FMCG

by Greg Thain

  Regional growth reflected the relative weighting of emerging markets in the three zones. The one with the biggest such markets, Asia, Oceania & Africa, grew fastest at nearly 8%; second came Americas at 6% and Europe was last, at 2.3% (the latter included a double digit increase from Eastern Europe). Nestlé, which had been built mostly by acquisitions, was conscious that using the potential of emerging markets involved more than providing ‘beads to the natives’ i.e. rolling out developed market brands. Nestlé had instituted the concept of Popularly Positioned Products, made in local factories. Some were purpose-built, combining affordability in emerging markets with high levels of nutritional value and great taste. Availability was not left to inefficient or non-existent local networks: Nestlé invested in direct store delivery networks and had some impressive levels of distribution - 70% in Indonesia and a staggering 90% in India.

  The move towards using global scale without sacrificing local commercial focus continued apace. GLOBE was now rolled out to 80% of the businesses. It was cutting a swathe through an almost ludicrous amount of complexity that had come from having hundreds of stand-alone businesses - Nestlé had 481 operational factories. Before GLOBE, the company had over a hundred data centres with no connectivity; now it had four. Almost every company used to compile its income statements differently; now there was one single Nestlé way. GLOBE was not just a standardisation tool. In Chile it identified 342 different sales channels for Nestlé products, some of which, such as cruise ships calling at Chile’s ports, had fallen between the cracks. While schemes such as Operation EXCELLENCE had reduced the company’s average cost of goods (from 51.8% of sales in 1996 to 41.3% in 2006), the next level of cost savings was coming from the GLOBE-enabled Global Nestlé Business Services. The latter was busy outsourcing various back office activities. Another key organisational change implemented was the integration of the concept of business executive manager. Each market now had a profit-responsible manager for each category in which they were competing.

  2007

  Chairman Peter Brabeck signed off his final year in the CEO role by announcing two things. First, the major steps in the transition to being a nutrition, health and wellness company were now complete. Secondly, and due to this transition, Nestlé would not only match the demographic growth opportunities of emerging markets – i.e. growing populations, increasing wealth and longer lives - but would ‘clearly outpace that growth’. So no pressure then, on the new CEO, promoted from running Zone Americas, Paul Bulcke.

  The major steps referred to were the acquisitions: from Novartis by its Medical Nutrition Division, and also the Gerber baby food business. These made Nestlé global number two and clear number one in each respective category. Nestlé nutrition was now an 11 billion franc turnover division operating in over 100 countries, comprised of four business units:

  · Infant nutrition accounted for around 70% of the unit’s sales and, in a tacit acceptance that Gerber had been ahead of Nestlé in the field, Nestlé had adopted the Gerber concept of Start Healthy. Stay Healthy across the entire Nestlé portfolio. There was also an admission that Gerber’s R&D laboratories had been ahead, particularly in developing products for toddlers, such as the Graduates from Gerber product range. Gerber had also been more innovative in developing services such as Gerber Life, North America’s leading provider of juvenile life insurance.

  · The new healthcare nutrition unit met the needs of people with specific nutritional deficiencies, particularly the elderly: cancer and digestive illnesses plus chronic conditions such as diabetes

  · Performance nutrition was perhaps a slightly exaggerated classification for products such as energy bars and sports drinks

  · Weight management via the Jenny Craig came in fourth

  There was little doubt that the beefed-up Nestlé nutrition was seen as the future of the company - it called itself the leader of the Nestlé fleet. However, it only accounted for just over 10% of company sales and its organic growth rate in 2007 of 9.7% was eclipsed by much stronger gains in less fashionable parts. This included Milo, Lean Cuisine, Nestea, Nan, Dog Chow, Nedo, Coffee Mate, Pure Life and Nespresso. All these were driving much higher growth rates and contributing to an overall company organic growth of 7.4%.

  This growth was driven slightly more by volume than by pricing and came across all product groups. Powdered and liquid beverages grew by over 10% and prepared dishes and cooking aids brought up the rear at above 4%. Performance by zone followed the pattern of previous years - double-digit increases in Latin American and Asian emerging markets and Eastern Europe outweighed gains in developed markets. The Nestlé Model seemed well and truly entrenched.

