Why BofA Downgraded Nestlé: The Pet Food Problem That Sank a Buy Rating

Structural losses in North America Petcare (~13% of group sales)

BofA flagged mounting competitive pressure in the North American pet food business, which represents roughly 13% of Nestlé's total group sales . Nestlé's global pet care revenue fell 3.2% year-over-year to CHF 8.9 billion in H1 2026, marking a second consecutive year of declining pet-care sales . The North American segment underperformed particularly badly, with weak volumes that disappointed turnaround expectations under CEO Philipp Navratil . BofA analysts led by Nicolas Ceron said Nestlé has been losing share in both cat and dog food, with the dog food losses appearing structural — reflecting a consumer shift toward fresher, less processed pet food formats .

Fading tailwind from lower coffee and cocoa costs

Lower input costs for coffee and cocoa had been a margin tailwind for Nestlé, but BofA noted that benefit is now largely behind the company . BofA had earlier forecast coffee margins to bottom at ~19% in 2025 before recovering to 20% in 2026 and 21.6% in 2027 . With those easy comparisons now in the rearview mirror, the commodity-cost benefit that had supported profit expectations has dissipated.

31.4% drop in H1 2026 net profit

Nestlé reported net profit of CHF 3.5 billion for the first half of 2026, down sharply from CHF 5.1 billion in H1 2025 — a decline of 31.4% . Nestlé attributed the drop to increased restructuring costs and write-downs of assets held for sale . While underlying operating margins were relatively steady — the recurring underlying trading operating profit (UTOP) margin eased just 10 basis points to 16.4% — the headline earnings collapse weighed heavily on investor sentiment.

Constrained pricing power and weak volumes

Nestlé's real internal growth (RIG), a key measure of sales volumes, was just 1.2% in Q1 2026, with pricing contributing 2.3% . In North America, volumes were especially weak — RIG turned negative at -0.6% in the second quarter, disappointing investors who had expected a stronger turnaround under new management . The stock fell as much as 7.3% on July 23 after Nestlé reported H1 earnings, the worst single-day drop since 2020 . The company's ability to pass through higher prices to consumers is increasingly constrained as cost-of-living pressures persist.

Sector-wide pet food headwinds (also hitting Freshpet)

BofA's downgrade of Nestlé was not an isolated call. The same bank had previously downgraded Freshpet from Buy to Neutral, cutting its price target 26% from $81 to $60 in October 2025, citing decelerating sales growth (from 20%+ to low double digits), weaker consumer pet spending, and slowing pet adoption . In July 2026, BofA again trimmed Freshpet's price target to $70 from $75 as competitor Hill's Pet Food entered the fresh dog food market . These parallel downgrades reflect a broader structural slowdown in the pet food category, driven by declining post-pandemic pet adoption rates, budget-conscious consumers trading down from premium brands, and intensifying competition from fresher alternatives.

The rapid reversal in BofA's outlook

Just three months earlier (April 2026), BofA had initiated coverage with a Buy rating, betting on a rebound in core categories . That bullish view collapsed as H1 2026 results revealed persistent volume weakness in Nestlé's most important growth engine (North America), a collapse in reported net profit, and intensifying competition across the pet food aisle — all while the easy margin tailwinds from commodity costs faded. The cumulative weight of these factors shifted BofA's risk/reward assessment from positive to neutral, with the bank reducing its long-term growth assumption to -1.0% for the North America Petcare segment in its discounted cash flow model .