LAUSANNE, SWITZERLAND — Nestle S.A. may dispose more food brands to compete in an industry the company’s chairman described as “pulverized” by megamergers. Leaders of Vevey, Switzerland-based Nestle discussed strategies to stay ahead of new rivals during the company’s annual general meeting on April 16 in Lausanne. The proposed combination of Kraft Foods and the H.J. Heinz Co., and the pending joint venture between Mondelēz International, Inc. and D.E Master Blenders 1753 B.V. threaten to topple Nestle’s leadership in the food and beverage sector. The Kraft Heinz Co. would become the third largest food and beverage company in the United States in terms of sales, behind PepsiCo, Inc. and Nestle and ahead of the Coca-Cola Co., General Mills, Inc., and the Kellogg Co.
“The creation of Kraft-Heinz as well as the merger of Mondelēz-Douwe Egberts (Jacobs Douwe Egberts), which will create a formidable competitor in the coffee segment, and the spectacular growth of some multinationals in developing countries, all require two things of Nestle to ensure that it remains the undisputed leader in our industry,” Peter Brabeck-Letmathe, chairman of the board, told shareholders. “First of all, an acceleration in our policy of adjusting our portfolio of activities, and at the same time, better use of our size.”
Nestle in the past few years has chipped away at its portfolio, divesting such brands as PowerBar (to Post Holdings), Juicy Juice (Brynwood Partners), Joseph’s Pasta (Brynwood Partners), and Jenny Craig (North Castle Partners L.L.C.) and its Mexican ice cream business (Grupo Herdez). More recently, the company has entered into exclusive negotiations to offload its Davigel frozen foods unit to European food service operator Brakes Group.
The complexity and scope of Nestle’s portfolio have both benefited and burdened the company, particularly lately in a difficult consumer environment.
“The food industry has undoubtedly faced major problems since the financial crisis, which can be partly explained by a deflationary environment, particularly in Europe and certain developed countries,” Mr. Brabeck-Letmathe said.
Consumption of processed food products in kg per capita in the United States has steadily declined, and consumers are spending less money on traditional food products in large retailers, he said. Monthly spend in bars and restaurants has risen 160% from $19.2 billion to $49.9 billion between 1995 and 2015, while monthly spend in grocery stores has increased 69% from $29.8 billion to $50.4 billion in the same time period, Mr. Brabeck-Letmathe noted.
“This change in consumer behavior has a stronger impact on some categories than on others, for instance on soft drinks consumption,” he said. “This phenomenon triggered considerable upheaval in the beverages industry.”
The trend has benefitted Nestle’s bottled water business, which includes Nestle Pure Life, Poland Spring, S.Pellegrino and Perrier brands. Nestle Waters has become the third largest beverage company in the United States, Mr. Brabeck-Letmathe said.
“Nutrition, health and wellness is proving increasingly every year to be the main growth driver,” he said.
Other parts of Nestle’s portfolio haven’t been as successful.
“…some of our activities are not yet meeting consumers’ expectations, as we have painfully experienced with our frozen products business in the U.S.,” Mr. Brabeck-Letmathe said.
Efforts to revive some of the underperforming brands have included reformulations and innovation. The company said it improved the health and nutritional profile of almost 11,000 products in 2014. Most recently, the company announced plans to reduce sugar and/or remove artificial ingredients from such brands as Nesquik and Butterfinger.
“We also continued our active portfolio management, making choices about where we wanted to invest… where we wanted to improve, and what we wanted to divest,” said Paul Bulcke, chief executive officer. “Making such choices enables us to put our people and our resources behind our best ideas, products and categories to deliver sustained financial performance.”
Nestle’s second strategic action involves “making better use of our size” by driving efficiency and effectiveness within the organization through the newly created Nestle Business Excellence program. By combining corporate support functions at the executive level, the company hopes to bring speed and agility to all support functions so operating units may focus more on generating demand of products.
“With these two major approaches, at strategic and operational level, which require flawless execution now, I believe that your company is and will continue to be as well balanced and prepared as possible to achieve our ambitious targets that we have set with you and for you,” Mr. Brabeck-Letmathe said.
For the first three months of 2015, Nestle reported sales of 20.9 billion Swiss francs ($22 billion), up 0.5% from the year-ago period, but negatively affected by unfavorable currency translation. The company delivered 4.4% organic growth, in line with expectations, reflecting organic growth of 2.5% in developed markets and 6.7% in emerging markets. Executives confirmed the company’s full-year target of about 5% organic growth, with improvements in margins, underlying earnings per share in constant currencies and capital efficiencies.
The first-quarter performance followed 2014 total sales of 91.6 billion Swiss francs ($96.3 billion), with organic growth of 4.5%, and net profit of 14.5 billion Swiss francs ($15.2 billion) with earnings per share at 4.54 Swiss francs ($4.77). The company said it outperformed the market overall.
“As we look to 2015 and beyond, I can say that our company — your company — is well positioned,” Mr. Bulcke said. “We are well positioned to respond to the challenges and to grasp the many opportunities presented to us.“While delivering in the short term, we will remain focused on our business, long term, and continue to build the foundations for future growth. Exactly as we have done in previous years; exactly as you expect your company to do, today and tomorrow.”