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Source: Economist; 8/7/2004, Vol. 372 Issue 8387, p55-58, 3p, 2 Color Photographs, 3 Graphs Document Type: Article Subject Terms: *CORPORATIONS -- Growth *CORPORATE reorganizations *BUSINESS planning *STRATEGIC planning *ORGANIZATIONAL effectiveness Company/Entity: NESTLE SA People: BRABECK, Peter Abstra ct: The article looks at growth and reorganization at Nestlé, a Swiss food and drinks group, as of August 2004. Peter Brabeck, who became chief executive officer in 1997, wants Nestlé to become larger. The company's first task is to transform its unwieldy empire into a more efficient and co-ordinated operation. Mention the Nestlé name to most people and invariably they will think first of instant coffee and second of a scandal over the company's sales of baby-milk formula in poor countries that still haunts the group 30 years after it first surfaced. Brabeck seems much more interested in big strategic changes than in finding new ways to remedy Nestlé's tin ear to criticism or to improve its public image. Nestlé tries to play down the dangers of the obesity epidemic for its business, but all food producers have to reckon with marketing risk related to fear of fat and the financial risk of being sued by consumers on health grounds. Brabeck has created a new Nutrition division that brings together clinical nutrition (food for people with diabetes or a heart condition), performance nutrition (food that prevents athletes in endurance sports from keeling over) and baby food. Nestlé intends to expand its existing businesses, but will also continue to push into new markets. To do this, it is prepared to go anywhere, even Iraq or Iran. Full Text Word 2873 00130613 14073878 Business Source Complete HTML Full Text
Daring, defying, to grow
No change to all change
It has yet to convince anyone that bigger is better. by centralising control over specific businesses. for example. 4. Nestlé's priority is rapid growth." asserts Peter Brabeck.600 to 400. Danone and Heinz.000 since 2000. Nestlé. And its future expansion might be at the price of even lower margins. has kept on getting bigger.000 to 234. the firm . he says.2.Over the past 20 years Nestlé has grown enormously through an ambitious spending spree and by going into exotic markets. Mr Brabeck has one uncomfortable legacy. More recently. That is a tall order. for instance. Achieving that will not be easy. Meeting Mr Brabeck's ambitious growth targets at the same time will be even harder. Some analysts reckon Nestlé ought to be returning money to shareholders rather than using funds to go on growing.000 global workforce.It has also shut more than 100 factories and reduced the number of its brands from 1. some of his reforms. who became CEO in 1997. has cut its workforce by 33. Rival Unilever. Similarly.Today it dwarfs its competitors with a market capitalisation of SFr120 billion ($98 billion). Small wonder that some idealistic teenagers boycott Nestlé's products. have lagged those of competitors such as Unilever. Xavier Croquez at Exane. Nestléscored another spectacular own-goal with a clumsily handled effort to extract payments from impoverished Ethiopia. the harder the challenge appears. wants Nestlé to become even larger. Most food firms either stayed the same size or shrank themselves in an effort to boost margins. the closer one looks at Nestlé. The company's first task is to transform its unwieldy empire into a more efficient and co-ordinated operation. a broker in Paris. In fact. Nevertheless. and pretax profits of SFr11 billion last year. in October 2003 Cadbury Schweppes announced that it intended to shrink itself. The British-based maker of soft drinks and confectionery is shutting one in five of its 133 factories and cutting 10% of its 55. But others disagree. Mr Brabeck. many companies concluded that they could become operationally efficient by being focused. is to lay the foundations for a big increase in the company's SFr90 billion annual sales. Its profit margins. Few companies are more exposed than Nestlé to reputational risks. In the zone Vaulting ambition A real makeover Liste n Download MP3 Help Section: Special report: Nestlé Despite its size. 3. by contrast. calculates that over the past 30 years Nestlé's shares (denominated in dollars) have out-performed the S&P 100 by a factor of more than three. But can it achieve this while it is busy trying to transform its entire business? Dateline: VEVEY "WHEN you stop growing you start dying. a Swiss food and drinks group. chief executive of Nestlé. could yet make it easier for senior managers to avoid such problems in future. Mr Brabeck says. His goal. Mention the Nestlé name to most people and invariably they will think first of instant coffee and second of a scandal over the company's sales of baby-milk formula in poor countries that still haunts the group 30 years after it first surfaced. Over the past 15 years. Yet Mr Brabeck seems much more interested in big strategic changes than in finding new ways to remedy Nestlé's tin ear to criticism or to improve its public image. More recently.
