The abrupt change of management at Nestlé has shown the pressure the food industry is under. Is the industry giants’ business model still viable for the future?
When the Nestlé Board of Directors appointed Laurent Freixe, a veteran, to the CEO position, there were also voices of disappointment. Disappointment because there is sometimes almost a kind of shared understanding among the public that the food industry needs to change fundamentally. How is an insider supposed to achieve this?
However, the industry cannot be turned around so quickly, as a number of supposed truths show.
Misconception 1: Highly processed products have no future
After sugar, salt and fat, nutritional science has discovered another problem area that supposedly has a negative impact on health: highly processed foods. Put simply, this includes foods or drinks with additives that you would not use when preparing them at home. Examples include ready meals, chocolate, chips or ice cream.
Diabetes, intestinal diseases and even cancer are associated with highly processed foods. But the term “highly processed” is controversial: not only are there different definitions of this term, but it also encompasses so many different foods that it is difficult to make general statements.
Nevertheless, governments in various countries are considering how to limit the consumption of highly processed foods. And it is indeed possible that regulations on highly processed products will one day make manufacturing processes more expensive. But there is no reason to believe that this type of food will disappear.
Apart from the fact that consumers like them, highly processed products have advantages: They last longer, are suitable for storage – and are therefore less prone to food waste. Ready-made products, which typically fall into this category, save consumers time when shopping and cooking.
Shelf life and time savings are the achievements that gave rise to the food industry: Henri Nestlé’s “Kindermehl” enabled mothers to quickly prepare baby food. George Page sent Swiss condensed milk in cans from Cham to other countries. The merger of the two pioneering companies laid the foundation for the global Nestlé corporation.
Mistake 2: Customers only want healthy products
One industry expert sums it up like this: “There are three things that make food worth eating: salt, sugar and fat.”
But under pressure from new regulations and more health-conscious consumers, major food companies have revised their product ranges and reduced sugar and salt content.
But this restructuring of the product range reaches its limits if consumers do not like the new recipes and the products remain on the shelves. “We react to the market” is the internal motto at Nestlé. The products produced are what people buy.
That’s what Mars says too. The company just bought the Pringles manufacturer Kellanova for $30 billion because it believes that consumers will continue to eat chips for a long time to come.
It’s similar with chocolate. The industry is convinced that consumers will continue to indulge in luxury products despite increased health awareness and weight loss injections. To make the decision easier for them, manufacturers have responded with smaller packages.
Mistake 3: Trendy products – such as plant-based meat substitutes – are big business
A food company must keep track of trends and eating habits. This enables the company to react to competition in good time, adapt its products or even gain a foothold in a new area.
But launching a new product is expensive and success is uncertain. That is why it is often more worthwhile for a company to get more out of an existing brand. For example, with marketing or efficiency-enhancing measures. The announcements by the new Nestlé CEO Laurent Freixe are therefore aimed in this direction.
In addition, the general hype and media coverage on the topic of meat-free food suggests that new types of food are much more important than they actually are.
To illustrate this, it helps to look at an acquisition by Nestlé in 2022. Orgain, a manufacturer of plant-based protein shakes, had sales of around 400 million dollars at the time – that’s about 0.4 percent of Nestlé’s sales of 93 billion francs. At this size, even with high growth rates, it took a very long time for this to have a noticeable impact at the group level.
The only figure that Nestlé announces for sales of meat and milk substitutes and food labelled as vegan is 800 million francs in 2021. This is simply because plant-based meat substitutes in general are still a niche.
Misconception 4: The future belongs to small, new brands
As long as the low interest rate phase lasted, a lot of money flowed into startups in the food and beverage sector. On the one hand, the trend towards regional products created demand. On the other hand, influencer marketing on social networks suddenly made a completely different marketing possible.
However, a large number of these companies quickly disappeared again because they could not afford the costs of building a brand. And the really original and successful ones were soon taken over by a corporation.
The importance of brands is evident in the current environment with an increasingly price-conscious customer base. The stronger and more iconic a brand is, the harder it is for consumers to switch to a cheaper own-brand from the supermarket.
In addition, if a company already has an established brand, it can introduce new variants under this brand. This is easier than having to launch a new product from scratch. One example is Coca-Cola and the sugar-free Coke Zero. Beer companies can follow the trend by offering non-alcoholic variants of their existing brands.
Misconception 5: Investors value sustainability above all else
The large food companies are an ideal target for all kinds of criticism – from the polluted environment to working conditions to unhealthy recipes. In addition to non-governmental organizations, investors are also pushing the companies to make improvements.
However, it has become apparent that sustainability is not at the top of the agenda for all investors.
For example, at the annual general meeting in the spring, Nestlé shareholders rejected a proposal by activists that would have required the company to produce a healthier product range. 88 percent of investors voted against it.
There was a backlash in this regard from two of Nestlé’s competitors. Both Unilever and Danone had to resign CEOs who had made sustainability a top priority. In both cases, investors had made it clear that they had other priorities.
Conclusion: Reality is more boring
As abrupt as the change at the top of Nestlé may have been, the food giant’s portfolio is not changing suddenly.
Even with a groundbreaking invention like the Nespresso capsules, it took many years before the company started making good money with them – not least because internally the company preferred to rely on the established Nescafé product for a long time.
Big Food will continue to adapt. It is quite possible that further transactions of companies or parts of companies will follow the Mars-Kellanova deal. However, the innovations in the product range will continue to be gradual and unspectacular – simply because consumers do not change their habits so quickly.