Joint ventures are flavor of the month at Nestlé. There are reasons why the trend may catch on at other global brand manufacturers, but such tie-ups should be used sparingly.
The world’s biggest food company said late Thursday that it will sell a 60% stake in cold-cut meats business Herta to family-run Spanish peer Casa Tarradellas. Last week, Nestlé agreed to sell its U.S. ice-cream brands such as Haagen-Dazs to existing private-equity tie-up Froneri for $4 billion.
Joint ventures aren’t new in the packaged-goods sector. French dairy giant Danone, for example, has a long-standing partnership with fermented drink maker Yakult. But they could become more popular as companies such as Unilever and Nestlé come under continued pressure to sell brands that drag down their overall sales growth.
This month’s deals at Nestlé are different beasts. Selling American ice cream to Froneri gave the joint venture global scale and could help the Swiss company to cash out at a higher valuation if its private-equity partner PAI decides to float the business in a few years’ time. On the other hand, the smaller meat tie-up, which values the brands at around $765 million, is probably a sign that Nestlé couldn’t find a buyer to take the entire business at acceptable terms.
These partnerships are a better option than leaving unloved, hard-to-sell assets in the main portfolio or selling them at a rock-bottom price. But too many could create problems if they distract key executives. Nestlé’s main marketing boss, Patrice Bula, for example, sits on the board of the Froneri ice-cream partnership. The company is aware of the risk. Nespresso’s departing Chief Executive Jean-Marc Duvoisin will join an internal strategy team tasked with making sure that JVs don’t pull management away from more important work within the core business.
And although putting sluggish brands into partnerships can boost a company’s overall sales growth, and perhaps its stock-market valuation, the model lacks transparency. Nestlé will only keep 40% of Herta, meaning the business won’t be consolidated in its revenue and operating profit but will still affect its bottom line. “Excessive JV’ing poses a challenge as it removes earnings from scrutiny and investors get less insight into growth rates, profit margins or other trading issues,” said Jefferies consumer-goods analyst Martin Deboo.
More consumer companies may turn to food pairings as they try to shake up their portfolios, but they are best used in moderation.
Write to Carol Ryan at carol.ryan@wsj.com
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