FMCG

by Greg Thain

  The main event of the late 1990s was a handing over of the CEO position from long-time occupant, Helmut Maucher to his chosen successor, Austrian and lifetime Nestlé man, Peter Brabeck. The transition had been planned years in advance. Initially, Helmut moved to an executive chairman role before handing over responsibility completely. On first taking over, Brabeck defined his priorities as follows:

  · Innovation and renovation

  · Efficient operation

  · Greater accessibility of Nestlé products: Whenever, Wherever, However

  · Improved consumer communication

  Brabeck also flagged up that he saw the future as Nestlé moving from being an agro-alimentary business into one focused on consumer wellness. To that end Brabeck created a Nestlé Nutrition Division on his very first day as CEO.

  Efficient operation went in two directions: the disposal of businesses deemed past their peak, such as the Findus frozen foods unit; and the outsourcing of base ingredient processing. So cocoa beans were handed over, along with a collection of Nestlé factories, to industry specialist Barry Callibaut. The combination of this portfolio cleansing and processing outsourcing netted Nestlé $1 billion; and resulted in the sale or closure of fifty-four factories. Nevertheless the company still owned and operated well over 400 factories, spread around the globe.

  By the end of 1999, sales had increased from the 1980 conglomerate days by over 200%: and net profits had increased almost six-fold, up from 2.6% of sales to 6.3%. Such had been the turnaround that, for five years in a row, Fortune magazine named Nestlé the Most Admired Global Food Company. Although now more streamlined, there was no real change to Nestlé’s acquisition strategy. Pet food giant Ralston Purina was acquired in 2001 for $10.3 billion and merged with the Friskies business to form another global entity, Nestlé Purina Pet Care. This had annual sales of over $6 billion, making Nestlé the world’s leading pet food company. The North American ice cream business was fluffed up in 2002 with the acquisition of Dreyer’s: as was the microwave snacks segment with the purchase of Chef America Inc. the same year.

  By 2002, Nestlé had six global brands: Nestlé, Nescafé, Nestes, Maggi, Buitoni and Purina. They also managed a vast portfolio of around 8,500 national and regional brands. This would have been an impossible task without the company’s high degree of emphasis on local operating autonomy. Even with what seemed such a bloated portfolio, around 70% of sales came from brands either number one or number two in their respective markets. Beverages accounted for 28% of sales; Milk Products, Nutrition and Ice cream 27%; Culinary Products 25%; Confectionery 13%; with Alcon and the L’Oréal investments bringing up the rear.

  How Global Are They?

  Nestlé has been globally focused since its second year of operation when Henri opened a sales office in London. The whole company story is one of a food company going global; so we will not laboriously list out each market entry here. The Swiss market was never a major focus for the company, because it simply wasn’t large enough to sustain a business for any length of time. It now accounts for barely more than 1% of company sales. By 2002 Nestlé was the world’s biggest food producer, operating in over 450 factories and employing nearly a quarter of a million people in 84 countries. Its biggest market, the US, accounted for 12% of sales (notably, the company’s entire top management were all non-US expatriates). Its next largest market, France, did not even account for 5% of sales.

  Nestlé is the most global of companies in span, but at the same time one of the most local in operation. In a large European market, Nestlé sectors will have around 4,000 products for sale across all its product range, of which 99% will be regional or local brands. The world’s largest food company passionately believes that the world market for food is made up of small local markets. Consumers in many countries believe Nestlé to be local – for example, 95% of Japanese consumers believe it to be a Japanese company.

  How Are They Structured?

  Because Nestlé went so global so early, local operating autonomy was the only practical choice to manage the company. Communications and travel were then so restricted. The company’s conglomerate phase further emphasised the local and regional operating model. Again, there were no real practical alternatives for grouping together restaurants, wineries, contact lenses, condensed milk and the like. It was only when Nestlé began to concentrate its portfolio in the 1980s and ‘90s that it became in any way practical to start to assemble teams with global category responsibilities. Even so, acquisitions were made at the local level. When Nestlé bought Stouffer’s, for example, it was actually the Nestlé USA legal entity that did the buying, and it was into the local US company that Stouffer’s was absorbed.

