ZURICH Nestle's (NESN.VX) underlying sales growth slowed to 4.3 percent in the first quarter, underperforming its rival Danone (DANO.PA), as unrest disrupted business in the Middle East and chilly spring weather hit bottled water and ice-cream sales.
Nestle also faced negative consumer sentiment in the wake of a horse meat scandal, a chocolate egg recall and increased competition in the coffee business.
Sales at the world's largest food company rose to 21.9 billion Swiss francs (15.43 billion pounds) but fell short of an average estimate of 22.58 billion in a Reuters poll.
Nestle said it expected to see stronger momentum in key emerging markets and confirmed full-year guidance of 5-6 percent underlying sales growth and an improvement in its trading operating margin.
"The figure looks disappointing, particularly in the wake of Danone's strong numbers," Kepler Capital Market analyst Jon Cox said.
Earlier this week, Danone reported quarterly sales growth of 5.6 percent, on strong demand for baby food in Asia, a category Nestle boosted with its recent Pfizer (PFE.N) baby food buy.
Nestle Chief Executive Paul Bulcke said he expected to see volatility throughout 2013.
"The start to the year reflects the caution we expressed in February," he said in a statement.
The maker of Kitkat chocolate bars and Nespresso coffee pods said consumer sentiment remained subdued in Europe, where volume growth was partly offset by falling prices. Sales in the region grew 1.5 percent to 3.7 billion francs.
Business in North America is improving as the pizza category returned to growth and soluble coffee brand Nescafe performed well, the group said. Overall sales in the Americas increased 5.3 percent to 6.6 billion francs.
Sales growth in Asia, Oceania and Africa slowed further to 4.4 percent from 8.4 percent in full-year 2012.
The destruction of a factory in Syria, where civil war has raged for two years, created supply shortages in the Middle East, investor relations head Roddy Child-Villiers told an investor call.
"Asia looks like it has decelerated from the fourth quarter. I expect the stock to react negatively," said Cox.
Nestle shares fell 1.6 percent to 63.30 francs at 0702 GMT, underperforming a 0.7 percent fall in a European sector index .SX3P.
Nestle shares have risen about 8 percent so far this year, trading at about 18 times estimated earnings for the next twelve months, at a premium to Danone at about 17.1 but at a discount to Unilever at 18.6 times.
Unilever (UNc.AS) (ULVR.L) reports first-quarter results on April 25, and Mondelez International (MDLZ.O) on May 7.
Nestle bought U.S. pharmaceutical company Pfizer's baby food business for $11.85 billion (7.77 billion pounds) last year. It will have to divest parts of the business, notably in Mexico, where competition authorities said the tie-up would give Nestle too much power in the baby food market.
(Editing by David Cowell and Tom Pfeiffer)