Mr Reichenberger used to run Nestlé's operations in New Zealand as a local company with four factories and very few imports and exports. According to Wolfgang Reichenberger. others have outstripped Nestlé. Mr Brabeck's biggest deal so far. Mr Maucher sold off or shut down unprofitable businesses. Some senior managers had to be sent elsewhere in the world. In 1981 Mr Maucher took over a company that was struggling after a misguided diversification into hotels and restaurants. In particular. seen as the best way to cater to local taste and to establish emotional links with clients in far-flung places. Nestlé's spending spree started under Helmut Maucher. In 1992 Nestlé took over Perrier. and might focus further by selling its biscuits business. Mr Brabeck carried on buying. Danone. Mr Maucher then hit the acquisition trail. Having reached the limits of local expansion he pooled Nestlé's operations in New Zealand. management had either to come up with a new model or to split up the company. Australia and the Pacific Islands by consolidating accounting. administration.) Having cleaned up Nestlé's portfolio. Four years later came the $10. So is focus in the food industry good or not? Nor is it obvious how to run Nestlé as a coherent global business without losing the ability to adapt its products to local tastes and traditions.) Mr Maucher also acquired the biggest ice-cream makers in Spain. accepts Mr . a mineral-water company. There is no global consumer. after a couple of years in the job Mr Brabeck abruptly switched tack. a French producer of mineral water. "People had become kings in their kingdom. and put in place the foundations of Nestlé's present setup. was acquired. Second. It was not a popular decision with the Australians.3 billion purchase of Ralston Purina.has also outperformed rivals (see chart 1). there were two "unique" features they wanted to preserve. a French rival that makes only water. But at the core of his effort lies a conundrum." he says. Others quit. No change to all change At first Mr Brabeck continued to run the firm as his predecessor had. In fact. dairy products and biscuits. Nestlé started to consolidate the management of its factories in individual countries into regions and to combine the oversight of similar products in "strategic business units". (That deal remains a problem because trade unions are still fiercely resisting a restructuring plan. shrunk or disappeared. an American pet-food maker. And after he took over. Other ice-cream brands were snapped up." says Mr Reichenberger. products and brands would continue to be far more influential. Nestlé's chief financial officer. among other things. In other corners of the Nestlé empire the new streamlined model did not go down well either. sales and payroll. "We are trying a new paradigm. In 1988 he bought Britain's Rowntree. Australia and Canada. In 1997 San Pellegrino. he says. so much so that on August 2nd Nestlé threatened to sell Perrier. Smarties and After Eight chocolates. However. Although some more focused competitors have struggled. the group would keep its commitment to decentralisation. is doing better than Nestlé in all three sectors. The first was that information technology (IT) would not play much of a role in the day-to-day running of the firm--Nestlé's focus on its people. so strong was the culture that the two men even put together an internally published list of things that should not change when Mr Brabeck took the reins. Nestlé was becoming so uncompetitive that these sacred cows had to be dumped. ice cream and pet food the group's main business lines. Mr Brabeck now wants to prove that size and operational efficiency are not mutually exclusive. Mr Brabeck's predecessor. Nestlé has not been afraid to invest in emerging markets and in new lines of business that are not immediately profitable. It made Nestlé one of the world's two biggest makers of pet food--privately owned Mars of America is the other. He decided to make mineral water. maker of KitKat. The first thing to go was decentralisation. (Commitment to confectionery came later.
