by Greg Thain
Efficiency
We only use resources to the full, waste nothing and do only what we can do best.
Since that distant day that the first Forrest Mars first read Higher Control in Management, the key driver amongst the Mars’s efficiency principles has been - and remains - return on assets. This is the company’s prime financial measure and, as it rightly believes, rightly vitally important growth driver. In simple terms, Mars measures its profitability against the value of the assets employed in the business: standard enough.
Where Mars differs is that it does not measure total assets by calculating the actual capital that has been invested in existing plant, buildings, infrastructure etc. but by the replacement cost of the assets now. This is a double-edged sword for managers. On the downside, if both they and a competitor are selling a similar product at the same price and competitor costs calculations are using a similar but 20-year-old machine, the competitor will be recording a higher percentage ROTA – his machine’s price will be lower than the Mars price. This might well encourage, for example, a bigger advertising spend. On the other hand, the benefit over time for the Mars manager is that, as the machine is valued not at what it cost twenty years ago but what a new one would cost today, he has every incentive to replace the machine. His ROTA will remain unchanged but he will benefit from a more modern, more efficient machine, and essentially improve his product’s quality and value at no cost. Which is why Mars is always investing in newer and better machinery than its competitors.
ROTA also explains why there are no office fripperies, why managers fly economy and why Mars tends to steer clear of businesses it does not thoroughly understand. At this very moment (early 2011), ROTA is the tool that is upgrading and improving the Wrigley set-up far further and faster than Cadbury ever did with Adams. ROTA as a performance measurement means Mars has to be the most efficient company in the industries in which it operates.
Freedom
We need freedom to shape our future; we need profit to remain free.
It is a common conceit, when competitors’ managers explain away their own inability to compete with Mars, to claim that as a private company Mars doesn’t need to show a profit. To some extent, this is true. Mars can and does think in decades - the extension into China is a good example - rather than obsessing about quarterly earnings as a city-driven company might. But the Mars family didn’t become one of the richest in America by never making a profit. The company sets itself very high operating profit targets – usually well above industry norms – but reinvests most of it back into the business. The Mars family has always paid itself modestly and rarely taken significant dividends, except in extremis: a divorce, for example.
However, there can be no doubt that the focus on profit – always intense – has been greatly magnified since the Wrigley takeover. The company now finds itself not only with a shareholder – albeit a benign one – but in mountainous debt to Wall Street and the need to pay back the debt back is the company’s currently paramount wish. Profit (= freedom) is after all one of those five principles. It’s made a change to a company wholly unused to balancing investment opportunities with debt repayment, but absolutely needing to. How the company navigates this tricky course will almost certainly determine whether the Wrigley acquisition is a one-off in scale terms of scale or whether Mars gets more of a taste for making the big deals. But since Mars has not, and almost certainly will never, see itself as a holding company with mixed bag of ever-changing businesses, our view is that such temptations will be resisted unless a particularly appropriate combination offers itself: another Wrigley-type deal in either confectionery or pet foods. Ferrero, for example, should the Ferrero family ever decide to sell. That, we suggest, would also be a Mars unmissable.
Summary
Mars Inc. has annual sales of over $30 billion, operates 401 factories and offices in 73 countries and employs over 70,000 associates. By any measure it is a global company, but one that acts very locally. The company has eleven brands with annual sales revenues of over $1 billion (Pedigree $4.7bn, Snickers $3.6bn, M&M’s $3.5bn, Whiskas $2.8bn, Dove $2.6bn, Orbit $2.5bn, Milky Way/Mars Bar $2.4bn, Extra $2.2bn, Uncle Ben’s $1.6bn, Royal Canin $1.5bn, Twix $1.5bn). Three of these came from acquisitions. Over 90% of company sales come from three categories: Pet Care, Confectionery and Gum. It is the world’s largest confectionery company, Snickers and M&M’s are the world’s best-selling confectionery products and it is America’s third-largest private company (behind Cargill and Koch Industries). So it is probably fair to say that the business model developed by Forrest Mars Senior and the brands developed by successors Frank and Forrest have been resounding successes.
