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Nestlé to miss its long-term sales target, again

October 20, 2016
Consumer Packaged Goods

Nestlé SA reported subdued sales growth and said it would fall short of a key revenue growth benchmark for a fourth straight year, underscoring the difficult environment for major global consumer goods companies.

The results, which were below analysts’ expectations, came on the heels of recent figures from peers such as Unilever PLC and Danone SA that also showed slower growth.

These companies, like Nestlé, face headwinds including weaker global growth particularly in emerging markets, volatile currencies, changing consumer tastes and a difficulty raising prices in an environment of low inflation or even falling prices, known as deflation.

Vevey-based Nestlé, owner of Crunch candy bars, Puppy Chow pet food and Nespresso coffee, said Thursday that sales for the first nine months of the year were 65.5 billion Swiss francs ($66.2 billion), up from 64.9 billion Swiss francs a year earlier and slightly below analysts’ expectations.

Organic sales—which strip out the effects of currency swings and acquisitions—rose 3.3% from the previous year. Nestlé said it expects organic sales growth of 3.5% for 2016 as a whole, down from its previous forecast of around 4.2%.

It would be the weakest rise in at least 20 years.

Nestlé shares fell more than 1% in early European trading but then recovered somewhat and were just 0.3% lower late Thursday at 74.5 francs.

“The revised guidance might not be a real surprise, however, [it] is nevertheless a negative for a stock living on a reputation of being defensive and diversified,” said analysts at Baader Helvea Equity Research.

Failure in 2016 to achieve organic sales growth of between 5% and 6% would mark the fourth successive year the company has missed its long-term goal, which it refers to as the “Nestlé Model.” Still, Chief Executive Paul Bulcke said the company was sticking with the “ambition” of 5% to 6% growth.

“I do believe that in normal conditions that 5%-6% is definitely something we have to aspire to,” Mr. Bulcke said in an interview. “We’re living in quite special conditions. Everyone has to admit that.”

He said a mix of faster global economic growth and rising prices should create the conditions for Nestlé to reach its growth objective again. “The atmosphere is a little bit depressed in general and that is affecting the macroeconomics of our industry to a certain extent,” he said.

When inflation is unusually subdued, or when consumer prices fall, consumers get a boost in the shape of higher disposable incomes. The flip side is that companies such as Nestlé rely in part on being able to lift their own prices to generate growth, and when they can’t, it affects revenue.

Meanwhile, Nestlé has faced problems of its own, particularly a recall of its Maggi noodles in India last year and weakness in its frozen foods business in the U.S. Nestlé said Thursday that its Maggi business “continued to gain back market share and comparatives turned favorable.”

“Bulcke has been fighting fires over the last three or four years,” said Jon Cox, head of Swiss equities at Kepler Cheuvreux. “He inherited a business that did very well up until 2012. After 2013 he has been struggling to get growth back in a much more competitive environment.”

In an effort to spur growth, the company has expanded its nutrition-and-health-sciences business. Reflecting that emphasis, the company in late June tapped Ulf Mark Schneider —the former head of German health-care company Fresenius SE—to be its next chief executive starting Jan. 1.

Mr. Bulcke, who has been CEO since 2008, will become Nestlé board chairman next year.

By Brian Blackstone

Source: Wall Street Journal

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