  The structure in the late 1980s was still very much driven by regionalism: five regions were the key operating units of the business:

  · Zone 1 – Europe

  · Zone 2 – Asia & Australia

  · Zone 3 – Latin America

  · Zone 4 – North America

  · Zone 5 – Africa & Middle East

  There was one board-level operation - Product Direction and Marketing Service – tasked with looking ahead unencumbered by profit responsibility and supporting/advising the regions and their operating units.

  Major change first came in 1993 with the acquisition of Perrier. The latter was managed in a global manner. This prompted Nestlé to combine all its water interests into one globally managed division, Nestlé Waters. Even though this broke the habit of a lifetime, it made sense. The water category is somewhat unique because there are no local tastes to tweak the product and, certainly for spring brands, no scope to tweak. If you manage the Perrier brand in China or San Pellegrino in Chile, you can’t just invent a new serving size to suit some under-served local retail channel, because you have no factory.

  Once the core categories became fixed, Nestlé could develop systems and structures that would progressively enhance global capabilities: yet, without removing profit responsibility from local operating units. As is always the case, the first step is to get everyone talking the same language and looking at the same numbers. Nestlé tackled this challenge in 2000 with the launch of the GLOBE initiative (Global Business Excellence), which included group-wide, standardized best practices, plus data standards and information systems. This created the organisational basis for Nestlé’s to embark on its transformation into a nutrition, health and wellness company with global capabilities and local operating excellence.

  In 2005, the Nestlé Nutrition division, set up in 1998, was made an independent entity within the group. This assumed global responsibility for the areas of infant nutrition, healthcare nutrition, weight management and performance nutrition. By this time, other strategic business units had been set up for the other core categories, making eight in all: beverages (excluding waters); milk, nutrition and ice cream; chocolate and confectionery; prepared dishes and cooking aids; pet care products; health care and nutrition and out-of-home catering (now professional food services), along with Nestlé waters.

  Three of the eight units have profit responsibility and report directly to the CEO - Nestlé waters, Nestlé health care nutrition and Nestlé professional. Health care nutrition and professional food services had quite different routes to market than the usual Nestlé set up, which is why they have full operational responsibility. Health care nutrition aims to pioneer a new industry by developing science-based and personalized nutritional solutions in the areas of gastrointestinal health, metabolic health and brain health. It is thus primarily distributed through hospitals and pharmacies. Professional food services goes through specialist food service distributors.

  The remaining five strategic business units - beverages; milk, nutrition and ice cream; chocolate & confectionery; prepared dishes and cooking aids; pet care products - report into one board member, who also has responsibility for marketing and sales. These units are not profit-responsible, having a remit to operate over a longer timeframe, usually 3 to 5 years ahead. They are tas
ked with forecasting both how the categories will evolve and developing global category strategies. From these, market entry strategies, acquisition targets, global brand strategies and innovations and renovations can all be discerned. As so many of Nestlé’s brands are either local or regional, it would make no sense at all to have profit responsibility at this level. To cope with this increased level of complexity at the corporate level, the five regional zones were reduced to three: Europe, the Americas and Asia/Oceania/Africa.

  What Have They Been Doing Recently?

  2004

  Although Nestlé reported a slight decline in sales during the year, this was primarily due to a strengthening Swiss franc and disposals exceeding acquisitions (in what had been a quiet year). Underlying organic growth was decent at above 4.5%, of which 3% came from volume growth. Performance had been muted by a relatively poor year in Europe where volume declined by 1.6% and prices could not be increased to compensate. While Eastern Europe was performing well, with organic growth of nearly 8%, it was still a small part of the pie for Nestlé. These sales were not quite 10% of the total European region. Nestlé’s problems lay in its two biggest European markets, France and Germany. This was partly due to the rise of discount retailers such as Aldi who carried very few Nestlé brands. Elsewhere performance was much stronger: organic growth in Zone Americas was nearly 8%, and 7% in Zone Asia, Oceania and Africa.

