Nestle plans $10-billion revamp

CEO Mark Schneider embarks on food major 's biggest overhaul in a decade

Nestlé may buy or sell businesses with combined sales of almost $10 billion as Chief Executive Officer Mark Schneider embarks on the biggest overhaul of the world’s largest food company in at least a decade.

Selective acquisitions and divestments could affect about 10 per cent of total revenue, Schneider told investors as he unveiled his new strategy to investors at a conference in London on Tuesday. Nestlé, which has about 90 billion francs in sales, aims to focus on faster-growing businesses such as coffee, bottled water and pet care as the company tries to sell its US chocolate business in its first major retreat from sugary snacks.

“We’ll need to trade out of some product areas and into others,” Schneider said. “We’ll act decisively, and the US confectionery is a good example of that.”
 

For the first time, the Swiss owner of Nespresso coffee and Perrier water set a fixed profitability target, aiming for an underlying trading margin in 2020 that’s as much as 2.5 percentage points higher than what it achieved last year. That’s still shy of the level sought by activist investor Dan Loeb, whose hedge fund firm Third Point bought a $3.5 billion stake in Nestle earlier this year. 

Loeb declined to comment on Nestle’s plans. The shares traded 0.9 per cent higher as of 11:12 am in Zurich.

“The target is certainly attainable,” said Jean-Philippe Bertschy, an analyst at Bank Vontobel. “While it will please some investors, others -like Loeb -may be a bit disappointed.”

Nestlé’s adoption of a profit target marks a broader shift among the world’s biggest food companies, after decades of prioritising scale. Now, with many of their mass-market brands facing scepticism from consumers seeking healthier and hipper alternatives, sales growth is slowing and consumer-goods giants are under pressure from investors to cut costs and to move into more profitable niches.

The CEO already announced a share buyback worth as much as 20 billion francs ($21 billion), the planned disposal of Nestlé’s US confectionery unit and acquisitions of coffee and fresh-food businesses. The company has also been cutting jobs at its skincare unit.

Schneider said Nestlé isn’t immediately changing its stance on its stake in French cosmetics maker L’Oreal, which he described as a “fabulous” investment, contributing 9 per cent of the Swiss company’s earnings per share over the past decade. The death of L’Oreal heiress Liliane Bettencourt last week prompted speculation about the future of Nestlé’s 23 per cent holding in the French cosmetics company.

Nestlé plans to keep its US frozen unit, and the ailing skin-health business has a strategic fit, according to the CEO. He also said the company is trying to revamp its Gerber baby nutrition division in the US and Yinlu food in China.

Nestlé has faced calls for a shakeup from Third Point, whose stake is equal to about 1 per cent, while rival Unilever fended off a takeover bid earlier this year from Kraft Heinz, backed by buyout firm 3G Capital Partners.

Unilever is targeting an underlying operating margin of 20 per cent by 2020, while Danone aims to exceed 16 per cent that year. That compares with Nestlé’s new goal for an underlying trading margin of 17.5 per cent to 18.5 per cent by 2020.

FOCUS ON FAST- GROWING BUSINESS
 

• Selective acquisitions and divestments could affect about 10 per cent of total revenue

• Nestlé aims to focus on faster-growing businesses such as coffee, bottled water and pet care as the company tries to sell its US chocolate business

• Company says it will keep consumer health care as additional growth platform to complement food and beverages

• It plans to accelerate three-year buyback programme by adopting an even pace on repurchases over the period

• Nestle confirms target for mid-single-digit organic growth in 2020