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Nestle (NSRGY)Stock (Consumer Products Industry, Food & Beverage Industry)
 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[6] - most recently it has promoted the health benefits of its chocolate. To this end, Nestle created the largest research and development network in the industry, employing over 5,000 scientists and technicians.[7] 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.[8] 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.[9].
[edit] Business Segments[edit] BeveragesBeverages comprised 26% of Nestle's 2007 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.[11] Nestle's strong brand recognition helps them compete with other brands such as Maxwell House, Lipton, and Evian as well as various store brands. [edit] Milk Products, Nutritional, and Ice CreamMilk Products, Nutritional, and Ice Cream was Nestle's largest segment in 2007 with 28% of the companies total sales. 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. [edit] Prepared Dishes and Cooking AidesNestle's Prepared Dishes and Cooking Aides segment, which contributed 17% of the company's 2007 sales, consists mostly of products, like microwave lasagna, that are designed to be ready to eat very quickly.[12] 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] [edit] ConfectioneryNestle's Confectionery segment comprised 11% of their total 2007 sales. 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.[14] Nestle's confectionery products compete with chocolates and candies from Hershey Foods (HSY) and Cadbury Schweppes (CSG) and snacks from manufacturers such as Kraft Foods (KFT), as well as various store brands. [edit] Pet CareNestle's Pet Care group contributed 11% of the company's total 2007 Sales. 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. [edit] Pharmaceutical ProductsNestle's Pharmaceutical Products division was responsible for 7% of the company's 2007 sales. This segment consists of pharmaceutical and cosmetics brands. Nestle owns about 77% of ALCON (ACL) and 30% of L'oreal (LRLCY).[15] 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.[16] [edit] Business FinancialsNestle Revenue and Operating Income[17][18] (CHF in millions)
[edit] Key Trends and Forces[edit] Changes in Raw Food Prices put Nestle's Margins at RiskThe 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%.[20] 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.[21] [edit] Consumers Demanding Healthier FoodsNearly all of Nestle's revenues come from sales of food and beverage items. Therefore, 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.[22] 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.[23] 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.[24]  [edit] Strong Swiss Franc Hurts Nestle's SalesDuring the twelve months from May 2007 to May 2008, the Swiss franc appreciated relative to both the U.S. dollar and the euro.[26][27] 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. The opposite is true as well, with a weak franc boosting Nestle's international sales. Given the appreciation of the franc in 2007 and early 2008, revenues from international sales will face downward pressure. In order to help minimize the effect of fluctuating exchange rates, Nestle purchases currency futures, swaps, forwards, and options.[28] [edit] Key CompetitorsNestle 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:
Nestle and Key Competitors 2007[32][33][34] ($ in millions)
Note: Data for Nestle, Unilever NV (UN), GROUPE DANONE (DA), and Cadbury Schweppes (CSG) were converted to U.S. dollars using the average USD-CHF, USD-EUR, and USD-GBP exchange rates for 2007.
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