Nestlé is simplifying its product offerings after selling less Nespresso pods and Perrier bottles
What to know
Nestlé is stagnant. The company sold nearly 94B CHF worth of goods (about $100 billion), but volumes declined for the Swiss-based company after it raised prices an average of 8.2% for the year. More telling is that real internal growth, the company's internal growth metric that looks at product preference and volume, declined by 2.6 percent in the fourth quarter. To make matters worse, margins are contracting, and executives are left looking for solutions. "It's clear that at this point, we're not talking broad-based price increases," CEO Mark Schneider said on the investor call, "but very targeted by category, by situation, and well justified by the data."
That means that Nestlé will manage price increases through SRGM moving forward. That's the process of super granular price increases. It leaves any mass profitability actions focused on efficiency improvements.
One of the ways to increase efficiency is to simplify product offerings, which is a really tall task for a company with over 2,000 brands across 180 countries. "There is a tremendous promise when it comes to cost efficiencies," Schneider said. "near term and even increasing the organic growth longer term by focusing on the items that are most in demand."
A simplified portfolio can have a strong impact on a company's efficiency. From a strategic perspective, it allows the company to streamline ordering and simplifies managing supply chain shortages. Buyers will no longer have to pay premium prices for raw materials only used in a handful of items. From a tactical perspective, it significantly reduces change over time in manufacturing—allowing the company to produce more of its high-volume items at higher levels of efficiency.
Here's how Schneider described the company's rationalization behind shutting down its Canadian frozen foods unit.
This is a book of business of about CHF 150 million. It's a business that was not really sellable and not really a winning proposition because we don't have our own local manufacturing in Canada. These products were made in the U.S. and then imported.
And clearly, by the time you're talking transportation and you're talking currency, it was hard to turn this one into a winner. But we believe that walking away from it and winding it down over a period of 2 years, while being a drag on rig and organic growth for the short term clearly will have significant benefits for the business going forward, and that is essentially what we're interested in.
The business's margins were limited by currency and transportation, and instead of managing something with low profitability, management can now focus on selling profitable items that retailers want.
Nestlé's Organic Growth is Up, but it is somewhat misleading.
- The company had 8.3% organic sales growth, but almost all growth was pricing related.
- Using an internal metric, which strips out price increases and the Russia war, Nestlé grew just .1% and actually saw negative growth in North America (-1.3%)
Nestlé's biggest price increases were in North and Latin America for the year.
- It raised North American prices by 11.6%, compared to 6.4% in Europe.
- Petcare was a bright spot, with the segment growing 14.5% for the year.
Executives at Nestlé no longer want to talk about price increases.
- "I'm slightly confused on your attitude, your philosophy of pricing," an analyst said. Throughout COVID Nestlé has been transparent that it would be a price leader—raising prices early and often. Now, after declining volumes, they're getting a bit cagey.
- "I don't think it's helpful to our shareholders to now speculate on how many rounds of pricing there will be. As you can imagine, this is highly specific by market and category," Schneider said.
They said it:
CEO Mark Scheider on removing low-selling or low-profit items:
And at the risk of beating the Canada example to death, I mean we're showing you that we're willing to walk away from a book of business, take the hit on RIG, take the hit on the underlying volume and organic growth and basically simplify the company, focus the growth spend and actually use those resources to advance the winners. It doesn't mean we're eager to walk away. And so if we can sell something, we will sell it. But we are ready to walk away. And I think this builds on a period when you think back to the time before COVID, there was a period of 4, 5 years when us included everyone in the industry was really striving for organic growth.
And I think at that time, in hindsight, it's clear to me that we will probably take a little easy on this permanent process of SKU rationalization that should be going on in company like us that has such a large number. We were probably at the time, a bit more reluctant to take these hits on volume rig and organic growth. And as a result of that, the product program as well a little bit, especially since we were cranking up innovation a lot and had a nice new stream of innovative products coming to market. And as I explained in the prepared remarks, what got our attention initially was the supply chain constraints.
And there, we had to make choices like how do you use limited resources to make either one product or another. But then once we saw the tremendous benefits from that, we saw that there is a significant opportunity here to do more and really played a win as opposed to just play to have another SKU on the shelf and focus profitable growth. That's essentially what we're after. So that will include some further SKU items but that will also include some divestitures over time so that we are even more focused. We will continue as a multi-category diversified food and beverage company, no question.
But we believe that the company overall within that broader scope will benefit from even more focus than before. And that's essentially what we're after. And this is where the supply chain constraints, just open our eyes in terms of that additional upside that we've left on the table.