The meltdown at Nestlé

0:00In 1898, John Nuveen had a vision to underwrite municipal bonds that would propel American infrastructure into the 20th century. More than 125 years later, that vision lives on. Today, Nuveen has grown into a leading global asset manager with expertise spanning public and private markets, still investing with a future in mind. Nuveen. Invest like the future is watching. Visit nuveen.com slash future to learn more. Investing involves risk. Principal loss is possible. So I have a question for you, Madeline. When you hear the company name Nestle, what is the first thing that comes to mind for you?

0:37I think the first thing that comes to mind for me is Nescafe, Nespresso, all of the coffee brands that they own. Yeah, all the Nesses. All the Nesses, yeah. Yeah, for me, I was thinking about that myself, and I feel like the first thing that my mind jumps to is Nestle Tollhouse cookies. Do they have those in the UK? They don't have them in the UK, but I believe that they have a shout-out in Friends, the TV series. Yes, Nestle Toulouse. Nestle Toulouse. My grandmother said she got the recipe from her grandmother, Nestle Toulouse. What was her name? Nestle Toulouse.

1:24Nestle Toulouse?

1:30You Americans always butcher the French language. Yeah, that's a throwback. So, obviously, Madeline, who's the FT's Consumer Industries reporter, and I are both quite familiar with the Nestle brand. And it makes sense. Nestle is the largest food and beverage company in the world. It's more than a century and a half old, and it owns loads of brands, from Kit Kat candy bars to Purina cat and dog food. The footprint is massive. They've literally invented entire categories, including infant formula, milk chocolate is one of their innovations. But I think the thing that sticks out the most to me about Nestle is this story that they tell about themselves as feeding the world, nourishing the world.

2:21You know, I know some people who actually get misty-eyed talking about Nestle. You know, people are really proud to work at Nestle. And I feel like that bubble has maybe burst a bit. In recent weeks, Nestle's been rocked by a scandal, which comes on top of a series of problems the business was already facing. I think the best way to describe what's happening at Nestle is a meltdown. The share price was hugely under pressure, which was causing massive investor dissatisfaction. You know, there were jitters inside the company about restructuring projects. And the latest is that within the space of literally two weeks, they lost the CEO and the chair of the entire company, both of whom have been at Nestle for many years.

3:07I'm Michaela Tendera from the Financial Times. Today on Behind the Money, things at Nestle have gone from bad to worse. after a scandal involving the company's CEO came to light. And as the consumer goods sector faces an industry-wide reckoning, can Nestle survive the turmoil in one piece?

3:40My colleague Madeline tells me that recently things haven't been so great. not just for Nestle, but for many companies like them. The entire consumer sector is in a real mess at the moment. Basically, after COVID and the cost of living crisis, consumers are just buying less. You know, they're tightening their belts. They're trading down to own brand and off-brand products, you know, rather than more expensive branded goods. And this has had a big impact on profit margins for these big companies. Procter & Gamble, Unilever, and others, these are all huge multinational conglomerates. And they've built their businesses following a key motto.

4:24Bigger is better. But Madeline tells me that this model might be reaching an inflection point. A lot of the investor dissatisfaction and investor pressure that we've seen on these big consumer multinationals is a skepticism around whether this big conglomerate model works anymore. These companies, they kind of believed that being in every category all around the world was a strength, right? So, you know, if you're diversified, if one part of the business, you know, is less strong or one part of the world is under pressure or one category is under pressure, you can balance it out across all these other different categories.

5:02But there's been a huge trend away from that. Public markets are beginning to question whether any management team can deliver sustained growth while overseeing a wide array of different businesses. And so multinationals throughout the industry have been taking a knife to their lower growth brands. So, for example, at Unilever, they sold off huge chunks. You know, first of all, it was the kind of margarine and spreads business. Then it was tea. Now they're selling off large parts of the food business. at Wreck-It, which is another big conglomerate. They're selling off loads of their home care products.

5:40They're trying to sell their Mead Johnson baby food business. So it's a real trend. But Nestle has really resisted that. And they really dug their heels in to the idea that they are the biggest and they are the best and they are everywhere. And why have they resisted that? It's a really good question. I think part of it is to do with the pride that I was talking about earlier. You know, there's, I hesitate to call it arrogance, but I think there is a bit of pride in Nestle being the biggest and the best and being a pioneer and feeding the world, particularly what they've done, you know, innovating in baby formulas and infant nutrition.

6:22They kind of say that they've saved premature infant lives with their baby formulas. They've nourished impoverished people with their fortified foods, you know, in Africa. While Nestle's business performs well during COVID, the company faces a series of mishaps and earnings misses in the years that follow. There's a water purification scandal related to Nestle's water brands like Vittel and Perrier. And in 2023, Nestle warns of a hit to sales after the integration of an IT system was botched, causing delays to its supply chains for vitamins and supplements. Last year, Nestle's share price is down some 30 percent from its peak around the beginning of 2022.

7:08In an attempt to reinvigorate its business, the company appoints a new CEO called Laurent Frex.

