Nestlé's Future May See Less Reliance on Packaged Foods

By Brian Blackstone Features Dow Jones Newswires

The world's biggest packaged-food company may be cutting back on packaged food.

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Nestlé SA outlined a far-reaching strategic shift this week, days after activist investor Daniel Loeb, who has accumulated a 1.25% stake, asked for big changes. Nestlé promised new investment in its high-growth business like bottled water, coffee, infant nutrition and pet care. It also signaled it would consider consumer health-care acquisitions.

What Nestlé didn't mention in its new strategy: "prepared" food, a core Nestlé sector that includes household names like Lean Cuisine, DiGiorno pizza and Herta processed meats, a brand popular in Europe. That, coupled with a number of high-profile food sales in recent months, has analysts and investors expecting more divestitures, though it may take awhile.

Earlier this month, Nestlé's new Chief Executive Mark Schneider put on the block its U.S. confectionery business, which includes the Butterfinger, Baby Ruth and Crunch candy bars. Last month, Nestlé agreed to sell three of its frozen food brands in Italy.

A Nestlé spokewoman decline to comment on its prepared foods business.

"It's a small revolution that's taking place," said Jean-Philippe Bertschy, analyst at Vontobel Research. "Nestlé's frozen foods, ice cream and pizza businesses are areas for possible disposals" over the next three to four years, he said. Jon Cox, head of Swiss equities at Kepler Cheuvreux, said he expects additional disposals in confectionery, frozen foods and cereals in the coming years.

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Nestlé hasn't signaled any specific new divestitures. On Tuesday, it said only that it "will continue to adjust its portfolio in line with its strategy and growth objectives."

Few analysts expect a full buffet of food-brand sales from Nestlé. The company has been investing heavily in some of its brands, including ice cream and Lean Cuisine, which it says it has successfully turned around in recent years.

But the company said it is targeting acquisitions and investment at faster-growing segments far from its traditional base in prepared food. The cheap, ready-to-eat brands were staples of supermarket shelves for decades but have recently fallen out of favor amid competition from healthier options.

Nestlé Chairman Paul Bulcke has said Nestlé, like other consumer-goods companies, has been slow to respond to rapidly changing consumer tastes. In an interview late last year, when he was still chief executive, he cited its reliance on the word 'lean,' which is on all of its packages of Lean Cuisine meals.

"'Lean,' that was so in: diet; lean. All these arguments all of a sudden were not valid anymore because 'lean' is linked with sacrifice," he said. Not having seen this change coming "is somewhat a frustration, but then we reacted then pretty fast when we saw it."

Nestlé breaks out its products in broad categories. Its prepared food and cooking aid business brought in 12.15 billion Swiss francs ($12.6 billion) in sales last year, or about 13.6% of overall sales. But sales have lagged behind in other segments, delivering just 2.7% growth, excluding things like acquisitions and divestitures. Organic sales at Nestlé grew as a whole 3.2% last year.

Still, the businesses are among the company's biggest revenue generator. Adding in various slower-growing brands in some of its other food-oriented units -- those units include confectionary, milk products and ice cream and powdered and liquid beverages -- these businesses make up a big chunk of Nestlé sales, particularly in the U.S. "It may not tick many attractiveness boxes, bottom up," said Martin Deboo, consumer goods analyst at Jefferies International. "But, top down, it represents 20-25% of sales in their biggest market [in the U.S.] and is making a significant contribution to both central overheads and overall clout with the likes of Wal-Mart," said Mr. Deboo.

The packaged food business is also a bit of a buyer's market recently. Unilever PLC put its spreads business, including margarine but not mayonnaise, up for sale earlier this year. Reckitt Benckiser Group PLC is selling its French's mustard.

Write to Brian Blackstone at brian.blackstone@wsj.com

(END) Dow Jones Newswires

June 28, 2017 14:13 ET (18:13 GMT)