Nestlé, the world’s largest food company, is at a crossroads. With a storied history of household name brands like Nescafé, Kit Kat, and Purina, it faces mounting pressure to maintain market leadership amid a challenging global economic environment. Under the leadership of its new CEO, Laurent Freixe, the company is pursuing a bold turnaround strategy. However, executing this plan while contending with weak consumer demand poses a significant challenge for the Swiss-based multinational.
Freixe, who replaced Mark Schneider as CEO in 2023, has outlined a vision for the future of Nestlé centered on revitalizing its portfolio of “billionaire brands,” improving price competitiveness, and regaining lost market share. Despite the enthusiasm surrounding his plan, the backdrop of softening consumer demand, particularly in key markets like North America and Europe, has added complexity to an already difficult task.
As Freixe embarks on his mission to steer the company back to growth, investors are cautiously optimistic but aware of the hurdles ahead.
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The Challenge of Weak Consumer Demand
One of the most significant challenges for Freixe and Nestlé is the broader macroeconomic environment. The global economy is still feeling the aftershocks of the COVID-19 pandemic, the subsequent supply chain disruptions, and inflationary pressures exacerbated by geopolitical events, such as Russia’s invasion of Ukraine. These factors have led to increased commodity and energy prices, squeezing consumers’ purchasing power and pushing them toward lower-priced alternatives.
In particular, Freixe has highlighted that Nestlé’s two largest markets, North America and Europe, have experienced sluggish growth. In North America, Nestlé was only able to raise prices by 0.6% in the first nine months of 2023, reflecting the delicate balance between remaining competitive and protecting its margins. Meanwhile, in Europe, grocers have become tougher negotiators, and some of Nestlé’s products were removed from shelves during the third quarter of the year.
The company’s response to these challenges has included cutting its full-year sales outlook after disappointing nine-month organic sales growth. Freixe acknowledged the gravity of the situation, telling investors that Nestlé is operating in an “environment characterized by softening consumer demand,” which will require strategic adjustments to navigate.
A Strategic Shift Under Freixe
Laurent Freixe is no stranger to Nestlé, having spent over four decades with the company, working across various regions, most recently in Latin America. His deep understanding of Nestlé’s operations and culture is seen by many as an asset, especially as he takes the reins during a period of transformation. However, his long tenure also comes with expectations that he must balance innovation with the traditional strengths of the company.
Freixe’s turnaround strategy revolves around several key pillars:
- Revamping the Executive Board and Simplifying the Organizational Structure
Upon taking over, Freixe made it clear that he intended to streamline the company’s operations to make them more agile and responsive to market conditions. One of his first moves was reducing the number of geographical regions from five to three. This simplification aims to improve decision-making and speed up the company’s ability to adapt to changing market dynamics. - Focusing on the “Billionaire Brands”
Freixe’s strategy places a significant emphasis on Nestlé’s 31 “billionaire brands,” which account for a substantial portion of the company’s revenue. These include iconic products such as Nescafé, Kit Kat, and Pugrina pet food. By focusing on these brands, Nestlé aims to drive growth throuh enhanced marketing, innovation, and a sharper competitive edge. This approach is similar to the strategy employed by rival consumer goods company Unilever, which has also concentrated its efforts on its top brands. - Becoming More Price Competitive
In an environment where consumers are increasingly price-sensitive, Freixe has made it a priority for Nestlé to improve its price competitiveness. The company has faced criticism for raising prices significantly in recent quarters to offset rising costs, which has led to a decline in volume growth. As Nestlé begins to slow down its price hikes, Freixe must strike a balance between maintaining profitability and winning back consumers who have switched to cheaper alternatives. - Innovation and Marketing
A key part of the turnaround plan involves reinvesting in marketing and innovation. Under previous CEO Mark Schneider, Nestlé had scaled back on both, a move that worried investors who feared that the company was not doing enough to keep its products relevant in the eyes of consumers. Freixe has pledged to reverse this trend, with the goal of reinvigorating Nestlé’s product lineup and enhancing its appeal through creative marketing campaigns.
Investor Sentiment: Cautious Optimism
Freixe’s vision for Nestlé has been met with cautious optimism from investors. After he outlined his turnaround strategy, Nestlé’s shares rose by around 2%, signaling a positive initial reception. However, analysts have been quick to point out that the road to recovery will not be easy, particularly given the current market conditions.
Warren Ackerman, an analyst at Barclays, noted that while Freixe “came across well and made the right noises,” the pressure on Nestlé’s key markets in the U.S., Europe, and Latin America remains significant. Ackerman also warned that 2024 would likely be a “transitional year” for the company, with negative earnings growth expected for the second consecutive year.
Jean-Philippe Bertschy, an analyst at Vontobel, echoed these sentiments, suggesting that Nestlé may need to dispose of some of its brands in the future to streamline its portfolio and focus more heavily on its top performers. This could involve selling off smaller, less profitable brands as Nestlé looks to sharpen its focus on the 31 billionaire brands that drive the majority of its sales.
Long-Term Outlook: A Path to Recovery?
While the immediate future looks challenging, there is hope that Freixe’s turnaround plan will set Nestlé on a path to recovery. By focusing on its core strengths—iconic brands, innovation, and marketing—Nestlé has the potential to regain its competitive edge. However, investors will need to be patient, as the benefits of these initiatives may take time to materialize.
Ackerman of Barclays advised investors to “look beyond 2025,” suggesting that the next few years will be more about stabilizing the business than delivering rapid growth. Freixe himself has acknowledged that the turnaround will not happen overnight, emphasizing that 2024 will be a year of transition as Nestlé lays the groundwork for future success.
In the meantime, Nestlé’s ability to navigate the complex macroeconomic landscape will be a key determinant of its success. As Freixe continues to execute his strategy, the company will need to remain agile and responsive to changing consumer preferences, particularly as economic uncertainty continues to weigh on the global market.
