Nestle has conceded that it is facing some significant challenges in the US frozen category. However, comments at the firm’s investor day this week would seem to suggest that the world’s largest food company has set out a roadmap for how to “fix” lacklustre brands such as Lean Cuisine. Katy Askew reports.
Nestle has zeroed in on weeding out under-performing businesses in its global operations. The company is raising its focus on expanding in science-based health and wellness categories while selling off assets that fail to align with its strategic direction – or fail to perform on the top line.
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As part of this increased focus on portfolio management, Nestle has sold off a number of businesses recently – from its Jenny Craig weight management unit to its PowerBar and Musashi brands.
The logic behind this is clear. By selling off weak links, Nestle management is able to focus its resource allocation behind businesses with greater growth potential.
Speaking during the firm’s investor day in Boston this week, CEO Paul Bulcke said that the company is employing “more discerning portfolio management” and “evaluating better what the consumer values, where we can get margin”.
As part of its portfolio management strategy, Nestle is currently evaluating the performance of “2,000 cells” – which Bulcke said are defined as “businesses and geographies and countries” – compared to 1,200 last year.
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By GlobalData“We have three possible outcomes,” the chief executive told analysts. “[Firstly], if a category is something that is in line with our strategy, adding to the Nestle model and we are winning in the category, then we have to invest more… [Secondly,] other businesses we can win in, we do have strong brands, we have a time line and a plan to get there… fix them…. [Thirdly], if you cannot win there or you cannot enjoy the business… over time we are going to divest.”
Bulcke said that this latter group primarily consists of “smaller businesses” that will be divested “brand-by-brand”. He added: “Sometimes bigger things, like Jenny Craig.”
Following the sale of Jenny Craig, a number of pundits speculated that Lean Cuisine, Nestle’s under-performing frozen diet brand, might be next on the block.
However, an earlier presentation from Jeff Hamilton, president of Nestle prepared foods in the US, and John Carmichael, president of US pizza, would suggest that Lean Cuisine is currently in the “fix” category for the Swiss food giant and the company is preparing to step-up investment in the brand.
According to Nielsen data, the overall frozen category in the US has shrunk in size by 1.8% over the last two years. Within that, the decline of the frozen diet meals market has been steeper still, dropping 7% to a value of US$2.1bn.
Within the declining diet meals category, Lean Cuisine holds a leading market share, accounting for 40.9% of total sales in 2013. However, Hamilton and Carmichael revealed, Lean Cuisine’s market share is also in retreat – the brand accounted for 43.2% of total sales in 2011.
Nestle identified a number of factors it associates with falling category sales. Frozen sales as a whole are feeling the impact of “negative consumer perception of freshness and quality of frozen foods”, which is helping build demand for products that support “speed scratch cooking”. The competitive landscape is also sharpening with the “rise of pure, natural and better-for-you products” and “increasing competitive intensity both in and out of aisle”, the executives suggested.
In reference to the steeper decent witnessed by Lean Cuisine, Hamilton and Carmichael said: “consumers want to associate with healthy weight not hard diet… Attitudes to dieting have significantly changed… consumers want to eat healthily, not diet.”
Sales of all products – not just frozen – with the words diet, light, low, or reduced in their name have seen a downward sales trend in recent years. In 2013, unit sales were down 11.2% while dollar sales dropped 6.6%.
The outlook for Lean Cuisine – a declining brand in a declining category – looks challenging. But is it a brand beyond hope? Nestle thinks not.
The company is upbeat on the potential offered by the frozen category. While it has fallen out of favour with consumers, it addresses a number of consumer needs – from reducing food waste, to convenience, to nutritional benefits and portion control.
As the largest player in US frozen, with sales of $394bn – two-and-a-half times bigger than the nearest rival – “Nestle will lead the way” in revitalising the category, the executives asserted.
In regards to Lean Cuisine, the group plans to “modernize positioning from diet to healthy lifestyle”.
With growing obesity rates, Nestle said that Lean Cuisine’s proposition is “very relevant” to consumer need, but hampered by “outdated brand positioning”. The company will therefore shift tact from a “diet food expert for weight loss” to a “modern wellness partner for a healthy lifestyle” in a bid to shed its self-confessed “80’s brand” reputation.
Significantly, Nestle also plans to expand Lean Cuisine into new growing sub-categories of the frozen sector – namely breakfast and snacking. Over the 2012-13 period, frozen breakfast sales saw CAGR of 6.4% to $2.9bn and snacks saw CAGR of 0.3% to $2.6bn, Nielsen data reveals. With 86% of snackers seeking healthier alternatives, Nestle believes that the opportunity for Lean Cuisine as a healthy snack brand is significant.
In the pipeline, Nestle has breakfast products including a turkey sausage English muffin and wild blueberry and pomegranate oatmeal. Snack products Nestle is preparing to launch under the brand include monterey jack jalapeno stuffed pretzels and spinach and artichoke snack pizza.
Nestle has set out a clear agenda for its frozen businesses as a whole and its Lean Cuisine brand specifically. The strategy reasserts Nestle’s faith in the category and its brands and would seem to rule out any potential disposal of the likes of Lean Cuisine in the near term.
However, Kepler Cheuvreux analyst Jon Cox warned, while Nestle is “doing the right things” this does not mean a quick fix solution.
“We suspect the key US business (25% of group sales) is unlikely to accelerate this year (1.8% for food and beverages in 2013, 2-3% including other businesses), when we had anticipated a H2 recovery,” Cox wrote in the wake of the investor seminar. “Indeed, US weakness could last some years, given a fragile and discerning consumer and problems in its frozen category.”
Nestle has never been open to the criticism that it is short-termist in its investment thesis. However, with slowing growth in the emerging markets and Europe also, investors might be left wishing for a speedier turnaround.
