Nestle CEO, management under pressure as infant formula crisis adds to woes

By Levin Stamm and Fabienne Kinzelmann

 

For Nestlé SA, the baby-formula crisis that has sparked the largest recall in its history is a scandal it could have done without.

 

The tainted infant-milk mess, triggered by a contaminated ingredient, came as the world’s biggest food company was already struggling to revive its shares from their multi-year lows, adding further pressure on its new Chief Executive Officer Philipp Navratil and his management team to present a turnaround plan when the Swiss giant unveils full-year results on Thursday.

 

It’s just the latest in a string of setbacks for the maker of brands including Purina, Nespresso and KitKat that’s been battered by falling volumes, bloated costs, volatile consumer demand and management turmoil. Navratil, a company veteran, and Chairman Pablo Isla — the duo who’ve been at the firm’s helm for less than half a year — face an impatient crowd of investors.

 

“The pressure is enormous,” said Vontobel analyst Jean-Philippe Bertschy. “Full-year results have become almost anecdotal, as investors are now squarely focused on the robustness of quality controls in the infant nutrition case and on the strategic update pledged by the new management team.” 

 

Nestlé shares are close to their lowest level in eight years and have dropped about 38 per cent from a peak in 2022. By contrast, main competitors Danone SA and Unilever Plc have gained 32 per cent and 28 per cent respectively over the same time period.  

 

While the shares have recovered from a recent slide after it emerged that the fallout from its tainted infant formula recall may be more contained than initially feared, investors worry that its wide-ranging problems are symptomatic of larger issues at Nestlé. 

 

“It could be indicative of just a little too much focus on saving costs and hitting the short-term quarterly number rather than making decisions for the longer-term oriented shareholder,” said Thomas Kuehne, a portfolio manager at LLB Asset Management AG, which owns Nestlé shares.

 

Fresh ideas on how to rekindle growth are urgently needed as the firm’s so-called real internal growth — a key metric used by Nestlé because of its sprawling portfolio of more than 2,000 brands — will likely remain sluggish until at least the second quarter of this year. That’s in contrast with record quarters earlier this decade.

 

“Recently, the growth has been driven solely by prices,” said Kai Lehmann, a senior research analyst at Flossbach von Storch, which holds Nestlé shares. “The question is how to truly increase the volume again.” 

 

Thursday’s strategy update may include a reorganization to streamline businesses. Navratil has signaled that he wants to focus on four core divisions — pet care, coffee, nutrition and health, and food and snacking — while centralizing functions such as marketing, an area the company didn’t invest enough in during years of short-term margin expansion. 

 

As Nestlé moves ahead with the sale of its struggling vitamins and waters units, investors are asking what else could land on the block. A sale of a part of its about 20 per cent stake in cosmetics company L’Oréal might buy some breathing room, reducing debt that’s nearing three times earnings, and help defend a dividend that has long underpinned its shares.

 

“It will be crucial that we receive an update on some of the under-performing units, how they want to reduce the net debt level and how they plan to accelerate the free cash flow,” said Vontobel’s Bertschy. “The market will look for a precise roadmap rather than another broad reassurance – a plan that is clearly underpinned by concrete actions, milestones and measurable commitments.”

 

How the new strategy will take shape may also be determined by how Isla — the first outsider to become chairman — builds up his board, which lost several members, most recently after the ouster in September of former CEO Laurent Freixe over an undisclosed romantic relationship with a subordinate. 

 

Isla is expected to propose at least two new directors at the annual general meeting in April, according to people familiar with the matter.

 

Meanwhile, Nestlé has indicated that the infant formula recall is unlikely to exceed 0.5 per cent of group sales. Still, “it could take a larger hit on earnings in the next couple of quarters, when accounting for unplanned spending on logistics, alternative sourcing, and marketing to rebuild consumer confidence,” said Morningstar analyst Svetlana Menshchikova.

 

Granted, the latest infant-formula problems haven’t affected Nestlé alone. Its French rival Danone and closely held Groupe Lactalis as well as Switzerland’s Hochdorf Nutritec AG were also hit by the same contamination issue. Additionally, the world’s largest producers of branded foods have all been struggling with shaky demand amid rising living costs. 

 

Additionally, some market observers say Nestlé may have gotten over the worst of its woes. The recommendation consensus — proxy for the ratio of buy, hold, and sell ratings — recently turned more optimistic, with half of analysts currently giving the stock a buy or equivalent rating.

 

That said, Morgan Stanley’s Sarah Simon — the only Bloomberg-tracked analyst with a sell rating — sees no bargain as she expects sales growth and margin expansion to lag the broader sector. According to her, the stock looks “expensive” for what it can deliver to shareholders.