In the spotlight: Nestle looks to combine nutrition, premiumisation
Nutrition, premiumisation will differentiate Nestle brands - Bulcke
After sales fell below the "Nestle Model" in 2013, the world's largest food maker intends to leverage its focus on health and wellness and a new drive that could see its stable of well-known brands adopt a more premium positioning to revitalise top-line growth.
The company booked organic sales growth of 4.6% for fiscal 2013, just shy of the 5-6% organic growth rate targeted under its long-term target but in line with consensus expectations.
Revenue expansion was hindered by weak economic conditions and down consumer sentiment across its markets, management emphasised during a conference call to discuss the result. Chief executive Paul Bulcke said the macroeconomic environment was one of "soft, soft growth", with "below recent levels in emerging markets" and "minimal or no growth in developed markets".
In emerging markets, Nestle booked a 9.3% increase in organic sales during the year, meaning that developing economies now represent 44% of group sales. Africa and the Middle East booked double-digit increases and, while sales gains slowed in China, Nestle insisted it maintained or grew market share across key categories.
CFO Wan Ling Martello said the Americas "finished the year broadly where they started" with "steadily improving RIG [real internal growth] momentum in the second half, especially in Latin America". However, that was offset by sluggishness in North America, which witnessed "a continued decline in the frozen food category". Meanwhile, in Europe sales were affected by deflation and negative pricing.
Nestle said it has focused on innovation and product development to drive growth in 2013 and insisted that will continue to be key in 2014.
According to Bulcke, 2013 was a "record" year for innovation - with much NPD still to work its way through to the consumer. "30% of our sales last year were linked with innovations in the last two to three years," Bulcke added.
While Nestle has been "disciplined" about driving continued cost savings the group has not scrimped when it comes to R&D, Bulcke insisted. "R&D is where we don't save money for cutting costs."
Nestle has focused its innovation on sharpening its health and wellness drive. Bulcke insisted nutrition is Nestle's "strongest value driver" and one "driving competitive advantage for our brands". Nestle Nutrition - which includes businesses from baby to senior nutrition - booked sales growth of 8.2% last year, driven by a double-digit increase in infant formula sales.
However, the company is progressing this strategy and intends to combine its nutrition focus with a new "premiumisation" drive, Bulcke revealed.
"Another growth platform combined with this is premiumisation. Premiumisation is expressed by defining more nutritional benefits; it is defined by taste; it is linked with systems and services; it is increased personalisation. It is premiumisation in different aspects that creates value for our company."
Bulcke suggested expanding in the premium space will help Nestle raise its game in both developed and developing markets. "The nice thing about premiumisation is this is not only for the big mega cities of the developed world. It is also working very well for the developing world. Remember, an emerging middle class is in these areas of the world too. That is why we talk about managing extremes - premiumisation and managing the emerging consumer."
For Nestle, premiumisation is about more than placing a higher price tag on products - it is about increasing the value that they offer to the consumer. While that may result in higher costs and therefore higher pricing, it will not necessarily be the case, the chief executive insisted.
Bulcke pointed to the success of Nestle's Kit Kat brand in the Japanese market as a case in point. Thanks to an innovative approach to marketing and communication, Nestle has developed an emotional attachment between Kit Kat and consumers, which has come to be associated with "good luck" for "students taking exams.
"Kit Kat Japan is a good story. Japan is a country where we are growing quite vigorously this year. It is not an environment where growth is natural and we are growing - and that is thanks to seeing our business from different angles. Kit Kat is not a Kit Kat. They have premiumised this product very strongly in Japan and it is growing and is part of the Japanese landscape. They opened a boutique where you have to queue for three blocks to get in. It is the intrigue of the brand that we have all know for over 75 years - how you can really re-energise that through premiumisation."
In other areas, premiumisation is about communicating nutritional benefits to consumers in innovative ways. Nestle increased its digital investment by 40% in 2013 and the company is working to leverage new ways to build connections with consumers, including the development of websites and through social media. Success in Japan, Martello suggested, was also partly due to the high consumer uptake of digital platforms.
While Nestle did not enjoy dynamic organic sales growth in 2013, the year should be viewed as a "building block" enabling the Swiss food giant to deliver future results in-line with the Nestle Model, Bulcke suggested.
"The results have been there for many years. 2013 was a building block... we have a band of 5-6%, that is what we deliver in the past, that is what we will deliver in the future."
For all Nestle's plans to link nutrition with premiumsation, in the short term analysts expect the company's sales forecasts to come under pressure.
A target of 5-6% organic revenue growth looks to be a stretch for 2014, as the company faces some significant currency exchange headwinds and ongoing economic weakness. Nestle guided to sales growth of "about 5%" for the year, with growth to be back-end weighted.
"Guidance was fairly cautious for 2014, with an indication that performance will be back-end loaded. Top-line growth guidance of 'about 5%' means organic growth will be at the bottom end, or slightly below, the Nestle Model," Sanford Bernstein analyst Andew Wood noted. "We consider that this is quite reasonable guidance in a still tough market environment," he added.
MainFirst's Alain Oberhuber was somewhat more critical of the outlook. Noting that the 2014 forecast is "below our as well as market expectations," Oberhuber downgraded the stock. "We will reduce our earnings forecasts by round 3-5% due to lower organic growth," he explained.
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