Nestlé coy on future of ‘disappointing’ US confectionery unit

Analysts say the division does not fit the group and say divesting the US confectionery unit could become a real prospect. Volume declines in US and UK confectionery Nestlé CFO François-Xavier Roger said in yesterday’s earnings call: “Confectionery has been negatively impacted by volume, mainly in the United States and in the UK. “On the other hand, we have KitKat, which is still growing nicely, more specifically in emerging markets.” In its fiscal 2016 results (Jan-Dec) posted yesterday, the company’s revenues in its global confectionery unit were down -2.2% to CHF 8.68bn ($8.68bn) compared to last year. Trading operating profit for the division fell -4.5% to CHF 1.19bn ($1.19bn) for 2016. Nestlé said the confectionery business recorded +1.8% organic growth and a -0.5% real internal growth decline for the full year. Operating profit margin for the unit was down 30 basis points to 13.7% for the year. US confectionery unit Nestlé said in a release that US confectionery performance was “disappointing” and was hit by low growth in mainstream chocolate and a competitive environment. Euromonitor International expects the US chocolate confectionery market will decline 1% in volume sales between 2016 and 2021 as Americans’ GDP per capita is set to fall while the category is caught in an “anti-sugar crossfire”. Bank Vontobel identified Nestlé US confectionery business as “an ideal candidate for disposal” in March last year – a view analyst Jean-Philippe Bertschy told this site today he maintains. ‘No strangers to portfolio management’ Bloomberg asked Nestlé CEO Mark Schneider if the company would offload the US confectionery division in a video interview. “First and foremost, we try to fix our businesses and get back to growth. We see ourselves as operating managers, not as traders,” he said. “However, if something does not fit into the longer-term strategy, if there’s no hope of turning around organic growth and profitability, then yes, we have been no strangers to portfolio management in the past and that will continue ,” said the CEO, who took over from Paul Bulcke on January 1. Losing US market share Vontobel estimates Nestlé's US confectionery business is worth around CHF 900m ($901m) in annual value sales. The company has strong brands such as Butterfinger and Crunch, but is fourth in the US chocolate market with an 8.8% market share in 2015 having slipped behind Lindt (9.5% share), it says. The bank says the license for Nestlé's strongest confectionery brand KitKat has been “granted indefinitely” to Hershey since 1988. KitKat is the fifth most popular US chocolate brand with US sales of more than CHF 500m ($500m), according to the bank. Vontobel has encouraged Nestlé’s global confectionery division to focus on KitKat and leading local brands such as Cailler and Baci Perugina. Confectionery ‘clearly does not fit the wider portfolio,’ says Euromonitor Lianne van den Bos, senior food analyst at Euromonitor International, said Nestlé's results showed it was focused on cost-cutting and margin improvement. She went further to say the entire global confectionery division could be reviewed. “Whilst unthinkable before, the shedding of Nestlé’s confectionery arm may become a very real scenario in this transition. To date, it carries the second lowest trading operating profit compared to its other divisions, and clearly does not fit the wider portfolio,” she said. Outlook for 2017 Vontobel is anticipating 2% to 4% organic growth for the Nestlé group in fiscal 2017 and says the CEO seems to have “embarked on a deep clean-up of Nestlé's portfolio”. Nestlé itself is targeting 2% to 4% organic growth in fiscal 2017.

Nestlé coy on future of ‘disappointing’ US confectionery unit

Butterfinger maker Nestlé refuses to speculate if it will offload its challenged US confectionery business, but says it is “no stranger” to portfolio trimming.

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