ZURICH/LONDON (Reuters) - Nestle (NESN.S) plans to close a skin cream factory in Switzerland and shift production elsewhere in response to a slowdown in a business once seen as one of its rising stars.
The move comes as Nestle’s new chief executive Mark Schneider overhauls Europe’s largest company, which has come under pressure from an activist shareholder pushing the food giant to react more quickly to industry changes.
Nestle Skin Health said on Thursday it would close the Egerkingen factory in northern Switzerland, where it makes Daylong sun cream and products for dry skin, with the potential loss of 190 jobs.
It plans over the next 12 to 18 months to transfer manufacturing to other factories. Nestle Skin Health announced in 2015 it would build a new plant in Brazil, scheduled to open in 2018.
Skin treatments have been a major part of a push by the world’s largest food maker into higher-growth and more profitable health products to counter a slowdown in its traditional food businesses, which range from Purina pet food to Perrier water.
But the three-year-old unit, born when Nestle took over its Galderma joint venture with L‘Oreal (OREP.PA), has not performed as well as expected.
“The business is still in the expansion phase, but the results have been disappointing,” said Patrik Schwendimann, an analyst at Zuercher Kantonalbank.
He estimates that Nestle Skin Health had sales of about 2.3 billion Swiss francs ($2.38 billion) last year and that margins for that unit, combined with Nestle Health Science, were around 9.2 percent, down from 12.5 percent in 2015. “Companies in the health area should be getting margins of at least 15 to 20 percent in the mid-term,” he said.
Nestle does not break out results for its skin health business separately, but said in July the business had lower second-quarter sales volumes and pricing, hurt by a soft performance in China and pressure from generic versions of its prescription medicines.
The company sells dozens of different products via prescription, over the counter and as corrective and aesthetic products which are used by doctors.
Nestle has responded by launching an overhaul of its skin health business, aiming to simplify its organisation and geographical footprint.
One analyst saw Thursday’s move as a sign that Nestle’s new CEO is being decisive about cutting costs and improving profits.
“For me it’s a clear indication that the CEO is really now implementing and executing his plan at high speed, in all Nestle’s businesses, by looking at underperformers, tracking costs and improving cash returns,” said Jean-Philippe Bertschy at Vontobel. “No more holy cows at Nestle.”
Nestle said production costs at the Egerkingen site had been rising because volumes were low and the factory was not running at full capacity.
Since Schneider took over as CEO in January, he has dropped the company’s long-term growth target, announced a 20 billion Swiss franc share buyback plan and the intention to sell its U.S. confectionery business.
Schneider, who joined Nestle last year from German health care company Fresenius, is expected to give more details of his strategy at an investor seminar next month.
In June, activist shareholder Daniel Loeb’s Third Point Capital revealed a $3.5 billion stake in Nestle, and urged it publicly to take steps to improve shareholder returns.
($1 = 0.9648 Swiss francs)
Reporting by John Revill, editing by David Evans and Adrian Croft