by Greg Thain
With the company being run once again from Vevey, the focus switched to beefing up the war-damaged European parts of the business. In 1947 a merger was agreed between Nestlé and the Swiss food company, Alimentana, whose large range of soups, bouillon cubes and spices was sold under the Maggi name. Their common link was the evaporation processes for soups and drying processes used to make the bouillon cubes. The company name evolved once again to the Nestlé Alimentana Company. They would stay that way following the 1950 acquisition of Britain’s Crosse & Blackwell, a manufacturer of soups and canned foods.
The company was now a broadly based in foods, with varying degrees of dependence on the evaporation technologies in which Nestlé was a world leader. In 1952 they kept their technical lead by improving the coffee evaporation process: the spray was now made from 100% roast coffee beans. Nestlé had a geographic spread second to none and their core food categories would benefit greatly both from the rise of the supermarket format, and the growing importance of convenience foods. The coffee business went into overdrive, as instant coffee became the beverage of choice for countless millions. During the 1950s sales of Nescafé tripled, helping Nestlé quadruple their sales from 1945 to the 1960 level of $2.5 billion without making a single acquisition during the 1950s after that of Crosse & Blackwell.
As the 1960s began, Nestlé was well positioned compared to many of its competitors. Yet it was looking to widen its category participation (although dry goods categories did well with the supermarket boom) and also its technological base beyond the drying of instant products. What would be the Next Big Thing in the food industry? In 1963, Nestlé invested in the US version of their British Crosse & Blackwell subsidiary, Libby, McNeill & Libby. A canner of fruits, vegetables and meats might not have sounded like the Next Big Thing. Their next acquisition seemed more like it: Nestlé entered the emerging frozen foods sector with the purchase of Findus International, who operated primarily in Britain and Scandinavia.
Not that Nestlé completely ignored their base business at this stage. In 1965 the company’s Swiss laboratories perfected a revolutionary freeze-drying method for instant coffee. This enabled the creation and launch of a whole new premium instant sector with Tasters Choice in 1966. In 1968, Nestlé entered another new category. It involved no evaporation whatsoever and yet would, in time, become not just the Next Big Thing but the Next Huge Thing – bottled water They bought a 30% stake in Vittel, the French mineral water company.
Nestlé had become Switzerland’s largest company operating over 200 factories around the world. The primary mantra of the business world in the 1970s was diversification and Nestlé was no exception to the trend. As eating out became more popular at the expense of home-prepared family meals, Nestlé got into the restaurant business. It founded Eurest, a joint venture with Compagnie Internationale des Wagon Lits et du Tourisme, and then bought into the Australian restaurant chain, Cahills. The rise of the Californian wine industry also took Nestlé’s eye: it bought Beringer Wines plus a host of vineyards. The American part of the business was simultaneously bolstered by the acquisition of Stouffer in 1973. The company consisted of three divisions: frozen foods, restaurants and hotels. In France, Nestlé started an ice cream business in partnership with France Glaces, and a German water business was acquired a year later.
Sales, through organic growth and acquisitions, quadrupled between 1960 and 1974, from $2.5 billion to $9.9 billion – a respectable figure even today, so huge back then. The company was now operating in eleven product areas: the seven new ones being canned goods, ice cream, frozen foods, chilled foods (including yoghurt), mineral water, restaurants and wineries. However, their first real participation outside the food sector came in 1974 when the owner of the L’Oréal hair care and beauty business, Liliane Bettencourt (daughter of the founder) approached Nestlé. Fearing nationalisation from the incoming socialist French government, she proposed swapping 30% of her L’Oréal stock for an equivalent amount of Nestlé stock. Nestlé, appreciating the growth potential of both the category and the company, took the deal. It would turn out to be one of the most lucrative investments in Nestlé’s history.
