On Thursday, the Swiss food giant Nestle Société Anonyme posted a drop in its profit for the first half of 2014. As per Nestle’s report, the slump in profit was due to two chief reasons. One of them is the unfavorable exchange rate and the other is reduced demand in developed markets.
Nestle is not the only company that is facing the problem due to sluggish market in Europe and other developed countries. The French company Danone and the Anglo-Dutch company Unilever are experiencing the same. Danone reported poor dairy sale and Unilever has missed the prediction for second quarter sales in July.
Nestle announced it will start a 8 billion Swiss francs (roughly $8.8 billion) share buyback program. The program will lower the company’s share capital by approximately 3.6%. The buyback program will begin this year and continue all through 2015.
Nestle’s net profit from this year’s January to June slipped 9.6%. In 2013, the profit for the first half was 5.12 billion Swiss francs. This year it stood at 4.63 billion Swiss francs. Nestle also scored below the prediction of the analysts. Analysts predicted the first half profit to be 4.99 billion Swiss francs. Paul Buckle, the CEO of Nestle said, “We delivered solid, broad-based organic growth, driven by real internal growth and pricing in what is still a very volatile trading environment.”
The main reason Nestle’s revenue in the first half of this year saw a drop of 4.8% from the previous year is weak foreign currencies. When the revenue converted to swiss francs, the margin got reduced. The organic sales growth is not dependent on currency fluctuations. The organic growth was 4.7%, lower than the long-term target of Nestle.
Some analysts said the condition has become tough for food groups because in developed countries, prices are under pressure and in emerging markets, the demand has been slowing due to economic meltdown. The only reason Nestle has been able to stand tall is by spending more on marketing and abandoning underperforming units. An analyst called Jean-Philippe Bertschy said, “Nestle is one of the very few players in the consumer goods sector not to disappoint the market in the first half, and not giving a profit warning for the full year.”
So far Nestle has somewhat managed to avoid hazardous consequences by heavily advertising its products. Whether or not the share buyback program fetches the same success to Nestle is yet to be seen.