Nestlé cuts full year outlook as Maggi noodle scare hits sales

By Nathan Gray

- Last updated on GMT

Nestlé cuts full year outlook as Maggi noodle scare hits sales

Related tags Nestlé

The worlds biggest packaged food manufacturer, Nestlé, has revised its growth target for the year to 4.5%, after the Maggi noodle recall in India knocked sales and under-calculated U.S. Skin Health rebates weighed down profits.

The Swiss company had previously signalled an aim of between 5% and 6% organic growth each year, however ‘exceptional events’ in Q3 mean that the food and consumer health giant has cut its full-year forecast – despite a ‘good’ performance in the first half of 2015.

Sales in reporting currency dropped 2.1% to €60 billion (CHF 64.9bn) in the nine months through September, said Nestlé, noting that the fall in revenue from sales was primarily due to currency effects.

“After a good performance in the first half of the year we were impacted in the third quarter by exceptional events, with Maggi noodles in India and a rebate adjustment in Nestlé Skin Health,”​ commented Nestlé CEO Paul Bulcke – who noted that despite the exceptional events and negative currency impacts, real internal growth increased, “reflecting broad-based positive momentum across our business and many of our markets.”

Despite ‘solid’ performances in Europe, and from its Nestlé Waters and Nestlé Health Science business units, and ‘significant improvement’ in its North American operations (especially in frozen food), Nestlé was also impacted by slower sales recovery in China, said Bulcke.

“On the whole, organic growth fell short of our expectations and therefore we project organic growth of around 4.5% for the full year, with improvements in margins and underlying earnings per share in constant currencies, and capital efficiency.”

‘Significant impact' 

The recall of Maggi noodles earlier this year over safety concerns – which led to products worth around €43.5 million​ being destroyed as a precaution – has continued to have a ‘significant’ effect on the company’s performance in the South Asia region, said Nestlé.

Meanwhile, in its Skin Health division, Nestle's U.S. prescription drug rebates exceeded what it had set aside for this purpose, resulting in an additional one-off charge in the third quarter.

A note from Bernstein said Nestlé’s Q3 results were disappointing, and ‘well below expectations’ – and a situation that is ‘exactly the opposite’ of Unilever’s results that were reported yesterday​.

The noted added that while full year sales guidance was reduced from ‘around 5%’ to '‘around 4.5%’, “this may require a broad definition of “around” given that YTD is +4.2%.”

What next for Nestlé?

Analysts from Euromonitor have suggested that as Nestlé continues to persue a long term growth strategy, it may look  to spin out its ice cream business and gain a stronger foothold in the premium chocolate markets.

Indeed, Lianne van den Bos, Packaged Food Analyst at Euromonitor International said the global manufacturing giant’s recently announced joint venture​ with Europe’s largest private label ice cream manufacturer, R&R, “is a clear example of the company’s long term growth strategy.”

“Whilst a tie-up with R&R might seem counterintuitive for a company aiming to be the world’s leading nutrition, health and wellness company, in reality it is a good way to separate its ice cream sales from its core business and gain operational efficiencies by joining forces,”​ she commented. “Ultimately, over the long term, Nestlé could spin-off its entire ice cream business which would free up a big lump sum to further invest in skin care or pharmaceuticals, in line with their investment in Galderma.” 

Meanwhile, Jack Skelly of Euromonitor said the recent launch of upmarket chocolate brand Cailler demonstrates Nestlé’s interest in the premium chocolate market. 

“Nestlé is performing below that of key chocolate market rivals such as Mars, Mondelez and Lindt,”​ said Skelly. “It suffers from a lack of premium offering in Western Europe and North America, where brands such as Lindt and Brookside have performed very well over the past five years.”

“It has lost nearly 1 percentage point market share in Western Europe since 2010. In part, this is due to the company’s reliance on KitKat, which represents over 40 per cent of Nestlé’s chocolate sales.”

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