Nestlé not thwarted by thaw in frozen

by Monica Watrous
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Hot Pockets and Lean Cuisine are among Nestlé's challenged brands in the freezer aisle.

VEVEY, Switzerland – Nestlé SA remains confident in its frozen business, despite continued headwinds. Behind pet care, the category is the Swiss company’s second largest in the United States, where Hot Pockets, Lean Cuisine and other brands have been losing steam.

“We are, across the board, really facing some challenges in frozen food,” said Chris Johnson, executive vice president, Nestlé Business Excellence, during an Oct. 16 call with financial analysts to discuss third-quarter performance. “However, we do believe in this category. Frozen, we believe that this is a very, very worthwhile category for us.”

For the nine-month period ended Sept. 30, the company had sales of 66,224 million Swiss francs ($70,190 million), down from 68,350 million Swiss francs ($72,443 million) in the comparable period, reflecting unfavorable foreign exchange, divestitures, net of acquisitions and reduced sales growth. Nestlé reported organic growth in all geographies but said ongoing challenges in frozen foods bore a negative effect on performance. Particularly pressuring results during the third quarter were strategic reductions in trade promotion behind some of Nestlé’s frozen-food and ice cream brands.

“We have been backing off, and that is a decision,” said Paul Bulcke, CEO. “We have been taking out, for example, on premium retail base ice cream … We say, well, that’s not our business, to be competing only on price and driving a lot of efforts for nothing, for no substance, for no even strategic dimension we can build in. That’s the same in frozen.”

The move affected market share for Nestlé, but Bulcke said the company sees signs of a turnaround.

“We’re not going to be pushed in the wrong corners,” he said. “We’re not going to let competitive intensity manage, per se, our businesses. Now, it hurts, and it has to be compensated. And that takes some time sometimes in very strong, very broad categories like frozen.”

The company said it has seen some of its recent innovations performing well despite category headwinds.


A mixed picture

Nestlé divides the frozen category into four segments, each of which has its own issues, challenges and opportunities, Johnson said. The largest is pizza, comprised of DiGiorno, Tombstone, California Pizza Kitchen and Jack’s brands.

“On a positive note, we’re seeing some positive growth in the first nine months of the year,” Johnson said. “We’re seeing growth in our premium areas in pizza. We’re seeing growth with our value brands in pizza.”

Capitalizing on the customization trend in the restaurant industry, Nestlé unveiled a personalized pizza kit from DiGiorno during the quarter.

“There are opportunities still to grow DiGiorno, and we’re seeing where we have innovations like our thin and crispy crust, and we’re launching new items in this area,” Johnson said. “We have optimism that this, we see, will come back.”

Stouffer’s competes in what Nestle calls its regular meal segment, and the brand has delivered mixed results. Multi-serve meals, including a meat lover’s lasagna, and individual macaroni and cheese cups are performing well, but Johnson noted the company is “struggling a bit on the single-serve side.”

In Nestlé’s handheld snacks segment, Hot Pockets has taken a hit on various issues this year, including a recall related to bad beef from a supplier in February.

“This one, we’re struggling,” Johnson said. “We had a recall at the beginning of the year on some of our items. We’ve also been hit with some issues related to the reductions in federal assistance, which is a big part of the consumption of this particular product. But what’s encouraging is we’re seeing increases in velocities, regains in distributions, and we’re seeing this one is starting to come back.”

Also under pressure is Lean Cuisine, Nestlé’s player in the reduced-calorie frozen meal segment.

“We’re seeing a declining segment,” Johnson said. “We are also declining in this segment.”

Recent innovations from Lean Cuisine in breakfast and snacks, however, are showing promise, he added. Nestle launched a Morning Collection featuring breakfast sandwiches with egg whites on English muffins and steel-cut oatmeal with apples, cinnamon and almonds or blueberries and pomegranate.

“We have leadership in all four of these segments,” Johnson said. “We have very strong brands. And it’s our challenge to make sure that we’re innovative and that we provide and address consumer needs better and better as we move ahead.”

Added Bulcke: “I’m confident, too, in the frozen business in the United States.”

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