Nestle’s Turnaround Still Has a Bitter Aftertaste – Moby THE GIST
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Nestle’s turnaround is showing signs of life, but investors still got indigestion. Organic growth improved to 3.6% in the first half, real internal growth rose to 1.5%, and demand strengthened across coffee, snacks and emerging markets. But net profit fell 31.4% to CHF 3.5 billion (about $4.3 billion), margins were squeezed by coffee and cocoa costs, and shares dropped sharply after management sounded more cautious on second-half profitability.
WHAT HAPPENED
Nestle reported first-half organic growth of 3.6%, up from 2.9% a year earlier. The more encouraging number was real internal growth, or volume-led growth, which rose to 1.5% from just 0.2%.
But the profit line looked much rougher. Net profit fell 31.4% to CHF 3.5 billion from CHF 5.1 billion a year earlier. The underlying trading operating profit margin slipped slightly to 16.4%. Higher coffee and cocoa prices hurt profitability, alongside increased marketing spending, tariffs and the impact of an infant formula recall.
Investors were not impressed. Nestle shares fell heavily after the results, with the stock suffering its biggest drop since 2020.
There were bright spots. Coffee grew 7.5%, helped by Nescafé. Food and Snacks rose 3.7%, supported by Maggi, KitKat and Milo. Petcare grew 2.7%. Emerging markets, excluding China, grew 7.1%, while China stabilized after earlier inventory reductions.
Nestle also pushed ahead with portfolio changes. It announced a 50:50 joint venture for its waters and premium beverages business, expected to generate around CHF 2.8 billion in net cash proceeds in 2027. Its mainstream vitamins, minerals and supplements business and ice cream division are also classified as assets held for sale.
WHY IT MATTERS
Nestle is trying to turn around a supertanker without spilling the coffee.
For years, the world’s biggest food group has looked too slow, too sprawling and too dependent on price rises. It has great brands, but not enough momentum. It has scale, but also complexity. And after years of inflation, consumers have become more selective about what they are willing to pay for.
That is why the volume improvement matters. Food companies spent much of the inflation shock pushing through price hikes. That protected sales, but it also tested consumer loyalty. The real prize is getting shoppers to buy more again.
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Nestle is starting to do that. Real internal growth is moving in the right direction, and pricing contributed less to growth than it did a year ago. But investors wanted more.
The stock had rallied before the results on hopes that volumes would surprise to the upside. Instead, the second-quarter volume growth was good, not great. In a turnaround, “fine” can still be a problem when the market has already priced in “finally.”
The margin outlook was the bigger bruise. Nestle had previously pointed to stronger second-half margins, but now expects second-half profitability to be broadly similar to the first half.
There are reasons for the squeeze. Coffee and cocoa have been expensive. Marketing investment is rising because Nestle needs to rebuild brand momentum. Tariffs are adding friction. And the infant formula recall has hurt one of the company’s most sensitive businesses.
The portfolio cleanup is the clearest sign that management understands the problem. Nestle is focusing on four core areas: Food and Snacks, Coffee, Nutrition and Petcare. Selling or separating water, ice cream and parts of the vitamins business should simplify the group and free up cash.
The water deal is especially important. Brands such as Perrier, San Pellegrino and Acqua Panna are valuable, but water is capital-intensive. A joint venture lets Nestle keep some exposure while taking cash off the table.
The turnaround plan also depends on Fuel for Growth, Nestle’s cost-savings program. Savings have reached CHF 1.7 billion and are on track for CHF 2 billion this year. That gives management money to reinvest in marketing, innovation and faster-growing brands. The risk is that savings get eaten by input costs before investors see the benefit.
Nestle still expects 3% to 4% organic growth this year, with real internal growth accelerating and free cash flow above CHF 9 billion. That is solid. But solid is not enough when investors are waiting for proof that the new Nestle is leaner, faster and more profitable. For now, the turnaround is moving. It just hasn’t reached the checkout yet.
WHAT’S NEXT
Investors will watch whether volume growth keeps improving in the second half and whether coffee and cocoa costs ease enough to support margins. The key tests are infant formula recovery, portfolio disposals, cash generation and whether Fuel for Growth savings turn into visible earnings improvement.
Nestle has a cleaner recipe. Now it has to make the numbers taste better.