Swiss food conglomerate Nestle is about to get its first outside CEO in nearly a century in a move that could bring asset sales, more focus on health-related categories and steps to reinvigorate the confectionery business.
Incoming CEO Ulf Mark Schneider, a health-care veteran, starts work Jan. 1. His hiring earlier this year was a signal to investors that the board wants change. Nestle is the world's biggest food company in terms of revenue, although some analysts forecast 2016 could bring its worst organic sales growth in more than a decade.
Besides its chocolate and confectionery businesses, the packaged foods company sells baby food, dairy products, coffee, frozen pizza and pet food. The company's Nestle Health Science division also is active in food and nutrition products geared to patients with diabetes, obesity and Alzheimer's.
"They need a change in their business strategy where there's more focus on health and less focus on the particular snack categories," said Lianne van den Bos, a senior food analyst at Euromonitor International. She said the hiring of an outsider is "a clear sign of having a bit of a shakeup in the Nestle structure."
Nestle — a multinational company that sells brands ranging from KitKat candy bars to Dreyer's ice cream — has faced challenges in the confectionery and snack space due to a consumer shift away from sugars to more health-conscious foods. There's also been the impact of smaller food and beverage companies with disruptive brands that have more effectively responded to new trends.
U.S.-traded shares of Nestle are down this year while the is up almost 13 percent through Tuesday. Nestle also is down over the past three years while the broad-based stock index is up almost 25 percent in the same stretch.
Nestle announced in June that Schneider would replace CEO Paul Bulcke, who began his career with Nestle in 1979 and is slated to become chairman. Schneider was chief executive of German health-care company Fresenius for 13 years. The last time Nestle brought in an outsider to fill the CEO slot was in 1922.
In our view, Nestle's culture can be best described as introverted and lackadaisical, especially in its attitude towards cost control and profitability.James Edwardes JonesRBC Capital
Schneider, 51, helped triple revenue and net income at Fresenius through acquisitions and built the European company into a global leader in dialysis products and services. He also focused on growth in North America, buying dialysis clinics and urgent care centers as well as swallowing a large generic drugmaker.
Nestle, with about 2,000 brands worldwide, could see a huge makeover under Schneider with acquisitions in the wellness space and more health-based products. Nestle owns a 23 percent stake in French cosmetics giant L'Oreal valued in excess of $20 billion. The sale of the stake could be used to fund acquisitions.
"Arguably, the quickest way for Schneider to 'accelerate' Nestle's journey would be to make a large acquisition in health care," Credit Suisse analyst Alan Erskine said in a recent note. He said such an approach could bring "meaningful execution risk" and just "offer limited synergies."
Nestle declined comment for this story.
In October, Nestle hired an executive from Botox-maker Allergan to head Nestle Skin Health, a division specializing in products for skin, hair and nail health. In 2014, Nestle bought the rights to several cosmetic drugs in a $1.4 billion transaction with Valeant Pharmaceuticals International.
Nestle's other health-related holdings include a minority stake in Accera, a Colorado company specializing in medical foods for neurological disorders like Alzheimer's disease. Nestle also sells food and beverage products for people with other special needs, including obesity, diabetes and gastrointestinal conditions.
Meantime, Nestle's 335,000 employees worldwide could see the new CEO tighten the screws on cost controls.
"In our view, Nestle's culture can be best described as introverted and lackadaisical, especially in its attitude towards cost control and profitability," RBC Capital analyst James Edwardes Jones said in a report last week. The analyst made the case that other companies perceived as a target of private equity firm 3G Capital have come to make such matters more pressing.
The firm is known for its interest in food companies and has done deals previously with Warren Buffett's Berkshire Hathaway. To be clear, nobody is suggesting Nestle itself is a target; its market cap is in excess of $220 billion, or twice that of 3G's Kraft Heinz business.
Analysts are forecasting Nestle's organic top-line growth will be up 3.5 percent this year, a deceleration from the 4.2 percent in 2014. That would make it the slowest organic sales growth in more than a decade. Analysts view organic growth as a key metric of the company's performance since it excludes the effects of currency fluctuations and acquired or divested businesses.
There's an expectation by analysts that Schneider will take steps to address the company's under-performing confectionery business, which accounts for around 10 percent of total sales.
Nestle has been losing market share in chocolate, with its U.S. share falling to 8 percent last year from 9 percent, according to Euromonitor.
Volume growth in Nestle's Americas region has been suffering from increased competition and a slump in the entire U.S. confectionery category, including the mainstream chocolate market where it has been losing share.
At the same time, Nestle's is seeing headwinds in other markets around the globe. In October, management described China as "rather challenging," indicating that food and beverage categories it operates there "are basically flat in terms of growth."
"You see deflationary pressures in the West and you've seen a slowdown of the Chinese economy that are really important to them," said Euromonitor's van den Bos. She still expects China along with India and Africa to remain critical to Nestle's growth.
Nestle operates in about 190 countries, although the U.S. was its largest single market last year in terms of total sales, followed by China and France.
Analysts expect to hear more about Schneider's strategy when the company reports its full-year financial results in February.