By Richa Naidu
VEVEY, Switzerland (Reuters) -Nestle will boost advertising and marketing, trim costs by at least $2.8 billion by 2027 and carve out its water and premium drinks businesses into a standalone global unit as it looks to drive growth under its new chief, the company said on Tuesday
CEO Laurent Freixe, a 40-year veteran of the world's biggest food company, took the reins in September replacing ousted Mark Schneider who had disappointed investors for several quarters with weak sales volume growth. Under Schneider, Nestle (NS:NEST) gutted its marketing and advertising budget and invested less in innovation during the cost-heavy COVID-19 pandemic.
The repercussions continue to weigh on the Swiss company's revenue after shoppers switched to cheaper, better advertised or more innovative brands, eating into Nestle's market share.
Nestle, owner of brands including Nescafe, KitKat and Milo, said on Tuesday it aims to achieve cost savings of at least 2.5 billion Swiss francs ($2.83 billion) by 2027, in addition to rolling savings of around 1.2 billion Swiss francs.
It forecast medium-term organic sales growth to be more than 4% in a normal operating environment, and an underlying trading operation profit margin of 17%. That compares to organic sales growth of about 2% expected for the year ending Dec. 31.
The company will increase investment in advertising and marketing to 9% of total sales by 2025 to support growth, Nestle said at its capital markets day event in Vevey, Switzerland. The last time Nestle spent this proportion of its sales on marketing was in 2019.
Advertising and marketing expenses in 2023 were 7.7% of sales, an increase of 80 basis points from the year before, according to Nestle's latest annual report released this year.
"It is definitely a first step in the right direction to restore sales growth," Vontobel analyst Jean-Philippe Bertschy said. "The additional cost savings is significant."
Nestle pushed back on Tuesday against the idea that its portfolio of more than 2,000 brands needs to be cut down.
Freixe said he wants to "fix, rather than to sell, the majority of" its underperforming businesses.
"We don't have a portfolio problem," finance chief Anna Manz said, adding that the company wants to invest in organic growth.
Nestle also said that it plans to carve out its water and premium beverages businesses into a global unit starting Jan. 1, 2025.
"This is clearly a step to spin it off, maybe to private equity; all options on the table," Vontobel analyst Bertschy said. Rival Unilever (LON:ULVR), which has also fielded criticism for having too many brands, announced in March it planned to spin off its ice cream business and has signalled its willingness to sell weaker brands.
Freixe has said previously that he wants to invest heavily in the company's core brands like Nescafe and Maggi, which makes soups, sauces and noodles.
"Our action plan will also improve the way we operate, making us more efficient, responsive and agile," Freixe said in a statement. "This will allow us to deliver value for all our stakeholders."
($1 = 0.8835 Swiss francs)