Vevey, Switzerland-based Nestle SA (VTX:NESN) (ETR:NESR), maker of everything from coffee and frozen pizza to baby formula and bottled water, is “actively looking” at its brands and seeking to identify the laggards after posting its softest quarterly revenue growth in four years. As Nestle’s competitors like Unilever plc (NYSE:UL), Kraft Foods Group Inc (NASDAQ:KRFT), Sara Lee, and Campbell Soup Company (NYSE:CPB)’s have either divested or are looking to spin off assets, it has become apparent to CEO Paul Bulcke that he must do the same to the struggling brands of the world’s largest food maker. Given the economic state in the U.S. and Europe, it’s understandable to see large consumer-driven companies looking to shuffle their portfolios.
According to long-term Nestle investor, Thomas Russo, fellow investors can expect the consumer behemoth to look to “surgery” rather than “amputation” in the removal of brands where they have already slowed down expenditures.
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“They allocate capital to businesses with high-return prospects, and you would think that those starved of capital would end up being potentially available for sale. I would support that.”
Based on internal presentations reported by Bloomberg, businesses in frozen food and bottled water have been identified as laggards using a process the company depends on to assess the health of its wide array of brands.
Nestle this year beefed up what it terms a “cell methodology” tool that analyzes 1,000 distinct business units, or “cells,” across the 194 countries in which it operates, to help decide which ones should get more or less investment.
For each struggling business, “you bring it into acceptable terms and you have a timeline for that, or you sell it off,” Bulcke said in a March investor presentation.
The bottled water business in particular is of interest as the operations in North America are extremely dominant with a 22% market share, though that is down from 24% in 2010. Their flagship brand “Nestle Pure Life” is the biggest selling bottled water brand in the world and the combined sales of all brands are $7.2 billion with about 80% of that coming from North America. While smaller water brands could be on the chopping block, it is likely the “Pure Life” brand will remain in the Nestle SA (VTX:NESN) (ETR:NESR) portfolio.
“It is possible they would want to put all their focus behind Pure Life” and ditch North American regional brands like Arrowhead and Deer Park, said James Targett, an analyst at Berenberg Bank. Potential buyers of those brands could include beverage companies “with big checkbooks” like The Coca-Cola Company (NYSE:KO), which makes Dasani water, said Russo, the Nestle investor.