"The direction is good, but we need to speed up the pace"
Paul Bulcke, CEO and Delegate of the Nestlé Board of Directors, talks about how Switzerland’s largest Group is shaping up, and its future growth opportunities
In the food industry, an intimate knowledge of the market and in-depth expertise in nutrition physiology are essential prerequisites for success. Nestlé has been accumulating both for years. The strategy to transform the business into a nutrition, health and wellness Group was planned long ago. Paul Bulcke, the new CEO and Delegate of the Nestlé Board of Directors, is now in the driver’s seat and ready to implement the strategy. He sees no reason for a change of direction. On the contrary, he regards a linking of Nestlé’s competitive advantages with the growth ideas based on four pillars as a good starting point for further development. He is relaxed in his views on possible acquisitions, plans for L’Oréal and higher raw material prices.
It’s up to me to line up management and staff behind our plans in such a way that those plans can be put into practice faster than in the past.
Paul Bulcke, Nestlé CEO
Finanz und Wirtschaft: Mr Bulcke, the company you are about to head up is in excellent shape. What makes you so sure Nestlé can maintain its current form?
Paul Bulcke: Nestlé has a strong vision, and is very energetic in its operations. There is still much impetus left to draw on, and it will take us a long way yet. Our direction of development has been defined, so we can now focus on creating value.
Growth and margin improvement are your priorities. How do you intend to achieve them?
We have four clear competitive advantages, which are the envy of our competitors. The first is our portfolio of products and brands. We are the only food manufacturer capable of accompanying someone throughout his or her entire life, from morning to night of every day. The fact that 29 of our brands generate over CHF 1 billion in turnover is a sign of the strength of our brands. Together, they represent three-quarters of Group sales. Second on the list are our research and development capabilities. No other company in this industry maintains 23 research centers, as we do. No one is as networked with universities and other research outfits as we are, whilst still managing to keep development activities so closely aligned with Production. Thirdly, we operate around the globe. For us, presence is more than simply being there; thanks to our many years of experience – not only in sales, but also in local production – we have acquired in-depth knowledge of our markets. Our fourth and most important trump card is our workforce. We value and appreciate the 280 000 men and women who work for us. As a whole, they represent a unique pool of talents and values, and they live our corporate culture with passion and commitment.
Peter Brabeck, your predecessor, developed the strategy of transforming Nestlé from a food producer into a nutrition, health and wellness Company. What steps towards implementation can we expect from you?
The transformation idea was developed over a long period of time, and really started to take shape in the past few years. I was privileged to be involved in formulating the strategy, and I wholly support it. We want to be the world’s leading nutrition, health and wellness company, and we want to be recognized as such – both by the industry and the financial world. I see absolutely no reason for a change of direction. The best way to capitalize on our strength is to combine our advantages and continue along our chosen path.
But surely you have your own style?
As a new arrival at the start of my term of office, I feel no personal need to impose new ideas as a way of setting myself apart from my predecessor. It’s up to me to line up management and staff behind our plans in such a way that those plans can be put into practice faster than in the past. We need to speed up the pace. We have to be agile and fit to stay ahead.
Which aspects will you tackle first?
Nestlé has defined four growth pillars. Nutrition is the first of these, and includes our traditional, classic food business plus dietary supplements. Then there are our operations in the emerging markets, Nestlé Professional, the out of home food segment and our premium brands. In the traditional food business, close contact with the consumer, and a good knowledge of his preferences and tastes, are factors for success. The ability to exploit our knowledge and offer added value will place us that crucial bit ahead of our competitors. Added value is synonymous with margin. Our strong presence in the emerging markets secures us huge growth potential in the form of a rapidly growing class of population with a hitherto unknown level of purchasing power, which is now sufficient to cover more than basic everyday needs. We must use this leverage by launching products which these people can afford. We call these goods “Popularly Positioned Products”.
Can you quantify the market potential of these emerging countries?
We’ve been in business there for many years, and already generate one-third of total sales in these countries. We estimate that over the next few years, our growth rates there will be at least twice as high as in the industrialized nations.
What initiatives are you planning in connection with this? Will it involve the costly setting-up of large sales teams or the building of new production sites?
Additional opportunities lie not in pursuing our traditional business, but in implementing a new model. This is in turn based on adapting all the steps in the value creation chain. Let me give you an example. In north-eastern Brazil, a region with a low level of development but a high population (65 million), we have set up an organization which is independent from the rest of the country, with a regional manager who knows the particularities of the market very well, and is able to adapt our business accordingly. Contrary to our operations elsewhere, we now run one production site for various product categories, producing goods which meet specific nutritional requirements, we sell through local micro-distributors instead of national suppliers and advertise on the radio instead of on TV, as we normally would. We have doubled our growth rate as a result. We are pursuing similar initiatives in Asia and Africa.
Don’t the efforts you have described limit your competitiveness in terms of pricing?
No. The value we create justifies higher prices, which our customers accept. If we can make our procurement, production and sales operations more efficient than those of our competitors, we can keep the competitive advantages on our side. Nestlé must focus on innovation, and production and sales – I want to bring minds and hands together.
Why is Nestlé focusing so much attention on the out-of-home food segment?
In certain countries, over half of all expenditure on food goes on food consumed away from home. We cannot, and will not, allow a 50% market potential to go unexploited. This is a trend which we will also see in the emerging markets. The complexity of this field of business obliges us to concentrate on two areas: brand beverages at a global level – Nescafé, for example – and custom-made food for commercial customers at a regional level. In this segment, too, there is an unmistakable trend towards premium brands. We anticipate an above-average rate of growth.
