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Nestle falls behind as millennials warm up to frozen meals

Ignoring calls by some investors to divest the business, the Swiss food giant has revamped its product line in a bid to win over a new generation of consumers

By Richa Naidu and Melissa Fares  /  Reuters, Solon, OHIO

Chef Ricardo Landi prepares a dish at a Nestle SA development center in Solon, Ohio, on April 24.

Photo: Reuters

At Nestle SA’s US$50 million research center outside Cleveland, Ohio, food technicians and packaging experts three years ago set out to remake its frozen food lineup and appeal more to busy, health-conscious adults in their 20s and 30s.

Nestle might have gotten the menu right, but its timing was off. When young consumers came back to the frozen food aisle last year, the company’s supply chain was not ready. The result: It lost market share to rivals.

Jeff Hamilton, who heads Nestle’s US food business, said in an interview that the company did not have the manufacturing capacity ready to meet extra demand for its Stouffer’s Fit Kitchen and Lean Cuisine meals.

He said it was “sudden, significant and beyond our expectations.”

To catch up, Nestle has increased capacity at several of its US factories, including making adjustments to its plants and adding a new line in its factory in Jonesboro, Arkansas, Hamilton said.

“That doesn’t mean we’re not close to the edge, but I think we’re one step ahead from where we were,” he said.

Investors have long pressed Nestle to improve the performance of its frozen food business, leading the company to invite consultants, focus groups and international chefs to its Ohio research facility to help overhaul its menu.

Today, the lineup includes items like coconut chickpea curry and Sweet Earth Veggie Lover’s Pizza, advertised as organic or high in vitamin C.

Much of its effort revolved around a pitch to millennials, the young adult demographic that executives believed would purchase frozen meals if they were offered healthier, more modern choices at the right price point.

So when demand began rising a year ago, it should have offered Nestle a chance to quickly quiet critics. Instead, it marked a missed opportunity.

After several flat years, frozen food sales in the US have risen 1.4 percent in the past year, market research firm Nielsen Corp said.

Young adults helped drive the surge. Last year, millennial homes spent 9 percent more than average households per trip on frozen foods.

Yet since September last year, retailers have sold fewer Nestle frozen entrees than during the same period the prior year, hitting a low point in January, when Nestle volumes were about 5 percent down from a year earlier, according to AllianceBernstein LP analysts who reviewed data from Nielsen.

Competitors filled the gap. Frozen entree sales rose for both Conagra Brands Inc and Pinnacle Foods Inc, two key rivals, the data showed.

Conagra’s volumes were up about 10 percent annually in March.

Nestle’s retail sales have started to pick up, but are still well below last year’s levels, AllianceBernstein said.

Frozen food is a relatively small part of Nestle’s sprawling portfolio, which also includes Nescafe instant coffee and Pure Life bottled water.

It is one of the reasons some investors have called on it to sell the business, saying that it would free the Swiss company to focus on more important or higher-growth businesses.

“Nestle will never be able to convince me that management attention on a business like frozen is the same as what they’re giving to high-growth businesses,” said one Nestle investor, who declined to be named.

Frozen meals and pizza accounted for 14 percent of Nestle USA’s US$27 billion sales in 2016, or about 4 percent of the company’s global sales of about US$89.35 billion.

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