Nestlé Faces Continued Scrutiny Over Mineral Water Controversy

Nestlé is once again in the spotlight due to ongoing concerns regarding its mineral water practices, notably involving brands such as Perrier and Vittel. The Swiss asset management foundation Ethos has publicly criticized the company for its handling of these issues, emphasizing a lack of transparency leading up to the upcoming shareholder meeting.

Ethos director Vincent Kaufmann has expressed serious concerns, stating that Nestlé has been utilizing illegal methods to purify its mineral water for several years. Despite the company's payment of a two million euro fine in the previous year, no substantial information regarding these practices was disclosed in either the 2024 annual report or the sustainability report.

As a response, Ethos is recommending that shareholders deny the board of directors discharge for the 2024 financial year, thereby keeping open the possibility for legal claims related to the issue.

The scandal itself came to light in early 2024 when it was revealed that Nestlé Waters had employed treatment methods such as activated carbon filters, microfiltration, and UV light until 2022. This practice was not limited to French brands like Perrier and Vittel but also extended to Henniez in Switzerland. Nestlé defended its actions by claiming these methods were used to ensure consumer safety, but such practices contravened legal standards that stipulate that products labeled as 'natural mineral water' must be sourced directly from underground springs without treatment.

The situation has escalated to involve political ramifications in France, where critics allege that President Emmanuel Macron and his administration were aware of the violations but failed to act. In response to the growing controversy, the French Senate has initiated an investigative committee. Additionally, a lawsuit filed by the organization Foodwatch against Nestlé is currently pending, which accuses the company of misleading consumers.

Local authorities have also raised alarms regarding water quality issues following the cessation of the illegal treatment methods. Recent inspections by health authorities in the Gard department reportedly identified bacteria in the water. In the coming months, a decision will be made regarding Nestlé's ability to continue marketing Perrier as 'natural mineral water'. The company has assured that it complies with legal requirements.

Kaufmann has highlighted that Nestlé's lack of accountability regarding this matter has raised significant credibility issues for its water business. He emphasized the need for clarity on the extent of the problem, the individuals responsible, and the actions taken to address these risks. He insisted that shareholders deserve detailed information on the oversight conducted by the board regarding these matters.

Recently, there appears to be a shift in Nestlé's approach to the controversy. CEO Laurent Freixe recently participated in a hearing before the French Senate's investigative committee, expressing deep regret over the incidents and stating they did not align with the company's values. Freixe has also announced plans for an internal investigation in France, which was positively received by members of the Senate.

Commercially, the situation is critical for Nestlé, which has newly separated its water division into an independent entity and is actively seeking financial investors for a partial sale. This division may be valued at approximately five billion euros. However, potential investors may be hesitant to engage until the issues surrounding the scandal are resolved, which could adversely affect the sale price of Nestlé Waters.

The ongoing speculation about a potential complete divestment of the water business is fueled by concerns about stagnant growth, low margins, and increasing public criticism. Moreover, the water segment is increasingly perceived as a misfit within Nestlé's broader portfolio, which primarily focuses on food processing. Freixe acknowledged the distinct differences between the water business and the company's core competencies, underscoring the challenges posed by environmental factors affecting water sources.

In summary, while Ethos's proposal to deny the board discharge is unlikely to succeed--given that shareholder discharges are usually granted unless in exceptional circumstances--the issues surrounding Nestlé's water business remain a pressing concern for the company's leadership.