1974 also saw the first organised protests against the company’s marketing practices, especially in developing countries, for infant formula. Nestlé sued, and lost a case against the Bern Third World Action Group and their pamphlet, Nestlé Babies. The judgement decreed that Nestlé had to change their approach to the subject. Matters got worse as the oil crisis occasioned Nestlé’s first major slowdown since it restructured after the First World War. Economies, particularly in developed markets, stagnated. The Swiss franc strengthened against many currencies, driving down company earnings. Finally, the price of two of Nestlé’s two main raw ingredients, coffee and cocoa, rose four-fold and three-fold respectively between 1975 and 1977. It wasn’t a full-blown crisis for Nestlé, but it flagged up that the days of easy growth were over.
A consequence of the economic changes was that growth for Nestlé slowed down in the developed markets while continuing to power ahead in developing countries. These were less stable through either bouts of hyperinflation, military coups, or both. This made Nestlé refocus its acquisition strategy and look harder for growth markets in the developed world. An inspiration was their investment in L’Oréal, which continued to pay healthy dividends. The company made its second strategic investment outside the food and beverage categories by acquiring Alcon Laboratories in 1977. Alcon was a manufacturer of pharmaceutical and ophthalmic products (contact lenses, for example). Nestlé Group chairman Pierre Liotard-Vogt explained the acquisition as being an example of the company having ‘a very wide range of activities, all of which have one thing in common: they all contribute to satisfying the requirements of the human body in various ways’. This was a strategy that ruled out very little.
But one part of the business that had failed to convince everyone that it satisfied the requirements of the human body - particularly the requirements of babies in the developing world - was infant food. A US-based protest group, Infant Formula Action Coalition, initiated a boycott of all Nestlé products. This was successful enough to bring the company into negotiations with the World Health Organisation to try and lance the boil.
The business was still growing, reaching sales of $13.2 billion by 1979. However, this was nothing like the rate of growth Nestlé had become accustomed to. The company was now essentially a conglomerate administering a vast collection of highly decentralised businesses. Too many seemed to be going nowhere and Nestlé seemed to have little to offer these other than being banker and collector of earnings. As the earnings had now declined to a paltry 2.8% of sales, something needed to be done.
How Did They Build The Modern Business?
The emergence of the modern Nestlé from the cumbersome conglomerate of 1980 happened under the watch of one man, Helmut Maucher. He had joined Nestlé’s Frankfurt office in 1951 and rose through the ranks to become one of the three-person executive committee in 1981. Helmut would be the driving force of change in Nestlé for the next two decades. He came into the role with some firmly held beliefs. Firstly, that all major food companies had essentially the same technical and managerial capabilities. What made the difference was clarity in direction and speed of execution. Secondly, the company was operating in categories where, if they weren’t global in scale, they probably wouldn’t even survive, let alone thrive. And thirdly, Nestlé was in too many categories where it simply did not have the capability to be great. Only in food production and marketing did Helmut see Nestlé as having a competitive advantage. Early in his reign he told his team, ‘We want to serve the whole world, but we do not want to be the same as the rest of the world. We want to be in a business we actually know something about.’ At the time, this was a surprisingly novel attitude.
The strategy was pretty simple. Improve the bottom line by getting rid of the dogs, and then use the increased financial muscle to make some transformative food acquisitions. Thus, the ear
ly 1980s saw Nestlé selling many of the more questionable fruits of its 1970s diversification phase. They made only a few small acquisitions, mainly of European roasted coffee companies and American specialist candy companies. The bottom line improved substantially and even the Nestlé boycott was lifted in 1984. The two non-food interests, L’Oréal and Alcon, were kept on simply because they were so profitable and growing so consistently. Their earnings would be needed to help fund a breakthrough acquisition. This was of the Carnation Company in 1985 for $3.4 billion, at the time the largest acquisition ever outside the oil and gas industries. Nestlé had signalled they were changing and meant business.
