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FT editor Roula Khalaf selects her favorite stories in this weekly newsletter.
For the average consumer goods giant, life is sadly lacking in flavor. The pandemic-era bubble has dissipated, taking volume growth with it. Product prices have increased to the point that consumers can bear them. To achieve even half-decent sales growth, companies need to invest money in marketing and keep wielding the ax to even maintain margins.
That’s an apt description of Nestlé’s daily routine. On his first day in the capital markets, new boss Laurent Freixe has abandoned almost all objectives The Swiss group, manufacturer of Nescafé coffee, KitKat bars and Maggi broth cubes, had previously set. Nestlé will also turn its water business into a standalone unit, a possible prelude to the type of thin in which Reckitt and Unilever have been involved. All this makes perfect sense but, given Nestlé’s very slim prospects, it will be of little comfort to its investors.
Medium-term sales growth has slowed to more than 4 percent, below the mid-single-digit target set in 2022. That’s already led to a decline compared to the 8.4 percent achieved that year. Even that reduced level does not appear easily achievable given that Nestlé’s sales growth guidance for 2024 – after two cuts – has fallen to 2 percent.
Achieving this reduced level of ambition will require Nestlé to increase marketing investment to 9 percent of sales. That will cost an additional 700 million francs ($794 million) a year, according to a UBS analysis, about the same as the new cost cuts the company is targeting. Operating margins are therefore expected to stabilize at more than 17 percent (unchanged this year), below their previous target range of 17.5 to 18.5 percent.
All this reflects the fact that for Nestlé, as for other large consumer groups, growth is difficult to achieve. Emerging markets are no longer what they used to be. The products have achieved reasonable penetration and local brands are increasingly formidable competitors. In fact, Nestlé’s sales growth in emerging markets from about 12 percent in 2012 will fall to about 4 percent this year, Jefferies thinks.
Weakened underlying demand leaves consumer giants relying on their own innovation to outperform GDP. The race is on to create products that can take market share from rivals, or even open up an entirely new market. Nestlé did it with Nespresso capsules, now besieged by “compatible” rivals.
Ultimately, this is a much more difficult proposition than simply selling staples in growing markets, and creates a rather dull outlook.