  Within the product categories, as understandable with a diversified company such as Nestlé, performance was mixed. Waters achieved volume growth but partially through dropping prices in the key North American market. The other driver of growth was the continued rollout of Nestlé Pure Life and Nestlé Aquarel (now in 34 markets), with their combined volume up 45% to over two billion litres. Waters was now almost as important to Nestlé as soluble coffee: the latter barely moved forward in the year despite re-launches of Nescafé and Nescafé Cappuccino. As world market leader, the task in hand was to find ways to grow the category. Therefore, Nestlé had begun working with coffee associations to better understand the positive effects on the body, and also increasing a long-term sustainability agenda.

  Milk products and nutrition both had good years. Condensed milk was re-launched in its largest market of Brazil; while Carnation Instant Breakfast and the rolling out of Clinutren helped drive Nutrition. Ice Cream however was becalmed despite a good year for Haagen-Dazs in North America (the only territory in which Nestlé held the license for the brand). Slow Churned Dreyer’s Garand Light was launched in the USA using a patented technology to deliver a product as creamy as normal but with half the fat.

  Cereal Partners Worldwide was proving to be an excellent partnership: entering more markets and launching new products was proving a source of steady profitable growth. But Nestlé’s chocolate business was lagging behind the company average. A continuing slew of Kit Kat variants - such as Kit Kat Editions in the UK, Kit Kat Green tea in Japan and Kit Kat Chunky Peanut Butter in Canada - provided only short term growth and would need replacing early. Pet care rolled out their new strategic tagline of Your Pet, Our Passion across multiple markets. The food services division eagerly embraced the company’s wellness agenda, launching fortifying soups for the elderly in France and Maggi Wellness in the Netherlands.

  The performances of Nestlé’s investments outside food and drink showed why it had been a good idea to hang onto them. Alcon, by far the world’s leading eye care company (of which Nestlé owned around 75%), had organic growth of 11% and grew EBITDA by an impressive 17%. It is hard to get those growth rates in mature food categories. L’Oréal chipped in with a not too shabby 6.2% like-for-like increase. The two Nestlé/L’Oréal joint ventures, Galderma skincare and Laboratoires Innéov, continued to progress and provide joint research benefits.

  Operationally, Nestlé were pursuing a succession of cost-saving efficiency programmes. Target 2004+, a factory efficiency initiative, was closed at the end of the year having been declared a success. It saved over 3.2 billion francs, and, as usual with such things, was immediately replaced by an even more ambitious programme, Operation EXCELLENCE 2007, to extend the same cost-cutting eye upstream to suppliers and downstream to customers. Meanwhile, administration was kept under the microscope of Project FitNes, also extended to run until 2007.

  2004 also saw the nutrition agenda took firmer shape organisationally. Nestlé Nutrition was created as a stand-alone global business organisation and a Corporate Wellness Unit was formed. Nestlé Nutrition consisted of pulling together product categories characterised as ones in which the consumers’ primary motivation for purchase is nutritional claims made by the product. The categories involved - infant nutrition, health-care nutrition and performance nutrition - had shared characteristics of high-level research supported both by clinical trials and by regulatory expertise. The unit was targeted to be fully formed and profit accountable by January 2006. The corporate wellness unit was a different beast, with a remit to drive the nutrition, health and wellness agenda across all the strategic business units. This included driving cross-category initiatives, such as a company response to obesity concerns and to the nutritional needs of an ageing population.