$12 billion in sales and 42 factories across the country. California. utterly different from the dull combination of chocolate and wafers munched in Britain. "These markets function very differently because of the political realities of the region. its instantcoffee brand. economic woes in Japan (although the economy there is now improving). (A bag of sugar used to be identified by 50 different codes within Nestlé. Costs have been reduced. SARS and the war in western Africa. a project known inside the firm as "Globe". With 21. In Asia. The most ambitious would-be efficiency booster is "Global Business Excellence". Nestlé's American factories purchased their raw materials independently. Nestlé produces 200 different varieties of Nescafé. As part of an operation called "BEST". Globe is a group-wide resource-planning system. he saved more than SFr4 billion by the end of 2001. strong and sweet concoction of coffee." says Dominique Dupont. standardise packaging codes and provide more accurate data about raw materials and stock levels. the simpler the wares. That will not happen overnight. bosses in Glendale could not compare what subsidiaries were being charged. and Nestlé Crunch. a coffee brand. By closing or selling more than 150 under-performing factories. it introduced a common IT system and standards across the group. Nestlé USA. on the other hand. to cater to local palates. Globe will establish one technology platform for the group. Oceania and Africa. the company sometimes paid more than 20 different prices for vanilla to the same supplier. putting in a regional IT system and common standards. a candy bar. are the same everywhere. Until the group-wide IT system is implemented. KitKat in Japan comes in flavours as fancy as lemon cheesecake. In other words. is lowering manufacturing costs. Vaulting ambition . It was launched four years ago in co-operation with SAP.Country managers remain powerful there because it is especially vital to know local tricks of the trade. Mr Brabeck has also cut costs with vigour.) Once the new resource-planning system is fully functional in 2006 or 2007. planning and inventory software for each of its main regions--Zone Europe. "FitNes" is supposed to slice SFr1 billion (about 1%) off administrative costs by 2006.Brabeck. Three new programmes should bring further cost savings of some SFr6 billion by 2006. Because each factory identified vanilla with a different code. where Nestlé remains decentralised.Russians love a very thick. As a result. "Target 2004+". Before the changes. sugar and milk powder that would make western Europeans gag. Nestlé expects a big improvement in how data is used throughout the company. As a rule. Mr Brabeck has abandoned that other sacred cow--Nestlé's aversion to IT. On top of that more than a dozen different systems inherited from acquisitions are making it tricky to share information across operating units. At present Nestlé is still running three different versions of accounting. owns such American household names as Taster's Choice. For instance. for example. But already at the regional level efforts to make Nestlé more efficient are showing results. it is a sizeable company in its own right. a German software giant. the region is following the American example. and Zone Asia. who oversees Africa. Zone Americas. In the zone The project is a necessary. country management was merged into 18 regions in the late 1990s. Today there is a single code and factories pay suppliers the same price. the more they need to be adapted to local preferences. It should then hack out millions in costs from its supply and distribution systems. First he made production more regional. but the region has been a tough one thanks to the war in Iraq. says Mr Reichenberger. Oceania and Africa. headquartered in Glendale. but risky one.000 employees. Sophisticated products such as milk powder for premature babies.
And yet concerns about obesity and health in general are not only a threat. however. a milk-derived source of calcium that it adds to Nesquik's cocoa powder. because of alleged lies on the labels of its Vittel water bottles. Actimel. cereals and even ice-cream. it is prepared to go anywhere. Nestlé has withdrawn the blue yogurt pots from several European countries. Nestlé Waters says it dropped the reference to calcium in early April and claims the new bottles are marketed as water for families rather than for children. a line of yogurts called LC1 that is meant to strengthen the immune system and improve digestion.7%. though. though the two are partners in a cereal- . After a number of attempts at relaunching LC1. are probably unfounded. For instance. It will not be easy to get bigger by buying new businesses. nutrition. Antitrust authorities lurk. Nestlé is trying to position itself as a healthier company. adding iodine. the ability to take majority ownership of the business. the size of the population. head of Nutrition. yogurt. Mr Maucher used to say in private that Nestlé is all about marketing. says he is helping to include this message across the product range. launched with a more aggressive marketing push. for instance. compared