Nestle Ltd.'s revenue may take a hit in the short term after a report released by a Swiss investigative organisation revealed that its popular baby food products being sold in developing countries contained excessive sugar.
The Public Eye and International Baby Food Action Network found that variants of products like Cerelac—sold in countries such as India, the Philippines, and Brazil—contained an average of nearly 3 grammes of added sugar per serving. The variant sold in Europe and the US did not have as much sugar.
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Shares of Nestle India tumbled to an over-two-month low during the day on Thursday, after the news came out. It closed 2.95% lower, as compared with a 1.08% fall in the Nifty FMCG.
Nestle's dominance in the infant food market is striking, with an overwhelming 98% share and minimal competition. This stronghold is pivotal to the company's financial landscape, with milk products and baby foods contributing about 40% to its total revenue.
This market positioning highlights Nestle's significant influence and the crucial role of infant products in its business strategy.
Milk-based foods and baby food segments currently contribute significantly to its revenue and the company might experience a short-term revenue hit due to the prevailing demand sentiment surrounding the Cerelac controversy, said Preeyam Tolia, equity research analyst for FMCG and retail at Axis Securities Ltd.
However, Nestle's long-term revenue outlook remains strong due to its dominant position in the market, he said. With a staggering ~95% market share, Nestle essentially holds a monopoly in the baby food segment in India, which effectively shields it from significant competition, Tolia said.
Nuvama Executive Director Abneesh Roy does not expect the recent revelations to significantly impact the company's revenue for two reasons. First, over the past five years, Nestle has proactively reduced the sugar content in its infant food products by 30%, indicating a commitment to addressing nutritional concerns. Second, India's pricing is a major challenge compared to developed countries, which is why most food companies use added sugar in the products, he said.
As we transition towards stricter regulations and as per capita income improves, which is expected to happen only gradually, Nestle is expected to do better in terms of reducing sugar, Roy said.
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