Nestlé and Danone are coming under increasing pressure from investors and authorities following large-scale recalls of infant formula products, which have raised health concerns, led to official probes in France, and sparked debate over the speed of the two European food giants in reacting to possible contamination risks.
The recalls, which are among the largest to hit the infant nutrition industry in the past few years, have piled pressure on the two European food majors before their upcoming earnings announcements, where investors are likely to demand more concrete assessments of financial losses and assurances that measures have been taken to improve safety.
Nestle started withdrawing its infant formula products in December due to a possible connection with cereulide, a toxin that can cause nausea and vomiting in people who consume it.
The withdrawal of the products took place in different regions, including Europe, Asia, and the Americas, becoming a wide-scale problem for the world’s leading food company.
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The issue came to light when the newly appointed CEO, Philipp Navratil, released a video apology to the public, admitting to the concerns of the consumers and promising transparency as the company removes the affected products from the market.
Competitors of Nestle, such as Danone, were also affected by the crisis as the authorities investigated the practices of the industry regarding the withdrawal of the products
Since then, French authorities have launched probes into the handling of the product recalls, including the timing of safety actions.
Neither company has publicly revealed any information about the results of the probes, and both say they are fully cooperating with the authorities.
Consumer organizations in different countries have expressed doubts about whether the warnings had reached families in time, although the companies claim they took the right steps once the dangers were known.
Nestle stated that it is giving top priority to rebuilding its supply chain and restocking its shelves. Danone did not comment on investor worries about the financial impact of the product recalls.
The crisis comes at a delicate time for Nestlé, which has been trying to reignite sales volumes following a period of more subdued growth.
The firm has been dealing with changing consumer patterns, including rising demand for more affordable options, as well as external factors such as import tariffs in the U.S. for certain parts of its business
The infant nutrition range had been one of the more resilient areas of the business, making the recall particularly disappointing for the company.
Nestlé has already indicated that it does not believe the crisis will have significant financial repercussions, estimating that the affected products represent less than 0.5% of group sales.
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However, some investors have questioned this view. Kai Lehmann, a portfolio manager at Flossbach von Storch, said that he would have liked to see more information from the company, adding that investors were interested in understanding both the short-term and long-term implications.
“Something I would have expected a bit more proactive and transparent communication on,” Lehmann said, citing promises made by the new CEO when he took over.
Analysts at Jefferies have estimated the total potential exposure to the company could be around 1.6 billion euros ($1.9 billion), factoring in supply chain disruptions and possible secondary consequences such as lost sales or damage to brand reputation. “Reputation risks may extend beyond the products actually recalled, especially in regions where parents tend to stick with a preferred brand of formula,” said analyst David Hayes.
Experts in the industry believe that the infant formula market is particularly susceptible to confidence crises because consumer purchasing decisions are inextricably linked to safety concerns.
“It can take a long time to recover consumer confidence even if the health risk is minimal,” said Tom Booijink, senior dairy analyst for Europe and Africa at RaboResearch.
“In the infant formula market, your reputation is your most important asset,” Booijink said.
Some consumers have already altered their behavior.
Paul Jamieson, a father from Northumberland in England, said that his daughter had fallen ill after using a Nestlé-owned infant formula product. “When that trust is broken, it’s quite difficult to feel comfortable continuing to use those products,” he said.
Market forces show that competitors may profit from the crisis.
The German family-owned company HiPP, which makes infant formula, said that it had observed a substantial rise in demand following the recalls and that it had increased production to meet new orders.
The New Zealand-based a2 Milk Company said that it had not yet observed such a trend, which might indicate that local variations in consumer behavior vary.
The crisis may threaten the business sector of Danone, which has contributed to the company’s improvement over the past year.
The company’s strong sales in China, which is one of the largest infant formula markets in the world, helped the company to exceed market expectations in last year’s quarterly earnings report.
