O Nestlé, My Nestlé!

Sep 13, 2024 8 min read

Florian

“O Captain! My Captain!”

– An 1865 poem by Walt Whitman, now linked to “Dead Poets Society”

arvy’s teaser: Nestlé, the goliath of Big Food and Switzerland’s “Blue Chip” captain, is caught in a storm. Faced with shifting consumer trends and rising pressure against ultra-processed foods, Nestlé’s dominance is at risk. As it navigates through choppy waters, the future of the biggest Swiss company hangs in the balance.

“Musch ha”.

It is a Swiss expression used in investing.

It is said for stocks for which one is optimistic and believes in a rosy future. Or it is given to stocks that have always done well and will most likely continue to do well in the future. The latter are called “Blue Chips”. They are reputable, financially stable and long-established companies. Big businesses that everyone knows and feels safe with. Many financial professionals love to own them as it is good form, in the sense of “no one has ever been fired for owning Blue Chip XYZ”.

In Switzerland, we have three of them. Two from the pharma sector, Roche and Novartis.

But the captain of the Swiss “Blue Chips”?

Of course!

Nestlé.

Chart 1: Nestlé’s business segments and revenues

Source: Nestlé, annual report 2023

Big Food

Recall Big Tobacco?

There is the same with Big Food with twelve companies owning over 550 consumer brands (chart 2). Although you think you buy many products from many different suppliers, you very likely buy from one of these behemoths.

Filling bellies is a lucrative business.

This is because 1) the underlying market is resilient against the economy, as you always must eat and drink no matter what, 2) it is expected to grow by more than 40% by 2040 due to global population growth and rising incomes and 3) Nestlé makes around CHF 1.25 net profit for every CHF 10 in sales.

But what has long been loved by investors has changed.

Consumer trends are shifting, inflationary pressures are causing material costs to rise, and product prices cannot simply be increased and passed on to consumers as competition becomes tougher and shoppers can easily switch to unbranded and cheaper alternatives.

Nestlé, the company with the highest revenues, is slow to bring new and large products to market, which will have a significant impact on its sales of CHF 93 billion in 2023 (chart 1). This is reflected in organic growth of just 2.4% this year, compared with 4-6% in recent decades.

But that is not all, as the industry faces additional threats.

Here too, Nestlé finds itself at the front line of the storm.

Chart 2: Big Food – these 12 companies together own 550+ consumer brands

Source: Quartr

Reshape of the Industry

It is about changing consumer trends and growing awareness.

Mainly about sugary, processed foods, unnatural ingredients (the E’s) and the rise of diseases attributable to the consumption of ultra-processed foods (UPFs).

The problem?

Growing body of research suggests that it is not just excess sugar, fat and salt that causes health problems, but also the heavy processing used to make the cheap snacks. What is more, consumers may now indulge in them less as weight-loss drugs become cheaper and more convenient.

Both threats could reshape the industry – and transform what the world eats.

Nestlé is right in the middle of it. The company’s product range is divided into segments such as Frozen Food (Stouffer’s with macaroni & cheese or lasagna), Culinary Products (Maggi or Thomy), Confectionery (KitKat or Smarties), Dairy & Ice Cream (Mövenpick or Nestlé Yogurts) and Beverages (Nesquik, Nestea or Nescafé) alongside water and pet care.

A lot of UPFs.

On top, the US is a key region for its revenues (approx. 1/3), with the highest percentage consumption of UPFs (chart 3). These tasty products have contributed to the rise in obesity in recent decades.

To weather this?

Nestlé aims to boost sales of “lower calorie, more nutritious” products by 50% by 2030 as part of its commitment to a lower-calorie, healthier future.

But for now, it is just a drop in the ocean.

The stakes are high. Increased government pressure could force the food industry to overhaul production, not just tweak recipes or launch new products. Removing additives would raise costs, shorten shelf life, and hurt profits.

Taking it all into account, they could be facing their biggest challenge yet.

Our Swiss “Blue Chip” captain is caught in a storm.

Chart 3: Average consumption of UPFs as % of total calories

Source: The Economist

Patience

Dead Poets Society (1989) – remember the movie?

It stars one of my all-time favorite actors, Robin Williams. After a turbulent time, he is fired from school and his students call out to him, their captain, one last time with his favorite “O Captain, my Captain”.

Nestlé is currently undergoing a similar journey, as Mark Schneider, CEO since 2017, had to abandon ship at the end of August during a difficult phase. Yet investors, like the students, are standing by the stock with their heads held high.

But it seems we have just lost two captains: Schneider, who steered Nestlé and was hailed as a hero when he took office, and the company itself as the most important “Blue Chip”. After all, at 17% it has the largest weighting in the Swiss Market Index and is therefore of immense importance for our pension funds and the well-being of Switzerland.

Since 2022, the “Good Chart” has not been present – that is why we do not own it – as it has only been trending downwards while the overall market continued to rise (chart 4). The battered “Good Story” has certainly left its mark.

Patience is called for, as such a large ship cannot be turned around in a short period of time, but for Switzerland’s sake we hope that the storm will calm down fast or that they will manage to navigate out of it.

We would quickly recognize it by an improving “Good Chart”.

But for now, it remains stormy and the clouds dark.

And my Swiss heart keeps bleeding.

But I keep my head held high.

O Nestlé, my Nestlé!

Chart 4: Nestlé over the last ten years, including dividends