Recently, according to reports from foreign media, Nestlé is contemplating the sale of its 20% stake in L'Oréal Group, which is valued at approximately $47 billionThis strategic move aims to generate funds for advertising and marketing investments to help reverse the decline in market share that the company has been experiencing.

As the second-largest shareholder in L'Oréal, Nestlé's decision to divest could provide a significant influx of capital, especially given the relatively low share price of the company at presentThis potential sale could also fund Nestlé's ongoing marketing initiatives and stock repurchase plans, reviving investor confidence in the company's growth trajectory.

Nestlé has faced intensified pressure on sales growth in recent years, resulting in a leadership overhaul with a new CEO stepping inThe effectiveness of this new leadership in steering the company back to its peak performance remains to be seen, but the stakes are high given the challenges at hand.

This would mark the third time that Nestlé has sold shares in L'Oréal

The partnership between the two companies dates back to 1974 when the founding Bettencourt family of L'Oréal invited Nestlé to acquire a portion of its equity to stave off nationalization, making Nestlé the second-largest shareholder behind the Bettencourt family, who retained a 29.7% stake initially.

After maintaining a stable relationship for nearly 40 years, Nestlé's first sell-off happened in 2014, when L'Oréal repurchased 8% of its stakes for €6.5 billion, reducing Nestlé’s holdings to 23.17% and increasing the Bettencourt family's share to 33.13%. The second sell-off occurred in December 2021, when Nestlé sold 22.26 million shares worth €8.9 billion, further decreasing its stake to 20.1% while the Bettencourt family's holdings grew to 34.7%. Should Nestlé move forward with this latest sale, it would be a significant shift in their long-standing relationship.

News from Reuters suggests that such a sale may negatively impact L'Oréal's share price, prompting Nestlé to consider targeted repurchases to mitigate this potential fallout

This scenario could also present opportunities for the Bettencourt family to increase their ownership percentage in the beauty giant.

Interestingly, during the Barclays Global Consumer Conference, when asked about Nestlé's shareholding in L'Oréal, CFO Anna Manz indicated that the decision would rest with the board and refrained from offering further commentaryShe did, however, highlight that Nestlé has historically viewed this stake as a financial investment rather than a strategic one—a viewpoint that seems likely to continue in the future.

In related news, Nestlé's board recently appointed Manuel Favorin, the current Executive Vice President and CEO for Latin America, as the new CEO of Nestlé, effective September 1. Mark Schneider, who had served as CEO for eight years, has resigned from his position, indicating a shift in Nestlé's leadership during a critical period where there are escalating concerns over the company's growth prospects.

Unlike Schneider, who was seen as an outside hire, Favorin has a long history within Nestlé, having joined the company in France in 1986. His trajectory through various roles and regions including the management of Nestlé’s European operations during the financial crisis of 2008-2014 and his role in driving growth in the Americas sets him apart as a seasoned veteran of the company

Under his leadership, Favorin aims to focus on organic growth and expanding market share, prioritizing investment in brands.

With an urgent need to bolster performance while maintaining profit margins, the potential sale of L'Oréal shares could serve as an expedient solution for Favorin.

Examining the broader context of Nestlé's struggles in a competitive market, the company, founded in 1866 and headquartered in Switzerland, has established itself as one of the largest food and beverage corporations globally, engaging in a wide array of products spanning beverages, nutritional items, dairy, ice cream, pre-packaged foods, pet food, and more.

Despite a reported sales figure of CHF 93 billion for 2023, marking a decline of 1.5% compared to the previous year, the company recorded a 7.2% organic growth rate, primarily driven by increased product prices—a clear indication that volume may be suffering

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In the first half of 2024, Nestlé reported total sales plummeting by 2.7% to CHF 45 billion, and the basic trading operating profit fell by 0.8% to CHF 7.8 billion.

In the Greater China region, a vital market for Nestlé, sales dropped by 4.2% to CHF 2.4 billionAlthough there was an internal growth rate of 2.9%, external pressures, notably heightened competition, hampered Nestlé’s pricing strategy, yielding a negative contribution rate of -1.3%.

Industry analyst Zhang Shule observes that the slow product iterations from Nestlé in China starkly contrast with the rapid advancements of domestic brands such as Luckin CoffeeWhile Nestlé aims to cater to consumer demand, its scale limits the speed at which it can innovate compared to agile players in the marketAs a result, Nestlé has opted for steady supply of flagship products, employing incremental iterations rather than aggressive experimentation.

Nestlé also cited unfavorable currency fluctuations as a challenge, which, during the reporting period, led to a sales decline of 6.1% in Greater China