  2008

  A more difficult year. Huge variations, both up and down, in raw material costs didn’t stop the Nestlé Model doing its thing. Although reported net sales were only up by 2.2%, currency movements were masking organic growth of 8.3% in an acquisition-free year. Slightly worrying was a slowdown in real internal growth - volume in other words - which increased only 2.8%, with nearly double that rate of increase attributable to pricing. Great if the retailers and consumers are happy to pay, something which usually only becomes apparent over time.

  Other slight causes for concern were the low growth of Gerber, a business trumpeted on acquisition as having double-digit growth rates. This increased by less than 3%, while total Nestlé Nutrition grew by less than the company average – not what was advertised at all by the previous regime. In contrast, the stars of the previous year were still storming ahead: Nespresso up by nearly 40%, Coffee Mate and Nani around 25% and Dog Chow nearly 20%. Within the categories, the big news was the poor performance of Nestlé waters: volume declined by nearly 4% and margin went down too. The reasons given, ‘consumer down-trading due to the economic environment and the somewhat emotional debate about the perceived environmental issues around the category’, perhaps showed a somewhat dismissive attitude to a previous growth driver which was suddenly floundering. On the plus side, the cereal and beverages joint ventures racked up an amazing 20% real internal growth. This made up for the first real slowdown in Alcon in living memory, up only 2%, and a sedate 3% growth at L’Oréal.

  The big news of the year, unsurprising given a new CEO at the helm, was the introduction of a revised strategy. With the identity shift towards nutrition health and wellness company apparently complete, key questions emerged: what was management going to do with it and how? The new strategy was given, as these things usually are, a somewhat forced brand name, the 4x4x4 Roadmap. This embraced a suspiciously forced realisation that the company had four competitive advantages, four growth drivers and four strategic pillars. Theuy were outlined as follows:

  Competitive advantages: Unique Differentiators

  · Unmatched product and brand portfolio. Without doubt Nestlé has the largest portfolio of brands in the food industry but whether this is a feature or a benefit is arguable

  · Unmatched R&D capability. Nestlé certainly has one of, if not the biggest R&D functions in the food industry. It spent 2 billion francs in 2008, employing 5,000 people in 50 countries, plus the usual open innovation links. But, as the biggest food company, so they should. Whether it is the best - it didn’t seem to have been with infant nutrition – or the most intensive - as measured by % of turnover or PhDs employed per brand or whatever - is much more questionable

  · Unmatched geographic presence. Can’t argue with that. Marketing their products in around 130 countries and the longevity of their presence, particularly in emerging markets, is a huge plus; no-one else can claim to have been in China, Brazil, India and Mexico for a combined 370 years

  · People, Culture, Values and Attitude. Every large company says this: the only real difference Nestlé has is the level of local autonomy

  Growth Drivers: Enhanced Growth Potential

  · Nutrition, Health & Wellness. Every food company was busily reducing bad-for-you ingredients such as sodium, sugars, trans-fats etc. Nestle did so in over 3,000 produc
ts in the year, and was more forward looking -- increasing the nutritional density of another 2998 products. Plus, Nestle had been an industry pioneer in adding probiotics, which were included in products that generated sales of 3 billion francs

  · Emerging Markets and Popularly Positioned Products (PPP’s). While the percentage of Nestlé’s sales coming from emerging markets was not particularly earth-shattering, at circa 30%, the absolute level of sales at 35 billion francs was. Growth was also a healthy 15% in 2008. PPP products accounted for around 20% of sales in emerging markets and grew at 27% in the year. These were not just low prices out of the factory, but with an engineered low-cost route to market using micro-distributors and financed with micro-loans

  · Out-of-Home leadership. Nestlé professional was nearly through its transition to a globally managed unit across 97 countries. It was already the world’s leading company in this highly fragmented category encompassing all manner of routes-to-market. However, it was not clear what lay behind the company’s goal of doubling the 6.2 billion francs sales within the next ten years

  · Premium-isation. Premium food sectors were not new: everyone knew they were growing faster than average and delivering higher margins. The question was, was Nestlé uniquely positioned to benefit from this trend? While they owned some good premium brands, the vast bulk of Nestlé sales still came from good, basic everyday products.

