Key points:

  • The company was forced to revise its 2024 forecasts downward due to slower-than-expected sales growth.
  • Nestle maintained higher price growth rates while competitors lowered prices to attract customers.
  • A prolonged period of cutting marketing and innovation budgets has negatively impacted the company’s competitiveness.

In a statement published on Thursday, Nestle, one of the world’s largest food producers, announced upcoming changes in top management and operational structure. These changes come in response to a downgraded full-year sales forecast, driven by lower-than-expected sales growth over the past nine months.

Following the report, the company’s stock price dropped by approximately 2.5%.

What are the company’s issues?

In recent years, the food industry has faced unprecedented increases in production costs. The COVID-19 pandemic and geopolitical events such as Russia’s full-scale invasion of Ukraine have led to significant price hikes across all components of the production process, from raw materials (grain, sunflower oil) to logistics, packaging, and energy resources.

This year, as inflation has eased, many of Nestle’s competitors have slowed their price hikes in an effort to regain lost customers who had switched to more affordable alternatives. However, the Swiss company did not follow this trend, maintaining higher price increases. Analysts attribute this decision to a prolonged period of cuts in marketing and innovation budgets, which has harmed the company’s competitiveness. In August of this year, CEO Mark Schneider was removed from his position after several consecutive quarters of declining sales.

Nestle has revised its 2024 forecasts. The company now expects organic sales growth to be around 2%, and the underlying trading operating profit (UTOP) to reach approximately 17%. Earlier, in July, the company had predicted higher organic sales growth of at least 3% and a moderate increase in UTOP margin from 17.3% in 2023.

A painful reset for Nestle

The global food giant is undergoing a deep transformation, which Vontobel analyst Jean-Philippe Bertschy described as a “very painful reset, unprecedented in the company’s recent history.” He expressed surprise that the company had forecasted sales growth of 4% until July of this year. “For a large player like Nestle, a miss of just a few percentage points is highly significant,” the expert emphasized.

New CEO Laurent Freixe has introduced a comprehensive reorganization plan, which includes reducing the executive board, merging regional divisions, and optimizing the business structure in key regions. This is not the company’s first restructuring attempt: in January 2022, Nestle had already reorganized, dividing into five geographic regions.

Freixe’s key tasks are to boost innovation and marketing and restore investor confidence in flagship brands such as Nescafe and Kit-Kat.

Nestle’s performance over the past nine months has fallen short of analysts’ average expectations. Price growth was just 1.6%, below the consensus forecast of 1.7%. Real internal growth, reflecting sales volume dynamics, also came in below expectations at 0.5%, compared to the projected 0.8%.

In comparison, Nestle’s competitor, Unilever, is expected to show stronger results in the third quarter, with base price growth of 1% and base sales volume growth of 3.2%, according to analysts. Final data will be published next week.