Nestlé profits from growth of “billionaire brands”

Posted by Daniel Palmer on 19th February 2009

Nestlé, the world’s biggest food manufacturer, has announced sales for 2008 rose 2.2% to CHF 109.9 billion (A$145.68b) as innovation and renovation of their food brands stimulates growth.

Sales were driven by by organic growth of 8.3% and acquisitions, which added 1.7% to sales. The negative impact of currency fluctuations weighed heavily, however, reducing sales by 7.8% due to the strength of the Swiss franc compared to most other currencies. Nestlé’s Food and Beverages business, with sales of CHF 102.4 billion, was the main contributor to growth, achieving organic growth of 8.2% and helping the group post a 69.4% increase in net profit (an increase that was boosted by the sale of 24.8% of Alcon to Novartis).

“Nestlé’s 2008 performance reflects its ability to achieve a high level of organic growth together with an improvement in the EBIT margin, even in difficult times,” Paul Bulcke, CEO of Nestlé, said. “The Group’s results in 2008 are broad-based, demonstrate its intrinsic strength and provide momentum into 2009.”

“Nestlé’s ability to capitalise on a wide variety of market conditions across the world remains one of its decisive competitive advantages,” he added. “This will enable the Group to seize growth opportunities worldwide in 2009 by leveraging the company’s growth platforms, particularly nutrition, health and wellness and popularly positioned products, whilst also accelerating its cost efficiency initiatives. We believe that the Group will once again be one of the industry’s fastest growing companies in 2009, in line with the long-standing Nestlé model, and we are committed to achieving organic growth at least approaching 5%, as well as a further improvement of the EBIT margin in constant currencies.”

The main engine of Nestlé’s growth is the continuous innovation and renovation of its products and brands. In 2008, an additional 15% of Nestlé products were successfully tested for superior nutritional benefits and taste characteristics over competitors’ products, according to the company. Innovation was driven by a 15% increase of Nestlé’s Research and Development investment in Food and Beverages. Furthermore, the Company’s commitment to growing its brands is demonstrated by a 7.5% increase in consumer-facing marketing expenses in constant currencies. Nestlé brands with annual sales of more than CHF 1 billion (“billionaire brands”), such as Kit-Kat, Nescafé and Milo, accounted for over 70% of Nestlé’s Food and Beverages sales in 2008 and were the main drivers of organic growth.

In 2008, the organic growth of Nestlé’s total Food and Beverages business, amounted to 5.3% in Europe, 8.8% in the Americas and 13.1% in Asia, Oceania and Africa.

In all three Zones, EBIT margin improvements were achieved despite significant packaging and raw material cost pressures in many categories and despite the strength of the Swiss franc, Nestlé advised. The key drivers were faster growth of more profitable categories and markets in line with Nestlé’s nutrition, health and wellness strategy, operational efficiencies and the benefits of rationalising underperforming product lines.

The milk products and ice-cream, petcare and powdered and liquid beverages divisions achieved the highest growth for the year, with Nestlé Water the only sector to realise a decline in organic sales.

Powdered and liquid beverages – 12.8% organic growth.

The strong sales performance was on the back of some of Nestlé’s billionaire brands – Nescafé, Milo, Nespresso, Nesquik and Nestea. These brands benefited from a strong pipeline of nutritionally enhanced products, including new PPP (Popularly Positioned Product) offerings for lower-income consumers. In Asia and Australia, soluble coffee benefited from its continuous focus on products with improved nutritional profiles such as Nescafé Body Partner, Nescafé Protect and Nescafé Greenblend, the company noted.

Milk products and Ice cream – 9.2% organic growth

“The dairy category benefited from a multi-tier strategy with products adapted to different affordability levels and nutritional needs, reflected in the Nestlé Nido Nutrition System. Ice Cream’s organic growth was impacted by the decision to discontinue less profitable products and distribution routes. The super-premium portfolio with brands such as Mövenpick of Switzerland and Häagen Dazs performed well, as did health-focused offerings such as Skinny Cow in the US,” Nestlé reported.

Confectionery – 8.0% organic growth

The category continued to focus on both the lower income and the premium and super-premium segments, with dark chocolate and ever increasing part of their portfolio.

PPP Strategy

Nestlé’s Popularly Positioned Product (PPP) strategy, one of Nestlé’s four growth platforms and a specific business model which focusses on lower income consumers by offering them relevant and nutritious products at affordable prices, is proving particularly beneficial in these turbulent economic times. With an increasing number of consumers trading down in the current economic environment, PPPs and other initiatives providing lower-priced products are proving particularly popular, also in developed countries. PPPs achieved organic growth of 27% overall, with hundreds of separate initiatives worldwide.