After a frenzy of results, attention now turns to company capital markets events, with Nestlé, Heineken and Unilever in the spotlight.
This week I attended Nestlé’s investor seminar in Barcelona, where the company set out its strategy looking out to 2025. As the world’s biggest food company, it is a good bellwether for the rest of the food industry.
Under the leadership of CEO Mark Schneider, 20% of its portfolio has been rotated since 2017. More than 90 transactions have taken place in that time with a cumulative deal value of more than CHF50bn. Many of the more commoditised parts of the portfolio have been ditched as the company doubles down on its growth engines of coffee, petfood and health sciences. These three divisions were a third of group sales in 2012, but now represent half.
Nestlé managed well through Covid. Coupled with the current inflation tsunami, it still expects to be able to grow mid single-digits sustainably while improving margins to 17.5%-18.5% by 2025, up from 17% in 2022.
Crucially, it doesn’t see a structural hit to margins from inflation. For Nestlé, it is simply a matter of the time between when inflation hits its cost base, and when it can take pricing action with retailers. Management reaffirmed pricing action needs to be taken responsibly, as affordability becomes a key issue. It also accepted it is becoming more difficult to get retailers to accept more pricing in the teeth of a recession, especially as consumers increasingly shift to hard discounters.
Nestlé reiterated speed is of the essence. In terms of new product development, its time to market has reduced by 60% in the past five years. In future, its strategic thrust will be local first, global second, which in practice requires it to get even closer to consumers and understand local needs better. However, to succeed will require shorter and more simplified supply chains.
The other big priority is to get 25% of its sales online by 2025 (versus 15% today). If delivered, this would be double the level of global food peers but more importantly, it would be key to leveraging data analytics and automation. As the food industry becomes more ‘tech’, those companies with the best data and consumer insights win.
Given much higher volatility and costs, Nestlé plans to step up its recurring cost savings from CHF0.7bn to CHF1.2bn per annum. This will be important to secure growth leverage and the funds to reinvest. A big chunk of these savings will come from reducing SKUs and harmonising recipes. What really struck us at the investor seminar is that Nestlé has more than 100,000 SKUs, but 34% of its SKUs are only 1% of its global sales, and 11% of its SKUs account for 80% of sales.
This is now being addressed at pace with more than 1,000 projects in the pipeline. Although this will initially be growth dilutive, as underperformers are eliminated, Nestlé believes it will be accretive to growth in 2023 as these lines are replaced by higher-performing SKUs.
Nestlé is also looking to make progress in two other areas. Firstly, more transparent reporting on its nutrition profile and secondly, in responsible marketing with new policies on infant milk formula and marketing to children. It plans to benchmark its entire portfolio against a government-endorsed nutrient profiling model, which could help address some criticism that parts of its portfolio are unhealthy.
The external context has never been more challenging with geopolitical tensions, inflation, supply chain shocks, labour shortages, energy availability, regulatory pressures and the need to drive the sustainability agenda. This not only requires very flexible business models but also the funds to be able to deal with these myriad headwinds.
Next up is Heineken, which has guided to another year of high costs from commodities, expecting high teens inflation and subdued volumes in 2023 – flat or modest growth. The make-up is expected to be weak European volumes offset by stronger volumes in the rest of the world. Like Nestlé, Heineken is flagging higher cost savings.
Meanwhile, Unilever’s investor event is on 8 December in London, where the focus will be on the new organisational changes as well as any comments on worsening volume elasticity from higher pricing.
It had previously indicated it would face another €2bn inflation impact in H1-23, but interestingly this was only 20% covered at the time of the Q3 results in October. By now, cover should have increased and the company may be able to provide an update. As with Nestlé and Heineken, Unilever might need to find more ‘fuel’ to be able to step up brand and marketing investments.
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