Nestlé: slowing economies will derail growth ambitions

Sweet and salty — “swalty” — food combinations increasingly appeal to diners. Nestlé’s shareholders prefer sugary stuff in the form of capital gains and payouts. Chief executive Mark Schneider has therefore soured the mood with the news of the bite inflation has taken out of the Swiss food company’s profitability.

Global inflation may moderate next year. But recessionary pressure on household budgets will not abate. Nestlé shares are likely to continue trailing the MSCI Global Consumer Staples index.

Lex charts showing, Nestlé operating profit margin between 2018-25 and Nestlé the volume of shareholders, share buybacks and dividend payments and the last chart showing Nestlé share price. against the MSCI World index and MSCI World Consumer Staples index.

An investor day permitted Schneider to resuscitate long-term targets for sales and for profit margins. This year, as inflation lifted the price of goods, Nestlé’s organic sales growth bubbled up above its mid-single digits target. With average pricing up by 7.5 per cent in the nine months to September, the business now expects full-year sales growth of up to 8.5 per cent.

But steep cost inflation could make this year’s operating margin dip well below 2025’s target range of 17.5-18.5 per cent.

Schneider has high hopes for Nestlé’s growth areas of coffee and pet food. Analysts forecast the revenues of the latter division should grow three percentage points faster than the group total of 14 per cent by 2025. Together the two businesses account for more than 40 per cent of total sales.

More importantly, Nestlé needs more free cash flow. Dividends and buybacks have exceeded free cash flow, even after asset sales, in four of the last five years to 2021. This is despite some disposals of a bottled water business and part of a stake in cosmetics maker L’Oréal.

Schneider made clear on Tuesday that the company would aim for free cash flow equating to 12 per cent of sales by 2025. This year’s proportion should be under a tenth, according to S&P data.

Hitting those targets when economies are slowing rapidly will present a challenge. Inflation has curbed household budgets. Many shoppers will seek options cheaper than Nestlé’s fancy brands. Pet food may be immune. But downtrading seems inevitable in other food segments and in the mature Nespresso and Starbucks-branded coffee brands.

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