Nestle Speeds Up Overhaul to Counter Weakest Growth in Decades

Nestle, the biggest packaged food group of the world, is increasing spending on its restructuring in 2017 to up to 1 billion Swiss francs ($1 billion) in order to cope with the company’s weakest sales growth in more than two decades.

The largest company in Europe in market value is under pressure to increase returns from Daniel Loeb, an activist investor whose Third Point hedge fund reported a $3.5 billion stake in June.

It must also examine its brand portfolio and business model to make sure that its products continue to be appealing to consumers who often favour fresh, local foods to Nestle’s KitKat chocolate bars or Maggi soups.

Organic sales grew 3.1% in the third quarter, an increase from the  2.4% of the second, in line with the expectations of analysts in a Reuters poll. The performance was helped by improved trading in Asia and Europe.

Still, Nestle estimates growth for the full year around the 2.6% it made for the first nine months, suggesting a slowdown in the fourth quarter and 2017 as a whole. Sales from Last year grew 3.2%.

“Going forward, everyone is well advised to be cautious, and you see that reflected in our expectations for the fourth quarter,” said Chief Executive Mark Schneider on Thursday.

Francois-Xavier Roger, its Finance chief, warned that Asia and Europe might not be able to duplicate the good performance in the final three months. However, he confirmed the goal of Nestle of returning to mid-single-digit organic growth by 2020.

Nestle announced that it would spend up to 1 billion Swiss francs in 2017 on restructuring, multiply its initial plan, as it aims to decrease structural costs, such as by closing down factories, promoting efficiency and sourcing globally.

Its overall projections for restructuring costs of 2.5 billion francs between 2016 and 2020 continues to be unchanged.

The acceleration will decrease the operating margin of this year by 0.4 to 0.6 percentage point, while the underlying margin (before restructuring costs) is anticipated to increase by at least 0.2 percentage point in constant currency, said Nestle.

Last month, Nestle set a target for the underlying margin to reach 17.5-18.5% by 2020, an increase from 16.0% in 2016.

Slowing growth rates at packaged food groups have stimulated the interest of activist investors, with Procter & Gamble also becoming a target lately.

On Thursday, Unilever recorded lower-than-expected third-quarter sales, losing market share to competitors that are smaller, and dampening expectations that an aborted takeover offer from Kraft Heinz would spark a swift improvement.

Shares of Nestle were 0.8% lower at 1530 GMT, slightly plodding the European sector.

According to Reuters data, this year, the company has gained 16% so far and are trading at 28.3 times forward earnings, at a premium to Unilever at 25.8 times and Danone at 24.2 times.

Analysts said that the performance of Nestle was disappointing when compared to Danone that observed strong baby food sales in China which boosted growth in the third quarter to 4.7%.