Nestlé’s CEO switch serves up unappetising menu
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Liam Proud
LONDON, Aug 23 (Reuters Breakingviews) -Swiss consumer-goods giant Nestlé NESN.S has had a rough few years. The board’s decision to replace CEO Mark Schneider with insider Laurent Freixe, announced on Thursday evening, was abrupt but justifiable. The danger for investors is that the turnaround job will now be more painful than they had expected.
Nestlé’s key measure of annual sales growth has dipped to the low single digits in recent quarters, compared with around 6% to 10% from the start of 2021 to the middle of 2023. Its volumes have suffered, with price increases struggling to pick up the slack – a recipe that arguably augurs poorly for future growth given a softening U.S. economy.
Not surprisingly, investors seem to have lost excitement in the maker of Nescafé instant coffee and KitKat chocolate bars. Nestlé commanded a clear valuation premium to Unilever ULVR.L and Danone DANO.PA throughout much of Schneider’s eight-year tenure, but has recently slipped back, according to LSEG Datastream figures. Its forward price-earnings ratio fell below 18 this month, compared with Unilever’s current multiple of 19 and Nestlé’s own historic average of 22 under Schneider.
In sum, then, there’s probably enough bad news to justify the switch – even though many analysts covering the company seemed surprised. One possible reason for the shock is that Freixe takes over almost immediately on Sept. 1. The boards of major companies typically try to give investors more notice of such key management changes.
Granted, Nestlé chair and company veteran Paul Bulcke may well have been cooking this up for a while. With hindsight, it seems obvious that Freixe was being groomed for leadership: the Frenchman’s roles have included overseeing major markets like Europe, North America and Latin America.
Still, Nestlé’s turnaround may involve some immediate discomfort. The company is structured around key geographies known as zones, whose local teams shoulder responsibility for getting products in stores and flying off shelves. It’s possible that Freixe’s leadership will help inject some extra energy into that process and turn things around. More likely, though, boosting volumes will require some investment and therefore lower margins.
Nestlé’s marketing and administration expenses have dropped to around 19% of revenue last year, compared with 22% in 2018. The new broom may have to let that number rise to give the local teams more resources to get growth moving again, meaning earnings could take a hit this year and next. That might be the right thing for Freixe to do. But it would mean that investors have to swallow a bitter pill before getting to the sweet stuff later on.
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CONTEXT NEWS
Nestlé on Aug. 22 said that it had appointed veteran insider Laurent Freixe to replace CEO Mark Schneider, who had run the Swiss consumer-goods group for the past eight years.
Freixe will take over on Sept. 1. He previously led Nestlé’s European business during the 2008 financial crisis, before running the Americas division and eventually taking over the Latin American unit.
Nestlé shares fell by 2.2% to 87.44 Swiss francs as of 0744 GMT on Aug. 23.
Graphic: Nestlé has lost its price-earnings valuation premium https://reut.rs/4dWKajg
Graphic: Volumes have weighed down Nestlé’s sales growth https://reut.rs/4cx7AKM
Editing by Francesco Guerrera and Oliver Taslic
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