A Curious Slowdown at One European Outfit

 | Aug 11, 2013 | 6:00 PM EDT
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One central banker's eurozone recovery is another food company's slowdown. It all depends on whether you see 1% growth as an improvement.

This goes a long way to explaining what recently happened at Nestle (NSRGY). The company missed analyst projections and laid the blame on slow growth in Europe -- at the same time that the European Central Bank and eurozone governments from Italy to Germany have been pointing to green shoots that signal an economic recovery.

For the first six months of 2013, Nestlé reported that sales climbed 5.3%. If we strip out the effects of currency moves and acquisitions, thus getting the company's preferred measure for growth, organic sales grew by 4.1% in the first half. Price increases, which usually add significantly to Nestlé's top line, added just 0.8 percentage points this time around -- well below the 2-percentage-point contribution analysts were seeking.

Consumers, especially those in Europe, are extremely price-sensitive, Nestlé noted. That negates some of the advantages that the firm normally reaps from owning premium brands or top market share in key market segments. That price sensitivity also led to an increase in marketing efforts at the company -- spending in this area climbed 60 basis points in the first half.

Breaking down the trends inside that period doesn't raise hopes for the second half of the year, either. The 4.1% organic growth for the six months was below the 4.3% organic growth seen in the first quarter. If you think that this math means second-quarter growth had to be below that 4.1% average, you're absolutely right. Organic growth in the second quarter was just 3.9%.

All this puts in danger Nestlé's full-year organic-growth target of 5% to 6%, and the company has lowered this guidance to "around 5%."

The company didn't leave investors struggling to understand where the problem was. Sales were slowest in Europe, growing at just 1.7% in the half. Sales in emerging markets were also showing lower growth rates, and Nestlé couldn't make up for any shortfall in Europe. Sales in Asia, Oceana, and Africa climbed just 5% in the first half of the year -- a big drop from the 8.4% figure seen in 2012. (Sales in the Americas climbed 5%.)

Moreover, trends headed downward in Europe between the first and second quarters, with sales growth in Europe dropping to just 0.5% in the second quarter.

Nestlé's reports on European sales trends might be confusing to you if you've been paying attention to economists who have been busy predicting an end of the eurozone's recession. The ECB's quarterly survey of economists predicts a deeper-than-expected 2013 contraction of 0.6% (from earlier projections of 0.4%), but then a substantial acceleration to growth of 0.9% in 2014.

Government officials in individual eurozone countries see the recovery taking hold even sooner. Italian economic minister Fabrizio Saccomanni told The Wall Street Journal that he expects the Italian economy to start growing again in the fourth quarter of 2013. On July 25, Spanish economy minister Luis de Gjuindos said Spain was leaving recession behind. His evidence was data that showed Spain's economy shrinking at a slower pace in the second quarter.

How do you put the views of Nestlé and economists (and economy ministers) together?

It's pretty simple, I think.

In the quarters ahead, Nestlé had been looking for something like 1.5% sales growth in Europe -- so a drop to 0.5% in the second quarter marks a significant slowing. Economists are looking at a current contraction of 1% in European economies so, from that perspective, 0.5% growth would look really, really good. There's also, of course, the propensity of government ministers to talk up the economy that they're responsible for running.

Investors and markets have a tendency to behave as gross domestic product growth and company growth are more tightly linked than they actually are. Nestlé's results are a good reminder that they aren't, and that optimism and pessimism are frequently a function of your initial position.

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