Nestle and Unilever, Don't Be Fooled by Your Honeymoon

(Bloomberg Gadfly) -- A little light at the end of the consumer tunnel couldn't have come soon enough for Unilever NV and Nestle SA.

On Thursday both companies reported first-quarter sales that beat investor expectations, as their pricing power improved.

Each is in a honeymoon period right now. But both face an uphill battle to deliver, and the cost of failure puts the fundamental structure of these global giants at stake.

Unilever's update was the first since it rebuffed Heinz Kraft Co.'s $143 billion takeover approach. Only two weeks ago, CEO Paul Polman announced a strategic overhaul designed to convince investors that it had an independent future. It would have been tricky to set out this stall, and then follow up with disappointing results. Luckily, he didn't have to.

At Nestle, new Chief Executive Officer Ulf Mark Schneider is tasked with reversing several years of underperformance. He's already won investors' backing after ditching Nestle's long-term sales target and setting out plans to strike a balance between expanding sales volumes and cutting costs. Although today's expectations-beating sales result was nevertheless the lowest for over a decade, investors are betting that things will get better later this year.

Both have manged to eke out some pricing power, which is good news because falling prices mean more pressure to raise volumes. Nestle's pricing accelerated from 0.9 percent in the fourth quarter of 2016 to 1 percent in the first quarter of 2017, while Unilever's picked up from 2.6 percent to 3 percent.

Against this, the worry is slowdown in North America, where U.S. consumers have become more cautious over the past few months. If that persists that will amount to a substantial headwind to recovery. 

Investors are giving both companies the benefit of the doubt. Unilever shares are up 29 percent since the end of January, boosted by the bid. Nestle's elevation has been more gradual.

Kraft Heinz's approach to Unilever changed the landscape for the big consumer groups, and the consequences of disappointing performances are clear: if Unilever veers off course then it could face another tilt from a predator. At least Unilever has set out a battle plan, which includes spinning off its spreads business. 

For Nestle, Schneider's plan ruled out shedding confectionery and U.S. prepared foods, which have been underperformers of late (though frozen foods picked up a bit in the first quarter). He will have another chance to outline his assessment in September, and if the group's performance lags expectations, then, like Unilever's U-turn on spreads, he may have to think again.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

To contact the author of this story: Andrea Felsted in London at afelsted@bloomberg.net.

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net.