  2005

  Organic growth was over 6%, of which 4.2% was due to volume increases. These came from pretty much all categories and regions, and drove sales to a new high of nearly $73 billion. Again, it was mostly an acquisition-free year (along with a few small disposals), so the focus had been on embedding new structures and processes. Nestlé Nutrition was up and running by the year-end. It operated in more than 100 countries, with approximately a quarter of its 10,000 employees building close relationships with medical professionals. This unit had been expanded during the year by the acquisition of Protéika, a French wellness firm dedicated to providing solutions for weight management and metabolic disorders. The unit also set up an exclusive relationship with a company specialising in sterile filling technologies.

  The Wellness unit also had a few early feathers in its cap. It drove the rollout of the Nutritional Compass on-pack labelling across 50% of the entire product range, and the inclusion of more Branded Active Benefits (BABs) on products in all categories. BABs had first been introduced in 1999 with the aim of increasing the nutritional content and health benefits of existing products. Sales of products with BABs now amounted to over 2.9 billion Swiss francs, and had grown 20% in the year. Nestlé now had a wellness champion in each zone, strategic business unit and market. The champion was charged with rolling out the 60/40 decision, tool for new products or variants. Each new recipe must not only beat the nearest competitor in taste preference 60/40, but also have more nutritional or health benefits.

  Implementing these changes didn’t stop the CEO, Peter Brabeck, from plotting more structural and operational changes. He wanted to get the best of both global and local worlds, and to use the size advantage of the world’s largest food company - yet still remain as close to customers and consumers at a local level. Peter described his vision of Nestlé as ‘a fleet of agile, fast-moving businesses’. (Exactly how how Unilever had described themselves thirty years earlier). The businesses would remain fast moving by staying focused on consumers, innovation and communication. The fleet aspect required they head in the same direction, and be linked by shared consumer insights, R&D and back office scale benefits, which in turn flowed from the strategic business units. The fuel for the fleet would come from what were more encouragingly named ‘efficiency initiatives’.

  All this sounds quite obvious, but it represented a significant change in operational style. Nestlé were moving away from a decentralised multinational company towards a global, and ultimately a global multifocal company. Some categories, such as water and nutrition, would be resolutely global while others, such as culinary and chocolate, would keep a strong local focus, where local tastes varied so much. The link between the operating companies and the global structures would be ‘clusters’, essentially category- or brand-specific teams drawn from both local and globa
l units.

  2006

  In what was the company’s 140th year of operation, sales increased by over 8% to a shade under 100 billion Swiss francs. , Henri would have found this mind-boggling. It was also the eleventh year in a row the company had delivered the somewhat pompously named, Nestlé Model. This was a high level of organic growth - 6.2% - with a sustainable increase in profit margins (EBIT up 12%). Such models only tend to get a mention during the good times.

  The company was still pursuing the same two basic strategies. To make a transition to a nutrition, health and wellness product platform; and to make a transition to being selectively global, where scale was a competitive advantage. The portfolio transition stepped up a notch with two significant acquisitions. The first was the Jenny Craig weight management business. This consisted of over 600 Jenny Craig centres in the US, Canada, Puerto Rico, Australia and New Zealand. Here consumers received tailored support on nutrition, weight management and exercise; and were supported by personalised menus made up of Jenny Craig-branded foods. It was positioned in a fast-growing, profitable category and had been enjoying double-digit growth rates, where annual sales reached $400 million. The second acquisition, Australia’s Uncle Toby’s, was a little more mainstream with its range of breakfast cereals, nutritious snacks and instant soups.

  While all major categories grew, some were riding positive consumer trends. So beverages were up 8% and pet care 7%. Others, such as confectionery, had less going for them and grew only 2.6%. The company now had thirty brands, each generating sales of over 1 billion francs: but only one of them, Kit Kat, was in confectionery. The current stars of the show were Nespresso, which had grown over 40% to join the billion franc club and the combination of Nestlé Pure Life and Nestlé Aquarel, which grew 30% in the year. Below those stars, old-faithfuls like Nestea (up 20%); Coffee Mate (up 17%) and Stouffers (up 11%) were contributing to the party. As per usual, the external investments continued to bring in above-average performances: Alcon up 12% and L’Oréal up 10%.