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NSRGY AT A GLANCE

 

 

 

 

 

 

Nestle SA (OTC:NSRGY) is the world's largest food and beverage company, with 2008 sales of over 110 billion CHF ($103 billion).^[1] Nestle owns several major consumer brands such as Stouffers, Nescafe, Kit-Kat, Carnation, Nestle Water, and many others.^[2] All in all, 30 of Nestle's products earned 1 billion CHF or more during 2008, making Nestle a major force in the global food and beverage industry.^[3] Nestle competes with companies such as Unilever NV (UN), Hershey Foods (HSY), Kraft Foods (KFT), Cadbury Schweppes (CSG), and GROUPE DANONE (DA) in the packaged food market. With only 42% of its food and beverage sales coming from North America, Nestle is one of the most geographically diverse of the major food and beverage companies.^[4]

Although it already occupies the top spot in terms of sales, Nestle is attempting to continue sales and margin growth by increasing the nutritional value of its products^[5] - most recently it has promoted the health benefits of its chocolate. The company's stated goal is to transform itself from a food manufacturer to the world's leading nutrition, health, and wellness company.^[3] To this end, Nestle created the largest research and development network in the industry, employing over 5,000 scientists and technicians.^[6]

As retailers push private label products, the ability to earn and maintain shelf space at groceries, convenience stores, and other retail outlets plays a large role in the profitability of packaged food companies. Nestle's large portfolio of prominent consumer brands helps it maintain and increase its shelf space presence despite the growing private label trends, giving it an advantage over competing firms that lack such a strong brand portfolio.^[7] These advantages don't, however, insulate Nestle from the impact of rising raw food prices; as grains and dairy prices rise, so do Nestle's costs of production, which can pressure profits.^[8].

Business Segments

Beverages

Beverages comprised 26% of Nestle's 2008 revenues, making it the second-biggest segment after Milk Products, Nutritional and Ice Cream. Nestle owns several international beverage brands including Nescafe, Nesquick, Nestea, and Nestle Waters, each of which generated more than 1 billion CHF in 2007.^{[9] [10]} With more than 400 factories around the world, Nestle is able to formulate each product to local tastes; "Nescafe" in Switzerland has a different recipe to the same product sold in the USA.^[3] Nestle's strong brand recognition helps them compete with other brands such as Maxwell House, Lipton, and Evian as well as various store brands.

Milk Products, Nutritional, and Ice Cream

Milk Products, Nutritional, and Ice Cream was Nestle's largest segment in 2008 with 28% of the companies total sales.^[11] This division's brands include Carnation, Coffee Mate, Dreyer's, and Edy's, each of which totaled more than 1 billion CHF in 2007 sales. Nestle's milk and ice cream brands compete with products such as Breyer Ice cream and store brands. Their nutritional products include Gerber Brand baby food and Nestle brand yogurts. Nestle's nutritional products compete against brands such as Dannon Yogurt and store brands.

Prepared Dishes and Cooking Aides

Nestle's Prepared Dishes and Cooking Aides segment, which contributed 17% of the company's 2008 sales, consists mostly of products, like microwave lasagna, that are designed to be ready to eat very quickly.^[12][10] Nestle owns brands such as Stouffer's, Lean Cuisine, Hot Pockets, and Maggi, which each totaled more than 1 billion CHF in 2007 sales. Nestle has increased the nutritional value of its prepared dishes in order to compete with products such as DiGiorno, Bertoli, and Kraft Macaroni and Cheese.^[13] On January 5, Neslte bought Kraft's frozen pizza business for $3.7 billion, approximately 2.3 times its total sales in 2009.^[14] The purchase adds the DiGiorno, Tombstone, Jack's and Delissio brands to Nestle's stable of products, as well as the license to sell California Pizza Kitchen frozen pizza. In 2009, these brands generated revenues of $1.6 billion for Kraft. With this acquisition added to Nestle's existing product line, the company controls 33% of the market share for North American frozen foods.^[15]

Contents 1 Business Segments 1.1 Beverages 1.2 Milk Products, Nutritional, and Ice Cream 1.3 Prepared Dishes and Cooking Aides 1.4 Confectionery 1.5 Pet Care 1.6 Pharmaceutical Products 2 Key Trends and Forces 2.1 Changes in Raw Food Prices put Nestle's Margins at Risk 2.2 Consumers Demanding Healthier Foods 2.3 Strong Swiss Franc Hurts Nestle's Sales 2.4 Nestle Must Capture Growth In Emerging Markets 3 Key Competitors 4 Notes

Confectionery

Nestle's Confectionery segment comprised 11% of their total 2008 sales.^[10] Nestle's confectionery brands include Kit-Kat and Nestle Chocolate, each of which generated more than 1 billion CHF in 2007 sales. The Nestle Chocolate brand produces famous products such as Baby Ruth and Nestle Crunch.^[16] Nestle's confectionery products compete with chocolates and candies from Hershey Foods (HSY) and Cadbury Schweppes (CSG) (recently purchased by Kraft Foods (KFT) and snacks from manufacturers such as Kraft Foods (KFT), as well as various store brands.

