Nestlé plans restructuring following missed nine-month organic sales forecast

Photo : Reuters

Nestlé is undergoing a significant restructuring of its senior leadership and operational framework, the company announced on Thursday. This move follows a downward revision of its full-year sales outlook due to weaker-than-expected organic sales growth over the first nine months of the year. The challenges facing the packaged food industry have intensified in recent years, largely due to soaring costs across various sectors, including sunflower oil, shipping, packaging, grains, and energy, a trend exacerbated by the COVID-19 pandemic and the fallout from Russia's invasion of Ukraine.

While many of Nestlé's competitors have started to slow price increases in an effort to regain customers who have shifted to more affordable alternatives as inflation has eased, Nestlé has been slower to respond. Analysts noted that the company has cut deeply into its marketing and innovation budgets over the years, potentially impacting its brand presence and customer engagement. This strategic misstep contributed to the ousting of former CEO Mark Schneider in August after several consecutive quarters of disappointing sales volumes.

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In light of these challenges, Nestlé has revised its expectations for 2024, now projecting organic sales growth of around 2% and an underlying trading operating profit (UTOP) margin of approximately 17%. This is a marked decrease from its previous forecast of at least 3% growth and a moderate increase in the UTOP margin from 17.3% in 2023. Analyst Jean-Philippe Bertschy from Vontobel described the situation as "a very painful reset for Nestlé, unprecedented in recent history," questioning how the company had anticipated sales growth of around 4% until just a few months ago. He emphasized the scale of the miss for a company of Nestlé’s size, referring to it as "enormous."

Newly appointed CEO Laurent Freixe outlined his plans for a streamlined executive board and organizational mergers, which include combining Nestlé's Latin America and North America units, as well as merging its Greater China operations with those of Asia, Oceania, and Africa. This restructuring follows a previous reorganization in January 2022, which had divided the company into five geographic regions.

Freixe's key challenges include revitalizing innovation and marketing strategies and restoring investor confidence in Nestlé's core brands, which include popular products like Nescafé coffee and Kit Kat wafer snacks. According to Nestlé, organic sales for the nine-month period, excluding currency fluctuations and acquisitions, increased by 2%. Analysts had anticipated growth of around 2.5%.

Freixe commented on the current market conditions, stating, "Consumer demand has weakened in recent months, and we expect the demand environment to remain soft." Nestlé reported a nine-month price increase of 1.6%, falling short of analysts' expectations of 1.7%. The company experienced a modest real internal growth, or sales volume increase, of 0.5%, compared to the expected 0.8%.

In comparison, analysts project that rival Unilever will report a 1% increase in third-quarter underlying prices and 3.2% in underlying sales volume growth when it releases its results next week. Nestlé's Chief Financial Officer, Anna Manz, highlighted the contrasting input cost dynamics among competitors, explaining that the pricing environment is more favorable for them. She pointed to the volatile prices of coffee and cocoa, which have reached record highs in recent years.

Manz further noted that volume growth was affected by retailers and distributors reducing their inventory levels, as consumer purchases have declined, particularly in regions with weaker economic conditions, such as parts of Latin America. This combination of factors has left Nestlé in a precarious position, prompting the urgent need for a reevaluation of its strategies moving forward.