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Nestlé 2015 FY Results – Nestlé Succeeds in Becoming Healthier, but is it Getting too Lean to Stay Ahead?

Nestlé recorded 4.2% organic growth for the full year of 2015, which, whilst below projections of around 5%, represented a solid performance on the back of the Maggi noodle scandal and a slow performance in China. CEO Paul Bulcke reiterated that the company’s emphasis lies on profitable growth and, more specifically, succeeding in creating a health and wellness company in a tough operating environment.

During today’s conference call the emphasis lay on cost reduction and creating a lean business with fewer but bigger SKUs. The trading operating profit margin for 2015 went up by 10 basis points in constant currencies. However, while creating a lean organisation, divesting non-core operations and focussing on efficiency, is the company getting too lean?

In Bulcke’s words, “Nestlé needs to free up resources where they shouldn’t be and put them where they should be.” Nestlé is long overdue a strategic addition to its health and wellness portfolio, especially as its competitors have been very active in adding healthy brands to their business. To name but a few – Hershey acquired meat snack company Krave, Lotus Bakeries took over Natural Balance Foods and Urban Fresh Foods, and Mondelez added to its portfolio Enjoy Life Foods, which is a private US snacking company and the market-leading brand in the fast-growing “free from” category.

Nestlé’s food portfolio is succeeding in becoming healthier

For years now Nestlé has said it wants to be the world’s leading Nutrition, Health and Wellness company. While it still has work to do, from a food portfolio perspective its strategy has worked. Health-related dairy categories now make up the majority of the company’s sales. In fact, while, in 2010, Nestlé’s food portfolio was most reliant on snacks, representing 39% of sales, it has now been replaced by dairy, accounting for 42% of sales. Indeed, Nestlé’s portfolio overhaul is succeeding and taking it one step closer to its bold vision.

Nestlé’s Sales by Major Food Category 2010-2015

nestle-sales-by-major-food-category

That said, with many snack companies now also jumping on the health bandwagon, either through product formulation, portion control or acquisition of health-related brands, it is time for Nestlé to look for additions to its health portfolio and strengthen its competitive position. Indeed, PepsiCo is stirring things up in the Americas, where the gap between the two companies is closing. In addition, Lactalis has made a number of bold acquisitions in Latin America, and is now a strong competitor, especially in Brazil and Mexico, two of Nestlé’s largest growth markets.

Reallocating resources to HW yoghurt and non-dairy milk alternatives

In terms of future acquisition targets, strong growth is expected to come from HW yoghurt as well as non-dairy milk alternatives. Both categories will outperform their parent (food) category over the next five years. While the health and wellness counterpart only represents a small portion of the overall market for most foods, and therefore strong growth rates need to be put in context, that is not the case for yoghurt and milk alternatives.

future category performance packaged food v health and wellness

In fact, in yoghurt health and wellness sales make up the majority of the category, led by Danone’s Activia brand, but with Bright Food’s Momchilovtsi also growing at an impressive rate due to momentum in China. In terms of acquisition targets or even partnerships, Nestlé could seek a stake in Chobani’s yoghurt business, as the company is desperately looking for investment partners to expand the company to the next level. Chobani would greatly benefit from Nestlé’s wide-ranging distribution network, while Chobani’s yoghurt fits well in Nestlé’s health portfolio and could prove an important cash generator. Earlier this year both PepsiCo and Coca-Cola showed interest in a stake in Chobani, but, eventually, PepsiCo’s offer was rejected and Coca-Cola walked away.

Going forward Nestlé could invest freed-up resources in the fast-growing yoghurt category and seek to acquire fast-growing health and wellness brands as well as dairy alternatives.

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