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Consumer Goods Take a 'Timeout' -- WSJ

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02/17/2017 | 08:48am CEST

Slow times for sellers of consumer goods force company to declare 'timeout'

By Brian Blackstone 

VEVEY, Switzerland -- Nestlé SA has thrown out a long-running sales-growth target -- at least for the next three years -- as the world's largest packaged-food company and its rivals struggle with ultralow inflation and fast-changing consumer tastes.

Major consumer-goods companies, once mostly insulated from uncertain economic times, are scrambling to boost sales amid a host of global economic difficulties. Sluggish sales in recent years at Procter & Gamble Co. has forced it to cut costs and slim down. Earlier this week, Trian Fund Management LP, a big activist fund, said it had taken a stake in P&G, heightening urgency to turn things around.

Unilever PLC last month reported weak sales trends for 2016, and on Wednesday, Kraft Heinz Co. said it plans more savings than initially targeted in the face of slow revenue growth.

Each company faces distinct challenges in an array of markets and product categories. But all share broadly similar difficulties that are largely out of their control: tough competition in many of their biggest markets; currency swings that have affected costs; difficulty raising prices amid low global inflation; and fickle desires from consumers.

From companies like Nestlé, focused more on packaged food, consumers have clamored for healthier offerings. But those products have proven harder than expected to develop into big sales drivers.

Acknowledging the industry's travails, Nestlé Chief Executive Mark Schneider said the Swiss-based company would take a "timeout" trying to boost organic sales by 5% to 6% each year -- a goal it failed to reach again in 2016. Nestlé said on Thursday it achieved organic sales growth -- a measure that strips out currency fluctuations, acquisitions and divestments -- of just 3.2% last year, down from 4.2% in 2015.

It was the fourth straight year that the maker of Nesquik flavored drinks, Puppy Chow pet food and Stouffer's frozen meals missed the target, and 2016's growth was the weakest since the company started tracking the metric two decades ago.

Nestlé had emerged in recent years as a paradigm for the consumer-products industry, largely because of how it overcame the global financial crisis. But more recently its stock has lagged behind its peers, falling more than 2% in the last year compared with a 7.4% rise in the Stoxx 600 European consumer goods index.

Nestlé shares fell 1% in European trading on Thursday.

Mr. Schneider, who started as CEO on Jan. 1, said the company's new, more flexible sales target was "mid-single-digit organic growth," as opposed to the long-specified 5%-6% target. But even that vaguer goal won't kick in until 2020.

"This is a timeout from that model," Mr. Schneider said in an interview. For the coming three years, "we don't wish to be measured against that," he said.

Mr. Schneider said the company needed time to "cope with some of the remaining deflationary trends we're seeing, and we also need the time to adapt to some of these very fundamental changes that we've witnessed in the consumer-goods industry."

He said deal making wasn't the answer. Nestlé isn't on the hunt for any major acquisitions in the near term, he said, citing the "fairly lofty valuations" in the consumer-goods sector. Rather, Nestlé plans to push cost savings to maintain profitability, which will "increase restructuring costs considerably," the company said.

Nestlé has moved on several fronts to align its stable of products with changing tastes. It has cut sugar and changed its marketing strategy for Nesquik, and implemented new recipes at its frozen-foods business, which includes Lean Cuisine.

The company has invested heavily in nutrition and health sciences. But that division, which contributed 17% of overall sales last year, is still small compared with mainstay businesses such as beverages and prepared food.

Mr. Schneider's appointment as CEO underscores the urgency of Nestlé's efforts to pivot. Coming from German health-care company Fresenius SE, he marks the first outsider to take the helm at Nestle in nearly a century and brings the deep background in the sort of health-care businesses Nestlé has said is its future.

"Generally, the share of these products over time is going to increase," Mr. Schneider said.

Things are unlikely to improve much in 2017, however. Nestlé said it expects organic sales growth of between 2% and 4% this year.

Nestlé said Thursday that 2016 sales were 89.47 billion Swiss francs ($89 billion), up slightly from 2015 but just below analysts' expectations. Net profit was 8.5 billion francs, down from 9.1 billion francs in 2015 and well below analysts' expectations of around 9.5 billion francs. Last year's profit was weakened by a roughly half-billion franc noncash adjustment related to local taxes.

Write to Brian Blackstone at [email protected]

Stocks mentioned in the article
ChangeLast1st jan.
PROCTER & GAMBLE COMPANY 1.30% 77.43 Delayed Quote.-16.80%
STOXX EUROPE 600 1.09% 385.01 Delayed Quote.-1.53%
UNILEVER 1.32% 4133.5 Delayed Quote.0.19%
UNILEVER (NL) 1.46% 47.575 Delayed Quote.1.32%
UNILEVER (NL) 1.11% 47.4775 Delayed Quote.0.51%
UNILEVER NV (ADR) 1.80% 55.4 Delayed Quote.-1.63%
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