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Nestlé Drops Targets as Consumer Giants Struggle -- 2nd Update

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02/16/2017 | 04:04pm CEST
By Brian Blackstone 

VEVEY, Switzerland--Nestlé SA has thrown out its long-running annual sales-growth target--at least for the next three year---as the world's largest packaged-food company struggles alongside the rest of the industry against ultralow inflation and fast-changing consumer tastes.

The world's consumer-goods giants, once mostly insulated from uncertain economic times, have all scrambled recently to boost sales to combat a host of global economic difficulties. Low sales growth 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 weaker 2016 underlying sales, which strip out currency moves and acquisitions. On Wednesday, Kraft Heinz Co. said it plans more savings than initially targeted in the face of sluggish revenue growth.

Each company is dealing with different challenges in an array of markets and product categories. But all are being buffeted by 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 changes in what consumers want.

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

Amid those industrywide issues, Nestlé Chief Executive Mark Schneider said Thursday the Swiss-based owner of Nesquik flavored drinks, Puppy Chow pet food and Stouffer's frozen meals would take a "time out" trying to boost organic sales by 5% to 6% each year--a target it fell far short from hitting again in 2016. Nestlé said Thursday organic sales grew just 3.2% last year, down from 4.2% in 2015.

It was the fourth straight year it missed the target, and the weakest since the company started tracking the metric in 1996. Organic sales exclude currency fluctuations, acquisitions and divestments.

Nestlé had in recent years emerged as a gold standard of sorts for consumer products, largely because of how well it performed in the aftermath of the global financial crisis. But its stock has lagged behind its peers recently, falling nearly 3% in the last year compared with a 7.4% rise in the Stoxx 600 European consumer goods index.

Nestlé shares were down 1.5% in early afternoon trading in Europe.

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

"This is a timeout from that model," Mr. Schneider said in an interview. "For [2017], 18, 19 we don't wish to be measured against that."

Mr. Scheider 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.

Mr. Schneider said deal making wasn't a fix. 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 area. Rather, Nestlé said it would deepen cost-cutting, which will "increase restructuring costs considerably" to maintain profitability.

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 revamped its frozen foods business, which includes Lean Cuisine, with new recipes.

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. He joined from German health-care company Fresenius SE. He is the first outsider to run the company in nearly a century, and comes with a 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 growth 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]

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