VEVEY, SWITZERLAND — The pandemic has battered Nestle’s away-from-home sales, but the company has no plans to pull back its participation in the market, said Ulf Mark Schneider, chief executive officer. He said Nestle will “rethink,” not “rightsize,” the business, which globally spans the categories of water, coffee, confectionery and ice cream.
“It’s not about rightsizing per se,” he said during a July 30 earnings call. “It’s about adapting to change that I think is inevitable now in the out-of-home business. And yes, so probably there'll be less hotel and restaurant business for a while going forward, and people may be eating less at some company cafeterias for a while, but imagine how many more people, for example, ordered in from restaurants and dark kitchens and what have you. And so clearly there's a change in nature. And there's almost like a blurring of the lines between what is in-home consumption and what is out-of-home consumption.”
In the first half of the year, Nestle’s out-of-home sales declined by as much as 60% as many offices, restaurants and hotels closed, Mr. Schneider said. The company has seen “modest sequential improvement” since then, but a full recovery will take time, he added.
In the meantime, Nestle is looking at new opportunities where it can “embed our products and services into some of these new delivery services that are showing explosive growth,” Mr. Schneider said.
“And so rather than just trying to cut costs here, it's much more important now to take that resource, that highly qualified out-of-home resource, that we have built up and then really be sure that we put it to the best use so that we benefit from that new growth going forward,” he said. “And to me, that blurring line between in-home and out-of-home consumption, it's just another manifestation of this ‘anytime, anywhere,’ where traditional channels kind of mean less and less, and so you need to do business with these new ways of reaching the consumer, new companies that have new ways of reaching the consumer.
“So I see an opportunity there. It's going to be some choppy quarters, no question, and we may have to do some adjustments here and there, but overall we want to maintain a growth focus.
“And then also, let's not forget, for several decades prior to COVID, our categories in out of home have shown growth that was superior to in-home consumption. It may take a while. … And hence this is not the right moment to take a short-term view.”
Nestle’s year-to-date profit increased by 18% to 5.9 billion Swiss francs ($6.5 billion), and earnings per share increased by 22% to 2.06 Swiss francs ($2.29). The increase in net profit was driven by one-off income related to divestitures and improved operating performance.
Half-year sales decreased by 9.5% to 41.2 billion Swiss francs ($45.1 billion). Divestitures of Nestle Skin Health and the US ice cream business reduced sales by 5.3%, and foreign exchange lowered sales by 7%.
Organic sales growth was 2.8%, supported by sustained momentum in the Americas region, Purina PetCare business and Nestle Health Science.
“In the first half, the effect of COVID-19 on organic growth varied materially by channel as a result of lockdowns,” Mr. Schneider said. “Organic growth for retail sales accelerated to 6.3%, reflecting the significant shift from out-of-home to at-home consumption. Within retail, e-commerce saw exceptional growth of almost 50%, with a strong acceleration in the second quarter across all geographies and categories. E-commerce now accounts for 12.4% of total sales, as compared to 8.5% in 2019.
“Before COVID-19, the out-of-home channel accounted for around 10% of group sales. If we include on-the-go consumption and products typically bought on impulse, then the total contribution was closer to 15% of sales. Out-of-home sales declined sharply as a consequence of movement restriction; and the closure of many offices, restaurants and hotels, to name just a few. The rate of decline bottomed out in April at around minus 60%.”
Zone Americas achieved 5.3% organic growth, reflecting strong performance of Purina PetCare and Starbucks, Nescafe and Coffee Mate products. Frozen food drove double-digit growth, with increased sales for DiGiorno, Hot Pockets and Stouffer’s. Baking products, including Toll House and Carnation, saw good demand. The water business declined, due to the impact of reduced sales in away-from-home channels.
In May, the company said it was exploring strategic options, such as a potential sale, for the majority of the Nestle Waters business in North America to shift its focus on international and functional water brands, the latest move in an ongoing portfolio transformation that in the first half of the year included the sale of its US ice cream business and the acquisition of a majority stake in Vital Proteins, a collagen products brand. As part of this process, the company agreed to sell the Canadian Nestle Pure Life business to Ice River Springs.
“For our North America Waters business under review, we have seen very strong interest from potential buyers,” Mr. Schneider said. “We anticipate that we can complete this review in early 2021.”
Nestle maintained its original full-year 2020 guidance, which includes continued improvement in organic sales growth and in underlying trading operating profit margin.