  Strategic Pillars: Core Competencies with Excellence Potential

  · Innovation & Renovation

  · Operational Efficiency

  · Whenever, wherever, however

  · Consumer communication

  Of these, only whenever, wherever and however could be said to be a genuine, competitively-advantaged competence. Nestlé’s combined and uniquely global reach, a vast collection of non-global brands and local operational autonomy did the rest.

  The final leg of the Nestlé strategy lay not in the what but in the how: a way of doing business the company called ‘creating shared value’. This focused on three areas:

  · Nutrition. The company mission, in a nutshell, was to improve global nutrition: an action standard against which every management action could be measured

  · Water. While water was a huge category for Nestlé, it was less than clear why this was a key focus in creating shared value

  · Rural Development. This was more like it. Nestlé is a huge player in the global rural economy through coffee, cocoa and other key ingredients. The company’s work with 600,000 rural farmers to increase their productivity was laudable

  The bottom line on this newly laid out 4x4x4 Roadmap was that, according to Nestlé, it ‘positioned us as winners regardless of the environment . . . by giving the Group excellent defensive characteristics, but also by creating a platform for profitable growth’. It would soon get a good workout.

  2009

  A strong Swiss franc made the top line look a bit sick, with reported sales down over 5%. The market context was: weak consumer demand, rising raw material costs and intensive price competition from both branded and non-branded competitors. An organic sales increase of over 4%, of which nearly half came from increased volume, was a good performance. As usual, Alcon and the L’Oréal ventures did better than the Nestlé food and drink business, up nearly 7% compared to 3.9%. The largest operating zone, the Americas, had a very good year considering the turmoil affecting the US consumer market. Sales there increased by nearly 3% in local currency. The region was goosed by a 10% sales increase in Brazil. Europe was essentially flat with an impressive 6% sales increase in the UK wiped out by a very poor 6% decline in Germany. This was partly due to Nestlé’s continued relative lack of presence in the booming hard discounter trade channel. Asia, Oceania and Africa grew by nearly 7% with the greater China region growing double-digit.

  Business within the zones was conducted with a high level of local operating autonomy. This is an ideal strategy in times of great economic uncertainty, where fast and creative responses were required. So it comes as little surprise that the monolithic global operating units within Nestlé had much less successful years. Waters had negative organic growth of -1.4%, despite growing double digit in emerging markets and the Nestlé Life brand up 14%. Nestlé nutrition, the lead ship in the fleet a mere two years earlier, was wallowing with nil growth, and going backwards in Europe and the Americas. The situation in the newly-created Nestlé professional must have been even worse. Its results were shrouded from view, with a commentary that the unit had been ‘focused on establishing its strategic priorities’ – management speak for a real stinker of a year.

  So was the new strategy working? A look at the performance of the billion-franc brand club, accounting for 70% of company sales and up nearly 6% during the year, shows that Nestlé’s growth was coming pretty much as it had been the last few years. Nespresso was seemingly unstoppable, up over 20%, Pure Life, Beneful, Dog Chow and Galderma were up double digit, Nescafé, Nana, Purina, Purina One and Friskies up high single digits. The laggards, which declined, were the likes of Nestlé Ice Cream, Herta, Stouffer’s and Lean Cuisine.

