Nestlé Continues to Slim to Compete with New Food Industry Giants

By John Revill 

LAUSANNE, Switzerland-- Nestlé SA needs to continue shedding its fringe businesses and capitalize on its size to cope with the wave of megamergers that is reshaping the food industry, Nestlé Chairman Peter Brabeck-Letmathe said Thursday.

Speaking at Nestlé's annual meeting, Mr. Brabeck-Letmathe said the merger of H.J. Heinz Co. and Kraft Foods Group Inc.--a union being directed by Warren Buffett's Berkshire Hathaway; and Brazilian firm 3G Capital Partners L.P.--would create a huge competitor, particularly in the U.S., Nestlé's most important market.

The new company, which will be called Kraft Heinz Co., will compete with Nestlé in major categories such as coffee, where Nestlé is also facing "formidable" competition from the combined coffee businesses of by Mondelez International Inc. and D.E. Master Blenders 1753 BV.

Mr. Brabeck-Letmathe said Nestlé would continue to pare its portfolio of peripheral businesses to remain competitive with the new entities.

The Vevey-based food titan needs to accelerate its pace in selling its units because Berkshire Hathaway and 3G have "pulverized" the food industry, he said.

Nestlé needs an "acceleration in our policy of adjusting our portfolio of activities," Mr. Brabeck-Letmathe said.

The Swiss food giant has been selling its fringe businesses for the last 18 months and said earlier this week it had entered into exclusive negotiations to sell its Davigel frozen food business. The company has already sold off water and ice cream businesses this year and struck deals to sell a snack bar brand and the bulk of its Jenny Craig diet business.

Nestlé also needs to leverage its scale more effectively, Mr. Brabeck-Letmathe said without providing details.

Food companies often use their size to negotiate better deals with retailers and display their products more effectively in shops. Nestlé's U.S. operations, which were built through a patchwork of acquisitions, have already started combined bulk-buying of supplies in an effort to negotiate better deals.

The more competitive landscape comes as Nestlé faces slowdowns in almost all of its most important markets. The company has struggled in the U.S. as consumers ditch frozen foods, one of its most important businesses, and increasingly shun processed foods.

It is also experiencing slowdowns in China--its second-most important market--and Europe, which is experiencing a prolonged period of weakness.

On Friday, Nestlé is expected to post slower organic growth, a sales measure that cuts out the impact of currency translation and acquisitions, when it reports its sales for the three months to March 31.

Analysts expect the food giant to post organic sales growth of 4.1% in the quarter, down from 4.2% in the same quarter a year earlier.

The company targets a range of between 5% and 6% organic growth annually, a measure it has missed the previous two years.

Mr. Brabeck-Letmathe said the strong Swiss franc, which surged after the central bank removed a cap on the currency earlier this year, had an impact on the company's sales which are reported in francs.

The high value of the Swiss franc has reduced the value of Nestle's reported sales over the past nine years. The company's sales have reduced by 130 billion francs ($133.69 billion) since 2005, compared with the figure it would have received using constant currencies. This was more than Nestle's entire sales of 91.6 billion francs in 2014.

Aside from currency translation, the main impact was higher costs for products made in Switzerland, like Nespresso, as well as costs for the company headquarters.

Mr. Brabeck-Letmathe said the rise in the franc made measures to increase productivity all the more necessary.

Write to John Revill at [e-mail]

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