You mentioned “Premium”: How do you expect Nespresso to perform?
Nespresso is a huge success and has a fantastic future. The company is an excellent example of how values can be communicated and translated into growth. We expect sales to top the CHF 2 billion mark.
There is occasional speculation that Nespresso is a candidate for a spin-off. Is that an option for you?
Absolutely not. Nespresso is a gem that I am not looking to get rid off. It is a business which matches our growth strategy perfectly, and the Group can learn much from Nespresso. We can use this business model in our approach to restructuring our chocolate business. Consider, for example, how our research in the coffee segment is closely linked with Nespresso. No, we shall polish, not sell, this gem.
Nestlé has acquired Gerber and Novartis Medical in order to put Nutrition in a strong starting position. Are further acquisitions required?
With sales of some CHF 12 billion and growth rates of around 10%, Nestlé Nutrition generates about CHF 1 billion in additional sales every year, all by itself. We have four areas in Nutrition: products for children, for physical performance, for clinical use and for weight management. In each area, scientific findings are translated into solutions designed to meet specific individual nutritional requirements. Many of these solutions can also be applied to our main business. These four areas cover a very broad spectrum in themselves and developing them even further will give us substantial momentum. I therefore see no special need for acquisitions.
The sale of Alcon will net Nestlé a total of USD 39 billion. This means debts can be repaid, and the balance sheet will look even stronger. What are you going to make of this situation?
Isn’t that a great problem to have? We are currently in the middle of a share buy-back program, and have raised our debt levels to accommodate this. The proceeds from the partial sale of Alcon will neutralize this effect. We will also have funds available in case we wish to make acquisitions. The partial sale of Alcon was a carefully considered measure at the right time.
When will you think about external growth? In two years, when the Alcon package has been paid in full?
In two years, we will be two years the wiser. There is no point in speculating now, and in triggering turbulence by doing so. There are so many opportunities open to us in our traditional business. I take a very relaxed view of this.
And what is the plan with L’Oréal?
I’m relaxed about that, too. We’ll get round to that when the time comes.
Are there areas of business in which Nestlé ought to think about external reinforcement?
We always keep about CHF 2 billion ready in case any strategically appropriate acquisition opportunities arise. But the platform from which to achieve our goals is already in place. We need to deploy a lot of energy and resources to make full use of the opportunities open to us right now. That is where our focus lies, although we never exclude the possibility of strategically useful acquisitions. Our four growth platforms in combination with our four competitive advantages give us an excellent starting position for further development.
Nestlé has always passed on price increases thus far. Where are the limits to Nestlé’s pricing power?
Well, it’s not quite true that we can, or want to, pass on higher prices without further thought or consideration. Over the past one to two years, raw material prices have increased rapidly. We saw it coming long ago and built it into our pricing policy, step by step. For years now, Nestlé has been transforming itself from a conventional producer of food and beverages to a company that enriches its products with added value and extra functions, ideas which are encapsulated in the term “Nutrition”. Hence the percentage of raw materials has fallen proportionately in our calculation, and the impact of price increases in this area is correspondingly smaller. Finally, these supplemental functions and the innovation behind them make our brands strong, and that in turn means customers are willing to accept price increases.
Some analysts fear the entire food sector will suffer pressure on profit margins due to the increase in the cost of raw materials.
That is logical, if you see raw material prices rising and global acceptance of food price increases falling. Pressure will indeed occur when the only equation is “raw material price increases equal increase in cost of food”. But if you can control additional factors, as we can, the impact can be lessened. These factors include running our factories more efficiently, optimizing costs, improving our procurement policy, exploiting effects of scale and continuing to inject added value into our products. We are doing all of that. But, yes, of course we feel some headwind from time to time – as does anyone who moves forward.
And where are raw material prices headed?
Prices for the raw materials we need fell for many years, which created considerable imbalances. They have been rising fast in the recent past, but have still not reached their former level. The latest price explosion has also been fueled by increased consumption in developing countries, because more people were able to afford more. And in the grain sector, increasing demand for biofuels has played a role. Indeed there is already some debate as to whether that is the right solution. And thirdly, there is speculation. Hedge funds are ploughing billions into soft commodities. I believe, however, that we will see a leveling off, because hedge funds have to realize their positions from time to time, which may well be felt in the market fairly soon. I don’t think, though, that prices will fall back to their previous low level. We shall just have to learn to live with “fairer” prices for raw materials, and with a certain volatility due to the presence of hedge funds. In the longer term, this will benefit developing countries. For the time being, however, everything is out of kilter, a new balance has yet to be found.
Where do you stand on the biofuel debate?
Nestlé is part of society, and we like to take part in debates on such questions wherever we can. Politicians cannot simply set goals for switching over to biofuels without considering the repercussions. Fill your tank or your stomach – that is what it comes down to. And in this context, the huge volumes of water required to produce biofuels are questionable, too.
Regarding profit margin development, Nestlé has closed the gap on an industry comparison, but has not yet moved into the leader position. Do you acknowledge a need for action?
As I said, we want to be the leader; we want to set the benchmark measured against ongoing financial performance. In past years, Nestlé has increased sales continuously and expanded its margins without break-ups and restructuring. The Nestlé business model has proved itself to be balanced and sustainable. We are geared to the long term, and we move forward step by step. That is the best way to climb the Swiss Alps – and to achieve one’s goal.
Interviewers: Wolfgang Gamma and Manfred Rösch - Finanz und Wirtschaft
Read the German version published in Finanz und Wirtschaft :
Die Richtung stimmt, aber es braucht Tempo (pdf, 840 kb)
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