With Kraft Foods (KFT)' purchase of Cadbury in January 2010, Nestle dropped to the third largest chocolatier. In response to the merger, many industry analysts are speculating that Nestle may set their sights on H.J. Heinz Company (HNZ), General Mills (GIS), or Hershey Foods (HSY) as potential takeover targets.^[17] Officials from the first two companies have not responded to these rumors, however Heinz's stock rose more than 5% on possible takeover speculation. An spokesman for the Hershey Trust, the controlling shareholder in Hershey Foods (HSY) categorically denied any possibility of a merger.^[18]

Pet Care

Nestle's Pet Care group contributed 11% of the company's total 2008 Sales.^[10] Nestle owns several pet care brands that produced more than 1 billion CHF in 2007 such as Purina, Dog Chow, and Friskies. Nestle's pet care products compete against brands such as Iam's and store brands.

Pharmaceutical Products

Nestle's Pharmaceutical Products division was responsible for 7% of the company's 2008 sales.^[10] This segment consists of pharmaceutical and cosmetics brands. Nestle owns 30% of L'oreal (LRLCY) and recently sold its controlling stake in Alcon Inc. (ACL) for $39.3 billion.^[19] Nestle also participates in two joint ventures with L'oreal (LRLCY): Galderma and Laboratoires innéov. Galderma produces the topical acne medication Differin and Laboratoires innéov produces several cosmetics-related nutritional supplements.^[20]

On January 4, 2010, Nestle agreed to sell its its 52% stake in Alcon Inc. (ACL) to Novartis AG (NVS) for $39.3 billion. Bought in 1977 for $280 million, the investment's value has since multiplied more than 140 times.^[21] This influx of cash has fueled rumors of a possible acquisition by Nestle following Kraft's recent takeover of Cadbury.

Key Trends and Forces

Changes in Raw Food Prices put Nestle's Margins at Risk

The price of raw foods such as corn, wheat, and dairy can change due to factors such as weather and demand from other industries. Between April 2007 and April 2008, the price of food rose 5.1% and some products such as milk increased by nearly 14%.^[22] Nestle's ability to pass these cost increases on to consumers will play a big role in their ability to maintain their current profit margins.^[23]

Consumers Demanding Healthier Foods

Nearly all of Nestle's revenues come from sales of food and beverage items. Thus, changing consumer demand for different types of food and beverage items can have an impact on Nestle's sales. These changes can be seasonal; for example, consumers tend to demand more hot beverages such as coffee during the colder winter months.^[24] Long term trends also affect consumer demand. For example, the National Restaurant Association says that consumers have been demanding healthier food options when dining out, which reflects the larger trend of growing public concern for health and wellness in general.^[25] Nestle is attempting to take advantage of trends such as these by putting the "Nutritional Compass", which prominently displays nutritional information, on over 90% of its products' packaging, and repositioning itself as a nutrition and health company.^[26] Additionally, the company has introduced it's "Nestle Nutrition" product line, which posted 10.8 billion swiss francs in sales in 2008.^[3] This product line also focuses on the company's "60/40+" initiative. The goals of the initiative are that each Nestle product should be preferred to it's top competitor in a taste test by at least 60%-40%, while maintaining nutritional value.^[3]

Strong Swiss Franc Hurts Nestle's Sales

Between May 2007 and the beginning of 2009, the Swiss franc appreciated relative to both the U.S. dollar and the euro.^[27][28] Nearly all of Nestle's sales happen outside of Switzerland, but the company reports its income in Swiss francs. As such, changes in the exchange rates between the Swiss franc and other world currencies can greatly impact Nestle's revenue. When foreign currencies depreciate relative to the Swiss franc, any transactions denominated in those currencies will convert to a smaller number of francs, meaning less revenue for Nestle. In the beginning of 2009, a stronger franc cut sales growth by 2.1%.^[29] The opposite is true as well, with a weak franc boosting Nestle's international sales. In order to help minimize the effect of fluctuating exchange rates, Nestle purchases currency futures, swaps, forwards, and options.^[30]

Nestle Must Capture Growth In Emerging Markets

In 2008, sales in emerging economies grew organically (ignoring the effects of acquisitions) by 15.4%.^[3] The company hopes to continue this trend by doubling its sales in the ten largest emerging market countries by 2018. To realize this goal, the company has introduced its "Popularly Positioned Products." These products are lower cost and are priced at a level where poor consumers in the developing world can purchase them every day. This category saw enormous growth of 27.4% in 2008, and Nestle expects it to continue to grow. Additionally, Nestle is investing heavily in production capacity in new markets. For example, a five year, 3 billion South African Rand (ZAR) investment plan announced in September 2009 is expected to position the company as the premier nutrition, health, and wellness company in the region.^[31]

