The analyst referred to Nielsen market data to back up its assertion and claims the slide applies to volume, value and market share.
“Share trends have been the most worrying factor,” said Wood. “Market share has been negative for some time, but it is still deteriorating. Nestlé has lost share in almost every period over the past three years, but those share losses have recently become worse ...
“Share losses have been widespread, with Nestlé losing share in most categories over this period to a combination of private label and other branded companies. So, Nestlé’s issues appear company specific and they are not due solely to category weakness or widespread private label gains.”
Price inflation
Wood said price inflation in 2011 had hit volumes for the food manufacturer, the name behind brands such as Nescafé, Nesquik, Haagen Dazs and Maggi flavourings.
Despite a slow down in price inflation in the first half of 2012, he said: “With the lower pricing and/or increased promotion of 2010, volumes turned positive, averaging 2%. But, with the next bout of pricing in 2011 we have seen three consecutive semesters of negative growth, with H1 (the first half of the 2012 financial year) at -2%.
In addition, value growth had slowed over the past two semesters from about +2% in H1 2011 to 0% in H1 2012, he said. “H1 2012 is of particular concern given that volumes have been consistently weak, despite pricing that has fallen away, leading to a drop in growth.”
Recent discussions between Sanford C Bernstein and Nestlé had suggested two explanations for the hit the company was taking in the US. The first was that it was engaging in lower promotional activity relative to its competitors.
Promotional activity
“Unfortunately, our view is that this is possibly a function of Nestlé being too aggressive on promo beforehand (indeed, some of its peers in the frozen entrees category have been very critical of Nestlé over the last two years) and is now suffering the market consequences of having to roll back some of the promo activity,” said Wood.
Nestlé had also indicated that it had been cutting the number of stock keeping units (SKUs) in the US and resultant share losses. “Unfortunately, a need for SKU rationalisation normally comes after SKU proliferation when companies have aggressively pushed for growth by a rapid expansion in new product initiatives and line extensions that have inflated growth for a few quarters/years, but not led to sustainable growth,” said Wood.
“Curiously, sustained growth in Western Europe has more than offset the weakness in the US so far, but if Europe decelerates to very low single digits or flat growth and/or the US deteriorates even further (to -4%), the worst case scenario is Nestlé growing even below 4%,” he added.
He warned that he expected “considerable drop off in organic growth” from the second to the fourth quarters of Nestlé’s financial year, from 7.5% in 2011 to 5% to 5.5%.
Nestlé was unable to comment about Wood's claims, as the company was in a closed financial period, prior to publishing its first half financial figures as FoodNavigator went to press.