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Nestlé sees profit growth despite sales downturn

24-Feb-2005

Disposals and currency exchange rates pushed down full-year sales at Nestlé, the world's biggest food producer, but the decline had no impact on profitability, which grew by a healthy 8.1 per cent during 2004. IN order to stay ahead of the pack, increased expenditure on R&D and marketing was needed, however, writes Chris Jones.

Nestlé's sales reached CHF86.77 billion in 2004, down 1.4 per cent on the CHF87.98 billion reported in 2003, due mainly to a 3.5 per cent negative impact from currency exchange rates and to disposals, which outweighed the impact of acquisitions.

Organic growth (like-for-like sales plus the impact of price increases) was 4.5 per cent, slightly lower than its own expectations, but nonetheless well ahead of the rest of the industry, Nestlé claimed.

 

Net profits for the year were CHF6.7 billion and came despite increased raw material costs for milk, coffee, sugar, energy and packaging materials.

 

Currency exchange rates may have had a negative impact on overall sales during the year, but in Europe the strength of the euro against the Swiss franc allowed the company to compensate for an otherwise poor performance caused by weak demand and increasing competition on prices among the major retailers.

 

Sales in Europe remained largely unchanged at CHF28.6 billion, with a particularly poor performance from the company's ice cream business due to the disastrous summer weather. This performance - particularly bad when compared to the previous year's heatwave-boosted sales - masked growth in other European food markets, notably soluble coffee and culinary products.

 

An increase in the level of sales through hard discount outlets is also of note: some 5 per cent of total European sales are now through this channel, a reflection of the weak consumer spending power across much of Europe. But while discount stores are growing in popularity across the continent, they are not necessarily good news for companies such as Nestlé, which obviously have to pare back their margins to meet the retailers' demands, a move which is not necessarily compensated by increased volumes. That said, most discounters focus almost exclusively on own label foods, and it is a measure of the sheer size and scope of Nestlé's business that it is one of the few recognisable food brands to make it onto discounters shelves, adding useful volume.

 

In the Americas, Nestlé's performance was altogether more impressive, with organic growth of 7.7 per cent helping to offset an 8 per cent decline in the value of the dollar against the Swiss franc and allowing sales to remain slightly ahead of the previous year at CHF27.8 billion.

 

Nutrition played an important role in driving sales forward in the Americas - in line with the company's stated aim of focusing on this fast-growing segment of the market. In fact, organic sales of nutritional products grew by 8.7 per cent worldwide, with performance nutrition products (functional breakfast cereals or products such as Powerbar) posting organic growth of 18.2 per cent.

 

Asian/African sales were down by nearly 2 per cent at CHF14.4 billion, with good organic growth of 6.9 per cent offsetting the impact of higher raw material costs, natural disasters and rising fuel charges. China and the Philippines performed very well, but competition in the soluble coffee market in Japan depressed sales there.

 

Nestlé Waters, which includes the troubled Perrier brand, registered a mixed performance during the year, with European sales badly affected by the poor weather and shift towards lower margin products - a similar situation to that which has raised a number of questions regarding the future of rival Danone's investments in the bottled water market in the last week.

 

Industrial action at Perrier - which Nestlé claims needs restructuring to improve productivity - did little to help matters during the year, and while Nestlé's performance in the US water market (in both the retail and delivery sectors) suggests that while Perrier's future as part of the group remains unclear, the prospects of a total withdrawal from the global water sector is unlikely.

 

For 2005, Nestlé said it expected to show organic growth of 5-6 per cent, slightly higher than in 2004 despite little forecast change in the global economic conditions.

 

The figure to watch most closely in 2005 is likely to be EBITDA, however, with Nestlé's 2004 figure dropping slightly to CHF10.97 billion (from CHF11 billion) mostly as a result of increased marketing and research & development costs, areas that are likely to remain key in 2005, given the increasing competition for a dwindling share of consumer spending.

 

It will be interesting to see how quickly the expected increase in expenditure in these two areas filters through to increased sales and margins, but with much of the research expenditure at least focused on the core growth area of nutrition, the company will no doubt be confident of seeing an early return on its investment.

 

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