Nestle Targets Malnutrition to Fight Danone’s Gains (Update3)
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By Tom Mulier
Jan. 18 (Bloomberg) -- Nestle SA will begin selling drinks to fight malnutrition among the elderly in an effort to revive its nutrition business, which has trailed sales and profit forecasts every year since they were set in 2006.
Resource SeniorActiv supplements will go on sale in Switzerland this year, the company’s nutrition unit said in an e-mailed statement today. The product includes protein, calcium and vitamin D to promote muscle strength and prevent bone fractures, the world’s largest food company said.
The Vevey, Switzerland-based maker of Kit Kat bars and Nescafe coffee is struggling to keep pace with smaller rival Danone SA in health and medical nutrition, a market that Sanford C. Bernstein & Co. says is growing at 9 percent a year. Nestle’s nutrition sales rose 2 percent in the first nine months of 2009, short of the 11 percent growth in Danone’s medical nutrition unit and a fifth of the Swiss company’s long-term goal.
Nutrition is “clearly undershooting targets and they cannot carry on like that,” said Stephen Pope, chief global equity strategist at Cantor Fitzgerald Europe in London, who has covered Nestle for about six years. “Overall to the company, nutrition is a very important division and it’s an area where they’re trying to push.”
Nestle spokeswoman Nina Backes declined to comment on the nutrition unit’s performance missing analysts’ expectations.
‘Too Big’
Chief Executive Officer Paul Bulcke, who in 2008 pledged to make Nestle into the world’s biggest healthy eating company, is under fire after indicating the Swiss company would probably miss its sales growth target in 2009. This month, he decided to buy Tombstone and DiGiorno frozen pizza from Kraft Foods Inc. for $3.7 billion in a move that will accelerate revenue growth yet adds pizzas with as much as 70 percent of the daily recommended amount of saturated fat.
Nestle Nutrition includes some businesses such as the Jenny Craig weight-loss programs, which has faced client departures due to the recession in the U.S., while Danone’s nutrition business is focused on higher-margin products, according to Standard & Poor’s equity analyst Carl Short.
“Danone will do better just because the entire company is now really nutrition-oriented,” said Jean-Marie L’Home, an analyst at Paris-based brokerage Aurel-Leven SA. “Nestle is too big to concentrate only on nutrition.” Nestle’s sales are about four times Danone’s.
Profitability
Nestle said it plans to expand Resource SeniorActiv in other European countries, because as many as 40 percent of hospitalized patients are malnourished. About 90 percent of the elderly are deficient in vitamin D, and half don’t get enough protein or calcium, the company said. The product also includes ingredients that promote digestive health, according to Nestle.
“Typically these products start modestly,” said Richard Laube, head of Nestle Nutrition, at a press conference in Zurich. “They can have the potential of several hundred millions of Swiss francs in sales, but this will take years.”
A new Nestle baby food product line has failed to win over Europeans, and the company hasn’t invested enough in emerging markets, where nutrition sales growth is fastest, according to Patrik Schwendimann, an analyst at Zuercher Kantonalbank. Nutrition marketing campaigns and costs related to the new baby food cut Nestle’s total operating margin by 1.1 percentage points in the first half, to 17.4 percent.
In 2006, Nestle Nutrition CEO Laube set a goal of 10 percent sales growth and a 20 percent operating margin, without setting a time frame. Profitability of sports nutrition is as little as 10 percent, while Jenny Craig’s is about 12 percent, Bank Vontobel estimates. Danone’s medical nutrition operating margin was 21 percent in the first half, while its baby food profitability was 19 percent.
Gold, Promil
To boost growth, Nestle should use some of the $28.1 billion it raised by selling a stake in Alcon Inc. this month to fund nutrition purchases, Vontobel analyst Claudia Lenz said.
Nestle could make a joint bid for Mead Johnson Co. with H.J. Heinz Co. to obtain its business outside the U.S., ING Wholesale Banking analyst Marco Gulpers said. Nestle would have U.S. antitrust issues bidding alone for the company, valued at about $9.4 billion, he said. Mead’s Enfamil is the world’s largest formula brand, and Mead Johnson gets more than half its sales in Asia and Latin America.
Chris Perille, a spokesman for Mead Johnson, declined to comment, as did Pfizer spokesman Raymond Kerins and Heinz’s Michael Mullen. Nestle spokesman Robin Tickle wouldn’t comment on future purchases.
‘Going Well’
The Swiss company could also buy Pfizer Inc.’s infant nutrition business or Fresenius Group’s Kabi intravenous food unit, Lenz said. Pfizer has infant nutrition brands such as Gold and Promil and ranks as the No. 1 maker of infant formula in the U.K., Philippines and Australia, according to Lenz. Fresenius Kabi would allow Nestle to enter the market of food administered intravenously, adding a new product segment, she said.
Danone sold a cookie unit in 2007 to focus on healthier foods such as digestion-enhancing Activia yogurt. The sale also helped fund the purchase of baby-food maker Royal Numico NV, which boosted Danone’s sales growth in that business to 8.1 percent in the first nine months of 2009. Nestle has lost 3 percentage points of market share in western European baby food since that acquisition, according to Bernstein data.
Nestle hasn’t been able to grow quickly enough organically in baby food. Its most recent major nutrition addition, NaturNes, has gone “horribly wrong,” said Gulpers, because the company didn’t create a wide enough range. Nestle introduced plastic-packaged NaturNes to replace jarred weaning foods.
NaturNes is “going well,” and Nestle has introduced the product in five new markets after starting out in France and Spain, spokeswoman Backes said, without giving figures.
‘Focus on Nutrition’
A day before announcing the pizza purchase, Chief Executive Officer Paul Bulcke said the sale of the Alcon stake would help the company “concentrate on accelerating the development of Nestle’s position as the world’s leading nutrition, health and wellness company.”
Nestle shares dropped 5 percent in the three days after the pizza purchase, the biggest in more than four months, on investor disappointment that the first acquisition with the Alcon cash wasn’t in nutrition, analysts said. The shares gained 34 centimes to 49.46 Swiss francs in Zurich trading today. It has gained 21 percent in the past year.
Nestle risks becoming “just another” food company if it buys more businesses outside of nutrition, according to Andrew Wood, an analyst at Sanford C. Bernstein in New York. The total market for nutritional products, including ones to improve skin and hair, is worth more than $174 billion, the analyst said.
Kraft Pizza
“The acquisition of the Kraft pizza business is not a signal we are moving away from our focus on nutrition,” Nestle Chief Financial Officer Jim Singh said Jan. 7, adding that the company will lower saturated fat and salt content in the pizzas.
The Haagen Dazs maker will continue seeking “bolt-on” deals and has accelerated its search for “small” acquisitions in emerging markets, Singh said. The CFO said Aug. 12 that an analyst consensus of 2009 so-called organic sales growth of 4.1 percent would be a “good interpretation” of its annual outlook. Nestle targets gains of 5 percent to 6 percent a year.
“Nutrition needs to start going faster,” said Vontobel’s Lenz. “They have the firepower, so they should look at the possibilities.”
To contact the reporter on this story: Thomas Mulier in Geneva at tmulier@bloomberg.net.
Last Updated: January 18, 2010 12:08 EST
