By Martinne Geller and Silke Koltrowitz
LONDON/ZURICH (Reuters) - Nestle <NESN.S> set a profit margin target for the first time on Tuesday, responding to an industry slowdown and pressure from activist investor Third Point for greater near-term returns from the world's largest packaged food company.
Shares in Nestle rose 1.8 percent as the market applauded a plan shareholders said struck a balance between profit and growth, while allowing the Swiss company to invest in an uncertain future in which smaller brands are able to gain scale quickly and more shopping gets done online.
Investors were looking for Nestle's new chief executive Mark Schneider to demonstrate that it has a strong strategy to improve performance following four years of missing sales targets as the food sector's growth cools.
While many multinationals turned to cost-cutting, inspired by industry-leading margins at Kraft-Heinz <KHC.O>, Nestle and rival Unilever <ULVR.L> had argued that cutting too deep to deliver margin growth is a short-term solution.
But Unilever altered its stance after February's unexpected takeover bid from Kraft-Heinz, adopting a margin target of 20 percent by 2020 and Nestle has now moved in that direction, setting a margin target of 17.5 to 18.5 percent by 2020, up from 16 percent in 2016.
U.S. activist hedge fund Third Point, which in June revealed it had a $3.5 billion Nestle stake, had urged it to target 18-20 percent.
"The pace of change has picked up. We need to execute faster than before," Schneider said at his first investor seminar since becoming CEO in January. "Things will change but the way we approach business will not change."
"This company got, for a reason, to the leadership position it has today, and it is hell-bent on not losing it," he said.
The German and American dual citizen repeated Nestle's goal to reach mid-single digit organic sales growth by 2020, likening pursuing sales and margin growth to "going for a run and a diet at the same time".
It was unlikely the new margin target would be followed by another higher one, he added.
"While the targets offered for margins and sales growth didn’t set our pulse racing, we felt there was some proper rigour behind those targets," analysts at RBC Capital Markets, who were already factoring in a margin of 17.6 percent by 2020, said, adding they were sticking to an "outperform" rating and an 83 Swiss francs price target.
Thomas Russo, a Nestle shareholder for more than 30 years whose firm has a stake worth more than $1 billion, said the target was enough to quieten calls for change.
"It gives them the ability to stay at work without having the distraction of whether they'll concede a margin guidance, but at the same time not burden themselves from making the kind of bold investments that are required to deliver long-term value," Russo, of Gardner Russo & Gardner, said.
Not all shareholders think Nestle needs to follow the extreme cost-cutting that has earned Kraft Heinz and Anheuser-Busch InBev <ABI.BR> margins higher than peers.
"Nestle has done a good job being Nestle. It doesn’t need to be 3G,” Mark Grammer, portfolio manager at Toronto-based Gluskin Sheff, said, referring to 3G Capital, which controls both companies. Grammer has held Nestle shares for over 20 years, but did not disclose the size of the stake.
The investor day in central London was highly anticipated given the track record of Schneider, Nestle's first external CEO in nearly a century, and the arrival of Third Point, which is known for campaigns at other companies.
Third Point declined to comment on Nestle's target, but did compliment its executives, saying a lot of work went into the presentations.
"You did a great job," its head Dan Loeb told Chief Financial Officer Francois-Xavier Roger.
Nestle said strong cash generation would let it spread its share buyback programme of up to 20 billion Swiss francs ($21 billion) evenly over three years. It had earlier said it would be backloaded to 2019 and 2020 to preserve cash for M&A.
In recent months Nestle has bought into U.S. food delivery business Freshly, Sweet Earth meatless food and Blue Bottle Coffee and Schneider said it would keep identifying opportunities as well making divestments.
He noted that 10 percent of Nestle's group sales could be ripe for portfolio adjustment, while confirming Nestle remains committed to frozen food and saying Nestle's view on its 23 percent stake in L'Oreal <OREP.PA>, worth more than 23 billion euros, had not changed.
Third Point called for the company to sell its stake and last week's death of L'Oreal heiress Liliane Bettencourt rekindled speculation of changes.
Nestle has identified four areas which already account for 53 percent of sales - coffee, pet care, infant nutrition and bottled water - as key areas for investment.
It will also pursue consumer healthcare, in an effort to expand in pharmacies and drug stores and boost margins.
(Editing by Jason Neely/Keith Weir/Alexander Smith)