New Nestlé CEO wakes up and smells the bad coffee
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Aimee Donnellan
VEVEY, Switzerland, Nov 19 (Reuters Breakingviews) -Nestlé’s NESN.S new CEO is facing a harsh reality. Soaring inflation has dented consumers’ appetite for branded goods like Cheerios and Hot Pockets. On Tuesday, Laurent Freixe unveiled a new plan to boost sales, partly by slashing $2.8 billion of costs to free up cash for a marketing blast. But rising prices may make even these modest proposals difficult to deliver.
Freixe's plans at first glance seem humble. The Nestlé veteran, who grabbed the top job in August after the board ousted long-term boss Mark Schneider, is aiming to deliver over 4% medium-term annual revenue growth, excluding the effects of M&A and currency swings. That’s closer to the bottom end of a previous ambition of mid-single-digit growth. Meanwhile, he's only aiming to keep the company's operating profit margin stable at 17% over the coming years.
Still, Freixe deserves some credit for acknowledging the tricky state of the food market. The powdered and liquid segment, which makes up more than a quarter of the $230 billion company’s sales via brands like Nescafé, is growing well but it's harder to boost profits when the cost of coffee has soared to a 13-year high. Similarly, food ingredient prices have increased in Nestlé’s top markets like the United States and Europe, which is prompting consumers to opt for supermarkets’ own-brand goods instead.
The fix, according to Freixe, involves cutting and spending at the same time. He reckons he can slash $2.8 billion in costs by negotiating better contracts with suppliers and through other vague plans, like finding operational efficiencies. He will then use that money to ramp up the food giant’s investment in marketing to 9% of sales, compared with 7.7% last year. The idea is that an advertising blitz could help Nestlé claw back some market share.
Freixe, however, may find these savings hard to deliver. There are few signs that coffee and cocoa prices, a key ingredient in the company’s fast-growing confectionery business, are coming down. And it’s not clear that consumers would swallow the price rises that would be necessary to protect Nestlé’s profitability.
Investors are sceptical of Freixe’s turnaround plan: the shares dipped slightly on Tuesday. Nestlé now trades at less than 17 times the average analyst forecast for earnings over the next 12 months, compared with an average multiple of nearly 22 times over the past decade. Sell-side brokers’ forecasts imply that Freixe will miss his 4% growth goal, according to Visible Alpha data. In other words, the modest targets may not be modest enough.
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CONTEXT NEWS
Nestlé will boost advertising and marketing spending, trim costs by at least $2.8 billion by 2027, and carve out its water and premium drinks businesses into a standalone global unit as it looks to drive growth under its new CEO Laurent Freixe, the company said at a capital markets day in Switzerland on Nov. 19.
Nestlé expects medium-term revenue growth, excluding the effects of M&A and currency swings, of more than 4% in what it called a “normal operating environment”, as well as an operating margin of 17%, after stripping out one-offs like restructuring costs.
The company will increase its investment in advertising and marketing to 9% of total sales by 2025 to support growth. Advertising and marketing expenses in 2023 were 7.7% of sales.
Shares in Nestlé were down 1.1% to 77.32 Swiss francs as of 0845 GMT.
Nestlé price-earnings multiple lags 10-year average https://reut.rs/3UYSuHQ
Editing by Liam Proud and Streisand Neto
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