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When the chief executive of an underperforming company steps down, it raises hopes that things will soon start to improve. Nestlé’s shareholders may be waiting for a long time, however.
The departure of CEO Mark Schneider, while abrupt, is not inexplicable. The Swiss food and beverage group performed well in the initial part of his tenure, helped by increased spending on food during the pandemic.
Yet, of late, it has suffered a series of mishaps. The acquisition of Palforzia, a peanut allergy remedy, led to a $2.1bn impairment and was swiftly re-sold. It also suffered IT issues at its health science business which reduced the division’s organic growth potential. Meanwhile, sales growth has been on a disappointing trend. In February, Nestlé guided to an increase of about 4 per cent for 2024, lower than the market had hoped. Even that proved too optimistic: the sales outlook was cut to “at least” 3 per cent at interim results in July.
Nestlé’s share price performance reflects this lean period: it is down 16 per cent over the past 12 months, underperforming rival Unilever by over 35 per cent.
There don’t appear to be any easy fixes for new boss Laurent Freixe. The group has relied on price increases for 5.7 percentage points out of its 6.4 per cent three-year organic growth, according to analysis by Bruno Monteyne at Bernstein. It was not alone in this strategy among consumer goods groups, given broad-based ingredient inflation. But constrained consumers mean there is limited room to keep yanking up prices.
The other leg of organic growth requires raising volumes and improving the product mix. That is much harder to do, especially given the sluggish state of the markets in which Nestlé operates. Investors are also concerned that it might require a rebasing of margin guidance, which has been set at between 17.5 and 18.5 per cent for next year.
To his credit, Schneider did a good job at optimising profitability below the operating line, points out David Hayes at Jefferies, lowering the tax rate and increasing leverage to buy back stock. However, this means there is little room to juice up earnings in the absence of real operational improvements. For huge consumer groups, these require creating new products or even new categories, which is a long-term and uncertain proposition.
Despite their slide, Nestlé’s shares trade broadly in line with those of other consumer groups. Freixe said on Friday he wants to increase spending to support key brands. But he will need to come up with solid evidence Nestlé can turn a corner before the stock sweetens.
camilla.palladino@ft.com
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