BackNestle’s new course is not a two-minute meal
Nestle India is weeding out non-core brands from its product portfolio, but the receding tail's impact on the firm's overall financial performance is telling
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Nestle India Ltd is weeding out unprofitable or non-core brands and variants from its product portfolio, a strategy adopted by Nestle SA globally. But the receding tail’s impact on the firm’s overall financial performance is telling.
In the December quarter, Nestle’s domestic market sales rose by a measly 3.7% over the year-ago period. The company does not share volume growth numbers, but its statement did mention that sales rose mainly because of higher prices and product mix. It would not be a surprise if volumes had actually declined during the quarter as a consequence of its portfolio-trimming exercise.
Though Nestle’s new strategy is to shift to a more premium product portfolio, the transition may be difficult. The company’s material consumption rose by 8.8%, much ahead of sales growth during the quarter. If it is selling more premium products, gross margins should have been higher. Even a 21% growth in export sales—a low margin business—could not have caused that increase, since it is relatively small.
Stiff competition and a slowing market may be preventing Nestle from passing on cost increases. Its top three inputs by value are milk and milk products, flour, and palm oil, which together account for two-thirds of its material cost. Milk and wheat flour have both seen prices increase, while a weak rupee has affected palm oil prices. But other inputs such as green coffee and sugar have seen softer price trends.
Thus, the transition period may not only result in slower sales growth, but a difficult market may lengthen the time taken for a positive impact on margins. Products such as KitKat, Maggi noodles and Nescafe compensated for headwinds in other businesses, the company said. It expects the environment to remain tough and cost pressures to continue.
Though the company’s operating profit margin declined by nearly two percentage points over the year-ago period, on the brighter side the sequential decline was only 13 basis points. One basis point is one-hundredth of a percentage point
Signs of a recovery will come in two stages. Firstly, the effect on revenue caused by its diminishing tail brands will end. And, when the remaining brands grow to their full potential, the company’s sales and profitability should show a marked improvement. But these are some time away from happening. A revival in the economy is an important condition, as many of Nestle’s products fall in the discretionary consumption category.
Investors are likely to be disappointed by its earnings performance, as its profit after tax was flat at ₹ 281.7 crore. Its results came post-market hours on Friday and on Monday its share may see some pressure as investors ponder the long road ahead.
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