Nestle looks to new food lines as sales growth slows

Nestle, the world’s largest packaged foods maker, is counting on new products and price increases in the second half of the year to meet its full-year sales growth target after a weaker-than-expected first half, the company has said.

It has missed its long-term target of 5% to 6% annual sales growth for three years but it said it still expects organic growth this year will be in line with the 4.2% seen last year.

The shares which were up 1.7% yesterday, have gained 7% this year.

Organic sales growth, which excludes the impact of acquisitions, divestitures and currency, slowed to 3.1% in the second quarter, hit by weakness in China and deflation in Europe, while growth in the first half was 3.5%. Analysts had been expecting a rise of 3.6% in the second quarter and 3.8% for the full six months.

However, chief financial officer Francois-Xavier Roger said he thought pricing had hit the bottom in the second quarter and, to underscore the importance of innovation, said a third of Nestle sales came from products new to the market in the last two years. New products often fetch higher prices, which in turn boost profit margins.

The maker of Kitkat chocolate bars and Maggi noodles has also been cutting costs, shedding underperforming businesses and expanding its presence in the more profitable and faster-growing market for healthcare products. Liberum analysts, which has a ‘hold’ stock rating, said that “may lead to upside surprise although current progress is slow” and the shares remained “an attractive defensive haven”.

Faced with more demanding consumers asking for fresh, healthy products, makers of packaged foods are reformulating recipes, cutting sugar, salt and fat. To accelerate its health push, Nestle recruited Ulf Mark Schneider from German healthcare group Fresenius as its next chief executive.

“In our view, the Nestle investment case hinges on incoming CEO Ulf Mark Schneider, who takes over on January 1, 2017. In the meantime, though, we regard this as a competent set of results,” said RBC Europe analyst James Edwardes Jones in a research note. Asked whether Nestle would increase its dividend this year, Mr Roger only said Nestle had done so in the past despite the strong Swiss franc.

Nestle, which is also the world’s biggest coffee seller, has planned to give its instant coffee brand Nescafe and its Nespresso single-serve coffee a shot in the arm as fast-growing rivals with lean cost structures chip away at its global dominance.

While its two megabrands still control nearly 23% of the €68.3bn retail coffee market, the breakneck rise of JAB Holdings, which has bought nine rivals in four years to grab a 16% share, is pushing Nestle to innovate once more. n Reuters