Nestle SA, the world’s biggest food company that includes a prepared foods division based in Solon, needs to reignite sales that have disappointed investors for four straight quarters. One solution: Get smaller.
The maker of Nescafe coffee and DiGiorno pizza said earlier this month that it’s “actively looking” at its 8,000 brands and is seeking to identify the laggards after posting its weakest quarterly revenue growth in four years. Nestle has said it will struggle this year to meet its long-term forecast for annual sales growth of 5 percent to 6 percent, hurt by a deceleration in emerging markets, European weakness, and sluggish performances from its diet products, water and frozen entrees.
The slowdown increases the urgency for Chief Executive Officer Paul Bulcke to tackle underperforming areas, especially as his peers get leaner.
Unilever, whose ice creams and soups compete with Nestle’s, has raised more than $1 billion selling assets this year to focus on faster-growing shampoos and deodorants, and CEO Paul Polman has said there is more to come.
Kraft Foods Inc. and Sara Lee Corp. have both split in two, and Campbell Soup Co. is in talks to sell much of its European unit.
“We’re talking surgery, not amputation,” Thomas Russo, a partner at Gardner Russo & Gardner and a Nestle investor since 1987, said in a phone interview. “They allocate capital to businesses with high-return prospects, and you would think that those starved of capital would end up being potentially available for sale. I would support that.”
Nestle’s slowing growth has presented an uncommon quandary for investors, who for much of the past decade have bought the shares at a premium to food-and-beverage peers on a price-to-earnings basis. Now, the stock trades at a discount, according to data compiled by Bloomberg. Shares have risen about 4 percent this year.
The “air of invincibility and reliability” of the company has been eroded, Andrew Wood, an analyst at Sanford C. Bernstein, said in an Aug. 9 note.
Selling a large food business would be a departure for Nestle. This year’s enforced sale of infant-nutrition licenses in Australia and Africa was its biggest publicly disclosed divestment of a food-related asset since the 1997 sale of a canned tomato business to Del Monte Foods Co. for $197 million, according to data compiled by Bloomberg.
In contrast, Unilever has sold Skippy peanut butter for $700 million and Wish-Bone salad dressings for $580 million this year alone.
Unilever, the British-Dutch maker of Magnum ice cream, has sought to sell businesses whose sales are concentrated in Europe and the U.S.
Nestle possesses similar assets, such as Jenny Craig diet centers, Lean Cuisine frozen meals, PowerBar snacks, and some of its bottled waters in North America.
Nestle this year beefed up what it terms a “cell methodology” tool that analyzes 1,000 distinct business units, or “cells,” across the 194 countries in which it operates, to help decide which ones should get more or less investment. The system provides a “common language across the organization,” Chief Financial Officer Wan Ling Martello has said.
For each struggling business, “you bring it into acceptable terms and you have a timeline for that, or you sell it off,” Bulcke said in a March investor presentation. Nestle’s investor relations director Roddy Child-Villiers declined to say how many of the 1,000 units are underperforming.
Jenny Craig is “a problem that we need to address,” Martello told analysts Aug. 8. She declined to give a timeframe for its turnaround. Nestle paid about $600 million for U.S.-based Jenny Craig in 2006, and in 2010 tried to expand it into Europe. That hasn’t worked.
Nestle’s frozen-food unit has also come under pressure, executives said in a February presentation, because of a growing perception among U.S. consumers that frozen meals are less healthful than fresh fare. Sales of frozen dinners such as Lean Cuisine “continue to struggle for growth” in 2013, the company said this month.
Nestle has responded by banding together with frozen-food makers like ConAgra Foods Inc. to improve the perception of their products, and is also building a $53 million research and development center in Ohio. Innovations introduced so far have not moved the needle, Nestle has said.
Another brand that could be sold is PowerBar sports bars, said Alain-Sebastian Oberhuber, an analyst at MainFirst.