7:15Madeleine Speed: Good morning and welcome to Nestle. Laurent Frex is a Frenchman who's been at the company for nearly 40 years. He looks very unassuming, you know, he's got a kind of very kind face. He's very buttoned up, you know, very popular internally at the company. Everybody knows him. After Frex becomes CEO, he begins implementing an ambitious plan to cut costs by at least two and a half billion Swiss francs. But he also maintains a clear stance about making sure that Nestle stays the biggest food and beverage company in the world. And I remember from my own conversations with Laurent Frex, when I interviewed him earlier this year, he said something to me, you know, what's good about being small?

8:03Why would we slim down when we can be the biggest and the best everywhere?

8:07Madeleine Speed: We have a superpower at Nestle. Our superpower is in being the most global and at the same time the most local company. This is a big competitive advantage in an increasingly fragmented world. This is Frex talking at an event for investors last year. We have a global footprint in 188 countries, 60 % developed markets, 40 % emerging markets. Our global scale creates efficiencies and allows us to invest and do things that others just can't do. What he's saying here is that as others are pressured to slim down and to become more focused, Nestlé's strength is that it's everything, everywhere, all at once.

8:54The problem is that the share price is sinking. Investors aren't happy, so sooner or later they'll need to respond. They'll need to slim down like their peers or get sales growing strongly again. So Nestle is struggling. Then comes a new scandal that throws the company's future into further uncertainty. And it all takes place at the very heart of Nestle, the town where its headquarters are set up in Switzerland. Vevey, Switzerland. It's kind of a Nestle town. It's full of Nestle employees. So in late spring, things are a bit of a mess in Vevey. The whole town's awash with rumors about the CEO, Laurent Frex, and his romantic affair with one of his senior leadership team.

9:40And it's all kind of reaching a fever pitch, which explodes out into the open after this Swiss finance blog called Inside Paradeplatz publishes an incredibly salacious blog post about Laurent Frex and his mistress. The new CEO caught up in the rumor mill. In the summer, Madeline tells me that these rumors become impossible to ignore. Because Nestle employees are lodging formal complaints inside the company. I was hearing from my sources at Nestle, a lot of resentment, basically. And the main concern was complaints of favoritism by the CEO towards one person in his direct line of reporting. Basically, you know, the concern was one of a possible conflict of interest.

10:27With these complaints flooding in, the Nestle board gets involved. So they carry out an internal investigation, but they find no wrongdoing. That doesn't stop the rumors, however. They continue to fly. More articles get published on the Inside Paradeplatz blog, becoming even more salacious. And so the board announces a second investigation. But this time it's conducted externally. So the external investigation managed to confirm what an internal probe had missed, which was that Laurent Frex had failed to disclose that he was having a romantic relationship with the direct subordinate. And as the CEO, that represented, you know, a major conflict of interest.

11:11Now, we should add that Laurent Frex has not responded to the FT's request for comment. But Madeline, what was the internal company reaction to the results of this investigation? Yeah, people were asking themselves why it took two separate investigations to uncover this. What's interesting is that the company says now that Laurent Freix was asked outright by the chair, Paul Boulker, whether this affair was going on, and he denied it on multiple occasions. But the rumors persisted. we heard from investors that they were turning their sights on the chair, on Paul Bulka, because, you know, they were asking themselves too, how could he not have known?

11:55Why didn't the first investigation reveal this? The fact that this relationship took two separate investigations to uncover raised suspicions among shareholders that Nestle's chair, Paul Bulka, mishandled the probe. You know, while people inside the company weren't all that surprised, I think externally, you know, the reaction was one of shock, right? Especially in the Swiss corporate sphere, which is traditionally quite buttoned up and private. Madeline tells me that this also gave shareholders an opportunity to raise concerns that they've had for years about Nestle's corporate governance. For example, the fact that so many of the board members had these very long tenures.

12:36There were too many people on the board. There wasn't enough consumer goods experience on the board. And, you know, also the fact that they have this tradition of promoting the CEO into the chair role. So Paul Bulka, for example, was the CEO. He was then appointed straight into the chair role, which meant that he had been sitting on Nestle's board for almost 15 years. And for most investors, that doesn't pass the corporate governance test. So, Nestle's lagging performance. The scandal which laid bare these corporate governance issues. In September, it all comes to a head. On the first of the month, Nestle fires Frex.

13:22And then, just a couple weeks later, Bolkis steps down from his position as chair. Now, everything that's happened leaves Nestle in a tight spot. So what can it do to get back on track?

13:41The future of fixed income investing will continue to blur the lines between public and private markets. Nuveen's credit platform was built to navigate this shifting landscape, channeling capital toward the businesses, infrastructure and energy solutions that are shaping tomorrow's economy, all while aiming to deliver the resilience and returns that portfolios seek today. Nuveen. Invest like the future is watching. Visit nuveen.com slash future to learn more. Investing involves risk. Principal loss is possible. With Frex and Bolka out at Nestle, new leadership are taking the reins. So the new leadership power duo at Nestle is CEO Philip Navratil, who was previously, and actually for not a very long time, the head of the Nespresso business.

