NESTLE to embark on massive retrenchment

Nestle, the Swiss-originating food and drinks giant, may have hit a bad patch as it has announced a significant reduction of its work-force as a result of worsening economic situations and declining performance. At its Annual General Meeting, AGM, just last month, shareholders openly protested the poor results posted by the company in the past year. The company said it was taking the uncomfortable decision having overestimated the rise of the middle class in Africa, The Financial Times reported.

 Although the policy will cover the whole of Africa, Hallmark can report that Nigeria accounts for a major chunk of its Africa market and the company’s recent poor performance in Nigeria may have weighed heavily in the decision to down-size the work force.

In the wee hours of yesterday the giant beverage manufacturer, Nestle SA announced its plans to cut 15 per cent of its workforce in 21 African Countries.

“We thought this would be the next Asia, but we have realised the middle class here in the region is extremely small and it is not really growing,” Cornel Krummenacher, chief executive for Nestlé’s equatorial Africa region, told the Financial Times in an interview at the regional headquarters in Nairobi.

The region covers 21 countries including Kenya, DR Congo and Angola.

 This has generated huge discomfort among staffers of Nestle in 21 African countries as they fear that they may fall within the category of persons to be sacked.

While efforts to reach Nestle Nigeria’s spokesman Dr. Sam Adeneko proved abortive as our text messages and calls received no response, the company which has spent hugely on expansion in Nigeria did not post very impressive performance  in its results for the year ended 2014.

For instance, Nestle Nigeria had noted that its end of year result for 2014 witnessed, ‘a mild growth in Turnover figure from N133.08 billion to N143.32 billion.

The Cost of Sales for the period slightly inch above previous year at N82.09 billion as against N76.29 billion in 2013.

Distribution, Sales and Marketing expenses stood at N24.68 billion as against the N22.93 billion in 2013.

Administrative expenses were put at N7.34 billion compare to N6.02 billion of corresponding year.

After taxation and other interests the company reported a Profit after Tax of N22.23 billion which slightly inched below 2013 profit by 0.10%’.

”With hindsight, much of the “Africa Rising” story was based on a now reversed commodity boom. With oil accounting for 60% of Africa’s export earnings, the collapse in the price of crude was always going to have a serious impact.

Yet nobody seemed able or willing to readjust, to switch off the hype. Until today! Nestle, admitted to the Financial Times of London it significantly over-estimated the continent’s near-term growth potential.

”Analysts say the Swiss multinational is now taking rapid remedial action, immediately slashing staff by 15% and putting its African ambitions on hold.

These MNCs forget that Africa, home to 15% of humanity, delivers less than 3% of global GDP – a result of weak governance and even poorer economic policies. Their subjects, surely, won’t tolerate such abuse indefinitely”.

Mr Krummenacher had sadly declared in the report that the turnover in the region (African) had failed to deliver in line with initial growth forecasts set out in 2008, when Nestlé, which has invested close to $1bn in Africa in the last decade, stepped up its expansion in the region.

Since then it has built a clutch of new factories, aiming to double its business every three years.

Instead, so far this year, the report also said, Nestlé has closed its offices in Rwanda and Uganda entirely, is reducing its product line by half, and might close some of its 15 warehouses before September.

Mr Krummenacher said the company would be lucky to reach annual 10 per cent growth in future years.

“We don’t have enough money every month to pay the bills. With these cuts, we hope we will be able to break even next year,” said Mr Krummenacher, who added that Nestlé had been borrowing from its Swiss headquarters and local banks to pay wages and buy raw materials.

 A survey from the African Development Bank, noted the report, put the continent’s middle class at 330m people in 2011. But a survey from Standard Bank last year – highlighted by Mr Krummenacher during the interview – puts it at a more sobering 15m across 11 countries, with only 800,000 middle class households in Kenya, a nation of 44m people.

It further said that Nestlé’s experience contrasts with that of several local competitors in the region who are still expanding, while several new shopping malls are opening across the continent this year, drawing big-name anchor tenants such as Walmart and Carrefour.

 For example, Nigeria, which is not part of Mr Krummenacher’s remit, is estimated to have 8m people in its middle class.

“I think Nestlé bet big and it didn’t come through,” said Aly-Khan Satchu, an investment adviser in Nairobi. “It didn’t have the right products for the market and the growth of the middle class is not as fast-paced as it might have been. Some multinationals expected a steeper trajectory.”

The report made it clear that the retrenchment was in contrast with Africa’s consumption-fuelled growth story, which has drawn investors in search of a new, fast-growing market, adding that Africa’s middle class underlines difficulties for foreign entrants into the sub-Saharan markets, which are dominated by family businesses broadly thriving on local know-how and the sale of cheap products tailored to individual countries.