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  1. Analysis
July 20, 2016

What next for Nestle under new CEO Schneider?

Nestle appointed Ulf Mark Schneider, currently CEO of healthcare company Fresenius, as its chief executive officer last month. just-food takes a look at what could be on the executive's 'to do' list as he takes the helm at the world's largest food maker. 

Nestle appointed Ulf Mark Schneider, currently CEO of healthcare company Fresenius, as its chief executive officer last month. just-food takes a look at what could be on the executive’s ‘to do’ list as he takes the helm at the world’s largest food maker. 

Nestle has long described itself as a “nutrition, health and wellness” company. 

The group has strong roots in science-based nutrition. It was founded 150 years ago by Swiss pharmacist Henri Nestle, who developed the breakthrough infant food Farne Lactee one year later in 1867. Nestle, however, also has a firm footing in less healthy areas of the packaged foods sector. Think Stouffer’s and Hot Pockets frozen food, Aero and KitKat chocolate, or Rowntree confectionery. 

Despite this exposure to categories and products that are typically high in fat, salt and sugar, Nestle’s strategy has been to expand the better-for-you areas of its portfolio. In 1997, the company created the nutrition strategic business division, which was to evolve into Nestle Nutrition in 2006, while 2011 saw the creation of a division focusing on specific dietary needs, Nestle Health Science. 

The company believes nutritional arguments can be used to drive demand in its mainstream categories, as well as growing the functional nutrition category itself. 

Nestle says its aim is to balance taste and nutrition, helping consumers make healthier choices. To this end, Nestle is developing products engineered to meet the nutritional needs of consumers at every stage of life, from pre-natal through to old age. These products feed through customer life-cycles, not only promoting healthy diets but also consumer loyalty at each stage of development. 

Last month’s appointment of a new CEO in the form of Ulf Mark Schneider, the chief executive of Germany-based healthcare company Fresenius, can be viewed as a further signpost signalling Nestle’s direction of travel.

Schneider, who has been the CEO at Fresenius since 2003, is set to join Nestle on 1 September, succeeding current CEO Paul Bulcke.

Nestle’s board has put forward Bulcke to be the KitKat and Maggi maker’s new chairman. Peter Brabeck-Letmathe, Nestle’s current chairman, will have reached the mandatory age of retirement when the Switzerland-based group has its next AGM in April next year and the company has lined up Bulcke as his replacement.

Brabeck-Letmathe, who has worked for Nestle for 50 years, including 11 as CEO and 12 as chairman, said: “With the proposed appointment of Paul Bulcke as chairman of the board and Ulf Mark Schneider as CEO, the board has increased the company’s capabilities to accelerate Nestle’s journey to become the world’s pre-eminent player in the nutrition, health and wellness sector. Together with our excellent executive team, Nestle is well prepared to face the increasingly difficult external environment and deliver on both its long-term and short-term performance goals.”

The selection of Schneider can be viewed as particularly pertinent because he is the first outsider to take the helm at the company for nearly a century. Louis Dapples, a banker, was the last chief executive to be sourced from outside the company in 1922, a year that the group reported its only financial loss. 

Euromonitor analyst Lianne van den Bos believes that the appointment demonstrates Nestle’s determination to expand its reach in the nutritional space where the pharma and food sectors coalesce. “Nestle’s recently appointed CEO with a background in the medical industry is a testimony to Nestle’s goal to redefine itself as a nutrition and health company,” van den Bos suggests. 

However, consumer scepticism surrounding the relationship between health, nutrition and science could serve to limit the short-term scale of this opportunity in Nestle’s mainstream consumer foods business, from where around 90% of its profits flow. 

As Eric Pierce, director of business insight at research firm New Hope, notes, “consumers are typically nervous about science in food”.  Pierce believes that currently mainstream consumers “would rather trust the wisdom of nature for health than science”. 

However, Pierce suggests that innovation is expanding the audience of science-based nutrition products, leading to a “rehabilitation of science” in the food sector, particularly in areas such as digestive and brain health. 

When Schneider joins Nestle, the group’s Nestle health science and Nestle skin house units will report directly to him. MainFirst analyst Alain Oberhuber believes this structure could see an increasing focus on these divisions, which are still relatively small – but growing – areas of the Nestle portfolio. In particular, Oberhuber says Schneider’s track record at Fresenius points to the prospect of increased M&A activity in these areas. At Fresenius, Schneider “was not afraid” to take on “material acquisitions” in pursuit of market leadership, Oberhuber observes. 

“During his Fresenius period, the company had steady organic growth but grew even twice as much via external growth. We believe that we will see faster growth through acquisitions in Nestle health science and Nestle skin health,” he notes. 

The analyst believes that this more aggressive acquisitive strategy could also extend to areas of the Nestle portfolio where the company has lost market share, such as ice cream and premium chocolate.  

Jefferies analyst Martin Deboo is less disposed to “over-interpret health focus”. While he says it is reasonable to expect “increased focus and scrutiny of Nestle’s quasi-pharmaceutical Health Sciences & Skin Health businesses”, Deboo stressed he is “not inclined to over-conclude around any increased emphasis on healthcare”. 

He said: “Nestle is at heart a consumer foods company” and suggests that, in fact, Schneider’s appointment could well herald a more radical approach to Nestle’s cost and portfolio management. “We do expect an increased focus on both the efficiency and efficacy of the R&D function,” Deboo adds. 

Indeed, this interpretation of Schneider’s appointment also fits with Nestle’s recent strategic drive to focus on areas of its portfolio that deliver higher returns and growth potential by pruning its portfolio. 

The company has shed a swathe of brands in recent years, starting with the Jenny Craig weight management business and extending to the likes of foodservice unit Davigel, the Powerbar and Musashi brands as well as regional businesses in markets such as Italy and Jamaica. Most recently, Nestle unveiled plans to roll its ice cream businesses – excluding US brands – into a joint venture with R&R Ice Cream.

Further cost-cutting and portfolio adjustment could well be on the cards at the world’s largest food maker. 

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