Nestlé chose Carnation for several reasons. Firstly, Nestlé’s US business was not huge by American standards. The big retailers in the States did not see Nestlé as a major player, beyond Nescafé and Stouffer’s. Secondly, Carnation had some key product synergies with Nestlé’s core strengths. 40% of their sales came from dairy related products, particularly dried and evaporated milk. Thirdly, Carnation had interesting products whose marketing Nestlé thought they could improve: such as Contadina tomato products, Coffee-Mate coffee creamer and Friskies cat food. Fourthly, the company was buyable, being family-controlled with key members looking to cash in. The deal doubled Nestlé’s US sales and catapulted the company to the world’s number one food company ahead of Unilever. It still did not make Nestlé a top five US food company. They rounded out the year by purchasing the American coffee roasters, Hill’s Brothers.
While big acquisitions, by their very nature, were infrequent, the Nestlé’s direction was clearly discernible by their smaller moves. They bought single market companies in categories where the company was interested in expansion, such as the Canadian pet food company Dr. Ballard, and the roast coffee company, Club Coffee in 1987. The same year, Nestlé flagged another increasingly important category when they built on their minority stake in Vittel to take full ownership.
1988 was a defining year for the new Nestlé. They made two major acquisitions. First, they purchased Italy’s third-largest food company, the Buitoni-Perugina Pasta Company, for $1.3 billion. The deal proceeded along the normal Nestlé acquisition lines of being agreed with the principle owners of the company. Nestlé’s policy was never to embark on hostile acquisitions, believing the benefits of having existing management on board during the integration outweighed the occasional missing of a good target. The next target, however, was to blow that policy out of the water.
By 1987, Nestlé’s chocolate business was the sixth largest in the world with a 4% global share. It was the company’s fifth largest product category with sales of around $2 billion. If chocolate was going to be an advantaged category for Nestlé, they had to be bigger than sixth in the world, but the list of possible takeover targets was small. Mars, the largest player, was a private company whose owners showed no signs of wanting out. The second largest, Hershey, was controlled by a trust which again was not interested in selling. This left Cadbury and Rowntree, both with around 7% global share, as the only real candidates for a transformative confectionery acquisition. Cadbury were in the throes of fighting off interest from US firm General Cinema. Involvement would only suck Nestlé into an unwanted bidding war, so instead they approached Rowntree, suggesting a minority stake and the beginning of a long-term relationship. The British firm refused. Nestlé took the hint and walked away.
Things changed in April 1988. Nestlé’s arch rival in the European chocolate market, Suchard, bought 14.9% of Rowntree shares in a dawn raid. Nestlé approached Rowntree again, offering a friendly bid to head off Suchard’s unwanted takeover. Rowntree again declined, leaving Nestlé no option. If they did not bid ($2.1 billion) Nestlé risked losing out on the only realistic option to change their fortunes in confectionery. This in turn prompted Suchard to buy more Rowntree stock, increasing their holding to 29.9%. This battle for Rowntree suddenly unleashed a wave of anti-takeover protests in Britain.
Rowntree’s response made it clear Nestlé was going to have to stay hostile or go home, ‘Nestlé has nothing we need, not its money, not its research and development, not its marketing, and not its distribution’. Not much wriggle room there.
Suchard now owned 30% of the shares and submitted a new, higher bid at the end of May. The odds were against Nestlé forcing through a takeover, so they returned to the negotiating table to see what it would take to get an agreed bid. The answer from Rowntree was essentially a reverse takeover of the Nestlé chocolate business. They wanted a global chocolate unit created within Nestlé, run by Rowntree senior management and with a Rowntree man on the Nestlé board. This was unacceptable. Nestlé had remained structured geographically and would not countenance the creation of a business unit that crossed national boundaries. Rowntree executives were told that, just as had been the case with all their acquisitions, Rowntree would be broken up to fit into Nestlé’s geographical zone structure. This was unacceptable to Rowntree executives, who had no intention of being the turkeys that celebrated Thanksgiving.
