Pursuing our value-creation strategy
Good food, Good life. It’s good business. Consumer expectations, competition, trade landscapes and society are all evolving at an unprecedented pace. Our company must respond to deliver good food in ever more relevant, accessible and sustainable ways. Every choice we make reflects our commitment to deliver Good food, Good life. Good is about holding ourselves to high standards and always striving to be better.
Our strategy: The choices we make
We aim to offer a portfolio of products that evolve with consumer needs, offer good nutrition and delight the senses, contributing to healthier, balanced lives and a healthier planet. This guides the choices we make today and shapes our portfolio for tomorrow – whether through product evolution, innovation, acquisition or partnerships.
We believe that Good food, Good life is best delivered by:
- Applying our nutrition expertise to enhance the health and wellness of people and pets.
- Meeting the needs of the modern consumer with healthy, delicious, convenient products for conscious, time-constrained lifestyles.
- Bringing premium food innovations to market fueled by consumer insights, pioneering nutrition science, and culinary excellence.
- Offering a wide array of plant-based foods, to be consumers’ preferred choice as they diversify their diets.
- Using our scale and expertise to increase access to nutrition for everyone, everywhere.
We play to win in all our categories while pursuing higher growth in coffee, pet care, infant nutrition, water and nutritional health.
Our value creation model
Our long-term value creation model is based on the balanced pursuit of resource efficient top- and bottom-line growth as well as improved capital efficiency. We create value by:
- Increasing growth through innovation, differentiation and by offering relevant products and solutions to our consumers. We are committed to reach a sustainable mid single-digit level of organic growth.
- Improving operational efficiency with the goal to increase our underlying trading operating profit margin to between 17.5% and 18.5% in 2020 (from 16.0% in 2016).
- Allocating our resources and capital with discipline and clear priorities, including through acquisitions and divestitures.
Nestlé's long-term value creation model
1 Increase growth
We compete in attractive and growing categories. We have a global footprint with presence in 187 countries. Our portfolio includes more than 2000 brands, from global icons such as Nescafé to local favorites like Bear Brand. Among these, 34 brands generate over CHF 1 billion each in annual sales at retail level.
We continue to actively manage our portfolio and prioritize our investments to stay relevant, address the latest consumer trends, and win in every category and market in which we operate. This requires setting clear priorities and allocating resources behind activities that create the most value, either through growth or efficiencies.
Invest in high-growth categories and geographies
We increased investment behind our high-growth categories of coffee, pet care, nutrition, water and nutritional health. Together, they represented 59% of sales and grew by 4.1% in 2019. We are also encouraged to see attractive growth levels within other segments of our portfolio, including from brands such as Maggi, KitKat, Bear Brand, Garden Gourmet and Sweet Earth. We are committed to investing selectively behind growth opportunities across all of our categories and new growth platforms such as plant-based food and beverages, ready-to-drink beverages and healthy snacking.
Our high-growth regions continued to offer significant opportunities. In 2019, emerging markets represented 42% of sales and grew by 4.7%. This is around twice as fast as developed markets.
We have also continued to invest in strategic areas such as:
- E-business, including digital marketing and e-commerce. In 2019, our e-commerce sales represented 8.5% of sales and grew by 18.5%. This puts us at the higher end of the food and beverage industry.
- Premiumization. In 2019, our premium offerings represented 26% of sales and grew by 7.4%.
- Direct-to-consumer. In 2019, direct-to-consumer businesses represented 8.2% of sales and grew by 4.6%.
Fix underperforming businesses
We continued to take action to restore growth and profitability in underperforming businesses. In 2019, we took the following steps:
- Integrated the Nestlé Waters business into the Group’s three geographical Zones from the start of 2020. This came in addition to increased focus on high-growth segments such as sparkling, premium still and flavored waters.
- Developed further the turnaround plan for our Gerber baby food business in the United States. Innovation, particularly with organic offerings and healthy snacks, supported the improvement.
Manage our portfolio
We focus on categories and geographies where Nestlé has an ability to win. We continued to evolve our portfolio toward attractive, high-growth businesses by:
- Divesting underperforming or non-core businesses such as Nestlé Skin Health. We also announced the sale of our U.S. ice cream business to Froneri, our global strategic partner in ice cream. We also agreed to sell a 60% stake of Herta and create a joint venture with Casa Tarradellas.
- Acquiring core strategic businesses. We continue to monitor the market for potential acquisitions, but will remain disciplined and diligent to secure attractive returns.
Since 2017, we have completed or announced more than 50 transactions (acquisitions and divestitures) with annual sales equivalent to 12% of Group sales.
