The products that Nestle (NASDAQOTH: NSRGY) makes are known across the globe, yet the food giant is still vulnerable to the macroeconomic trends that have threatened the entire industry. Recently, lower raw material prices have resulted in food price deflation, and that has had a downward impact on Nestle's revenue even as it offers opportunities to boost profits. Coming into Nestle's release late last week of its nine-month sales figures as of the end of its third quarter, investors expected that they would continue to see evidence of downward pressure from the deflationary environment on the company's sales. Although those factors are playing a role in its results, Nestle still believes it can grow through internal efforts and by using its pricing power. Let's look more closely at what Nestle said and what lies ahead for the food giant.
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Image source: Nestle.
Nestle looks for more growth opportunities
Overall, Nestle reported decent numbers in its nine-month update. Sales came in at 65.5 billion Swiss francs, implying 22.3 billion Swiss francs in revenue for the third quarter by itself. The nine-month figures were up just 1% compared to the previous year's period, once again showing some of the headwinds that Nestle faces in trying to grow its top line.
Taking a closer look at Nestle's sales results, however, you can see more clearly what's driving the company's successes and what's holding it back. The strength of the Swiss franc produced a 1.7 percentage point foreign exchange impact, hurting the company's overall business. By contrast, Nestle produced organic growth of 3.3%, with real internal growth amounting to 2.5%. Pricing added another 0.8% to the company's overall revenue.
As several other global companies have seen lately, performance in the Western Hemisphere was stronger than Nestle saw elsewhere. Organic growth in the Americas amounted to 4.8%, which was more than double the 2.1% rate of growth in Europe, the Middle East, and North Africa. Nestle's Asia/Oceania/sub-Saharan Africa segment split the difference with 2.5% organic growth. Interestingly, though, nearly all of the advantage in Nestle's performance in the Americas came from pricing. Real internal growth was actually the slowest in the Americas, with the Asia segment growing at a faster 3% pace.
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More broadly, Nestle had more success in emerging markets than in better-established ones. The company reported organic growth of 5.3% in emerging markets, compared to just 1.9% in developed markets. However, again, pricing power was essential there, because real internal growth for both geographical segments was identical.
CEO Paul Bulcke again highlighted Nestle's overall strategy to get through tough times. "In an environment marked by deflation and low raw material prices," Bulcke said, "we continued to privilege volume growth, resulting in real internal growth at the higher end of the industry in both emerging and developed markets." The CEO also noted that Nestle has been successful in maintaining or even gaining market share in most of its component businesses.
What's ahead for Nestle?
Nestle will rely on a combination of strategies to try to bolster growth in the future. As Bulcke put it, "We maintain a high level of brand support while building our innovation pipeline both globally and locally. At the same time, we drive more operational and structural efficiencies by standardizing, sharing, and scaling more activities above market."
The problem, though, is that Nestle still faces immediate difficulties in keeping its top line growth strong. The company said that it now expects organic growth of just 3.5%, down from previous projections of more than 4%. Despite expected improvements in margin, earnings, and capital efficiency, Nestle will still have to deal with growth-related headwinds for the foreseeable future.
One key will be for Nestle to emphasize its strongest markets. During this period, key markets included Mexico, Russia, and India, and the Southeast Asian market is also doing well. Yet China still faces challenges, and until Nestle solves that puzzle, it won't be able to realize the full potential of that huge emerging market.
Nestle shareholders weren't entirely pleased with the results, sending the stock down about 3% in the two days following the announcement. For Nestle shares to rebound, the company will need to see a restoration of its growth trends back toward the long-term sales target of 5% to 6% organic growth that investors want to see.
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