Nestlé sets profit margin target of 18,5 percent!

Nestlé HQ Vevey, Switzerland. Photo: Wikimedia Commons/Odrade123 [CC BY-SA 3.0 (]
Nestlé HQ Vevey, Switzerland. Photo: Wikimedia Commons/Odrade123
By Reidar Molthe

28 September 2017 14:35

Nestlé sets profit margin target of 18,5 percent!

Nestlé set a profit margin target for the first time on 2017-09-26, to satisfy Third Point, a very activist investor in Nestlé.

Shares in Nestlé rose 1.8 percent as the market applauded a plan shareholder said struck a balance between profit and growth, while allowing the Swiss company to invest in an uncertain future in which smaller brands can gain scale quickly and more shopping gets done online.

Investors were looking for Nestlé’s new chief executive Mark Schneider to demonstrate that it has a strong strategy to improve performance following four years of missing sales targets as the food sector’s growth slows.

While many multinationals turned to cost-cutting, inspired by industry-leading margins at Kraft-Heinz (KHC.O), Nestlé and rival Unilever (ULVR.L) had argued that cutting too deep to deliver margin growth is a short-term solution, according to Reuters.  However, Unilever altered its stance after February’s unexpected takeover bid from Kraft-Heinz, adopting a margin target of 20 percent by 2020. Now Nestlé has moved in the same direction, setting a margin target of 17.5 to 18.5 percent by 2020, up from 16 percent in 2016.

Run and diet at the same time

U.S. activist hedge fund Third Point, which in June revealed it had a $3.5 billion Nestlé stake, had urged it to target 18-20 percent. “The pace of change has picked up. We need to execute faster than before,” Schneider said at his first investor seminar since becoming CEO in January. “Things will change but the way we approach business will not change. This company got, for a reason, to the leadership position it has today, and it is hell-bent on not losing it,” he said to investors.

The German and American dual citizen repeated Nestlé’s goal to reach mid-single digit organic sales growth by 2020, likening pursuing sales and margin growth to “going for a run and a diet at the same time”. It was unlikely the new margin target would be followed by another higher one, he added.

Thomas Russo, a Nestle shareholder for more than 30 years, whose firm has a stake worth more than $1 billion, said the target was enough to quieten calls for change.

“It gives them the ability to stay at work without having the distraction of whether they’ll concede a margin guidance, but at the same time not burden themselves from making the kind of bold investments that are required to deliver long-term value,” Russo, of Gardner Russo & Gardner, said.

Not all shareholders think Nestlé needs to follow the extreme cost-cutting that has earned Kraft Heinz and Anheuser-Busch InBev (ABI.BR) margins higher than peers. “Nestlé has done a good job being Nestlé”, said Mark Grammer, portfolio manager at Toronto-based Gluskin Sheff.

Nestlé remains committed to frozen food

The investor day in central London was waited for, given the track record of Schneider, Nestlé’s first external CEO in nearly a century, and the arrival of Third Point, which is known for its campaigns at other companies. Third Point declined to comment on Nestlé’s target, but did compliment its executives, saying a lot of work went into the presentations.

In recent months Nestlé has bought into U.S. food delivery business Freshly, Sweet Earth meatless food and Blue Bottle Coffee and Schneider said it would keep identifying opportunities as well making divestments.

He noted that 10 percent of Nestlé’s group sales could be ripe for portfolio adjustment, while confirming Nestlé remains committed to frozen food and saying Nestlé’s view on its 23 percent stake in L’Oréal (OREP.PA), worth more than 23 billion Euros, had not changed.

Third Point called for the company to sell its stake and last week’s death of L’Oréal heiress Liliane Bettencourt renewed speculation of changes.

Nestlé has identified four areas which already account for 53 percent of sales, coffee, pet care, infant nutrition and bottled water, as key areas for investment.