NSRGY Nestle SA (PK)

By Brian Blackstone 

VEVEY, Switzerland -- The Nesquik bunny is slimming down, and so is the chocolate drink whose package it has adorned for decades.

Nestlé SA is betting reduced sugar and a new advertising strategy will boost sales amid a growing consumer backlash against sweet drinks.

The revamp comes amid a broader makeover at the world's biggest packaged-food company by sales, as it attempts to deploy its research and marketing muscle to meet rapidly changing consumer tastes -- and turn around lackluster revenue growth.

Nestlé for years has fallen short of its own 5% to 6% target for annual organic growth. For a company with sales of around $90 billion a year, that's a tall order in the best of times. But Nestlé and its rivals have struggled to boost volumes and lift prices amid consumers' push for healthier fare and super-competitive markets.

A recent push into health sciences offers hope, but that unit is too small to make a big difference in the short term, analysts say. That leaves Nestlé reliant on standbys including Stouffers's frozen TV dinners, KitKat chocolate bars, Nescafé instant coffee and powdered drinks like Nesquik.

Nesquik and Milo, a malted beverage popular in Asia, generate combined sales in their various forms of about 3.5 billion Swiss francs ($3.4 billion) a year for the company, according to analyst estimates, or 4% of Nestlé's overall revenue. Nesquik's status has endured with powdered, syrup and ready-to-drink options. It is No. 2 in the global flavored-powdered drinks market behind Milo, according to market-intelligence firm Euromonitor.

Nesquik, launched in 1948 in the U.S. as Quik, once benefited from some healthy-eating bona fides: chocolate powder got children to drink milk. Today it faces a barrage of competition from cheaper chocolate drinks sold by big supermarket chains. It also finds itself, along with powdered competitors and sodas, at the epicenter of debate over sugar content.

A few years ago, Nestlé executives concluded that Nesquik -- a prized "billionaire" brand in Nestlé speak, meaning more than $1 billion a year in sales -- was showing its age. It had too much sugar and a marketing theme centered on the omnipresent cartoon bunny.

"We did not believe that where Nesquik was is a sustainable way of continuing with this brand," said Nestlé executive vice president Patrice Bula, who is spearheading the revamp, in an interview.

In 2015, the company introduced a reduced sugar version in the U.S. The next year, it launched an additional version in France, cutting added sugar from 10.6 grams a serving to five grams. It plans another new launch this spring in the U.K. and then other European countries, cutting added sugar by an additional 30% to 3.4 grams a serving.

Nestlé plans a U.S. launch in 2018 of the lower-sugar version it is introducing in Europe this year. That is something even big fans of the drink say they would embrace.

"Sometimes, I worry that I'm overindulging the girls since they do drink their milk with it twice a day," said Erica Chao, 37 years old, of Miami, who has been drinking Nesquik since she can remember, and now gives it to her daughters. "A new formula with less sugar is not a bad idea at all. I really don't think the girls will even notice it."

After Nestlé introduced its lower-sugar version in the U.S. two years ago, Nesquik market share moved higher, to 10.8% of the U.S. market for chocolate-flavored powder drinks in 2016, according to Euromonitor, up from 9.8% in 2013.

Still, skeptics say there may be limits to what Nestlé can do. Nestlé excels at R&D and traditional marketing, but it hasn't reacted quickly enough to an era when parents and young children get information on mobile devices as much as they do from TV, some analysts say.

"The new generation is so different from the moms and kids they were serving from the 1950s through 2010," said beverage-industry consultant Tom Pirko. "How relevant is that bunny to four- or five-year-olds on their iPad; how do they identify with that?"

With the Nesquik revamp, the company is taking steps to catch up.

In November, Nestlé teamed up with Barcelona's soccer team to promote Nesquik and Milo. Nestlé has made two global brand films and plans a website, called Nesquik Studios, this year.

The Nesquik bunny, the cartoon rabbit that has appeared on the package for decades, is smaller and no longer dominates the packaging.

The urgency behind the Nesquik retooling forced executives to overhaul how they make and execute decisions, Mr. Bula said: "Nestlé has, and also I think it is part of a certain appetite or sense of Swiss perfection, tried to get everything really right, which delays you."

A short drive from company headquarters along Lake Geneva, scientists at Nestlé's labyrinthine research center -- cut into the hills near Lausanne -- are tackling the health-taste trade-off. "The innovation is on the ingredients side," said Olivier Roger, a 12-year Nestlé veteran whose team of 10 scientists experiments with ways to reduce sugar.

Mr. Roger looked at 160 suppliers over two years to create the new formula for Nesquik. In the same building, Nestlé built a mini factory where prototypes can be produced and tested quickly.

"We have a little more pressure to succeed," said Mr. Roger.

--Stu Woo contributed to this article.

Write to Brian Blackstone at brian.blackstone@wsj.com

(END) Dow Jones Newswires

January 27, 2017 05:44 ET (10:44 GMT)

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