By Deborah Ball Of THE WALL STREET JOURNAL
ZURICH (Dow Jones)--Nestle SA (NSRGY, NESN.VX) reported a 42% decline in net profit in 2009, in part because of a one-time gain in 2008, but said underlying sales growth was strong thanks to increased ad spending that stimulated sales and robust emerging markets such as China and Africa.
Nestle, based in Vevey, Switzerland and owner of brands such as KitKat, Gerber baby food and Nescafe coffee, saw sales fall 2.1% to 107.6 billion Swiss francs ($99.7 billion) from CHF109.9 billion in 2008. Net profit fell to CHF10.42 billion from CHF18.04 billion in 2008, when Nestle benefited from the sale of part of eye care company Alcon. Operating profit was largely flat at CHF15.0 billion.
However, organic growth, which adjusts for divestitures, acquisitions and currency movements, was up 4.1% for 2009, with growth picking up strongly in the last quarter.
The economic downturn has pushed shoppers to cut back on spending or trade down to cheaper products. At the same time, however, a drop in raw material prices last year allowed many companies to sink the savings into extra advertising or deals such as offering extra product for the same price.
That helped companies such as Unilever PLC (UL, ULVR.LN), Groupe Danone SA (DANOY, BN.FR) and Nestle lure shoppers into spending more on their products. Nestle increased its advertising spending by 10% last year.
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Nestle, the world's largest food company, outpaced its main European rivals last year in underlying growth. Unilever posted underlying sales growth of 3.5%, while Danone saw 3.2% growth. Nestle's very broad portfolio, its leverage with retailers and large businesses in the emerging markets helped it outperform. Nestle's Brazilian, African and Chinese businesses all posted double-digit growth last year. By contrast, European sales rose an anemic 0.3%.
As shoppers in the emerging markets spend more on packaged goods, Nestle expects those countries to represent 45% of its group sales in the medium-term, up from 35% currently. Nestle is investing heavily in new factories and launching cheaper versions of its big brands there to meet demand. Helped by these markets as well as a moderate pick-up in Europe, Nestle Chief Executive Paul Bulcke expects 2010 organic growth to be higher than last year.
In 2009, pet food, including brands such as Friskies and Purina, grew 7.9%, while confectionery grew 4.3%, led by a 7.1% rise in KitKat, the Swiss company's largest candy brand with sales of about CHF2 billion. Last year, Nestle stood at the sidelines while Kraft Foods Inc. (KFT) launched a successful takeover of Cadbury PLC (CBY, CBRY.LN), leaving Nestle a more distant No. 3 player in the world candy market behind Mars and a combined Kraft-Cadbury. To help fund its long takeover battle, Kraft sold Nestle its frozen pizza business for $3.7 billion last month.
Nestle's waters business, including Pure Life, Poland Spring and Perrier, was its worst category, with organic sales down 1.4%. Over the last two years, concerns about the environmental impact of plastic bottles, aggressive competition from private label and shoppers' reluctance to spend on bottled water has transformed a fast-growing business into a problem child for Nestle.
Some analysts have been concerned that high unemployment and tepid growth will keep shoppers from spending, forcing the consumer goods companies to continue to invest heavily in advertising to lure people to shop. At the same time, commodity costs are expected to increase this year.
Nestle said it will continue to invest in marketing and expects input costs to rise 2% to 3% this year.
But very strong emerging markets, a steady stream of innovations and a pick-up in growth in laggards such as Western Europe will push sales higher this year, said Nestle management. The company has a long-term goal of 5% to 6% sales growth.
Elsewhere, Nestle, which is due to reap a windfall of $28 billion from the sale of its remaining Alcon stake to Novartis AG (NVS, NOVN.VX) later this year, said it plans to launch a CHF10 billion share buyback program once an existing CHF25 billion buyback scheme is completed during 2010.
Analysts have speculated that Nestle could use some of the windfall to make a large acquisition, such as Mead Johnson or General Mills. Bulcke has tried to tamp down such speculation by saying that Nestle is only interested in acquisitions in the range of CHF2 billion to CHF3 billion.
In early afternoon trading in Zurich, Nestle's shares were up 2.62% to CHF52.80.