CONSUMER STAPLES INDUSTRY: DAY 1

 What I read: Letters to Shareholders and MD&A - Nestle

1) How does the company make money? 

Nestle has multiple product lines and it currently focuses on 4 major sectors:

-Pet food

-Healthcare consumables (like protein powders etc)

-Food and snacks

-Coffee

 

Of all of these currently confectionary and coffee are its crown jewels closely followed by pet food.

 

Its product lines are currently quite vast. 20% of its total sales comes from over 18 business units, all of which are very mature in their life cycle. This means that they do not have much scope for 'real internal growth', which is growth by volume and not price.

2) Who are its customers and how loyal are they?

 

Nestle sells to retail stores, off the home outlets (to restaurants, cafetarias etc) and digital marketplaces. Customers are not very loyal except in certain categories like coffee. In 2025, the company did have to increase prices due to increasing raw material costs, and this did impact the volume of sales.

3) What are the biggest risks of the business?

 

There are multiple risks associated with the consumer staples sector including changing consumer preferences and changing external environments. External environment changes can further be subgrouped as technology and regulatory changes.

 

The consumer preferences issue is currently prominent for Nestle given that they have a huge portfolio of products. This necessitates that they divest from many of them to focus on more promising product lines. Another way in which they are tackling changing consumer preferences is by repositioning their product lines (for eg: by positioning some of their food products as healthcare products by increasing the protein constitution etc).

 

Nestle, however, is currently not positioned to react appropriately to changing environmental conditions which is why their share price and financial performance are both deteriorating. Nestle has faced multiple corporate governance issues. Its CEO had to be changed twice in the same year due to serious scandals. High turnover across the board of directors is widely regarded as being a huge red flag in company analysis.

 

The second issue has been litigations surrounding their food products. Their infant formulae had to be recalled due to dangerous substances being found in them. This resulted in huge inventory write off costs for the company which dwindled their gross margins.

4) What is the management proud of this year?

 

One thing the management is proud of is clearing away around 60% of Nestle's Value Gap. Value gap is the gap between Nestle's sales and the overall consumer staple market's sales, which shows Nestle is really underperforming the market

Another thing the management is proud of is being well ahead of its target objectives, in implementing the 'Fuel for Growth Strategy'. Under this strategy the company aims to achieve cost savings of 3B CHF by 2027.

 

They are achieving this through proposed digitization, employee layoffs and by also restructuring their operations (through divestitures, spinoffs etc).

5) Does management sound self-aware or promotional?

I'd say management sounds self-aware as they are acknowledging the scandals and concerns for shareholders. However, there are also several areas like lower Capex, limited R&D expenditures etc which is rather concerning, especially given that they want to eventually reposition multiple product lines. Such low levels of activity is most likely due to the governance issues that emerged.

 

There is also a stark demarcation made between 'underlying trading profit' (more recurring/day to day profits) and actual trading profits (which includes several one off items). This demarcation is useful as the company's performance would not be so good if we factor out the benefits of their divestitures, which are one off.

 

Another concern with Nestle, overall, is the decline in institutional holdings of the company's security, and corresponding increase in retail investors holding the security. This indicates that the institutional and arguably more sophisticated investors are losing faith in the company's prospects.