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Nestle seeks cost savings

May 26, 2016
Consumer Packaged Goods

Nestle announced on Wednesday new cost savings as part of efforts to cope with increasing competition and to make its sprawling business more efficient, and stood by its long-term annual sales growth target of 5 to 6 percent.

The world’s largest packaged food company identified about 2.5 billion Swiss francs ($2.5 billion) in savings over the next three years, in areas such as procurement and factory efficiency. It expects a 200 basis point reduction in costs as a percentage of sales by 2019/2020.

Like rivals, Nestle is coping with a sluggish economic environment and more demanding consumers in emerging markets, particularly China, where it was caught off-guard by how fast consumers embraced e-commerce and healthier foods.

In several cases it has lost market share to small, local rivals that can adapt more quickly than Nestle, which sells thousands of products around the world, with annual sales of about $90 billion.

The target may go some way toward satisfying investors that have grown concerned of late, after Nestle has missed its long-term 5 to 6 percent growth rate for three years, and has also recently not given very detailed margin improvement plans.

Chief Financial Officer Francois-Xavier Roger declined to comment on margins, telling an investor meeting the company had not yet decided how much of its savings would be reinvested and how much would flow to the bottom line.

The company said there was no change to its 2016 forecast of top line growth in line with 2015, when sales rose 4.2 percent.

“We mix ambition with targets,” Chief Executive Paul Bulcke said. “We’re not backing off from our ambition.”

Nestle’s stock has fallen 1 percent this year, underperforming the average of the world’s top non-cyclical consumer goods companies. But its shares are valued in line with the average.

CHINA, DIGITAL IN FOCUS

The head of Nestle’s business in Asia, Oceania and Africa, Wan Ling Martello, dampened expectations Nestle’s Yinlu business in China could see a quick recovery.

“This turnaround will take time,” she said, stressing though that the business was still good, and seeking to address some of the issues that have hurt it, such as the movement of consumers away from low-priced peanut milk toward higher-end dairy drinks.

Nestle has turned around its U.S. frozen foods business, with revamped marketing, packaging and recipes. Some analysts expect these improvements, and weak comparisons in India due to last year’s recall of Maggi noodles, will help the company return to its 5-6 percent growth target by the end of this year.

At the investor meeting at Nestle’s headquarters near Lake Geneva, the company also announced new initiatives to help it partner with technology companies as it seeks to boost its online presence. The company currently generates about 4.5 percent of its sales online, versus 3.9 percent last year.

($1 = 0.9908 Swiss francs)

By Martinne Geller

Source: Reuters

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