UK – As Mark Schneider took the stage at London’s Corinthia Hotel for his first big strategy update, seated at the back of the ballroom was Dan Loeb, the activist investor who has spent the last three months goading the Nestle SA chief executive officer to seek profits over scale.
Schneider took a step toward meeting the hedge-fund chief’s demands, setting the Swiss food company’s first fixed profitability goal as it focuses on key businesses like coffee, pet care and bottled water rather than growth for growth’s sake.
But Nestle stopped short of a wholesale embrace of Loeb’s agenda, vowing to keep its stake in French cosmetics giant L’Oreal SA.
The adoption of a profit target comes amid a broader shift among the world’s biggest food companies.
With many mass-market brands facing skepticism from consumers seeking healthier and hipper alternatives, consumer-goods giants are under pressure from investors to cut costs and to move into more profitable niches.
“We’ll need to trade out of some product areas and into others,” Schneider said at the seminar Tuesday. “We’ll act decisively.”
Selective acquisitions and divestments could affect about 10 percent of Nestle’s total revenue of $90 billion a year, Schneider said.
Nestle is already trying to sell its U.S. chocolate business, its first major retreat from sugary snacks, as the Nescafe maker embarks on its biggest revamp in at least a decade.
Nestle shares gained 1.8 percent in Zurich.
Nestle will aim for an underlying trading margin of 17.5 percent to 18.5 percent in 2020 – as much as 2.5 percentage points higher than what it achieved last year.
Loeb, whose hedge fund firm Third Point disclosed a $3.5 billion stake in June, has been seeking a target of 18 percent to 20 percent.
Loeb declined to comment on Nestle’s plans but mingled with company executives – showing the more consensual side he’s displayed recently after earlier jousts with the management of companies like Yahoo Inc.
“I can tell you put a lot of work into this,” Loeb told Chief Financial Officer
Francois-Xavier Roger as the two chatted about the presentation afterward. “You did a great job.”
The margin target isn’t higher because Nestle also needs to accelerate sales growth, Schneider told investors.
The CEO already announced a planned disposal of the U.S. confectionery unit and acquisitions of coffee and fresh-food businesses.
The company said Tuesday it’s accelerating a previously announced share buyback worth as much as 20 billion francs ($21 billion).
“The target is certainly attainable,” said Jean-Philippe Bertschy, an analyst at Bank Vontobel AG. “While it will please some investors, others – like Loeb – may be a bit disappointed.”
Schneider said Nestle isn’t immediately changing its stance on L’Oreal, which he described as a “fabulous” investment, contributing 9 percent of the Swiss company’s earnings per share over the past decade.
The death of L’Oreal heiress Liliane Bettencourt last week prompted speculation about the future of Nestle’s 23 percent holding, which Loeb wants sold.
Nestle plans to keep its U.S. frozen unit, and the ailing skin-health business has a strategic fit, according to the CEO.
He also said the company is trying to revamp its Gerber baby nutrition division in the U.S. and Yinlu food in China.
In facing calls for a shakeup, Nestle has company among other consumer-goods giants.
Rival Unilever fended off a takeover bid earlier this year from Kraft Heinz Co., backed by buyout firm 3G Capital Partners, while activist Nelson Peltz is seeking a board seat at Procter & Gamble Co.
Others are also responding by raising their profitability goals. Unilever is targeting an underlying operating margin of 20 percent by 2020, while Danone aims to exceed 16 percent.
Last year Nestle announced plans to increase its margin by at least 2 percentage points by 2019 or 2020 through cost savings.
Nestle aims to reach 2 billion francs to 2.5 billion francs of permanent cost savings by 2020, Roger said.
The company expects to incur restructuring costs of about 2.5 billion francs from 2016 to 2020, and it’s aiming to reduce the number of Nestle sites in Paris from seven to one, he said.
Nestle also plans to consolidate its operations in Vevey, where it’s based.
“Virtually all of you underestimate the will to win at this company,” Schneider said.
“It’s hellbent on not losing its leadership position.”