Nestlé today reported global organic sales growth of 4.5% for the 2014 financial year, with sales exceeding CHF91.6 billion. When questioned during its financial results presentation, Nestlé’s CEO Paul Bulcke highlighted that “this year’s performance wasn’t great or outstanding, but we achieved solid growth given the market conditions”.
Whilst Nestlé grew in line with market performance, is it enough for the world’s biggest food company? Euromonitor examines if “solid growth” can be turned into “great growth” in two of its largest markets, China and the US. With growth for Nestlé lagging behind its key competitors, we look at what they are doing differently to outperform the market.
Nestlé's Sales and Organic Growth - FY2014
Source: Nestlé 2014 Financial Results Press Release
"There is fundamental work to be done" in North America’s frozen food market
As acknowledged by Nestlé’s CEO, North America’s frozen food arm has been underperforming. Since 2010 the company’s market share in frozen processed food has dropped 0.7 percentage points to 15.1% in 2014. For ice cream, the erosion of market share was even more pronounced falling from 30.7% in 2010 to 29.5% in 2014.
It is fair to say that conditions are tough for Nestlé. American consumers already spend the highest proportion of their packaged food budget (10%) on frozen processed food; and it is this high level of maturity that is proving to be an obstacle to future growth for the category. At the same time, consumers’ perception that frozen food is unhealthy and the opposite of fresh, does not help. Therefore Nestlé needs to focus on value driven products. “People buy value and not prices” – a point that was reiterated by its CEO at the results presentation. For a product such as frozen pizza this translates into more premium gourmet pizza with a thinner crust, such as the brand Dr Oetker which overtook Nestlé’s number 1 position in Canada after it acquired McCain’s frozen pizza business. Value can also sit in more unique and healthier toppings and snack size offerings as consumers move away from the typical three meals a day and snack instead.
Its Lean cuisine brand continues to face perception issues. Consumers do not want to associate food with diets anymore and have instead moved towards eating healthier. The brand name itself runs counter to this trend and Nestlé should consider repositioning this line.
“We need to reconnect with Chinese consumers”
Perhaps the most noteworthy result is the company’s relatively slow growth in its Asia, Oceania and Africa region with only 2.6% organic growth being reported. As pointed out by Nestlé’s CEO, this was mainly due to China, the company’s third largest packaged food market which has accounted for 20% of its global growth alone over 2009-2014. In fact, when taking a closer look at chocolate confectionery which is its largest sector in China after baby food, its competitive positioning has weakened compared to the top 5 players.
Top 5 players chocolate confectionery China 2011-2014
Source: Euromonitor International
In China, Nestlé admits that “they lost touch with the market and they need to reconnect”. Some of the reasons given for these disappointing sales were failing to come up with a product offer that is adapted to a changing consumer that sits between the traditional and the new generation. An example of this was gift giving, which is strongly rooted in Chinese culture, slowly fading away as the Chinese consumer becomes more modern. Therefore one can assume that typical foods that would be given as a gift, such as boxed assortments, would be on the decline. However, the opposite holds true. Boxed assortments in China has shown a double digit growth of 13% in retail value over 2013-2014. Ferrero, which is famed for its boxed assortments and relies heavily on gift giving with its premium assortments, outperformed Nestlé with 19% growth in 2014. It is its premium chocolate status that gives Ferrero its added value, something Nestlé says it wants to aim for too.
Leading brands that are gaining market share in the Chinese chocolate confectionery market are Ferrero Rocher, Hershey’s Kisses and M&M – so what is it that these brands have in common? Not much in terms of product formulation yet continued investment in the Chinese market is paying off. Mars is trying to build iconic brands by opening up its first M&M World flagship store in Shanghai and Hershey is investing heavily to expand distribution through its latest acquisition Shanghai Golden Monkey Food Company in 2014.
Outlook for 2015
In 2015, Nestlé is aiming for organic growth of “around 5%”, expecting similar conditions to 2014. However, with world GDP expected to be lower this year than in 2014 according to the IMF, it’s more likely Nestle will hit the lower end of its 5% aim as the nature of its business is quite GDP-linked. Moving forward, whilst Nestlé is shifting its reliance on food towards health care, it does generate one third of its business from confectionery and frozen processed food. Therefore it is unlikely it will disinvest these categories just yet.
Having said that quite a lot of “loose” sales come from smaller categories such as spreads, pasta, meal replacement and sweet and savoury snacks where sales have been underperforming over the last five years, and have contributed little to overall 2014 growth. Perhaps Nestlé should rebalance its portfolio away from these categories and instead focus on strategically chosen iconic food brands if it wishes to shift its reliance to health care in the longer term.
Nestlé is facing the same headwinds as in 2014 but the group as a whole has still managed to deliver steady growth given the market conditions and will continue to lead global packaged food with a strong 3.4% share in 2014. It will take serious investment and competitive edge for the number two player Mondelez to close the gap with Nestlé. A gap which is roughly equivalent to the combined sales of a handful of Nestlé’s iconic brands: Stouffer's, Kit Kat and Häagen-Dazs. Yet with the company refocusing its investment on nutrition and healthcare, who is to say that it won’t?