(Bloomberg) -- Nestle SA plans to separate its bottled water brands into a standalone business as new Chief Executive Officer Laurent Freixe seeks to bolster growth at the world’s largest food company.
Creating a freestanding arm for brands like Perrier and Acqua Panna could be a prelude to a sale or spinoff of the water business, which has seen slowing organic growth in recent quarters. Freixe also plans a marketing push to try to restore the luster of Nestle’s other brands, a move that looks set to tighten profit margins in the medium term.
A 38-year company veteran, Freixe took over in September after the ouster of his predecessor Mark Schneider, who led Nestle for almost eight years. The new CEO last month lowered the company’s target for organic sales growth this year to around 2%, which would be the lowest annual rate since at least the turn of the century.
The bottled water and premium beverage operations will be combined into a global unit at the start of next year led by Muriel Lienau, head of Nestle waters in Europe, the company said Tuesday. The water business, which represents less than 4% of revenue, has struggled of late from contamination issues and supply constraints. Management will evaluate its strategy, including partnership opportunities.
After saying last month he was reviewing Nestle’s portfolio of products, Freixe stopped short of announcing any disposals, such as part of its stake in L’Oreal SA, or its frozen foods unit, which has suffered in the US. Freixe pledged to fix, rather than sell, the majority of Nestle’s underperforming businesses.
Citigroup analysts said they had hoped for more in terms of strategic action at Nestle’s capital markets day, particularly for frozen foods, but reckoned a “lack of potential buyers made it difficult.”
Nestle shares fell as much as 2% in Swiss trading, bringing the decline this year to more than 20%.
Under Schneider, Nestle made well-received exits from a facial injections business and a partial disposal of ice cream through a joint venture with buyout firm PAI Partners, which allowed it to share in some of the gains. PAI has since begun exploring options for that business.
European food rival Unilever Plc, meanwhile, is separating its ice cream unit through a spinoff or sale after sluggish sales growth for the business, which includes brands such as Ben & Jerry’s.
Asked whether a buyout fund could take a stake in the water business, Freixe said it will take time for the team to review strategic options for the unit. He said it “was kind of obvious” to bring water brands together into a global unit, and to then look for opportunities.
The CEO is increasing advertising and marketing investment to 9% of sales by the end of 2025 to bolster Nestle’s brands, which range from Purina pet food to Nespresso coffee and KitKat candy bars, and to win back market share lost when prices were raised during the recent period of high inflation.
To free up funds for spending on its brands, Nestle said it will seek at least an additional 2.5 billion Swiss francs ($2.8 billion) of cost savings by 2027. Even so, profit margins are likely to be squeezed somewhat.
Nestle now predicts a trading operating margin of at least 17% over the medium term, below the prior 17.5% to 18.5% goal. Sales will rise 4% or more in the mid-term, compared with the mid-single-digit growth previously targeted.
“Given that consensus is already below 4%, we would be happier if the company were to guide more conservatively,” RBC analyst James Edwardes Jones said in a note.
--With assistance from Allegra Catelli.
(Recasts to lead on water business)
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