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Nestle pricing strategy helps lift sales in tough markets

Senior Vice President of Swiss food maker Nestle, David Frick, arrives for the company's annual general meeting in Lausanne April 11, 2013.
Senior Vice President of Swiss food maker Nestle, David Frick, arrives for the company's annual general meeting in Lausanne April 11, 2013.

By Silke Koltrowitz

VEVEY, Switzerland (Reuters) - Nestle said competitive pricing helped to lift sales growth in spite of tough conditions in emerging markets and Europe, reassuring investors worried by recent negative news from its peers.

The world's biggest food group and rivals such as Danone and Unilever have been grappling with sluggish consumer demand in austerity-hit Europe and a slowdown in many emerging markets, hit by inflationary pressures and political instability.

But Nestle said on Thursday that it achieved a slight pick-up across all its markets in the third quarter and expects the trend to continue into next year.

The company's share price rose on the news and was up 2.9 percent by 1254 GMT, against a 1.9 percent rise on the European food sector index <.SX3P>.

Investing in its strongest brands while divesting underperforming businesses, improving capital allocation and structural efficiency should help to drive growth and preserve margins, Chief Executive Paul Bulcke said at the company's headquarters in Vevey, Switzerland

Underlying sales, stripping out the effects of foreign exchange, acquisitions and divestments, grew 4.4 percent in the first nine months of the year, helped by improvements in all three of Nestle's geographical regions - Asia, Oceania and Africa, Europe and the Americas.

That was slower than the 6.1 percent in the same period last year and just below a 4.5 percent forecast in a Reuters poll, but it was slightly better than the 4.1 percent growth in the first half.

EUROPEAN IMPROVEMENT

Sales in emerging markets, which account for about 45 percent of group sales, were up by 8.8 percent, against 8.2 percent in the first half.

In Europe, lower prices helped it to gain market share. CEO Bulcke said this proved the company is sensitive to consumers' needs, while European head Laurent Freixe pointed out: "We're still growing in a market without growth; most of our competitors aren't."

Nestle sees signs of improvement in Portugal and Spain while Italy and Greece are still slow, Freixe said, adding that Northern Europe, Russia and Britain are driving growth in the region.

Bernstein analyst Andrew Wood described the results as fairly solid and somewhat dull, but added: "After the 'excitement' of Unilever's Q3 reduced sales guidance, Danone's Q3 sales miss and full-year profit warning, and Nestle's disappointing year-to-date performance, that is probably all that Nestle's shareholders were hoping for."

Unilever said last month that a further slowdown in emerging markets meant that underlying sales growth would be 3-3.5 percent in the third quarter, while Danone on Wednesday cut its full-year growth target to 4.5-5 percent in the wake of product recalls and a bribery scandal in China. Unilever publishes third-quarter results on October 24.

GROWTH MOMENTUM

Nestle's group sales rose to 68.4 billion Swiss francs ($74.7 billion), lagging a 69.3 billion franc estimate in the Reuters poll.

"We expect our continued growth momentum to enable us to deliver around 5 percent organic growth for the full year, together with an improvement in margins," the company said.

The maker of KitKat chocolate bars and Maggi soups had cut its 5-6 percent long-term goal in August and warned at the time that even the lowered guidance would be tough to reach.

In the first half, Nestle's operating profit margin was 15.1 percent, against Unilever's 14 percent and 13.3 percent at Danone.

Bulcke confirmed the company had drawn up a list of businesses to be improved or divested but declined to give further details. Sources have told Reuters that the PowerBar energy bar and Jenny Craig weight-management businesses are up for sale.

Italian newspaper La Repubblica reported on Thursday that Nestle had submitted an offer to buy Italy's Ferrero, the maker of Nutella chocolate spread. Ferrero denied it had received an offer and Bulcke said Nestle is not planning any big acquisitions.

Nestle's shares, which have gained about 4 percent this year, are trading at 17.2 times forward earnings, on a par with Unilever and at a small premium to Danone at 16.8 times. ($1 = 0.9160 Swiss francs)

(Editing by David Goodman)

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