Nestlé Is Both Teacher and Threat to Danone -- Heard on the Street
April 22 2021 - 9:41AM
Dow Jones News
By Carol Ryan
Nestlé could be a role model for troubled peer Danone as it
deals with an activist campaign. Unfortunately for the latter, a
resurgent Nestlé also poses the biggest competitive threat it has
in years.
On Thursday, the Swiss maker of Nespresso coffee and Purina dog
food said comparable sales increased 7.7% in the first three months
of the year, stripping out the impact of portfolio and currency
changes. This was double what analysts expected and the company's
best quarter in almost a decade. Nestlé's pet-food brands,
confectionery, dairy products and powdered drinks all sold
well.
Things were less rosy at Paris-based Danone, which reported a
3.3% drop in first-quarter sales earlier this week. The Dannon
yoghurt maker is looking for a new boss after an activist campaign
by Artisan Partners and Bluebell Capital Partners ousted the
company's chief executive last month. The new hire will be under
pressure to sell weak brands, speed up innovation and raise profit
margins that are low by industry standards.
Mimicking Nestlé is a good place to start. Almost four years
ago, the Swiss food giant faced an activist campaign when Daniel
Loeb's Third Point took a stake in the business. Since then, it has
overhauled its portfolio of brands with 75 acquisitions and
disposals and cut the time needed to get a new product onto
supermarket shelves from 18 months to 12 or less. The business
invested in high-growth categories like pet food and coffee that
have boomed during the pandemic. Since Third Point's campaign
kicked off, Nestlé has delivered total annual shareholder returns
of 12% in dollar terms, FactSet data shows.
The downside for Danone is that it also has to compete with
Nestlé's slicker business. In tough product categories that both
companies are exposed to, Nestlé appears to be recovering more
quickly from the pandemic. Sales in its waters business, hit by
restaurant and hotel closures, fell 5.6% in the quarter, compared
with a 12% slump for Danone's. Artisan said the French company
should ditch some of its mass-market water brands that face
competition from private label products -- a maneuver Nestlé
completed last month.
In baby food, a category that the two companies dominate,
Nestlé's sales fell 4.4% in the first quarter even as they returned
to growth in the crucial Chinese market. Danone's "specialized
nutrition" division fell 7.7% and its China baby-food business is
still negative. Birthrates have fallen during the pandemic. While
this may prove temporary, the business of feeding fewer babies will
be intensely competitive for a few years. In other potentially bad
news for Danone, Nestlé is pushing into plant-based foods,
traditionally the former company's stronghold.
Danone's shares trade at a 30% discount to its Swiss rival's as
a multiple of forward earnings. Nestlé provides the best road map
to closing that gap, as well as the biggest obstacle.
Write to Carol Ryan at carol.ryan@wsj.com
(END) Dow Jones Newswires
April 22, 2021 09:26 ET (13:26 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.
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