  2010

  In 2010, Nestlé got back to making some strategic moves via mergers and acquisitions. It started with the purchase from Kraft of the DiGiorno brand of frozen pizzas, the market leader in the US. This, when combined with Nestlé’s frozen meals, snacks and Ice cream, made the company the clear leader in the US frozen sector. Priced at $3.7 billion, it was good value, as Kraft was in somewhat of a fire sale situation (having to sell one of its crown jewels to finance a bid for Cadbury). Nevertheless, it is difficult to see how the acquisition in any way aided the nutrition agenda, other than perhaps pushing some more business Jenny Craig’s way. This $3.7 billion was small change compared to the sum that came into Nestlé’s war chest when they sold the Alcon ophthalmic business in August 2010 for an eye-watering $41 billion (including previous share divestments). This was not a bad return on an investment of $280 million in 1997. The company also made smaller acquisitions in water in China, culinary in the Ukraine, confectionery in Turkey and pet food in North America.

  Organisationally, Nestlé accepted the reality that the previously much-vaunted Nestlé nutrition unit was not living up to expectations. The fit between infant nutrition, healthcare nutrition and so-called performance nutrition was to say the least forced. Infants eating bottles of pureed pears, cancer patients having bags of enteral feed infused, and joggers munching on a Powerbar don’t really have a lot in common. Danone’s unit in the marketplace was trouncing the healthcare nutrition business so something had to be done. The answer was to split off healthcare nutrition, along with its recently acquired metabolic disorders arm, Vitaflo, into a standalone Nestlé Health Science unit. The newly created Nestlé Institute of Health Sciences would support this.

  Elsewhere, the 4x4x4 strategy trundled on its merry way, more as a convenient mnemonic for what the company had been doing anyway and was continuing to do. Emerging market sales were now up to 39 billion francs, around 36% of company sales and growing 11.5%. Nestlé now had thirteen emerging markets in which their sales exceeded one billion francs and five that exceeded two billion. 47% of the company’s 449 factories were now located in emerging markets. Maggi, the leading food enhancement brand in Africa, sold 90 billion bouillon cubes, each fortified with key micronutrients to address market-specific deficiencies. This was just one of the 4860 popularly positioned products now in the range.

  This emerging markets performance contributed to an overall 6.2% organic growth, of which nearly 5% was volume, another demonstration of the power of Nestlé’s country-by-country capabilities. The US, which was by far Nestlé’s single largest market with sales of 31 billion francs, grew by 4.5%. This performance was driven by Purina PetCare’s innovations in the new and fast-growing pet treat category e.g. the launches of Purina ONE Shreds and the rather delicious-sounding Fancy Feast Gray Lovers. Whilst the new pizza business showed its strength by gaining market share, the weight management cate
gory struggled. Both Lean Cuisine and Jenny Craig had to tighten their belts during another lean year.

  Brazil, where Nestlé had been for 90 years, grew another 11%. Not only was Brazil the company’s third-largest market, but it was also closing quickly on the number two, France. Zone Europe had a better year, growing almost everywhere, although the problems in Germany continued with another sales decline. Zone Asia, Oceania and Africa had a predictably good year, with Greater China accelerating to a near 15% increase. Waters began to get its act together, but if you can’t sell bottled water in what was, for the northern hemisphere, the hottest summer in living memory, then there is no hope.

  2011

  The year when the percentage of sales for emerging markets hit the magic 40% mark! Nestlé achieved 13% organic growth from those markets, with highlights like India 20%, Africa 18%, and Mexico 14%, boosted by acquisitions, China 23%. The two Chinese businesses in which Nestlé acquired 60% ownership positions were: Hsu Fu Chi (makers of sugar confectionery and traditional Chinese snacks with a strong route-to-market network); and Yin Lu (a Nestlé co-packer who also made ready-to-drink peanut milk and ready-to-eat canned rice porridge). The company also bought a host of smaller businesses, all located entirely within emerging markets.

  The top line from the north was down from 110 billion francs to 84 billion. This was due to a combination of Alcon’s sale and an ever-strengthening Swiss franc. Nevertheless, that reduced number contained impressive organic growth of 7.5%, split evenly between volume and pricing. To complement the 13% organic growth in emerging markets, developed markets grew by over 4%, with Europe in total finally returning to a decent, 5% level of growth. PPPs in Eastern Europe grew at twice that rate. In Asia, Oceania & Africa it was all about PPPs, as the company set a goal to reach a million more retail outlets within the next two years.