Nestlé’s New Baby Formula Woes Challenge CEO’s Revamp Plan

(Bloomberg) — Philipp Navratil has had a tough start to 2026.

Only months after taking charge of Nestlé SA, the Swiss foodmaker’s chief executive officer is battling a deepening infant formula contamination crisis that has spread from a handful of countries in Europe to more than 50 worldwide in less than a week.

Scores of products across brands like BEBA, SMA and Alfamino are being recalled and multiple production sites have been affected by the discovery that cereulide, a toxin that can cause nausea and vomiting, was detected in an ingredient from one of its oil suppliers.

Nestlé initiated the recall, no babies have been reported ill and the food maker said the financial impact will be limited, yet damage has been done.

Shares of Nestlé are down more than 4% since the recall began, and analysts at Jefferies are forecasting a sales hit of as much as 1.2 billion Swiss francs ($1.5 billion). The drip feed of disclosures about new markets affected this week has raised questions about trust in a company with a checkered history when it comes to the sale of infant formula.

Navratil, who came in last year pledging openness after his predecessor was ousted in a scandal involving an office romance, is now facing his first major operational challenge at the same time he’s trying to cut thousands of jobs and turn around performance.

“It’s important that Nestlé gets in front of the recall in terms of transparency,” said Christopher Rossbach, chief investment officer at J. Stern & Co, a Nestlé shareholder. “A supplier failed. That’s something that can happen, but there has to be radical transparency. It’s the only way to deal with it.”

Toxin Detection

News of the potential contamination first came to Nestlé’s attention more than a month ago following tests the manufacturer conducted through its own safety protocols. The company, which also makes coffee, pet food and chocolate, then traced the source of the contamination to an ingredient known as arachidonic acid oil. This discovery set off a chain reaction as Nestlé identified affected batches and informed local authorities — a process made more challenging over the holiday period.

The name of the supplier has not been disclosed. Foodwatch, a consumer rights group, criticized the delayed public warnings from Nestlé and said there should be tougher penalties for companies violating food safety regulations.

The 49-year-old Navratil, a veteran of Nestlé, has been coordinating the response from the company headquarters in Vevey, with the first recall starting on Dec. 10.

“The orders on how to handle this are coming from the very top,” said a Nestlé spokesman. “Philipp Navratil is closely involved, being briefed daily and following every decision.”

Nestlé has received thousands of calls this week from worried parents with every conversation lasting a couple of minutes on average to up to half an hour, the spokesman said. He added that strict protocols are being followed given infant formula is a highly-regulated product.

One of the major difficulties for Navratil and Nestlé is that the initial detection of cereulide is tricky and testing for it is expensive and complex, according to Professor Monika Ehling-Schulz at the University of Veterinary Medicine Vienna. And when it’s found, the battle is just beginning.

“Because the molecule is very small, it cannot be removed by filtration. Furthermore, because of its structure, it also survives very high temperatures,” said Ehling-Schulz, who co-developed a standard method for the detection and quantitation of cereulide. “In a contaminated product, it is therefore almost impossible to remove. Affected facilities must be properly cleaned.”

Food safety standards in many countries dictate a zero-tolerance policy for cereulide in products, meaning no detectable level is acceptable. The Netherlands had first-hand experience of this around 15 years ago, when more than 100 students fell ill with food poisoning after consuming a cereulide-contaminated rice dish. Even trace amounts can affect a large number of people.

“Safety, quality and compliance are not negotiable for Nestlé,” the company said in an emailed statement. It added that all affected factories have been thoroughly cleaned and “restarted operations with reinforced quality management, in full compliance with local authority requirements.”

Revival Plan

The recall is an unexpected challenge for Navratil, the former Nespresso boss who is trying to revive Nestlé ’s performance. Since he took charge, Navratil has announced plans to slash 16,000 jobs, 4,000 of which will come from manufacturing. He wants to refocus the company’s attention on driving up product volumes and free cash flow, while winning back customers, reducing debt and preserving the dividend. He also plans to boost spending on advertising so the company can bet on fewer but bigger product initiatives.

As Nestlé battles to contain the fallout, pressure to keep a lid on costs throughout the business will intensify to ensure the company can meet its targets.

This isn’t the first time that Nestlé has had a recall and some have been far more serious. In 2022, two children died in France after eating the company’s Buitoni Fraîch’Up pizza contaminated with E. coli. But Austria’s health ministry described it as the largest in Nestlé’s history, expanding from a limited regional action to one involving six continents.

Nestlé previously faced years of criticism and boycotts over its infant formula marketing practices dating back to the 1970s in developing countries, where limited access to clean water contributed to widespread health problems.

A 2008 scandal in China that involved formula from a domestic maker has fueled safety concerns in the world’s largest formula market. Nestlé has removed 41 batches of products from the market. Authorities there on Thursday urged Nestlé to act quickly to protect the rights and interests of Chinese consumers.

One small area of relief for Navratil is that the large, lucrative US market is not involved in the recall. The US baby formula market is highly concentrated among a few key manufacturers and any temporary shutdown of one supplier’s facilities could affect supply, as happened in 2022 when Abbott Laboratories recalled several brands, exposing the fragility of the supply chain.

Still, the scale of the recall, and the size of the potential financial hit, is larger than it initially appeared and what Nestlé originally communicated, according to Kai Lehmann, senior research analyst at Flossbach von Storch, an investor in the company. While Nestlé has yet to tally the total cost, the company has said the recall represents significantly less than 0.5% of annual group sales.

“Analysts put the damage at three times that amount,” said Lehmann. “When Philipp Navratil took office, he promised greater transparency. Even though it is understandable that the company needs some time to sort everything out, I would have expected more updates by now.”

Nestlé said it’s focused on handling the recall and ensuring at the same time that formula supply is also maintained — something of paramount concern to local authorities. The spokesman said the company quickly identified a new supplier of arachidonic acid oil, which is then further processed in one production site in Switzerland.

“The production site which processes the oil has been running 24/7 since Monday,” he said. “No chocolate on the shelves we can live with, but that is not the case with infant formula.”

–With assistance from Sonja Wind and Lisa Pham.

(Updates with Foodwatch comment in ninth paragraph. A previous version corrected the spelling of the CEO’s name.)

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