Nestlé: the water margin | Financial Times

Nestlé knows how to run a pantry. The food multinational has decanted mass-market bottled water and canned congee, restocking the shelves with altogether more nutritious items such as vitamins and biopharmaceuticals.

The reshuffled portfolio — the result of 75 deals since 2017, turning over almost a fifth of its portfolio — tilts the Swiss group towards higher-margin products.

Water, one part of which has been sold to private equity for $4.3bn, garnered underlying trading operating margins of just 10 per cent last year. That is less than half those creamed off nutritional and health science. Petcare, with margins of 24 per cent and robust organic sales growth of 10 per cent last year, makes up a bigger share. 

All this marks a turnround for the Swiss group, which fell into the doldrums in 2017. And contrasts with French rival Danone where activists seek a revival. It is testament to Nestle’s disciplined M&A strategy.

Nestlé spurns the big, splashy transactions that proved such a millstone around the P&L of Reckitt Benckiser (see Mead Johnson), preferring smaller, easily digestible deals that leave more scope for growth. 

Bernstein estimates Nestlé’s deals alone will boost top line growth by 80 basis points in 2023, up from 35bp in 2019. The company itself is guiding for mid single-digit organic sales growth in the medium term, from 3.6 per cent last year, implying a lift of 140bp. 

The Swiss group has proved adept at building up flavours and formats and taking them global. This is the company that has launched hundreds of different flavours of KitKats in Japan.

It isn’t all sweet for the chocolatier. The strong Swiss franc plus disposals erased organic gains and more. On a reported basis, last year’s sales fell 8.9 per cent to SFr84.3bn ($94.1bn). Like Unilever, out-of-home sales fell as locked-down consumers stayed away from restaurants and kiosks.

The flipside of that — more Americans chowing down on packaged mac-and-cheese and Oscar Mayer frankfurters — can be seen in Kraft Heinz’s 6.5 per cent rise in organic sales. Still, Nestlé looks to have the more sustainable path to growth.

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