Nestle Lanka’s disappointing performance extends to third quarter

Nestle Lanka PLC reported disappointing numbers for the September quarter (3Q17) as the sales slowed and production cost rose sharply. The company is battling a period of high inflation and taxes, which negatively impact consumer demand and push up its direct costs. 

Accordingly, the local unit of the world’s largest food and beverage company, reported a top line growth of 9.0 percent year-on-year (YoY) to Rs.9.64 billion for the quarter under review, less impressive considering its past performance.

The cost of sales for the same period rose by 20.5 percent YoY or doubled the rate of sales growth to Rs.6.36 billion, weighing on the gross profit and pinching the margins hard. 

The company, which produces Nespray milk powder and Maggi coconut milk powder among many other products, reported earnings of Rs.15.16 a share or Rs.814.4 million for the quarter, down by 24 percent YoY.

This is the third consecutive quarter that the company recorded negative growth in earnings.

The Swiss multinational is grappling with how to cater to the shifting demands for less sugary and healthier products in almost all markets it operates.   

While Nestle is trying to adjust its strategy towards this growing trend in most mature markets, it has so far done very little in emerging markets. 

This was proven when the Sri Lankan president himself recently singled out Milo— Nestle’s most popular chocolate malted drink— for its high sugar content. 

Launching a walk to mark the World Diabetic Day at Galle Face President Maithripala Sirisena said last Sunday that Milo’s sugar content had increased from 15.0 percent to 16.5 percent within five years and demanded to reduce it to below 5.0 percent or face legislative controls. 

The incident perhaps marks the first in the history of Nestle where its product was singled out by a president of a country. The president’s remarks are going viral on social media and the company is yet to respond to the remarks.  

Presenting his maiden budget last week Finance Minister Mangala Samaraweera proposed to impose an excise duty of 50 cents per gram of sugar contained in fizzy drinks and other beverages.   

This probably was the first time in Sri Lanka’s history where a national budget contained a tangible measure to make its people healthier. 

The new tax was aimed at controlling non-communicable deceases such as diabetes and obesity, specially among children. 

Nestle globally has been struggling for years to maintain growth and at the beginning of the year it abandoned its 5-6 percent organic growth target as the sales have been anemic. 

The multinational is also being pressured by an activist investor to maintain a profit margin and improve performance and the company in September set a trading profit operating margin of 17.5-18.5 percent by 2020 without extraordinary gains. 

Meanwhile, the Sri Lankan unit for the nine months ended September 30, 2017, reported earnings of Rs.45.71 a share or Rs.2.46 billion, down by a sharp 31 percent YoY. 

Revenue for the period was Rs.27.6 billion, slightly down by 0.7 percent YoY.

As at September 30, Nestle SA held a 90.82 percent stake in Nestle Lanka PLC.