Nestle and Danone Under Fire for Recent Baby Formula Recalls

Impact of Baby Formula Recalls on Nestle and Danone

By Alexander Marrow

Financial Implications and Investor Concerns

LONDON, Feb 18 (Reuters) - Nestle and Danone face investor pressure to spell out the financial impact of their biggest infant formula recalls in recent history, and show they have learnt lessons from crises that have hit their shares and left dozens of babies ill.

Reputation and Consumer Trust Issues

Nestle started recalling products in December across Europe, Asia and the Americas over possible contamination with cereulide, a toxin that can cause nausea and vomiting. 

Market Share and Competitive Landscape

The crisis prompted a video apology from the KitKat and Nescafe maker's new CEO Philipp Navratil and engulfed rival producers, including Danone and privately-owned Lactalis. 

French authorities have opened investigations into how the withdrawals were handled, consumers are questioning the speed of the recalls, and investors want clarity on the financial impact at Nestle's annual results on Thursday and Danone's on Friday.

Danone declined to comment. Nestle said it was focused on replenishing stocks. 

'REPUTATION IS EVERYTHING'

"I would have expected a little more proactivity and transparency in terms of communication," said Kai Lehmann, portfolio manager at Nestle investor Flossbach von Storch. "This is precisely what Philipp Navratil promised when he took office." 

The crisis adds to the challenges facing Navratil as he tries to revive sluggish volume growth at the $260 billion consumer goods group, already pressured by U.S. import tariffs and consumers trading down to cheaper brands. 

Nestle has said it does not expect a big financial hit, but Lehmann questioned whether its estimate - that fewer than 0.5% of group sales are affected - still holds. Jefferies analyst David Hayes puts Nestle's total exposure at 1.6 billion euros ($1.9 billion).

"The downstream effects are likely to be greater, without question," Lehmann said, criticising what he called Nestle's “salami tactics” in releasing information gradually. Nestle says it has acted swiftly and proactively throughout. 

Six experts, analysts and consumers interviewed by Reuters say the companies face a battle to restore their reputations.

"In the infant formula business, your reputation is everything," said Tom Booijink, senior dairy specialist for Europe and Africa at RaboResearch. 

For Paul Jamieson, a father in Northumberland, England, whose daughter fell ill after consuming a Nestle-owned formula, trust has evaporated. "When that trust is compromised, it's very difficult to feel comfortable continuing with those products," he said. 

MARKET SHARE RISKS

France has identified Chinese company Cabio Biotech as the source of arachidonic acid (ARA) oil contaminated with cereulide. Producers including Nestle and Danone have rushed to switch suppliers and boost production. 

Cabio Biotech did not respond to a request for comment.

Danone is particularly exposed: around 17% of total profits come from infant formula in China, compared with less than 2% for Nestle, said Jefferies' Hayes. Chinese parents remain highly sensitive to contamination risks after previous scandals.

Danone's shares are down more than 5% this year, while Nestle's have recovered from a late January slide. 

Both companies risk losing sales and market share. Danone's strong Chinese business helped drive a third-quarter sales beat, while Nestle's NAN formula, a bright spot against weaker Gerber volumes, has been caught up in the recalls. 

Some competitors are already benefiting. Family-owned German brand HiPP told Reuters it has seen a sharp increase in demand and has increased production. New Zealand's a2 Milk, however, said it did not expect a major boost. 

Hayes said the recalls may force Navratil to trim Nestle's volume-growth forecast by around 100 basis points.  

"It might be unfair, but people may ask if (Navratil) is unable to really control and avoid these things because (Nestle's) just too much of a Goliath to oversee," Hayes said. 

($1 = 0.8450 euros)

(Reporting by Alexander Marrow. Editing by Mark Potter)