2 Improve margins
In order to fuel faster growth we must remain disciplined on our cost management and strive for efficiencies at all levels. This approach enables us to free up resources to reinvest in product innovation and brand building, creating value for our consumers as well as our shareholders. Consumer-facing marketing expenses increased by 3.4% in constant currency.
We made good progress on our structural savings program across all areas of manufacturing, procurement and administration. At the end of 2019, we reached CHF 1.9 billion gross savings or 76% of the expected amount for the period from 2016 to 2020.
In manufacturing we continued to optimize our production footprint. In 2019, we closed or sold 16 factories and reduced factory fixed overheads by 5.5%.
In procurement we continued to leverage our scale. Global buying through our three global purchasing hubs increased from 55% in 2018 to 61% in 2019. The number of specifications for raw and packaging materials decreased for the second consecutive year, which allowed us to reduce complexity and costs.
In administration we continued to simplify and standardize processes. The penetration of our shared service centers increased for the fourth consecutive year.
Increase operational efficiency
We have continued to adapt our organization to be more agile, simple and digitally enabled. To drive agility, we have further empowered our markets and Zones, increased accountability, enhanced decision-making and encouraged calculated risktaking. To support simplicity, we have standardized processes, leveraged scale and increased automation. To be digitally enabled, we have raised competencies and developed digital platforms. In parallel, we have aligned compensation incentives to prioritize profitable growth and improve capital efficiency.
3 Allocate capital prudently
Our priorities are to invest in the long-term growth and development of the business, while increasing shareholder returns and Creating Shared Value. Our preference is to allocate capital toward value-creating investments to expand the company’s core food, beverage and nutritional health product business. We take a disciplined approach to capital allocation, with prudent financial policies. In doing so we aim to maintain a conservative but efficient capital structure that provides flexible access to financial markets. In combination with improved operating performance, this has allowed us to increase our return on invested capital by 20 bps, from 12.1% in 2018 to 12.3% in 2019.
Invest in growth drivers
Investing for the long term takes the form of R&D investment, brand support and capital expenditure to support organic profitable growth. We allocate these resources discerningly, focusing on projects with the highest potential to create economic profit. Working capital maintained a downward trend. Our five-quarter average working capital in % of sales reached 0.6% at the end of 2019, –80 bps versus the prior year.
Exercise discipline in acquisitions
Making acquisitions is a key element of our portfolio management strategy. Targets must have a good strategic and cultural fit with our organization, offering attractive financial returns. We are disciplined when it comes to acquisition prices in order to protect our return on invested capital. We have clear governance in place for acquisitions, with solid integration plans, precise accountability and targets. To better identify internal and external strategic growth opportunities, we have created a new Group Strategy and Business Development function, effective January 1st, 2020.
Return cash to shareholders
We have demonstrated our strong commitment to maintaining a high level of reinvestment into the business while at the same time continually increasing capital returns to shareholders. We do this by increasing our dividend year after year. Based on our performance of 2019, the Board of Directors has proposed a dividend increase of 25 centimes to CHF 2.70 per share to be paid in April 2020. This will be our 25th consecutive annual dividend increase. We regularly return any excess cash to shareholders through share buybacks. As a result of our strong free cash flow generation we have returned CHF 9.7 billion of capital to shareholders in 2019 through share repurchases. This brings the total returned to shareholders over the last fifteen years to CHF 153.6 billion. Over the same period the outstanding number of Nestlé shares has been reduced by 26%. We have committed to return a further CHF 20 billion of capital primarily through share repurchases between 2020 and 2022.
4 Creating Shared Value: The way we operate
No other food and beverage company has the global resources and local know-how to make positive impact at the scale and pace of Nestlé. We aim to continuously improve, taking on commitments that ensure that we enhance quality of life for everyone.
We rally our 291 000 employees and 2000 brands to live our purpose day in and day out. Our people do this by responsibly manufacturing our products and managing our supply chain, bringing innovations to market in agile ways and building brands that delight and do good.
We use digital technology to anticipate consumer needs, then serve them in the most relevant and personalized way. By building a culture of sustainable business practices and continuous improvement, we strive to create a healthier future for all.
We create shared value at a scale that makes a difference. Together with our partners we are:
- Enabling people to lead healthier, happier lives by striving to make better products.
- Building strong communities and supply chains, improving livelihoods in communities directly connected to our business activities.
- Stewarding resources for future generations by minimizing the environmental impact of our operations.
- Maximizing long-term value by accelerating growth, improving margins and allocating capital prudently.