How can new Nestlé chief Laurent Freixe get the company back on track?

Nestlé continued to disappoint investors last week, with an insipid set of results in the third quarter leading to yet more downgrades for full-year growth forecasts.

It has become a troublesome trend for the world’s biggest food company. Former CEO Mark Schneider guided for 4% growth for 2024 back in February – lower than the market had hoped as high prices curtailed shopper demand.

Nestlé now expects organic sales to be up by “around 2%” this year, a drop from the “at least 3%” guided at the half-year stage in July. You’d need to go back seven years to find the last time the group registered growth that low.

Schneider became the inevitable fall guy for the malaise (with chairman – and former CEO – Paul Bulcke handily side-stepping any blame), but his speedy departure in August was still a shock. Hopes for a turnaround were pinned on Laurent Freixe, a 40-year company veteran.

The new CEO aired the latest bad news during his maiden trading update last week as he prepares to set out his new strategy at an upcoming capital markets day on 19 November.

Freixe managed to stem any further haemorrhaging of the share price by also announcing sweeping changes to the operating structure, creating a leaner executive board, and resetting long-term expectations around more “realistic” targets.

But the message to shareholders was clear: don’t expect a quick fix.

“It’s not uncommon for an incoming boss to take a kitchen sink to forecasts in an attempt to rebase expectations and set themselves up for a successful tenure,” says AJ Bell investment director Russ Mould. “Freixe needs to show he can find the right balance between protecting margins and growing sales. He also needs to show he can revive the company’s product portfolio, which was seen in some quarters as having become a bit tired under Schneider.”

So, what has gone wrong at the Kit Kat and Nescafé owner? And how can Freixe change it?

A quick glance at the quarterly figures in the past two years (see table) tells you what you need to know: negative volumes registered for six out of seven quarters from late 2022 into 2024, and organic growth came mostly from pricing.

“There are things Nestlé can do to improve market share and get better ROI on advertising spend, but the reality is that consumers are still reeling from the cumulative impact of significant pricing and are adjusting their shopping behaviour,” says Barclays analyst Warren Ackerman. “The sooner Nestlé gets ahead of this, the better.”

While Nestlé has clearly relied on price hikes for growth, the latest OC&C Global 50 report published by The Grocer this month showed an 8% rise in 2023 – on top of the same increase in 2022 – was at the lower end of the scale compared with industry peers.

Nestlé is by no means alone in its struggles in global fmcg. Pepsico lowered its 2024 revenue outlook earlier this month after two consecutive quarters of weaker-than-expected sales growth. Beyond food and drink, P&G last week reported a surprise decline in quarterly sales for the second time in a row.

All have been hit by a slowdown in North America, their biggest market, as consumers seek out cheaper non-branded alternatives, while the reliable growth engine of China has stalled.

And Ackerman also notes worrying new trends in Europe and Latin America for Nestlé, with more “value seeking” behaviour in the former and weak demand and slowing growth in Brazil and Mexico.

“This is not an easy backdrop to execute a turnaround,” he adds.

Self-inflicted woes

However, not all Nestlé’s woes are industry-wide structural issues. Several have been self-inflicted, such as a bungled IT upgrade at the health science business, a water purification scandal in France and a duff billion-dollar investment in peanut allergy treatment Palforzia.

There is a stark contrast in performance compared with Unilever and Danone, where underperforming CEOs were already ousted. Bold, new action plans at the two rival groups have boosted share price by about 19% in the past year at both. When Schneider stepped down, Nestlé shares were down 16% over a 12-month period.

Volumes at Unilever were also up by 2.6% in the first half of 2024, with a 2.1% jump at Danone. Nestlé struggled to stay above flat with a 0.1% increase.

One senior industry source notes the differences between the category mix of Nestlé and Unilever, with the former operating a more traditional food business, alongside a leading position in petcare, while exposure to beauty, personal care and home care helped the latter. “It looks like food has been harder than other categories,” the industry insider says. “And with brand positioning, more of Unilever’s brands look to be on the right side of category trends.

“If you play in a place where a brand is getting a little bit stale and you have credible private label alternatives, the ability for brands to carry all of that price without seeing some volume drift is harder. Whereas in beauty and personal care, brands are stronger and can carry it well.

