Nestle: Lack of product innovation hurts volumes

Last Updated: Fri, Dec 07, 2012 07:42 hrs

pOver the last 18 months consumer companies have been the refuge of equity investors as most other sectors have been severely hit by slowing growth and inflation Consumption has held on for most of this time but is now beginning to show signs of a slowdown So unlike in the past all consumer companies will not do well especially those which have not taken the right steps to improve their product portfolio and expand distribution Nestle has not only not done these things but has done the reverse Unlike some of its peers Nestle has undertaken channel and product rationalisation over the last year which has adversely impacted its salesppAnalysts say the slowdown in foods has been more pronounced than in the home and personal care segment The reason behind this is high food inflation and slower product innovation as a result of that In the face of rising input prices milk wheat and sugar most companies did not innovate Nestle is a classic example of this strategy The company stopped milk supplies to the armed forces discontinued low margin toffees Eclairs and lowered grammage as input prices shot up In the third quarter of calendar 2012 the company&rsquos net sales grew eight per cent significantly below the market&rsquos expectations of 16 per cent And most of this growth was value-led and not volume-led All these have resulted in Nestle&rsquos volume growth coming off since the fourth quarter of calendar year 2011ppThe worst criticism is that it has not come up with any new product innovations and only made marginal changes to older products Given that packaged food is about one-time usage analysts say the consumers&rsquo wallet share has been captured by the personal care segment where the product can be used multiple timesppAnalysts say under-investment in distribution categories and products has affected the company&rsquos performance The only saving grace will be last year&rsquos low base Motilal Oswal Securities expects volumes to recover from Q4CY12 gradually as the base turns favourable Deutsche Securities is not so confident and says Nestle&rsquos ability to outperform market growth is under question as its execution capabilities have been under a cloud The market seems unwilling to give it high multiples given that growth is missing Deutsche values the stock at 285x CY13 earnings with a target price of Rs 4100p

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