as head of Germany’s Fresenius SE. His $2.6 billion bet on peanut allergy drug Palforzia was a flop, and an investment in a stool transplant pill for gastrointestinal infections may not fit well in a portfolio that also includes KitKat chocolate bars and Nescafé.
In search of its next blockbuster category, such as pet food or coffee, Nestlé spent $5.75 billion on nutritional supplements and vitamins in 2021. But a post-pandemic downturn, exacerbated by IT problems that hampered supplies, has undermined that investment.
“It would not surprise us if Nestlé Health Science were to be sold in the medium term, which would be welcomed by the majority of investors,” says ZKB analyst Patrik Schwendimann.
Schneider has tried to revive the division by focusing on the issue of aging and on products that complement the popular new slimming products from Novo Nordisk A/S and Eli Lilly & Co. A further reduction in the lower-margin mineral water business may also be planned.
Freixe said he will accelerate Nestlé’s data transformation: Large consumer goods companies are using AI and sophisticated data analytics to predict demand and reduce costs. These savings can be reinvested in brand marketing to increase market share and sales of Nestlé’s staples.
“While the food and beverage industry has undergone significant changes in recent years, our top priority, my top priority, is to deliver sustainable revenue growth through market share gains,” Freixe said.
• With support from Levin Stamm.
