Remember how your mother used to tell you not to try to do too many things at once?
Well, apparently the mothers of the members of the board at the Swiss conglomerate Nestlé didn’t teach their kids the same lesson (or their sons and daughters just didn’t listen).
So hedge fund manager Daniel S. Loeb decided he would do the job himself, coyly snapping up $3.5 billion in shares of the world’s largest food company for his Third Point investment firm and then pressuring the Swiss-based company to slim down it holdings and start buying back some of its stock.
Apparently, this time around, the powers that be at Nestlé decided to heed the advice, at least partially.
On Tuesday, the $263 billion company announced it is prepared to spend up to $21 billion to buy back its own shares over the course of the next three years, although it also said it plans to expand its holdings into new acquisitions in fast-growing segments of its portfolio.
Loeb’s missive to Nestlé was well-founded.
With more than 2,000 brands in its portfolio, Nestlé simply was spreading itself too thin, and bottom line profit margins were becoming sluggish.
So how did a milk and candy bar corporation manage to get itself entangled into a broad spectrum of products ranging from pet food and food supplements to a 23 percent stake in the French cosmetic giant L’Oréal?
Back when the company first started in 1867, it was all about milk and pabulum, and throughout the next half century, infant and dairy products would be the main thrust of Nestlé’s production line.
From the get-go, the Nestlé family believed in thinking globally, and at the turn of the century, it opened its first factory in the United States.
By 1920, Nestlé had 40 factories worldwide, including in Brazil, where it decided to expand into the coffee market with the introduction of Nescafé, the first commercial instant coffee.
The Nestlé corporation always thought big, keeping prices low through mass production and economies of scale, supplying governments and large corporations at cut-rate costs.
By the 1960s, the company had begun expanding into any number of new food sectors, including frozen foods, juices and confectionaries, and as it grew, it gobbled up smaller labels around the globe, including Libby’s, Stouffer’s and Crosse & Blackwell.
In the 1970s, Nestlé’s seemingly insatiable hunger for expansion branched out beyond the food market and into the cosmetic and eye-care sectors, with substantial stakes in L’Oréal and Alcon Laboratories.
In 1984, it absorbed the U.S.-based Carnation brand, and 15 years later it branched into the pet food market.
A barrage of acquisitions, including Italian pasta-maker Buitoni and French mineral water-sourcer Perrier, followed, and as international consumers tastes evolved, so did the Nestlé portfolio, incorporating health-friendly items and cutting back on chocolate candies.
But in the end, Nestlé found itself too spread out and diversified to maintain a steady growth and profit shares began to falter.
Because it was so busy expanding, Nestlé’s traditional focus on quality and sound business practices also was sidelined.
Lawsuits for everything from tainted infant formulas and abusive child labor practices to price fixing and unsound waste disposal began to pile up, and Nestlé soon found itself treading water to keep its good name as a health-minded food supplier.
Profit shares began to stagnate even further, and even Nestlé flagship brands like the powdered milk line felt the pinch as online shopping and a preference for locally sourced foods edged out consumer preference for global labels.
And then along came Third Point to salvage the situation.
Loeb’s message to Nestlé is that it has to slim down its portfolio in order to concentrate on core products and to make the company more competitive.
Whether Nestlé is listening is not clear.
Mark Schneider, Nestlé’s chief executive, has already said he is not in favor of selling off the corporation’s L’Oréal shares.
But one thing is certain: A bloated corporation with too much excess fat is going to find it hard to keep up with trimmer, more agile companies in the race for consumers over the years ahead.
Thérèse Margolis can be reached at [email protected].
