Paul Grimwood, the head of Nestle’s operations in the UK and Ireland, is to move across the Atlantic to lead the Swiss food giant’s US business. Grimwood will take the reins of Nestle’s biggest market but one that is concerning analysts. Michelle Russell reports.

Nestle’s appointment of its UK and Ireland chairman and CEO, Paul Grimwood, to head up the firm’s US operations is being seen by some in the industry as a signal of intent by the group in what is its single biggest market. And one in which analysts suggest it has struggled of late.

The US represents 26% of sales, according to Sanford Bernstein analyst Andrew Wood, but, he argues, the market could be the world’s largest food manufacturer’s “Achilles Heel”.

According to Wood, Nestle’s volumes in the US have been negative in eight of 11 quarters from 2007 to 2012. The low point was a 3% fall in the second half of last year and Wood estimates Nestle’s volumes in the US dropped 2% in the first half of 2012.

Wood describes the volumes trend as “worrisome” for the company. “Nestle’s volume growth in the US has been weak over the past five to six years…in-line with pricing that was taken to battle persistent commodity inflation,” he says in a note today (6 August). “Volume growth was negative from mid-2007 through 2009. However, with a reversal in pricing in 2010, volumes were positive throughout the year, before turning negative again in 2011 and into 2012.”

Sales growth, Wood adds, is “even more of a concern”. Nestle enjoyed “generally positive growth” in 2007 through to mid-2009 as price hikes offset falls in volume but, recently, Nestle has seen “weaker and deteriorating growth”.

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“This is clearly a combination of continued negative volumes and pricing that has come off quickly…although the most recent period improved,” he says.

The US food sector has suffered in the last year in particular as manufacturers’ moves to increase prices (in order to offset a spike in commodity costs) led to cost-conscious shoppers putting less food in their baskets and pressure on sales volumes. The volume data put forward by Wood suggests Nestle has found the going tough in its biggest market.

Grimwood, who has been in charge of Nestle’s operations in the UK and Ireland since 2009, will replace Brad Alford, who is retiring after 32 years with the company. Nestle will be hoping Grimwood can repeat some of the success he has had in the UK and Ireland divisions when he crosses the Atlantic to take up his new job in October.

“The UK and Ireland has been something of a success for Nestle, they way they’ve driven that in terms of instant coffee and the chocolate turnaround there,” Kepler Capital Markets analyst Jon Cox tells just-food. “The confectionery turnaround has been seen as a singular success, so this [appointment] is probably a signal of intent in terms of how they view the [US] market going forward.”

Like Wood, Cox describes the US as a “troubling” market, and one that has experienced a growth in private label over branded goods in the last decade.

“The US market is undergoing a similar situation to what we’ve seen on and off in Europe over the last decade or so in terms of the advance of private label and people becoming much more price-conscious. The US was really seen as the birthplace of the brands and obviously the situation has changed.”

He added that while Europeans have become used to the growth in private label, some US food producers “aren’t really used to dealing with that”.

“It’s all about tweaking the packaging, bringing some of the things [Nestle] has done in the developing world into the developed world, and the appointment of [Grimwood] from the UK, could be a sign of what they’re thinking in terms of the way the US market will go. It’s all about winning share and innovating to drive growth rather than just relying on the overall market itself.”

However, Wood says Nestle is losing market share in some categories and Grimwood faces a number of “fundamental issues” within its US business that need to be addressed.

The group, Wood says, has “lowered its promo activity in the market while its peers have not…driving share losses”. He also says Nestle has reduced the number of SKUs in the market and therefore, again, suffering share losses as a result.

“Cleaning up a portfolio makes sense. Unfortunately, a need for SKU rationalisation normally comes after SKU proliferation as companies have aggressively pushed for growth by a rapid expansion in new product initiatives and line extensions that have “inflated” growth in recent quarters/years, but not led to sustainable growth,” Wood says.

The market will be keen to hear how Nestle’s US performance has performed in the last quarter when it releases its results on Thursday.

“We expect [sales] growth to slow considerably in Q2-Q4 (about +5%) vs. 2011 (+7.5%) and Q1 2012 (+7.2%),” he noted.

With Wood’s prediction that the US will be “a drag on total company growth” in 2012, the market will present a whole new set of challenges for Grimwood.