Nestle SA is to sell drinks to fight malnutrition among the elderly in an effort to revive its nutrition business, which has trailed sales and profit forecasts every year since they were set in 2006.
Resource SeniorActiv supplements will go on sale in Switzerland this year. The product includes protein, calcium and vitamin D to promote muscle strength and prevent bone fractures.
The Vevey, Switzerland-based maker of Kit Kat bars and Nescafe coffee is struggling to keep pace with smaller rival Danone SA in health and medical nutrition, a market which is growing at 9 per cent a year.
Nestle's nutrition sales rose 2 per cent in the first nine months of 2009, short of the 11 per cent growth in Danone's medical nutrition unit and a fifth of the Swiss company's long-term goal.
Nutrition is "clearly undershooting targets and they cannot carry on like that", said Stephen Pope, chief global equity strategist at Cantor Fitzgerald Europe in London.
"Overall to the company, nutrition is a very important division and it's an area where they're trying to push."
Chief executive officer Paul Bulcke, who in 2008 pledged to make Nestle the world's biggest healthy eating company, is under fire after indicating it would probably miss its sales growth target in 2009.
This month, he decided to buy Tombstone and DiGiorno frozen pizza from Kraft for $3.7 billion in a move that will accelerate revenue growth, yet adds pizzas with as much as 70 per cent of the daily recommended amount of saturated fat.
Nestle Nutrition includes the Jenny Craig weight-loss programmes, which has faced client departures due to the recession in the US, while Danone's nutrition business is focused on higher-margin products.
"Danone will do better just because the entire company is now really nutrition-oriented," said Jean-Marie L'Home, an analyst at Paris-based brokerage Aurel-Leven SA.
"Nestle is too big to concentrate only on nutrition."
Nestle's sales are about four times Danone's.
Nestle plans to expand Resource SeniorActiv in other European countries, because as many as 40 per cent of hospitalised patients are malnourished. About 90 per cent of the elderly are deficient in vitamin D, and half don't get enough protein or calcium, the company said.
The product also includes ingredients that promote digestive health.
"Typically these products start modestly," said Richard Laube, head of Nestle Nutrition.
"They can have the potential of several hundred millions of Swiss francs in sales, but this will take years."
A new Nestle baby food product line has failed to win over Europeans, and the company hasn't invested enough in emerging markets, where nutrition sales growth is fastest, said Patrik Schwendimann, an analyst at Zuercher Kantonalbank.
Nutrition marketing campaigns and costs related to the new baby food cut Nestle's total operating margin by 1.1 percentage points in the first half, to 17.4 per cent.
In 2006, Laube set a goal of 10 per cent sales growth and a 20 per cent operating margin, without setting a time frame.
Profitability of sports nutrition is as little as 10 per cent, while Jenny Craig's is about 12 per cent, Bank Vontobel estimates. Danone's medical nutrition operating margin was 21 per cent in the first half, while its baby food profitability was 19 per cent.
To boost growth, Nestle should use some of the $28.1 billion it raised this month by selling a stake in Alcon to fund nutrition purchases, Vontobel analyst Claudia Lenz said.
Nestle could make a joint bid for Mead Johnson with H.J. Heinz to obtain its business outside the US, ING Wholesale Banking analyst Marco Gulpers said.
He said Nestle would have US antitrust issues bidding alone for the company, valued at about $9.4 billion. Mead's Enfamil is the world's largest formula brand, and Mead Johnson gets more than half its sales in Asia and Latin America.
Chris Perille, a spokesman for Mead Johnson, declined to comment, as did Pfizer spokesman Raymond Kerins and Heinz's Michael Mullen. Nestle spokesman Robin Tickle wouldn't comment on future purchases.
The Swiss company could also buy Pfizer's baby nutrition business or Fresenius Group's Kabi intravenous food unit, Lenz said.
Pfizer has infant nutrition brands such as Gold and Promil and ranks as the biggest maker of infant formula in Britain, Philippines and Australia, says Lenz.
Fresenius Kabi would allow Nestle to enter the market of food administered intravenously, adding a new product segment, she said.
Danone sold a biscuit unit in 2007 to focus on healthier foods such as digestion-enhancing Activia yoghurt.
The sale also helped fund the purchase of baby-food maker Royal Numico NV, which boosted Danone's sales growth in that business to 8.1 per cent in the first nine months of last year.
Nestle has lost 3 percentage points of market share in western European baby food since that acquisition, according to Bernstein data.
Nestle hasn't been able to grow quickly enough organically in baby food.
Its most recent major nutrition addition, NaturNes, has gone "horribly wrong", said Gulpers, because the company didn't create a wide enough range. Nestle introduced plastic-packaged NaturNes to replace jarred weaning foods.
NaturNes is "going well" and Nestle has introduced the product in five new markets after starting out in France and Spain, spokeswoman Backes said, without giving figures.
A day before announcing the pizza purchase, Bulcke said the sale of the Alcon stake would help the company "concentrate on accelerating the development of Nestle's position as the world's leading nutrition, health and wellness company".
Nestle shares dropped 5 per cent in the three days after the pizza purchase, the biggest in more than four months, on investor disappointment that the first acquisition with the Alcon cash wasn't in nutrition, analysts said.
Nestle risks becoming "just another" food company if it buys more businesses outside of nutrition,said Andrew Wood, an analyst at Sanford C. Bernstein in New York.
He said the total market for nutritional products, including ones to improve skin and hair, was worth more than $174 billion.
"The acquisition of the Kraft pizza business is not a signal we are moving away from our focus on nutrition," Nestle chief financial officer Jim Singh said, , adding that the company would lower saturated fat and salt content in the pizzas.
The Haagen Dazs icecream maker will continue seeking "bolt-on" deals and has accelerated its search for small acquisitions in emerging markets, Singh said. Last year he said that an analyst consensus of 2009 so-called organic sales growth of 4.1 per cent would be a "good interpretation" of its annual outlook. Nestle targets gains of 5 per cent to 6 per cent a year.
"Nutrition needs to start going faster," said Vontobel's Lenz. "They have the firepower, so they should look at the possibilities."
- BLOOMBERG
Nestle targets elderly in bid to revive nutrition business
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