The battle finally ended on June 24th, 1988 when Rowntree reluctantly accepted an improved $4.5 billion offer. Nestlé were propelled to being the second largest confectioner in the world, with around an 11% global share and 18% in Europe. A key benefit of the acquisition, apart from the usual cost-saving synergies, was the roster of brands. Nestlé could take brands such as Kit Kat, Smarties, Rolo, Lion Bar and Black Magic into more international markets than British-based Rowntree had done. These brands, widely and frequently bought and consumed, could also be used as powerful vehicles for building and promoting the Nestlé name. The battle had changed the company for good. Everyone now knew that, in its selected categories, Nestlé was serious in its quest for scale.
Although deal-making was the name of the game now at Nestlé, the company still pursued a range of different paths to growth. The company research labs were still at the party. The Nespresso encapsulated espresso coffee concept, once developed, was test marketed in the office coffee sectors of Switzerland, Japan and Italy in 1986. By 1989, the system had been introduced into the Swiss household market in partnership with Turmix, who manufactured the machines.
In 1990, Nestlé looked outside of R&D and acquisitions for growth by forming three joint alliances. The first was with General Mills - the somewhat insular American breakfast cereal giant. The deal was that General Mills would provide their cereal brands such as Cheerios, while Nestlé would provide the distribution and marketing in countries around the world. This gave Kellogg’s a wake-up call in markets such as Britain and Australia, which they had had to themselves for decades. A key part of the deal, which was a 50:50 joint venture company called Cereal Partners Worldwide, was that the Nestlé brand name would go on all the packs, giving a further huge hike to awareness.
The second tie up, with Coca-Cola, under the unsurprising name Beverage Partners Worldwide, would ultimately prove less successful. It was limited to ready-to-drink tea and coffee lines in twenty-four countries. The third deal was one that really only a company of Nestlé’s global size and reach could pull off: a partnership with the Walt Disney Corporation. Not only would Nestlé be the exclusive seller of food and drinks at Disney resorts, but would also have exclusive rights to use Walt Disney characters on its packaging and advertising in a range of categories in Europe, the Middle and Far East.
These arrangements set the tone for the rest of the 1990s: large-scale moves that used and strengthened Nestlé’s position in its focus categories. In 1992 Nestlé became world leaders in the bottled water category, adding the Perrier Company, with its range of brands, to their existing waters portfolio. Contrary to their earlier negotiating stance with Rowntree, Nestlé organised bottled water globally under the name Nestlé Sources International, headquartered in Paris. The acquisition of San Pellegrino soon added to this empire. Pet food became the next product sector to increase global scale, with the acquisitions of Alpo in 1994 and Spillers in 1988, making Nestlé the second largest pet food compa
ny in Europe.
The first half of the 1990s also saw Nestlé move into the newly opened markets of Eastern Europe and China. In the latter half of the decade, more acquisitions were made to strengthen their ice cream and pet food categories. So far, in the water business, the company had been solely focused on spring-based waters. However, Nestlé could not ignore the approach being taken by both Coca-Cola and PepsiCo, which both developed water brands – Dasani, for example - that did not depend on output from one particular spring.
In 1997 the Nestlé labs created a formula to add mineral salts to completely purified water and give the taste profile Nestlé felt would have greatest appeal. This was handed over to Perrier Vittel in France to develop a production process capable of being installed anywhere worldwide (subject to the availability of acceptable water). The product was tested in mid-1998 in Pakistan, Thailand, Mexico and Brazil. Nestlé Pakistan was the first company to launch it for real, in late 1998, under the brand name Nestlé Pure Life.
Within a year, the product, now selling well from 15,000 retail outlets, was rolled out to markets such as Brazil, China, Mexico and Argentina and launched in Europe under the name Nestlé Aquarel. This was a striking example of how Nestlé maintained the principle of local autonomy. Brand essences might be sacrosanct and managed centrally, but local businesses had freedom to change brand names and tweak recipes to suit local conditions. Similarly, Nescafé had a different flavour profile in almost every country in Europe. Many other large companies sacrifice local adaptability for the cost savings of regional production and supply. Nestlé firmly believed this strategy to be a short-term measure that would cause long-term harm – it could open doors for local competitors to come up with more locally targeted products.