“Unilever has also done a better job in evolving its portfolio mix, selling off non-core assets in low-growth categories such as tea and spreads, and next ice cream. There is more fundamental portfolio engineering that Nestlé needs to do to really move the underlying growth rate. That might be great innovation they come out with themselves or might be a mixture of acquisitions and disposals.”

Nestlé has also underspent on marketing versus its peers, with the OC&C Global 50 showing the group invested just 4% of revenues in advertising in 2023. Viewed against the 23% committed by Mondelez, 17% by General Mills, 10% by PepsiCo and 9% by Unilever, it is not hard to see how competitiveness may have suffered.

RBC analyst James Jones says a marketing recovery is underway, while Barclays thinks the company is on track to return to pre-covid levels of 9% of sales.

The industry source adds: “Nestlé has turned the tap back on a bit too late relative to others. Unilever was thinking hard while in the midst of high Inflation about what to do on the other side to get growth happening again. That has helped them get out the blocks more quickly in the post-inflation period.”

While Freixe, a lifelong marketeer, acknowledged the need for more investment to support brands, he emphasised it would not come at the expense of profitability, with productivity savings stepping up to fund this. Noises, no doubt, to calm any market fears about a potential margin reset. Part of that was evidenced by moves to make Nestlé a simpler organisation with more agility, switching from five to three zones, with Latin America reintegrated back into North America and China back into Asia, along with corresponding management changes.

Read more:

• Nestlé appoints new CEO in surprise departure for Mark Schneider

• Nestlé invests £150m into Purina petcare factory in Wisbech

• Lindt loses market share as chocolate prices rocket

• Nestlé downgrades growth forecasts on weak shopper demand

Freixe hopes to convince investors he can fix Nestlé’s problems with better execution, which is his area of speciality.

During an analyst call after the Q3 results, he set out priorities including becoming more consumer-centric and a focus on innovation. And he talked of transforming Nestlé for the future through digitalisation, with the aim of becoming “a real-time, end-to-end connected, intelligent enterprise powered by data and AI”.

Ackerman of Barclays remains sceptical.

“These priorities are no different from what we’ve heard numerous times before from other turnarounds,” he says. “Bigger, bolder innovation must be the most overused term in CPG staples. It is execution and prioritisation of finite resources that counts.”

Freixe also acknowledged more work needed to be done to drive improvement in market share for its “billionaire brands”. “This is going to be one of my key priorities going forward,” he added. “If the pie is not growing, we can always take a bigger share of the pie.”

Jones highlights Nestlé enjoys leadership in about 60% of its market and warns it needs to understand its responsibility to stimulate a bigger pie.

“Nestlé is the global market leader in the food and beverage category, just as AB InBev is in alcoholic beverages and P&G is in home and personal care,” he says. “While neither has got everything right… they both have an explicit focus on growing their respective categories, not merely their shares of those categories.”

Ackerman agrees Nestlé has a responsibility to act like a category captain and drive category growth through “unmissable innovation that will drive consistent share gains”, regardless of what the macro and consumer backdrop throws at it.

“The bottom line is that we continue to believe that Nestlé has an excellent category and geographic footprint, but we question whether the organisation is agile enough to get ahead of fast-moving consumer trends,” he says. “Nestlé’s skillset has always worked best when categories compound slowly over many years, as has been the case with coffee and petfood.

“When consumer shifts happen more quickly Nestlé has struggled, with frozen food (especially in Europe) a case in point.”

A number of immediate challenges remain, with confectionery and coffee, two of Nestlé’s traditional strongholds, under pressure from raging commodity costs, meaning more price increases will be needed.

Ackerman notes how much harder it is now to land pricing, with delistings suffered in Europe as a consequence, and the potential knock-on effects to volumes.

Trends in petcare are also normalising as prices come down in a category that has been a stand-out performer for the group. And there is the known unknown of the impact of GLP1 weight-loss drugs on food companies in the US to consider.

A lot is riding on Freixe’s hotly anticipated strategy update at the November capital markets day. But no matter the course he chooses, turning the Nestlé supertanker will take time.