BackNestle’s long road to a recovery
Nestl's strategy may be right for the company's future but it is coinciding with tough times
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Nestlé India Ltd’s performance in 2013 had disappointed investors. Low sales growth was attributed to weak demand and the company’s strategy to focus on profitable products. Weeding out products that did not make the cut affected overall sales growth, and competition, too, was nipping at its heels.
In a recent analyst meet, it gave specifics of its 2013 performance. Domestic volume growth in 2013 was a mere 0.8%, with price and mix being the main reasons why sales rose by 7.1%. Nestlé is subjecting its portfolio to a stress test of sorts, resulting in three possible decisions: invest, fix or divest products. The objective is to improve returns and allocate resources more selectively.
Nestlé’s sales are organized into four main segments: milk products and nutrition, prepared dishes and cooking aids (noodles, soups, etc.), chocolates and confectionery, and beverages. In 2013, the two main points of pain were milk products and nutrition and chocolates and confectionery, which the company attributed to a portfolio review and challenges in certain products. In contrast, the beverages business did better and so did the prepared dishes segment and topped volume growth among categories with a 3.8% growth figure.
Now, Nestlé’s portfolio review is one reason behind its poor performance. It is not helping that competition is tough and the market is seeing slower growth. So what can Nestlé hope to gain from this process? One visible gain is on capital employed. Its working capital as a percentage of sales declined in 2013, and it also reported higher operating cash flows.
But it also needs sales of its slimmed-down portfolio to improve such that profitability and earnings growth can recover. In 2013, price hikes played a main role and so did higher advertising and sales promotion spending. But price hikes are also because of higher commodity prices. There might be stress on that front in 2014 as well. Milk, coffee, wheat flour and palm oil at current rates are higher than what was seen in 2013. A strong rupee may, however, bring some relief in the forthcoming quarters.
Nestlé’s strategy may be right for the company’s future but it is coinciding with tough times. A recovery in performance hinges more on demand improving, which depends on the uncertain prospect of a better economic situation. No wonder then that Nestlé’s share fell by 3% on Tuesday, a day after it held the analyst meet.
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