Nestlé’s CEO needs to ride two horses at once
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Aimee Donnellan
LONDON, Oct 17 (Reuters Breakingviews) -Nestlé’s NESN.S new boss has some knotty problems. Third-quarter results showed flaky top line growth at the $260 billion food giant, and came with further cuts to guidance. To stop the rot, Laurent Freixe needs a quick fix, and a longer-term one.
Nestlé’s numbers explain the speed of former CEO Mark Schneider’s August ousting. In the nine months ending September, organic sales only grew 2% year-on-year. Given that's below the 3% that the company forecast for 2024 as recently as July - which was itself a downgrade - Freixe has now cut growth expectations this year again, to 2%. A longer-term target of mid-single digit organic revenue growth is yet to be slashed, but weak volume and price growth imply it’s vulnerable. And the company's profitability is also under pressure: underlying profit margins fell from 17.3% to 17%.
Nestlé’s valuation has been flagging distress for some time. Before it released its results, the company traded on 17 times 2024 earnings, a steep discount to its 10-year average of over 22 times. That multiple has also dipped below rival Unilever ULVR.L. To close the near-term gap, Freixe has been brought in to get consumers excited about Nestlé products like Cheerios, KitKats and Perrier sparkling water. That will require a hefty spend on sales and marketing, although he could fund part of it by selling down some of its 20% stake in the beauty giant L’Oréal OREP.PA.
Longer term, Freixe has a more taxing issue: his larder is full of foods that may go out of fashion. Nestlé revealed last year that a third of its portfolio of mainstream products would not be considered “healthy” based on the Health Star Rating (HSR) system compiled by the World Health Organization and partners. And although western governments have yet to crack down on ultra processed food by imposing stricter labels and taxes, rising obesity rates suggest they may increasingly do so.
Freixe’s longer-term fix is clear enough. Despite soaring input prices, his at-home coffee segment was the largest contributor to growth in the first nine months via brands like Nescafé, Starbucks and Nespresso. To bulk this out, he could consider targets like privately owned Lavazza coffee chains. The latter’s 263 million euros of 2023 EBITDA implies such a deal would cost over 4 billion euros, if valued on Starbucks’ SBUX.O 2023 multiple of 17 times.
That, and cash deals that push Nestlé further into its other growth area of pet care, would push net debt above 3 times EBITDA. But if Freixe doesn’t think strategically, Nestlé’s long-term future will suffer. And if he doesn’t do an almighty marketing push, its market share right now could shrivel.
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CONTEXT NEWS
Nestlé is revamping senior leadership and its operating structure, the food giant said on Oct. 17, as it cut its full-year sales outlook following weaker than expected nine-month underlying sales growth.
Nestlé said it now expects 2024 organic sales growth to be around 2% and an underlying trading operating profit (UTOP) margin of about 17%. In July, it cut its organic sales growth forecast to at least 3% and saw a moderate increase in its UTOP margin from 2023's 17.3%.
The food maker's new CEO Laurent Freixe said he planned to reduce the size of Nestlé's executive board, merge the company's Latin America and North America units, and merge its Greater China and Asia, Oceania and Africa businesses, among other changes.
Shares in Nestlé fell 2.4% in early trading on Oct. 17, before recovering to be up 2% at 85.8 Swiss francs as of 1040 GMT.
Nestle's valuation premium has withered away https://reut.rs/3UcaSwI
Editing by George Hay and Streisand Neto
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