Mars isn’t an unstoppable machine – it can be and has been beaten locally and for long periods – but over the long haul it has proved to be an exceptionally strong and consistent performer. The Wrigley deal took Mars Inc.’s annual turnover close to $30 billion, a level that now been exceeded, and double the level at which the family handed over control in 2001. As the world’s largest confectionery and pet food company – with a small range of other interests in food, drinks and science - it’s fair to say the transition from family day-to-day management to something that resembles the corporate has been successful.
Looking forwards, it is highly likely it will retain its prized independence and continue to do well in most countries and most categories. Very appealingly, even charmingly, it is also pretty certain that it will continue to operate a corporate culture that is absolutely all its own.
Nestlé
Where Did They Come From?
Heinrich Nestlé was born in 1814 in Frankfurt-am-Main, but fled after a serious bout of rioting in 1833. Moving to the small town of Vevey in French-speaking Switzerland, he called himself Henri from then on. As a scientifically-minded man, Henri had trained and gone into business as an apothecary. This was a career involving a lot of work preparing formulations and experimenting for new and better ones - there were then few packaged, pre-prepared products available.
Henri had long been conscious of the high mortality rate for infants whose mothers were unable to breast feed, and, by 1847, he was devoting significant laboratory time to try to develop a substitute. Henri had a wide range of other interests; in 1857 he set up in business with other Vevey businessmen to manufacture a liquid fuel of his own invention and an artificial fertilizer. But Henri kept coming back to the problem of malnourished babies. He experimented with a mix of cow’s milk, wheat-flour and sugar to find a way of overcoming the twin problem: keeping most of the nutrition while not curdling or spoiling the milk.
By 1866, Henri was convinced he had found a solution. Farine lactée was made, he claimed, from ‘wholesome Swiss milk and a cereal component baked by a special process of my invention’. So Henri had a product, but needed publicity. The next year, the mother of a premature baby fell seriously ill and was unable to feed the child herself. The infant boy was too young to tolerate any of the usual foods, so was fed on farine lactée. He survived, and the news spread like wildfire.
Henri cashed in on this PR by calling his business Farine Lactée Henri Nestlé. He added to the level of personal branding by creating a logo based on the meaning of his surname – little nest. Unfortunately, ‘little nest’ also describes the size of the Swiss market. Virtually any manufacturing business based there had to develop internationally to have any chance of surviving at all. So Henri opened a London office, soon to be followed by sales offices in France, Germany and the United States. By 1872 he was exporting as far as South America and Australia. However, having no children and nearing his 60s - considered old in those days – Henri began turning his mind to putting his feet up. His answer came in the form of an offer of a million francs. The purchasing consortium was headed by Jules Monnerat, president of the Company Simplon Railway, and he would be chairman of the Nestlé Company for the next 25 years. Henri took a well-earned retirement.
One of Jules Monnerat’s first tasks was
to build upon a new product Henri had launched in 1874: condensed milk. Condensed milk was patented in USA by Gail Borden in 1856. After Borden’s first two companies failed to market his miracle product, he struck a partnership with a financier on a train, and founded the New York Condensed Milk Company. The breakthrough came with the American Civil War. The Union Army placed huge orders for a nutritious, compact foodstuff its troops could all but live on. Borden could not build enough factories to meet the exponential increase in demand, so he licensed his patent far and wide. Millions of troops got a taste for condensed milk, and returned home after the war to hook their families as well. By the late 1860s, what was known as conny-onny in some later markets was one of America’s fastest-growing foods. Borden’s train-ride investor’s $100,000 stake was worth $8 million at his death.
