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Jim Armitage: Dan Loeb wants short-term buzz but Nestlé shows sales must be nurtured

Example: Nestlé spent years building up Nespresso: AFP/Getty
Example: Nestlé spent years building up Nespresso: AFP/Getty

Dan Loeb must be aware of the Nespresso machine. If the activist investor doesn’t have one in his Wall Street offices, they’re present in every boardroom he’s terrorised.

Yet Nespresso would never have existed had it not been nurtured for years by Nestlé. Launched in the 1980s, it was a flop, with consumers baffled at why they should spend a small fortune on a pod every time they wanted a cuppa.

But Nestlé stuck with it, refining the concept before a marketing push culminating in the 2015 hiring of pitchman George Clooney. Last year, Nespresso made sales of $4.5 billion.

But this week, on the very day Nestlé announced a €200 million investment in Perrier, another brand revived from near-death, Loeb demanded Nestlé ditch underperforming businesses, return cash to shareholders, and focus on profit margins.

How many future Nespressos and Perriers will that policy kill off?

Parallels with Kraft’s assault on Unilever are obvious: aggressive US investor shakes up sleepy European giant with promise of bigger profits and job-slashing efficiency drives.

Loeb has demanded Nestlé slashes and burns until its margins are up from 15.3% to nearer 20%.

That, he will no doubt argue, is still way behind Kraft’s 29%. What he won’t be highlighting is this: Kraft’s margins are high, but its sales have been falling, quarter after quarter, for more than a year.

That’s what happens when you crimp investment.

Activist investors can be a force for good: witness how Elliott shook up the overpaid executives at Alliance Trust, and how it’s now holding BHP to account.

But they risk long-term value destruction in return for short-term returns. Fund managers, remember that as you sup your Nespressos at this week’s investment meetings.

Lloyds drags its feet

Lloyds’ sluggish behaviour in compensating victims of the HBOS Reading fraud meets with resignation from those who lost their businesses and livelihoods.

Despite a judge declaring them victims of an appalling criminal scandal way back in January, only one has yet been compensated.

The two I spoke to today told identical stories of Lloyds being painfully slow to respond and nit-picking over legal fees.

Lloyds says it is often the customers, not the bank, that want more time. It blames claims management companies for getting in the way.

In truth, Lloyds should have completed its review into these cases months ago. After the sterling work turning itself around and paying back the taxpayer, it now risks looking shabby and uncaring. A pity.