February 16, 2017 / 10:45 AM / 6 months ago

Nestle tweaks its recipe, gingerly

Beba baby food of Swiss company Nestle is offered at a supermarket of Swiss retail group Coop in Zumikon, Switzerland December 13, 2016.Arnd Wiegmann - RTSXB1K

LONDON (Reuters Breakingviews) - Nestle's new boss is tweaking the Swiss consumer goods group's recipe, but the taste so far remains the same. Ulf Mark Schneider used his first outing as chief executive on Thursday to back away from a long-held goal of growing sales 5 to 6 percent. That's hardly daring: Nestle has fallen short four years running. Schneider has scope to shake things up much more - if he has a free hand.

The maker of KitKats and Nespresso has a habit of missing targets and sacrificing profit to boost revenue. Schneider seems alert to the first issue. While the 3.2 percent increase in comparable sales for 2016 was disappointing, he has set out a more realistic range of a 2 to 4 percent revenue increase for 2017. The long-term growth goal is now "mid single digits".

Reinvesting profit is a tougher habit to break, but there are positive signals. Over the past four years, increases in Nestle's gross profit margin have contributed 5.5 billion Swiss francs of extra profit. But only around 15 percent of what the company saves makes it through to operating profit, because the rest gets invested in creating new products or souping up old ones. Schneider's plan to cut costs aggressively may leave more incremental profit for investors, once restructuring charges have washed through.

There's room to be far more radical. Selling the confectionery business would be a start, since sugar conflicts with the healthy image Nestle wants. Kepler analysts reckon that could be worth nearly 20 billion Swiss francs. Then there's the 23 percent stake Nestle holds for no good reason in L'Oreal, which at current market prices is worth 24 billion Swiss francs. Combined, that's enough firepower to launch a bid for, say, French dairy and nutrition group Danone, which has a market capitalisation of 37 billion euros.

The question is how much creativity Schneider will be able to exercise. His predecessor, Paul Bulcke, remains in the picture as chairman. That's a long-standing Nestle tradition, but it's hardly ideal. Despite the fresh blood, Nestle trades 6 percent below its 10-year average price-to-earnings ratio of 21. That would suggest investors aren't sure the recipe is going to change very much after all.

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