VEVEY, SWITZERLAND — Along with slowing growth in China and volatility in the Swiss franc, a major challenge facing Nestle S.A. is the frozen food category, particularly in the United States, where consumers’ perceptions and preferences have changed dramatically while Nestle’s frozen brands of Lean Cuisine, Hot Pockets, Stouffer’s and others have not.
Nestle’s net profit in fiscal 2014 increased to 14.5 billion Swiss francs ($15.3 billion), with reported earnings per share at 4.54 Swiss francs ($4.78), up 45% from fiscal 2013, benefitting from the sale of stake in L’Oreal. Underlying earnings per share increased 4.4% in constant currencies.
Nestle reported sales of 91.6 billion Swiss francs ($96.5 billion) for the year, down 0.6% from fiscal 2013. Organic sales grew 4.5%, below Nestle’s target of 5% to 6% for the year.
In addition to supply and logistics reorientation and structural cost reduction in Switzerland and destocking in China, Nestle’s business strategy over the coming year includes a sharp focus on the company’s frozen portfolio in the United States.
“The category has decreased over the last years 2% to 3% every year,” said Paul Bulcke, chief executive officer of Nestle, during a Feb. 19 earnings call with financial analysts. “Why? Because the consumer has changed, also the expectations that was not given through that category.”
For starters, the company is repositioning its long-struggling Lean Cuisine business to align with new consumer perceptions of health, including gluten-free, high protein and simple ingredients.
“We’re seeing that whole lean market, not only in frozen, in general is challenged,” Mr. Bulcke said. “People don’t want to go only for diet. They want to go for healthy lifestyles, and that’s where Lean Cuisine has to move into and is moving into.”
Nestle executives said new Lean Cuisine products key in on culinary trends, with such flavors as ranchero braised beef, which is gluten-free and contains no preservatives. From the Stouffer’s brand comes a new line of entrees called Fit Kitchen, with such products as cilantro lime chicken containing 25 grams of protein.
Nestle also is launching products in the faster-growing segments of breakfast and snacks. Set to debut are Hot Pockets Breakfast Bites, featuring a sausage, egg and cheese biscuit variety, and Hot Pockets Snack Bites, including a pepperoni pizza flavor.
Another focus of Nestle’s frozen food innovation is premiumization, particularly in frozen pizzas, with such new products as DiGiorno Pizzeria thin crust pizza and California Pizza Kitchen hand tossed pizza, each featuring upscale ingredients with preservative-free crusts and no artificial flavors.
Nestle is supporting these initiatives with a digital marketing campaign and a “freshly made, simply frozen” message.
“The category was a little bit starved of brand support,” Mr. Bulcke said. “You may remember we spoke about the fact that this category was driven into being on-deal, and there, all efforts were just pricing, and people don’t buy prices. They buy value. And we have to get that back in there, and that is what is being done.”
Executives expect the company will benefit from these efforts later this year.
“I think we have compelling plans, but that is going to have to get traction over the months to come,” Mr. Bulcke said. “It is clear that momentum is going to be built up over the months, I would say second quarter and then further on.”
Looking ahead, the company expects to deliver 5% organic growth in fiscal 2015 with improvements in margins, underlying earnings per share in constant currencies, and capital efficiency.“We have challenges, and we do have very strong challenges … and it’s, first of all acknowledge them, accept them as a challenge,” Mr. Bulcke said. “And we have not done everything right and we have failed in connecting with new realities, and we have to see them as opportunities by correcting them and bringing the right actions and strategies in place.”