Slowing sales in maturing markets drop Nestlé below expectations

Nestlé toned down expectations for full-year sales after slower third quarter growth showed the impact of softening demand in Asia and falling prices in Europe on the world’s largest food company.

The sales figure was below forecasts and Nestlé executives made it clear they expected 2014 growth closer to 4.5% than the company’s formal 5% target. Shares in Nestlé, the maker of KitKat chocolate bars and Nescafe coffee, fell more than 3%.

Food companies are facing tough conditions as prices in developed markets decline and growth slows in emerging markets.

In response, Nestlé has started selling underperforming units to focus on products offering higher returns. These include its Nespresso coffee pods, health foods, and skincare products that it hopes will drive growth.

Underlying organic sales growth, stripping out the effects of currency swings and acquisitions, was 4.5% in the first nine months of the year, below an average forecast for 4.7% in a Reuters poll.

Growth had been 4.7% in the first half of the year, implying a slowdown over the last three months and seemingly putting the stated 5% annual target beyond reach.

Chief executive Paul Bulcke said the precise figure was less important than maintaining progress in tough circumstances.

Asked whether the company expected full-year growth above 4.5% in 2014, Bulcke said: “It depends on how you define ‘around’, but I’m an ambitious man so yes, I’m confident we should overdo that.”

Nestlé’s shortfall contrasts with yoghurt maker Danone’s better than expected underlying rise in third-quarter sales, helped by improving baby food demand in Asia where it is recovering from a health scare.

Analysts expressed surprise that Nestlé had not officially cut its full-year growth target and had not been expecting such a marked slowdown in Asia, Oceania, and Africa (AOA).

“Real internal growth in AOA, with weakness in China, seems to have fallen into negative territory in the third quarter, which is a surprise,” the J Safra Sarasin analyst Michael Romer said in a note. He has a ‘neutral’ recommend-ation on the stock.

Shares in Nestlé, which have gained 2.5% so far this year, were down 3.1% at 1.40pm yesterday.

Nestlé shares are trading at 18.3 times forward earnings, at a premium to Danone at 17.4 times and Unilever at about 17.3 times. Unilever reports on October 23.

Adding to the economic headwinds are concerns about the impact of the deadly ebola virus in West Africa. The region is a top grower of cocoa and prices have increased on fears the virus could limit supplies.

Bulcke said the company was on “high alert” over ebola, although it has not yet spread to Ivory Coast and Ghana, where 60% of the world’s cocoa beans are produced.

Faced with slower growth in emerging markets and Europe’s deep-seated problems, Nestlé has started to reshape its business.

The company has sold most of its Jenny Craig diet business and its PowerBar energy bars, while investing in areas it considers promising such as the fast-growing skincare market.

Last month, it created a executive board position to better exposit its size and manage costs.


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