Dairy continues to drive Nestlé results

Related tags Ice cream Milk Nestlé

Dairy products remain an important growth driver for Swiss food and
beverages group Nestlé, despite the disposal of a number of assets
and poor weather conditions which affected sales during the first
half. But organic growth was down compared to last year, reflecting
ongoing market difficulties, particularly in Europe, writes
Sibonelo Radebe.

Milk-based products, nutrition and ice cream accounted for 60 per cent of the revenue growth in the first half of 2004, the company said this week, reporting a 2.5 per cent revenue improvement to SF42.4 billion (€28.2bn). Sales in the first half of 2003 had remained virtually unchanged compared to the previous year.

This growth represents an additional SF1 billion in turnover for Nestlé, of which around SF616 million came from milk products and ice cream. Total sales for this division grew by 5.5 per cent to SF11.6 billion, despite poor weather conditions impacting ice cream sales.

The beverages division, which includes the Perrier and Vittel bottled water brands, experienced a slight revenue decline from SF11.1 billion to SF10.8 billion, also hampered by the poor weather which contrasted dramatically with the heatwave of 2003.

In contrast, other divisions which had fared less well in 2003 because of the heat saw a return to growth in 2004. Revenue from prepared dishes grew 3.4 per cent to SF7.8 billion while confectionery sales were up 1.6 per cent.

Helped by these improvements, Nestlé managed to raise operating profit by 2 per cent to SF2.8 billion, also drawing gains from its rationalisation programme. CEO Peter Brabeck-Letmathe described the performance as "resilient in the face of higher raw material prices, poor weather conditions and continued challenging trading conditions in western Europe"​.

He added that further improvements were expected in the second half of the year, and that full-year organic growth would be around 5-6 per cent as a result. However, the group will have to show a strong improvement if investors' confidence is to be recovered. First half organic growth was 4.6 per cent - compared to 5.5 per cent last year - a long way short of the target.

While factors such as the weather, the strength of the Swiss franc and the global economy - over which the company has little control - will all inevitably play a part in whether Nestlé will achieve this goal, the Swiss firm can at least take some action to help bolster its performance by means of acquisitions and disposals.

For example, the purchase of the US ice cream group Dreyer's a couple of years ago has been one of the major drivers of growth in the dairy division, part of a broader resolve to reduce exposure to volatile commodities and move up stream into value-added products.

This strategy has more recently seen the disposal of chilled dairy products and UHT milk assets in Turkey and the outsourcing of functional brand LC1 in Germany. Outside the milk and ice cream division, the rationalisation programme has included the disposal of cocoa bean processing activities in the UK and Germany in June, as well as the Trinks drinks distribution unit in Germany.

The most high profile brand which could be slated for disposal is Perrier, the sparkling water brand based in the south of France, which continues to be a cause for concern. Efforts to reduce costs at the unit have been hamstrung by disagreements with employees, and a sale of the brand may yet be the most effective outcome.

But the disposals have also been mirrored by expansion into new business. For example, Nestlé has extended its joint venture with New Zealand's Fonterra dairy co-op by establishing new partnerships in Ecuador, Colombia and Trinidad & Tobago.

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