‘The incline has become steeper’: Nestlé’s uphill battle to grow

Nestlé disappointed the market yesterday (16 February) when it delivered underlying sales growth well below consensus analyst expectations. Fourth quarter organic growth stood at just 1.4% compared to consensus forecasts of 2.6%.

This slowdown meant full-year organic growth dropped to 2.4%. As Bernstein analyst Andrew Wood noted, 2017 was the sixth consecutive year of slowing growth for Nestlé. “The lowest this century”​.

Wood continued: “We would hope this is the nadir.”​

By the sound of it so, too, would Nestlé management. “Clearly, no beating around the bush, we are disappointed about our Q4 organic sales performance. It came in somewhat softer than anticipated. As a result of that our organic growth for the entire year 2017, while it is inside the guided range, came in somewhat on the softer side,”​ conceded CEO Mark Schneider.

However, Schneider insisted that the company remains on a path that will deliver its 2020 targets. 

“When it comes to the 2020 growth and margin targets… I'm in a position to fully confirm those to you,”​ Schneider stressed.

A ‘steeper’ incline

Schneider said Nestlé recognises that the group’s 2017 performance makes hitting this goal that much harder. “Our steps towards the mid single-digit organic growth targets that we've laid out for 2020 [have] been updated for the starting point now in the year 2017 at 2.4%. This compares to the 3.2% that we accomplished in 2016 hence we fully acknowledge that the incline has become steeper and so the challenge is certainly a harder one than the one that we looked at last year.”​

According to Schneider’s assessment, part of the problem Nestlé faced in 2017 was a delayed reaction from when actions were implemented to when they fed through to the group’s growth trajectory.

“A lot of the actions that we kicked off in 2017, over and above what you can see in the OG number, will actually benefit us in '18 and '19, because many of our actions invariably are linked with time lags when it comes to actually feeding into OG,”​ he argued.

This includes adjustments that Nestlé has made – and continues to make – to its portfolio via M&A. The company recently offloaded its low-growth North American confectionery unit and at the same time it has acquired a number of additional assets from plant-based ready meals maker Sweet Earth to nutrition group Atrium, Blue Bottle coffee and, most recently, Terrafertil.

With a lot of these deals yet to complete, Nestlé insisted that it is yet to see the full benefit of portfolio adjustments on the organic growth rate.

Closer to the consumer

Nestlé’s M&A strategy is designed to align the company’s portfolio with the “changing consumer​”.

The Swiss food giant sees health and traceability as two key issues shaping demand for food.

“At the centre of everything we do is the changing consumer. The consumer is more than ever interested in good nutritional products and the health benefits of nutrition. [Thus] fully validating our nutritional health and wellness strategy,”​ Schneider said.

However, while the consumer is on the one hand “very willing to pay for premium products”​ at the same time shoppers are “increasingly price sensitive when it comes to what they perceive to be exchangeable standardized products”,​ the CEO noted.

Schneider suggested that digital tools, which enable companies to be in “direct touch”​ with consumers also lead to “increasing transparency”​ which then results in “increasing price sensitivity”​.

Nestlé is therefore also focused on “efficiency work”​ to “remain competitive in all aspects of our business”.​

Fast-cycle innovation

Schneider also noted that there is a need for Nestlé to roll out strategic product innovation and renovation more quickly and to deliver “fast-cycle innovation”.​

“On innovation, we are taking a lot of steps to speed up. When you look at the role of our strategic business units… these are the people that do all this strategy development and some of the innovation planning. They face backwards into our R&D and they face downstream into our zones and markets when it comes to implementing this.​

“We have taken a lot of effort the last few years in terms of strength in the working relationship between these strategic business units and our R&D function to be sure that there's a smooth pipeline of things that are actually strategically relevant to each category and that are making a meaningful difference with consumers. And to basically speed up the flow of these products to make them available.”​

When innovation is rolled out globally, it needs to be executed with “discipline” and coordination. Meanwhile, locally relevant innovation needs to be “fast and direct”.​

Will it work?

While acknowledging the disappointing 2017 growth rate, Nestlé was upbeat on its ability to turn this trend around.

According to MainFirst CEO Alain Oberhuber the world’s largest food maker stands a good chance of picking up the pace over the coming 12 months.

“We expect that Nestlé will experience a stronger than expected organic growth development in full-year 2018,”​ he suggested.

However, Oberbuber chalked much of this up to the positive impact the confectionery disposal will have on comparisons, positive volume trends in China and an improved pricing environment in Europe.

The jury, it would seem, remains out on whether Nestlé’s efforts to align itself more closely with emerging consumer trends will pay off and the world’s largest food group can counter the side-effects of the global shift away from ‘big food’.