Nestlé 2015 H1 Results on Target yet Data Suggests it Needs a Reshuffle

The results from Nestlé H1 are on track with 4.5% organic growth, on par with the group’s target of around 5% growth for 2015. The emphasis of today’s investor call was on portfolio management and more specifically how Nestlé is addressing known weaknesses in its portfolio. The group is struggling with weakening demand in China, the world’s second largest economy, and is facing the aftermaths of the Maggi scandal in India’s instant noodles. Both resulted in a drop in trading operating profit margins for the AOA region by 80 basis points. Moreover, its stagnant frozen-food business is not helping things, despite a total rebranding of its Lean Cuisine products.

The appointment of new Chief Financial Officer François-Xavier Roger signals the group’s emphasis on portfolio management, in order to address its weaknesses. In a press release Paul Bulcke, CEO of Nestlé, stressed his confidence in the new CFO, who has vast experience in finance and control, mergers and acquisitions, and relations with regulators and investors. During his first investor call the Chief Financial Officer highlighted Nestlé’s model, designed to aid portfolio management, looking at profitability of brands amongst other things. With that in mind, Euromonitor assesses Nestlé’s current portfolio and where the group needs to rebalance.

Nestle

Source: Euromonitor International

Interpreting Nestlé results with a growth matrix

The graph above puts the performance of Nestlé over the last five years into context against average market performance, and Nestlé’s reliance on each category in terms of the group’s sales. The size of the dot represents the company’s reliance on that category for past growth, with larger dots such as confectionery showing heavier reliance than others such as Pasta. Moreover, the colour on the graph indicates if Nestlé’s performance in a category is below or above the market average. For example, Ice cream has grown by 1.8% CAGR – almost 100 basis points below global market average. Lastly, the axes reflect average CAGR growth, with horizontal looking at future growth and vertical at historic growth. For example, whilst Nestlé’s growth in chilled processed food has outperformed the market, the growth potential in this area, compared to other packaged food products, is low, as indicated by being far removed from the packaged food average forecast line.

Possible divestment categories: spreads, pasta, oils and fats, chilled processed food

A small but significant amount of sales come from smaller categories, such as spreads, pasta and meal replacement, where sales have been underperforming compared to the market average and contribute little to the group’s overall growth. For these categories, the group ought to look for potential buyers in order to keep a lean portfolio.

Moreover, for chilled processed food, whilst the category is slightly larger in terms of growth contribution, there isn’t much potential in terms of future demand. Herta is Nestlé’s only global brand in the category (mainly consisting of chilled meat) and it is only present in Western Europe. Brand recognition in chilled meats is noticeably low compared to products like snacks, and private label products set the scene in this region.

Defend leading position in Baby Food against Danone

Baby food is Nestlé’s star performer and is expected to be the fastest growing category of all packaged foods, contributing a third of the group’s growth in the last five years.  Nestlé should aim to defend its position against other players such as Danone. Despite the competitive advantage bestowed by the Pfizer acquisition, Danone’s recent progress should ensure that it remains a strong challenger to Nestlé’s dominance in many key developed and emerging markets. With the world’s largest food companies showing a growing interest in acquiring brands with a healthier and more natural image, in an effort to meet consumers’ appetite for less processed food in developed markets, Nestlé could make a decisive gain by acquiring a niche baby food player with natural or organic credentials.

Ready Meals and Frozen processed food offer little potential for future growth

Ready Meals and Frozen processed food contribute significantly to the group’s past performance with 22% of total sales growth, yet they are not expected to grow much in the future compared to other foods. With the company’s emphasis on Health and Wellness, something not typically associated with ready meals and frozen processed food, Nestlé could get a substantial sum of cash by divesting these product areas and instead shifting focus to defend its star products against rivals Mondelez, Unilever, Mars and Danone.