Nestle speeds up overhaul to counter slowest growth in decades

ZURICH - 19 October 2017: Nestle, the world’s biggest packaged food group, is doubling spending on its restructuring this year to up to 1 billion Swiss francs ($1 billion) to cope with its weakest sales growth in more than two decades.

Europe’s largest company by market value is under pressure to improve returns from activist investor Daniel Loeb, whose Third Point hedge fund revealed a $3.5 billion stake in June.

It must also review its business model and brand portfolio to ensure its products stay appealing to consumers who often prefer fresh, local foods to Nestle’s Maggi soups or KitKat chocolate bars.

Organic sales rose 3.1 percent in the third quarter, up from 2.4 percent in the second, in line with analysts’ expectations in a Reuters poll. Performance was helped by improved trading in Europe and Asia.

Still, Nestle forecast growth for the full year around the 2.6 percent it generated for the first nine months, implying a slowdown in the fourth quarter and the year as a whole. Last year’s sales rose 3.2 percent.

“Going forward, everyone is well advised to be cautious and you see that reflected in our expectations for the fourth quarter,” Chief Executive Mark Schneider said on Thursday.

Finance chief Francois-Xavier Roger cautioned that Europe and Asia might not be able to repeat the good performance over the final three months, but confirmed Nestle’s goal of returning to mid-single-digit organic growth by 2020.

Nestle said it would spend up to 1 billion Swiss francs this year on restructuring, double its initial plan, as it seeks to cut structural costs, such as by closing factories, boosting efficiency and sourcing globally.

Yet its overall forecast for restructuring costs of 2.5 billion francs between 2016 and 2020 remained unchanged.

The acceleration will reduce this year’s operating margin by 0.4 to 0.6 percentage point, while the underlying margin -- before restructuring costs -- is expected to rise by at least 0.2 percentage point in constant currency, Nestle said.

Nestle last month set a target for the underlying margin to reach 17.5-18.5 percent by 2020, up from 16.0 percent in 2016.

Slowing growth rates at packaged food groups have sparked the interest of activist investors, with Procter & Gamble (PG.N) also becoming a target recently.

Unilever reported lower-than-expected third-quarter sales on Thursday, losing market share to smaller competitors and dampening hopes that an aborted takeover offer from Kraft Heinz would spark a swift improvement.

Nestle shares were 0.8 percent lower at 1530 GMT, slightly lagging the European sector .SX3P.

They have gained 16 percent so far this year and are trading at 28.3 times forward earnings, according to Reuters data, at a premium to Danone at 24.2 times and Unilever at 25.8 times.

Analysts said Nestle’s performance was disappointing when compared to Danone that saw strong baby food sales in China boost growth in the third quarter to 4.7 percent.