Recently, foreign media reports have indicated that Nestlé is considering selling its 20% stake in L'Oréal Group to raise funds for advertising and marketing investments, aiming to reverse the decline in market share. Nestlé, as the second-largest shareholder of L'Oréal, holds a 20.1% stake currently valued at approximately $47 billion. Selling a portion or all of these shares at a time when Nestlé's stock price is relatively low would provide the company with funds for marketing and stock buyback plans.

In recent years, Nestlé has faced pressure in terms of sales growth, leading the company to recently replace its Global Chief Executive Officer. Under the leadership of the new CEO, it remains to be seen whether Nestlé can achieve a recovery in performance and return to its peak.

This would be the third time Nestlé sells L'Oréal shares. The partnership between Nestlé and L'Oréal began in 1974 when, to avoid nationalization, the founding Bettencourt family of L'Oréal Group invited Nestlé to acquire a portion of L'Oréal's equity, making Nestlé the second-largest shareholder after the family, with an initial stake of 29.7%.

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After a stable relationship that lasted for 40 years, the first reduction occurred in 2014. That year, L'Oréal Group repurchased 8% of the shares held by Nestlé for €6.5 billion, reducing Nestlé's stake to 23.17%, while the Bettencourt family's stake increased to 33.13%.

The second reduction took place in December 2021, when Nestlé sold 22.26 million shares of L'Oréal, valued at €8.9 billion, reducing its stake to 20.1%, and the Bettencourt family's stake increased to 34.7%.

If this reduction plan is implemented, it will be the third time Nestlé sells L'Oréal shares.

According to Reuters, Nestlé's selling actions may have a negative impact on L'Oréal Group's stock price. Nestlé may consider targeted buybacks to mitigate this potential impact, which would also provide the Bettencourt family with an opportunity to increase their stake in L'Oréal.It is worth mentioning that at the Barclays Global Consumer Conference, when asked about the view on holding L'Oréal shares, Nestlé's Chief Financial Officer Anna Manz stated that it would depend on the board's decision, and she could not comment. However, she noted that Nestlé has always regarded this equity as a financial investment rather than a strategic one, and it will continue to be so in the future.

Change of Global Chief Executive Officer

On August 23, the Nestlé Board of Directors appointed the current Executive Vice President and CEO of the Latin America region, François Rischard, as the CEO of Nestlé Group, effective from September 1.

At the same time, Mark Schneider, who has been the CEO for 8 years, has decided to relinquish his positions as CEO and board member of the company and will leave the company.

Nestlé's Board Chairman Paul Bulcke said in an interview with the Swiss newspaper Le Temps that the sudden change of Nestlé's CEO was due to concerns about the company's growth prospects.

Unlike the "parachuted" Schneider, the new CEO François Rischard is a long-time employee of Nestlé. Nestlé pointed out that Rischard joined Nestlé France in 1986. Since then, he has continuously advanced within the company, holding various positions in different businesses, markets, and regions. During the financial and economic crisis from 2008 to 2014, Rischard successfully managed Nestlé's European business. Subsequently, he took over as CEO of Nestlé Americas, accelerating growth in the region. In 2022, after the establishment of Nestlé's new regional structure, Rischard was appointed as CEO of the Latin America region, successfully leading the region through a challenging period.

At the end of August, Nestlé's new CEO François Rischard publicly announced his leadership strategy, emphasizing a focus on organic growth and market share expansion. To achieve this goal, Rischard stated the need to invest in brands. Rischard pointed out: "My goal is to create (financial) space with my management team so that we can make these investments."

For Rischard, he needs to quickly improve Nestlé's performance in a short period while also ensuring operating profit margins; perhaps selling L'Oréal Group shares is a quick and feasible solution.

Slow product iteration in the domestic market

Founded in 1866 and headquartered in Switzerland, Nestlé Group is one of the world's largest food and beverage groups, covering almost all food categories, including beverages such as coffee and tea, nutritional health products, dairy and ice cream, prepared foods and cooking products, pet food, chocolate and candy, bottled water, etc.According to the financial report for 2023, Nestlé's annual sales amounted to 93 billion Swiss francs, a decrease of 1.5% compared to the previous year, with the company's sales declining both globally and in the Greater China region. Despite an organic growth rate of 7.2%, this increase was primarily due to product price hikes, with pricing contributing 7.5% to the growth.

Entering 2024, Nestlé's performance remains challenging. On July 25th, Nestlé's financial report for the first half of 2024 showed a 2.7% decrease in total sales for the first half of the year, falling to 45 billion Swiss francs, with basic trading operating profit at 7.8 billion Swiss francs, a decrease of 0.8%.

In the highly scrutinized Greater China region, Nestlé's sales for the first half of the year decreased by 4.2%, to 2.4 billion Swiss francs. Although the actual internal growth rate reached 2.9%, the pricing contribution rate was -1.3% due to intensified industry competition, indicating that Nestlé's pricing strategy in this market faced obstacles.

Internet industry analyst Zhang Shule believes that Nestlé's product update speed in China is slow, in stark contrast to the rapid development of domestic coffee brands. Although Nestlé intends to cater to consumers, given its scale, it cannot compete with lightweight brands like Luckin in terms of iteration speed. Therefore, Nestlé can only supply major products stably and adapt to the market through small iterations, rather than quickly testing and mass-promoting new products.

Nestlé pointed out that, in the Greater China region, in addition to market competition, the negative impact of exchange rates is also a challenge. During the reporting period, exchange rate fluctuations led to a 6.1% decrease in sales in the Greater China region. Furthermore, to drive growth, the Greater China region increased investment in advertising and marketing, resulting in a decrease of 80 basis points in the basic transaction operating profit margin.

Looking ahead to the full year of 2024, Nestlé expects an organic sales growth rate of at least 3% and anticipates a mid-single-digit growth in basic earnings per share calculated in constant currency. The company expects the basic trading operating profit margin to remain stable and is likely to improve moderately.

After the release of the 2024 semi-annual report performance data, several institutions downgraded their ratings for Nestlé. Among them, Morgan Stanley rarely downgraded its rating for Nestlé due to concerns about the company's future growth prospects. Morgan Stanley analysts downgraded Nestlé's rating from "Equal Weight" to "Underweight," citing potential challenges for Nestlé in achieving growth in the coming years.