Analysis: Nestlé CEO Freixe's turnaround plan faces challenge from weak consumer By Reuters

By Richa Naidu

LONDON (Reuters) – Nestle's plans under new CEO Laurent Freixe to restructure and focus on its core brands have been welcomed by investors, but executing a turnaround strategy amid weak consumer demand will be a challenge. difficult task.

After replacing Mark Schneider as CEO last month, Freixe laid out plans Thursday to revamp the executive board, revive Nestlé's 31 core “billion-dollar brands,” become price competitive again and regain market share through innovation. and marketing.

It conveyed its strategy to investors as Nestlé – owner of brands such as Nescafé, Kit Kat, Sanpellegrino and Purina pet food – cut its full-year sales outlook after weaker-than-expected nine-month organic sales growth. .

Freixe said in an investor call that Nestlé is operating in “an environment characterized by weakened consumer demand,” particularly in North America and Europe, the company's largest markets.

In the first nine months of the year, the Switzerland-based group was only able to increase prices by 0.6% in North America, where its products are sold at retailers from Walmart (NYSE ) to Kroger (NYSE ).

In Europe, it is becoming increasingly difficult to do business with supermarkets and several products were pulled from shelves in the third quarter, the company said.

“Freixe clearly has a lot of work ahead of him to improve these weak points

trends,” said Bernstein analyst Callum Elliott. “Is this weakness really due to execution difficulties for Nestlé… or are these growth challenges just a reflection of the weak growth context in Nestlé's categories and a strategic dilemma problem facing the world's largest food company? ”

It has been a tumultuous two years for the industry, as the end of the Covid-19 pandemic triggered a supply chain crisis and sky-high commodity prices, followed by skyrocketing energy prices after Russia invaded Ukraine, and disruptions due to attacks on container ships in the Red Sea.

Since early 2022, when Schneider divided Nestlé into five geographic regions in what it called a market-led approach, Nestlé shares have fallen by about a third. Freixe will now reduce the number of regions to three to simplify the structure.

“Freixe showed up well and made the right noises,” said Barclays analyst Warren Ackerman. “However, the United States, Europe and Latin America are under pressure, so this is not an easy context to execute a change of course.”

'HE IS A LIFE'

Schneider was ousted from Nestlé in August without warning, after several consecutive quarters of weak sales volume growth, with total revenues propped up by high prices to cover rising costs. The group began cutting back on marketing and innovation, despite investor anxiety about it.

Shoppers turned to cheaper brands and this year, when Nestlé began to curb price increases, many of its brands were not innovative enough or well-marketed enough to recover sales.

However, investors and analysts appear encouraged by Freixe's turnaround plans, as Nestlé shares rose around 2% on Thursday despite the group cutting its full-year outlook.

“He's a lifer, right?” said Ben Lofthouse, head of global equities at Janus Henderson. “I think he's been at Nestle for over 40 years. He just came back from Latin America to try to steady the ship.”

Vontobel analyst Jean-Philippe Bertschy believes that there will be brand disposals in the future.

Nestlé, which also makes Quality Street chocolates and Haagen Dazs ice cream, has in recent quarters pivoted toward its “billion-dollar brands”: its top 31 brands.

The rhetoric has been similar to that of the rival food and consumer group. Unilever (LON:) which, under CEO Hein Schumacher, has focused on its top 30 brands of around 400. In the case of Unilever, the strategy has sparked speculation that the company might struggle to sell unwanted brands, a task that could be more difficult. for Nestlé, which has more than 2,000 brands. The company's sales growth this year has been driven by coffee, pet care and confectionery, where it has innovative new products.

Market share for Nestlé's core brands “improved” in the third quarter, Freixe said, although “overall market share for the total group was broadly in line with the first half.” Fixing this is a “key priority”, he added.

Investors will have to be patient, said Barclays' Ackerman. Next year will be “a transition year with the second consecutive year of negative earnings growth,” he said.

“Investors will have to look beyond 2025.”