VEVEY, SWITZERLAND — Nestle SA’s stock-keeping unit (SKU) rationalization program has evolved from a short-term initiative to a company-wide strategic priority. Management is committed to improving the business’ financial performance by doing more with less.
Initially, Nestle sought to alleviate supply chain bottlenecks by reducing product line complexity. The goal was to ensure the fastest turning SKUs were on shelf as markets around the world emerged from the pandemic.
“Once we started doing that, we saw there was tremendous promise in it, and we scaled it up and accelerated it quite a bit,” said Ulf Mark Schneider, chief executive officer, in a Feb. 16 conference call to discuss annual results. “And clearly, we noticed that we haven't done that sort of exercise for a long period of time.”
The focus has now shifted from individual SKUs in a line to brands, segments and geographies, according to the company.
“In cases where we cannot sell a business, we’re not afraid of walking away from it as long as we do it right,” Mr. Schneider said.
As an example, he pointed to Nestle’s pending withdrawal from the Canadian frozen food market.
“This is a book of business of about CHF 150 million ($162.4 million),” Mr. Schneider said. “It's a business that was not really sellable and not really a winning proposition because we don't have our own local manufacturing in Canada.
“These products were made in the US and then imported. And, clearly, by the time you're talking transportation and you're talking currency, it was hard to turn this one into a winner. But we believe that walking away from it and winding it down over a period of two years, while being a drag on RIG (real internal growth) and organic growth for the short term clearly will have significant benefits for the business going forward, and that is essentially what we're interested in.”
The withdrawal is expected to be completed by 2024, according to the company.
Underlying Nestle’s SKU rationalization program is the belief that a more focused business will be a more profitable business.
“That's essentially what we're after,” Mr. Schneider said. “So, that will include some further SKU items but that will also include some divestitures over time so that we are even more focused.
“We will continue as a multi-category diversified food and beverage company, no question. But we believe that the company overall within that broader scope will benefit from even more focus than before.”
Net income for the year ended Dec. 31, 2022, was CHF 9.3 billion ($10.1 billion), equal to CHF 3.42 per share ($3.70) on the common stock, and down markedly from CHF 16.9 billion, equal to CHF 6.06 per share, the year before.
Items affecting profitability included currency and “significant cost inflation” related to packaging, freight and energy costs as well as dairy and cereal ingredients. Nestle also benefited from its disposal of its shares in L’Oreal in 2021.
Annual sales reached CHF 94.4 billion ($102.2 billion), up from CHF 87.1 billion. Price increases supported much of the sales growth.
“Looking at volume, we saw an exceptional step-up in 2021 with growth almost three-times higher than historical levels in the context of elevated pandemic-related demand,” said Francois-Xavier Roger, chief financial officer. “This exceptionally high base of comparison and supply constraints negatively impacted our 2022 volume growth. Overall, the average volume growth for the last two years at 1% was only slightly lower than pre-pandemic levels, reflecting limited pricing elasticity to date.”
In 2023, Nestle is guiding organic sales growth between 6% and 8%.“This will continue to be pricing led,” Mr. Schneider said.