Nestlé’s reputation in danger over global infant formula recall

Summary

• Nestlé’s infant formula recall has intensified scrutiny, with critics accusing the company of slow and opaque communication.
• Investor confidence is shaken not by the scale of the recall alone, but by the emotional weight of infant formula and Nestlé’s recent pattern of crises.
• Behavioural finance experts warn that uncertainty, not bad news itself, is most damaging, and that delayed or unclear communication can erode trust more than the recall event.
• Nestlé’s recovery will depend on transparent, decisive leadership, with upcoming February results expected to outline how the new CEO will restore confidence following a year marked by instability.

Nestlé has long projected an image of stability, but the Swiss major has recently endured a rocky period, marred by a CEO ousting, a water filtration scandal, and a drop in sales. And now, the company is facing the fallout of the biggest product recall in its 160-year history.

What is the controversy with Nestlé?

In January, Nestlé recalled infant formula products in more than 60 countries across Africa, the Americas, Asia, and Europe over cereulide contamination fears.

No illnesses have been linked to the recalled ranges, which include brands SMA, NAN, BEBA and Alfamino. Nestlé claims this is a quality control issue with a supplier of ARA oil, an ingredient used across some of its infant nutrition products.

But the Swiss firm has come under fire over a lack of transparency: it has been slow to update the public about the problem and clarify the steps it’s taking to resolve the crisis, critics say.

Consumer watchdog FoodWatch International claims Nestlé told European regulators about the contamination risks back in December, but only issued a public recall a month later. “It is unacceptable that information is released to us in dribs and drabs and that the companies responsible for ensuring the compliance of their products delay informing consumers,” said Nicole van Gemert, executive director at the NGO.

Infant formula products are part of Nestlé’s Nutrition and Health Science business, sitting within the specialized nutrition segment. Specialized nutrition accounts for 37% of Nestlé’s net sales (inclusive of PetCare; 21% exclusive).

The batches of infant formula products included in the recall represent less than 0.5% of Nestlé’s annual group sales and the financial impact of the recall is not expected to be significant for the group, says Nestlé.

But how can the fallout from a major recall of a sensitive product category impact the CPG major’s reputation with investors?

How do investors feel about big companies in times of crisis?

Greg Davies, a specialist in applied behavioural finance, told us the strength of big brands is also their biggest vulnerability.

“Big companies have a huge brand recognition often benefit from that enormously because people feel comfortable with names they know. However, it’s a bit of a double-edged sword – in times of crisis, the familiar names almost get more scrutiny and more press and become held to a higher moral standard than companies which are less well-known.”

For investors, a one-off event would be easier to dismiss than multiple scandals or long-term instability.

“Isolated events, it’s very easy for people to mentally assimilate them. They will cause a stir but as humans, we forget things really easily. It is repeated exposure that tends to be cumulative and to amplify things – so multiple different issues repeatedly raised over an extended period of time in a high-profile brand is problematic.”

Recalls are one of those events that investors are most sensitive to, Davies added, because these often bring uncertainty and ambiguity. “If investors find that they are constantly wondering about where things stand, that is going to be more harmful than an issue that has been resolved effectively.”

A toxic mix of scale, prominence and emotions

Beyond the size of a recall, the type of product that’s being recalled is also important to investors. In Nestlé’s case, infant formula holds significant emotional meaning.

“The product itself has a huge emotional impact,” Davies said, adding that investors would want to know if a company is responding due to genuine interest of doing the right thing or due to external pressure, eg from regulators. “If there are suspicions that the response was not done right away and in a very clear way, that just adds to the general uncertainty about what people can expect from this company.”

“And that can really undermine faith in the company and certainty about how to evaluate.”

What can hamper Nestlé’s recovery from the infant formula scandal?

With specialized nutrition only one part of Nestlé’s product portfolio, how much of a long-term risk is there for the Swiss major from this product recall?

“The fact that it’s one product category out of many doesn’t get them off the hook,” Davies said. “The fact that it’s one of many is almost the problem – particularly when that one is to do with infant formula, it means it’s emotionally-salient, that people can focus on it.”

Poor or untimely communication with the public may also create doubts and undermine credibility.

“People talk a lot about trust, but it’s not whether I trust the company – it’s whether the company is demonstrating to me that it’s worthy of my trust,” Davies explained.

“And that happens where companies can demonstrate repeatedly they have undertaken actions that are costly to themselves, because it is the right thing to do.

“Recalls, as long as they’re done right, fall into that camp of things that would build trust because they’re costly to a company.”

What will happen to Nestlé’s share price?

Nestlé’s share price declined sharply after the company issued the public recall on January 5. Would confidence rebound?

That depends on what is revealed over time, Davies thinks; but the current volatility is normal.

“Share prices always jump up and down a hell of a lot more than genuine differences in long-term value indicate they should,” he told us. “So it is absolutely true to say that share movements are more volatile in the short term than is warranted by any change in long-term fundamentals.

“And that is very much driven by perception and emotional responses to things like this communication.

“So my suspicion would be that short-term moves probably have overshot – as long as there’s nothing else coming that we don’t know about yet.”

What can CEOs do to reassure investors in times of crisis?

With Nestlé CEO Philipp Navratil set to face investors next month for the company’s annual results presentation, what would be the key messages he – or any other chief executive in a similar situation – must get across?

“The main thing to reassure people of is clarity that there’s a bottom to it, that a line has been drawn under it completely,” Davies said. “If there are issues associated with positive things, those ones you probably want to just to keep hammering alongside.

“But the negative stuff, you really need to be demonstrating that it’s done, and it’s done by this date, and with credibility you can believe us that it’s done.”

And if there is no timeline, don’t make one up. “Go transparency first,” he said.

What’s next for Nestlé?

Nestlé’s annual results are due to be published on February 19 when CEO Philipp Navratil is poised to outline strategy and 2026 guidance.

Investment bank Jefferies issued a ‘hold’ rating for the company this week as it predicted a “dramatic but ultimately constructive reset year” for the Swiss major. Jefferies predicts price resets, a margin reset, and a larger focus on restoring volume growth.

Jefferies reduced its organic sales growth forecast to 2.8% (from 3.5% previously; consensus also 3.5%) over a more cautious pricing outlook; but volume/mix is expected to improve.