14:29And then the chair, Pablo Isla, who used to be the chair and CEO of Inditex, the Spanish fast fashion giant that owns brands like Zara and Massimo Dutti. Each of these men, Navratil and Isla, were appointed to their positions immediately following the departures of their predecessors. Although Isla was already due to take over the chair position next year in April. The hope with these two is that there will be a bit of a fresh perspective at Nestle. So Philip, while he's been at the company for a couple of decades and is a known entity, he's still relatively young. And then obviously Pablo, even though he's been on the board since 2018, comes from a completely different industry, right, from fast fashion rather than consumer staples.

15:20and yeah the hope is that they'll bring some change and that they'll think more broadly about strategic change at Nestle. Yeah so what sorts of changes are these two men considering what do you know about their plans so far to turn things around? I mean at the moment they're obviously keeping their cards close to their chests we don't have much indication yet of any strategic changes Hopefully we'll find out lots more this week when Nestle publishes its third quarter earnings and which will be Philip Navratil, the new CEO's first public appearance since all of this stuff went down over the summer.

16:04So there'll be a lot of people listening out for any hints and indications of future direction. Nestle shares have been underperforming for a while now. what are some of the potential paths they're considering to try and improve things? Well I mean it's an interesting question because before all this happened Laurent Frex was pushing through a turnaround you know there were cost cutting and efficiency programs but now you know we have a new leadership pair so they've got an opportunity to change what Frex was doing or to take even bolder action. From what I'm hearing from investors they want to see the company be faster, you know, more efficient, bolder, the things that investors always call for from companies, but also to consider selling off some of the slower growing brands and just generally think more strategically about the portfolio and the direction that Nestle is going in.

16:59Yeah, what might that look like, a slimming down? One suggestion we've heard is to get rid of the US frozen food business, which has been massively under pressure. This business includes brands like DiGiorno Pizza, which you'll know in the US, Hot Pockets, this kind of thing. They're currently trying to sell their water business in Europe, which includes brands like San Pellegrino and Perrier. And then there's sort of bigger calls for selling, for example, Nestle's 20.1 % stake in L 'Oreal, the French beauty giant. which would free up a lot of cash for Nestle to reinvest back in the business. Now, there's also the corporate governance piece of this.

17:48As we mentioned, the investigation into Frex's relationship took two separate attempts and raised suspicions among shareholders that Volca mishandled things there. So is Nestle planning to make any changes to address these corporate governance issues? When we put the corporate governance concerns to the company, they've stressed the fact that there is a new chair in place now and a new CEO. And I think they're trying to signal to the market and to those shareholders who are concerned about corporate governance that they've turned over a new leaf, right? That it's a fresh start at Nestle. What I've heard from critics is that that doesn't quite go far enough and that there's still a bloated board full of insiders.

18:33So those calls might not go away. So Madeline, in your opinion, obviously it's early days here, but do you think this new management pair will be able to turn things around for Nestle? Look, I think it's very early to make a call on that. I think it is promising. You know, Pablo Isla has an amazing reputation. He's shown that he's going to be very hands-on. He seems, you know, very energetic. He comes from an interesting and successful sector, right? Fast fashion. So I think in that sense, there is opportunity, but what investors and what others around the company want to see is a bold vision and somebody or a leadership team that's going to be willing to address some of the more tricky strategic questions around the portfolio and around, you know, how Nestle sees itself.

19:25Yeah. What are you going to be keeping your eyes on as things move forward? I think with Nestle, you know, it's one of these huge bellwethers for the health of the consumer. So at results, I'm going to be looking for any comments the new CEO will make around shopping behavior, you know, whether there's like any green shoots among consumers, whether they're back buying or whether sales volumes are still going to be under pressure. And then the other thing I'm going to be looking out for is any more shareholder dissatisfaction or even activist activity. So, you know, as I mentioned, the consumer sector broadly is very vulnerable at the moment.

20:05I think divestitures and the slimming down and the breakups happen when investors are calling for it. And when a company is a little bit more vulnerable, cracks open up for activist shareholders to come in and start calling for larger strategic change at a business. We've seen, you know, PepsiCo has just had the famous activist Elliot battering at its door with all kinds of suggestions. So, you know, Nestle, with what's gone on this summer, might be vulnerable to activist interest as well.

20:43Behind the Money is hosted by me, Michaela Tindera. This episode was produced by me, Safia Ahmed and Ethan Plotkin. Special thanks to Dan Stewart and Sam Chambers. Fact-checking by Simon Greaves. Sound design and mixing by Sam Giovinco. Original music is by Hannes Brown. Topher Forges is the FT's acting co-head of audio. Thanks for listening. See you next week.

21:20The future of fixed income investing will continue to blur the lines between public and private markets. Nuveen's credit platform was built to navigate this shifting landscape, channeling capital toward the businesses, infrastructure and energy solutions that are shaping tomorrow's economy, all while aiming to deliver the resilience and returns that portfolios seek today. Nuveen. Invest like the future is watching. Visit nuveen.com slash future to learn more. Investing involves risk. Principal loss is possible.