Nestlé continues to transform its portfolio

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On the eve of the publication of its results for the year 2020, Nestlé announces the sale of eight of its brands of bottled water in North America for 3.84 billion francs (4.3 billion dollars). Since June 2020, the Vevey giant has been seeking to part with it as part of a strategic reorientation of Nestlé Waters. The transaction with the One Rock Capital Partners and Metropoulos & Co funds also includes the water purification activity and the ReadyRefresh drink delivery service in the United States.

“This sale allows us to create a more targeted activity around our high-end international brands, local natural mineral waters and healthy high-quality hydration products”, comments Mark Schneider in the press release published Wednesday. This repositioning is part of a broader sales and acquisition strategy intended to transform the group’s portfolio.

Towards high-end water

Under competitive pressure and faced with disappointing results, Nestlé decided in 2019 to carry out a strategic review of its subsidiary created in 1992. “At the start of 2020, I did not think that Nestlé would go so far as to completely divest itself of these brands, ”says Jean-Philippe Bertschy, analyst at Vontobel. In 2019, the eight brands sold achieved a turnover of 3.4 billion francs. According to Vontobel’s estimates, for the past year the latter would only amount to 2.8 billion because of the pandemic and the devaluation of the dollar against the franc.

Still, the overall mineral water market in the United States is doing well. “In 2016, for the first time, water consumption exceeded that of sodas,” underlines Hervé Prettre, responsible for thematic investments at Edmond de Rothschild. But mineral water is a low-margin product. ” The increase in volume in recent years does not translate into higher profits. Especially since producers like Nestlé have to face cheaper local competition and, in 2020, the closure of bars and restaurants as well as the massive drop in tourism to which is added the criticism of plastic bottles.

Read also: Nestlé continues to reorganize its bottled water sector

“Losing speed”

However, the major brands of the Nestlé group, Perrier, San Pellegrino and Acqua Panna, are not affected by the transaction relating to mineral waters in the United States. “The less well-known brands like Poland Spring were losing momentum, hence Nestlé’s desire to sell them and focus on more prestigious brands with higher margins,” explains Hervé Prettre.

In its press release, Nestlé indicates, among other things, its intention to invest in “functional waters”. This terminology designates in particular flavored or mineral-enriched drinks presented as having a positive impact on health. “It is a strategy started three to four years ago to reposition Nestlé as a company selling innovative products and says science-based», Emphasizes Jean-Philippe Bertschy.

Global repositioning

The repositioning applied to Nestlé Waters is reflected at the group level. “There was a start in 2018 with the sale of the chocolate activities in the United States, where Nestlé was third but with little market share and products to integrate», Recalls Jean-Philippe Bertschy. In 2019, the group sold its American ice cream activities for $ 4 billion and sold a 60% stake in the charcuterie specialist Herta, while retaining the part dedicated to the production of vegetarian products.

But the policy led by Mark Schneider is also coupled with purchases. Last year alone, Nestlé acquired British pet food company Lily’s Kitchen, pharma Aimmune Therapeutics which develops a treatment for peanut allergy and Freshly, an American food delivery company. In total, since 2017, “more than 60 transactions have been concluded or announced, representing around 20% of sales,” notes Jean-Philippe Bertschy.

Despite the announcement of this sale, the share price remained relatively stable. After falling 0.52% at the opening, it was up 0.24% by late afternoon.

Climate and environmental pressure plan

In its press release, Nestlé also reiterates its commitment to make its bottled water sector carbon neutral by 2025. In California, the exploitation of the sources of Arrowhead, which is one of the brands sold by the group has was accused of participating in the worsening of massive droughts in the state and is the subject of an investigation by the authorities in 2018.

The water bottle production sector is also the subject of much criticism on the issue of plastic packaging. In his climate plan presented last December, Nestlé made a particular commitment to reduce its use of virgin plastic by a third and to make all of its packaging recyclable or reusable by 2025.