Condensed milk’s dramatic growth inspired the American consul in Zurich, Charles Page, to found the Anglo-Swiss Condensed Milk Company in 1866. He saw Switzerland, with its large milk production, as being the ideal manufacturing base, particularly to target Britain, at that time the largest concentrated consumer market in the world. Anglo-Swiss had had a free run at building this lucrative new market until Henri Nestlé moved into condensed milk, seeing clear manufacturing synergies between this product and farine lactée. Nestlé’s new chairman Jules Monnerat, also saw the threat in Anglo-Swiss’ expansion into cheese and instant formula feed.
As well as branching out into condensed milk, Nestlé became involved in another booming new category, milk chocolate. The cocoa business had been industrialised since the 18th-century and the first chocolate bars invented in the mid-1850s. Yet, the Holy Grail for chocolatiers was to develop a milk chocolate bar that, being less bitter, would have far greater appeal. Daniel Peter, had laboured for twenty years trying to crack the secret, but it was only in 1875 when he compared notes with his friend and neighbour, Henri Nestlé, that Daniel achieved his breakthrough. Using Henri’s newly launched condensed milk, he solved the problem of combining fat-rich cocoa powder with water-based milk.
Daniel and Henri didn’t form a joint chocolate company to exploit the breakthrough. Instead Daniel teamed up with his father-in-law, who ran Switzerland’s first chocolate maker, the Cailler Company and bought in Nestlé’s condensed milk as an ingredient. As the Swiss cocoa companies rapidly consolidated, Peter-Cailler-Kohler became the world’s leading manufacturer of chocolate, relying on Nestlé not only for condensed milk but also marketing and selling expertise in various foreign markets.
The growth in milk chocolate sales persuaded Nestlé themselves to enter the game in 1904. They reached agreement with the Swiss General Chocolate Company to produce Nestlé branded products. Nestlé’s head-to-head battle with Anglo-Swiss may have delayed their entry to the chocolate market. Run by Americans, the Anglo-Swiss Condensed Milk Company, was international in outlook from the start. They were itching to confront the Borden firm head on in their homeland. Nestlé didn’t want to miss out either and by 1900 had opened a US factory. (This was not Nestlé’s first overseas venture: in 1898 they had purchased the Viking Melk (milk) company in Norway.) It became clear that the Nestlé/Anglo-Swiss battle was consuming more time, money and effort than benefit it was adding for both players, so in 1905 they agreed to merge.
Called, somewhat unimaginatively, the Nestlé and Anglo-Swiss Milk Company, it began life as a truly international company. Factories operated in the United States, Britain, Germany and Spain in addition to their Swiss base. Australia, the company’s second-largest export market, got its first Nestlé factory in 1907. Exports boomed as the company set up local subsidiaries in other markets, to replace sales agents, and soon opened warehouses in Singapore, Hong Kong and Bombay. The core of the product range - baby formula and condensed milk - was perfectly suited to export, being compact and with long shelf lives. They proved particularly popular in countries where, for logistical or heat reasons, fresh milk was a rare commodity. In 1911, the company built the world’s then largest milk condensing plant in Dennington, Australia.
However most of the company’s manufacturing infrastructure was in continental Europe and Nestlé’s supply infrastructure was severely dislocated by the outbreak of the First World War. Not only were exports across Europe and over to Britain and elsewhere almost impossible, virtually all the milk coming into Nestlé’s factories had to be sold to meet the needs of milk-starved local towns. On the other hand, just as had been the case in the American Civil War, government orders for condensed milk sky-rocketed. Rather than leave this demand to be fulfilled by American competitors and risk losing their hard won sales forever, Nestlé went on a factory buying spree in America. This made Nestlé even more international in focus, operating a semi-global supply chain. By the end of the war Nestlé had forty factories across the world, producing double the company’s pre-war output. And, because the Swiss head office had been essentially cut off, the overseas subsidiaries operated with near total empowerment. Thus, two key defining aspects of the Nestlé Company - global operations and highly decentralised decision-making – were in place by 1920.