Key Competitors

Nestle competes with other packaged foods companies as well as store brands from retailers such as Safeway (SWY), Wal-Mart Stores (WMT), Walgreen Company (WAG). Nestle's major competitors are:

• Unilever NV (UN) - A Dutch company that produces packaged foods and products for the home and personal care markets. Unilever is one of Nestle's largest international competitors.^[32]
• Kraft Foods (KFT) - A U.S. company that produces packaged foods products. Kraft is one of Nestle's largest U.S. based competitors.^[33] On January 19, 2010, Kraft bought Cadbury Schweppes (CSG) for $19.5 billion, creating the largest candy company in the world and strengthening Kraft's international presence.^[34] Cadbury Schweppes (CSG) is a U.K. company that produces products for the confectionery and non-alcoholic beverages markets; they compete with Nestle's beverage and confectionery products internationally and in the U.S.
• GROUPE DANONE (DA) - A French company that produces packaged foods and beverages. Groupe Danone competes with Nestle internationally and in the U.S.^[35]
• Hershey Foods (HSY) - A U.S. company that produces chocolate and sugar confectionery products. Hershey Foods competes with Nestle's confectionery brands mostly in North America.

Notes

1. ↑ 2008 Totals.
2. ↑ NSRGY 2007 Management Report: Nutrition, Health and Wellness across the product portfolio, pg 33
3. ↑ ^{3.0 3.1 3.2 3.3 3.4 3.5} 2008 Management Report.
4. ↑ Nestle Management Report 2007
5. ↑ NSRGY 2007 Management Report: Leadership in Nutrition, Health and Wellness, pg 16
6. ↑ NSRGY 2007 Management Report: Leadership in Nutrition, Health and Wellness, pg 16
7. ↑ NSRGY 2007 Management Report: Nutrition, Health and Wellness across the product portfolio, pg 33
8. ↑ NSRGY 2007 Consolidated Financial Statements, Consolidated Income Statement, pg 3
9. ↑ NSRGY 2007 Management Report: Nutrition, Health and Wellness across the product portfolio, pg 33
10. ↑ ^{10.0 10.1 10.2 10.3 10.4} 2004-2008 Sales.
11. ↑
12. ↑ NSRGY 2007 Management Report: Nutrition, Health and Wellness across the product portfolio, pg 36
13. ↑ NSRGY 2007 Management Report: Nutrition, Health and Wellness across the product portfolio, pg 36
14. ↑ Frozen Pizza A Sizzling Investment, Investopedia.com, 1/13/2010
15. ↑ Frozen Pizza A Sizzling Investment, Investopedia.com, 1/13/2010
16. ↑ Nestle USA: Our Brands
17. ↑ The Kraft Cadbury Saga - Mergers Make More Mergers, Investorplace.com, 1/4/2010
18. ↑ [http://www.pennlive.com/business/patriotnews/index.ssf?/base/business/1264557305152560.xml&coll=1 Is Nestle Looking to Gobble Up Hershey?, Pennlive.com, 1/27/2010
19. ↑ NSRGY 2007 Management Report: Pharmaceutical and cosmetics activities, pg 48
20. ↑ NSRGY 2007 Management Report: Pharmaceutical and cosmetics activities, pg 48-49
21. ↑ Novartis to Buy Out Alcon from Nestle, Business Week, 1/4/2010
22. ↑ Jump in food prices biggest in 18 years
23. ↑ NSRGY 2007 Consolidated Financial Statements, Financial Risks: Commodity Risk, pg 65
24. ↑ Spectrum Commodities: Coffee Seasonal Chart
25. ↑ Consumer Demand for Ways to Fit Quality Meals Into Hectic Schedules Shape Restaurant Trends in 2008, According to National Restaurant Association
26. ↑ NSRGY 2007 Management Report: Leadership in Nutrition Health and Wellness, pg 31
27. ↑ EUR to CHF Exchange Rates
28. ↑ USD to CHF Exchange Rates
29. ↑ Nestle Q1 sales hit by divestments, currency moves.
30. ↑ NSRGY 2007 Consolidated Financial Statements, Financial Risks: Foreign currency risk, pg 62
31. ↑ Nestle to Spend R3 Billion On Growth.
32. ↑ Google Finance: Unilever NV
33. ↑ Google Finance: Kraft Foods
34. ↑ [http://www.businesspundit.com/kraft-buys-cadbury-for-19-5-billion/ Kraft Buys Cadbury for $19.5 billion, Business Pundit, 1/19/2010
35. ↑ Groupe Danone SA