Reporting their annual results last week, Danone and Nestlé’s leaders were pressed by investors on the impact of the infant formula recalls on earnings and future guidance.
The two food and nutrition majors were forced to pull formula from multiple global markets over contamination with cereulide, a toxin that causes vomiting and nausea.
Both companies played down the potential impact to earnings and brand equity but admitted Q1 performance would likely be impacted due to one-off losses.
Focus on restocking
Nestlé’s leadership told investors the company is focused on regaining shelf share in markets where product availability had been hit. This varies hugely by geography, CFO Anna Manz explained.
“It depends on whether we’re back on shelf fully, which we’re increasingly achieving, but not everywhere quite yet,” she said. “It depends on whether the competitive set are also recalling. We’ve got some markets where literally it was a tiny, tiny volume and so the recall has…not actually been something that’s been felt or experienced by the consumer. So the experience varies, and we are monitoring and understanding at that level of granularity.”
Manz added that Q1 will be “slower” mainly because of the infant formula impact, which will likely reduce sales volumes due to stocking issues.
As for reputational impact, Nestlé’s leadership was bullish. “I don’t believe that we will have a long-term issue on brand equity here,” CEO Philipp Navratil said. “It might take some time, but this is trust that we have to rebuild.”
The chief executive hinted that Nestlé could take legal action against the ingredient supplier – whom he did not name – at a later stage. “[The] focus of the company has been on the recall and is now on replenishing the stocks…and then we will see what needs to be done on the legal side,” he said.
Nestlé now testing all ARA oil
Nestlé is now rigorously testing all ARA oil, the ingredient linked to the contamination.
“We test the oil before it goes into production, during production, and when the product comes out of production,” Navratil said.
Nestlé did not respond to a request for comment on the cost implications of the additional testing or whether this would impact product prices.
Implicated supplier was added to reduce risk
The chief executive explained that Nestlé had historically relied on a single supplier for the ingredient, which posed a supply‑chain risk.
To mitigate this, the company brought in a second supplier – the one later involved in the contamination – to ensure continuity of supply.
“The supplier was checked and audited and was vetted and was cleared by our quality assurance,” Navratil said, adding that the supplier had failed to keep its process under proper control.
“Now, we have stopped sourcing from that supplier and we source from others,” he added.
Issue was ‘a rare occurrence’
Navratil insisted the contamination that triggered the recalls was “a very rare occurrence and that’s why it was not on our radar and not on the industry’s radar”.
“We found this issue because of our good manufacturing practices and quality standards that go beyond good manufacturing practices,” he said. “Also, as you have seen, it [cereulide contamination in infant formula, ed.] was not something that was regulated by anyone.
“There is now a level that has been put in place from a regulatory point of view. So the learning there is these risks move and we have to be one step ahead of identifying [them].
Danone doesn’t expect regulatory shake-up
Danone CEO Antoine de Saint-Affrique said the company hasn’t seen a major impact on share movement and doesn’t expect the recall to impact the formula space beyond clarifying safety levels for cereulide in food and infant nutrition products.
“We don’t see anything major [in terms of share movement], but it’s very, very early,” the chief executive said. “Noise around the category is never good news, but I don’t see it as something structural.”
“IMF is very, very regulated category,” he added. “In our factories, we have over 300 checkpoints when it comes to quality. There are rules in every country that are extremely strict.
“Do we expect a further strengthening of the regulation? Not in any major and significant way. There has been a change in the rules and regulation when it comes to cereulide. But by and large, we don’t expect the rules…to change.”
As Nestlé, Danone expects the recall to have a limited impact on Q1 results but not on brand equity.
“I don’t see at this stage any major brand equity impact on IMF,” said the chief executive. “There is obviously a disturbance on the shelf but from a pure brand and category standpoint, we haven’t seen anything major.”
Major brokers have largely maintained their views on Nestlé and Danone. The Swiss major retained its neutral rating from Jefferies, UBS, Deutsche Bank and JP Morgan; while Danone say buy ratings reaffirmed by Barclays, UBS, JP Morgan, with Deutsche Bank reverting to sell.