However, the end of the war brought a company crisis. Government orders dried up and supplies of fresh milk resumed to the population in general. Demand for condensed milk plummeted. The situation was exacerbated by rapidly rising prices for raw materials, a worldwide economic slowdown, adverse exchange rates and hyperinflation in the German economy. In 1921 the company recorded its first ever loss. Senior management thought the situation so bad that a Swiss banking expert was brought in to restructure the company. Factories were closed, debt was paid down and the company worked through the crisis.
By 1929 Nestlé was sufficiently back on its feet to acquire the Peter-Cailler-Kohler company. This merged with their own much smaller scale chocolate set-up to make chocolate the company’s second-largest category.
The company’s basic focus was on milk dried to varying levels as the key ingredient for its main product lines of baby formula and condensed milk (for sale and as an ingredient in chocolate). Therefore, the science of drying water-based ingredients was Nestlé’s core competence. It was always looking to develop improved methods and new uses. A scientist in Nestlé’s Australian business, Thomas Mayne, was motivated by much the same concerns that had led Henri into the business in the first place - that children were receiving insufficient nutrients from their daily diet during the Great depression. Mayne developed Milo in 1934. I was, described on the label as Nestlé’s Fortified Tonic Food. Simultaneously t, the main laboratories in Vevey were also working on a project that would transform the company.
In 1930, Nestlé were approached by the Brazilian Coffee Institute to find a better use for Brazil’s huge coffee surpluses in the reduced markets of the Depression. Nestlé, known throughout the world for its expertise in evaporation and drying processes, was asked to come up with an improved means of creating an instant coffee. This could be sold for a premium, year-round, rather than the year’s surplus being dumped onto the coffee bean market, reducing prices yet further.
The idea of instant coffee was not new. Several inventors claimed first rights to both powdered and concentrate versions and the product was commercially available by 1910. But it wasn’t very good. Much flavour was lost during the drying process. Nestlé’s top evaporation expert, Max Morgenthaller, assembled a team to work on the problem. He was given a long leash by today’s standards, taking seven years to come up with a new process that preserved nearly all of the flavour and could be industrialised. The answer lay in spraying a fine mist of a treated coffee solution into a heated tower. The droplets evaporated almost instantly, leaving a fine powder to float down.
Nestlé introduced Nescafé in Switzerland on April 1st, 1938 and geared up their main UK factory for mass production. However, timing was not on Nestlé’s side. The outbreak of war pretty much put a stop to the export of Brazilian coffee beans to Europe. Even more disruptively, company profits plummeted in 1939, down to $6 million from $20 m
illion the year before. Vevey, in neutral Switzerland, became increasingly cut off. Many of the top executives relocated to company offices in Connecticut to run the still functioning parts of the business from the US.
Coffee beans were imported into the USA, and Nestlé began constructing drying towers. As had been the case a generation earlier, they got huge military orders for a compact, almost ever-lasting foodstuff that would help sustain the bodies and morale of tens of millions of servicemen. The Second World War was the making of Nescafé and the remaking of Nestlé.
Nescafé became the company’s leading product. Production reached a million cases a year by 1943 and by 1945, even with the devastation of many of Nestlé’s markets, annual sales were more than double the 1938 level at $225 million. The company had changed into a global instant coffee business, with other categories in addition. As exports from the company’s many European factories had been stopped by the war, the company had used Nescafé profits to open subsidiaries and build factories in as many countries as possible unaffected by the conflict, primarily Latin America. The US business went from strength to strength.
By 1946, with Nestlé’s European factories restored to raw materials and were getting back up to speed, the company was operating 107 factories spread across five continents. It was already the world’s most global food company. Production was still concentrated in four large and growing categories: milk products (primarily sweetened, condensed milk), baby foods (where the postwar baby boom did wonders for sales of infant formula), chocolate and instant beverages (Nestea joining the range in 1946 to be followed by Nesquik instant hot chocolate in 1948, both developed in the US).
