LONDON, Feb 18 (Reuters) – Nestlé and Danone face pressure from investors to detail the financial impact of the biggest infant formula recalls in the companies’ recent history and demonstrate that they have learned from the crises that affected their shares and left dozens of babies sick.
Nestlé began recalling products in December in Europe, Asia and the Americas due to possible contamination by cereulide, a toxin that can cause nausea and vomiting.
The crisis led to a video apology recorded by Nestlé’s new chief executive, Philipp Navratil, and involved competitors including Danone and Lactalis.
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French authorities have opened investigations into the way the recalls were carried out, consumers are questioning their speed and investors want clarity on the financial impact on the annual results of Nestlé, on Thursday, and Danone, on Friday.
Danone declined to comment. Nestlé said it was focused on replenishing stocks.
‘REPUTATION IS EVERYTHING’
“I was expecting a little more proactivity and transparency in terms of communication,” said Kai Lehmann, portfolio manager at Flossbach von Storch, an investor in Nestlé. ‘This is exactly what Philipp Navratil promised when he took office.’
The crisis compounds the challenges faced by Navratil as it attempts to revive the $260 billion consumer goods giant’s sluggish sales volume, already pressured by US import tariffs and a migration of consumers to cheaper brands.
Nestlé said it does not expect a major financial impact, but Lehmann questioned whether the company’s estimate — that less than 0.5% of the group’s sales will be affected — still holds true. Jefferies analyst David Hayes estimates Nestlé’s total exposure at €1.6 billion.
“The follow-on effects are likely to be greater, without a doubt,” Lehmann said, criticizing what he called Nestlé’s “slicing tactics” in releasing information gradually. Nestlé claims to have acted quickly and proactively throughout the process.
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Six experts, analysts and consumers interviewed by Reuters say companies face a battle to restore their reputations.
“In infant formula, reputation is everything,” said Tom Booijink, senior dairy specialist for Europe and Africa at RaboResearch.
For Paul Jamieson, a father from Northumberland, England, whose daughter fell ill after consuming Nestlé baby formula, confidence has dissipated. “When that trust is compromised, it’s very difficult to feel comfortable continuing to use these products,” he said.
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MARKET SHARE RISKS
France identified Chinese company Cabio Biotech as the source of cereulide-contaminated arachidonic acid (ARA) oil. Producers such as Nestlé and Danone rushed to change suppliers and increase production.
Cabio Biotech did not respond to a request for comment.
Danone is particularly exposed: about 17% of its total profit comes from infant formula in China, compared with less than 2% for Nestlé, Jefferies’ Hayes said. Chinese parents remain very concerned about the risks of contamination following previous scandals.
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Danone’s shares have fallen more than 5% this year, while Nestlé’s shares have recovered from the drop recorded at the end of January.
Both companies are at risk of losing sales and market share. Danone’s strong performance in China contributed to third-quarter sales exceeding expectations, while Nestlé’s NAN formula, a bright spot amid Gerber’s weaker volumes, was hit by recalls.
Some competitors are already benefiting. German brand HiPP told Reuters it had seen a sharp increase in demand and increased production. New Zealand’s a2 Milk, however, said it did not expect a significant increase.
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Hayes said the recalls could force Nestlé’s president to reduce the company’s volume growth forecast by about 100 basis points.
“It may seem unfair, but people may wonder whether (Navratil) is really incapable of controlling and preventing these things because (Nestlé) is simply a giant that is difficult to supervise,” Hayes said.