with Unilever's 2.1%. A team of 30 people at the headquarters in Vevey watches over food safety and quality control at 511 factories in 86 countries. Danone's rival product. UFC says Vittel is fooling consumers by selling peach-flavoured water as a calcium-enriched mineral water. adding socalled branded active ingredients such as Calci-N. performance nutrition (food that prevents athletes in endurance sports from keeling over) and baby food. And Nestlé is busily selling the "new nutritional message" that food provides health benefits to people rather than making them fat. So far. but a huge opportunity. minerals and vitamins to water. even Iraq or Iran. In the past five years Nestlé has introduced 600 new or reformulated products in 48 countries. is doing much better. America's Federal Trade Commission took almost a year to approve the takeover of Ralston Purina in 2001. but all food producers have to reckon with marketing risk related to fear of fat and the financial risk of being sued by consumers on health grounds. the state of technology and whether the firm is welcome. Nestlé has consumer-complaint hotlines that follow up every complaint. but will also continue to push into new markets. depending on the country being a market economy. Luis Cantarell.Analysts are still sceptical about Mr Brabeck's reforms. a consumer group. Such recalls can be disastrous for a food company's image and reputation. Nestlé intends to expand its existing businesses. But Mr Brabeck is being notably ambitious: no firm of comparable complexity is making its management structure so flat. To do this. It is reformulating products. a big American food company. Nestlé has not done well with its most ambitious healthy product. The company is anxiously promoting its image of Swiss solidity across the globe. Others say Mr Brabeck is only doing what other bosses at many other big multinationals have done. As Danone is three times the size of Nestlé in the yogurt market it can distribute its products far more widely. Nestlé tries to play down the dangers of the obesity epidemic for its business. Mr Brabeck says that an important goal is to transform Nestlé from a food company to a "food. excluding acquisitions) was 5. Nestlé recently withdrew cans of baby food in Australia because of a mix-up over milk-powder ingredients at the factory. Its courage is paying off. Only Pepsi and Danone had similar growth rates. He has created a new Nutrition division that brings together clinical nutrition (food for people with diabetes or a heart condition). Nestlé's secondbiggest market after America. and that he faces greater complexity than most. As awareness of the obesity crisis is growing. Some say the new resourceplanning system will be running by 2010 at the earliest. the company was recently taken to court by UFC. From 1999 to 2003 organic growth (ie. health and wellness" company. Every year a few products are withdrawn. In France. Recent rumours that Nestlé plans to buy General Mills.
a joint-venture to produce nutritional cosmetic products. Can it do it? Swiss efficiency and determination suggest it can. a maker of ophthalmological equipment. Sheer complexity and the firm's history of stubbornness argue that it is over-reaching.making joint-venture. Another relative weakness is confectionery. the elderly owner of a controlling stake in the firm. Alcon seems the more likely to be sold. But the truth is that Nestlé is likely to try to finish its efficiency programmes before making a big buy. a holding company. Indeed. A combination would be formidable. Nestlé is one of the world's great companies. that transformed the Bettencourt and Nestléshares into direct stakes in L'Oréal. Rival Danone is doing conspicuously well. GRAPH: Battle of the big: (Source: Thomson Datastream) GRAPH: All over the place (Source: Company reports) GRAPH: A lot of this and that (Source: Company reports) PHOTO (COLOR) PHOTO (COLOR) . global group with strong controls and a lean cost base it would be a powerhouse. in 2002 Nestlé began co-operating more closely with L'Oréal via Laboratoires Innéov. as the first step towards an eventual takeover. But the food business is inherently tougher in a mature market such as western Europe. soNestlé would have to re-sell big chunks of General Mills. They see the recent dissolution of Gesparal. A real makeover What about non-core businesses? Nestlé has two big ones. Mr Brabeck must hope that his legacy will be kinder to his successor than his inheritance proved to be to him. Fewer than half of General Mills's products fit into Nestlé's brand portfolio. But before then Mr Brabeck and his team must deliver the goods. And it has also to address some obvious weaknesses. Mr Brabeck thinks central Europe and especially Russia will produce better growth rates in the next few years. Transformed into an effective. It owns most of Alcon. Many think Nestlé will try to buy all of L'Oréal after the death of Liliane Bettencourt. as well as 26% of L'Oréal. a French cosmetics giant.Chilled dairy-industry jargon for milk and yogurt--in Europe is Nestlé's Achilles heel.
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