Nestlé has many distinctive strengths that keep us at the top of our industry. Our people are our greatest strength. We have an attractive product portfolio in growing categories with leading market positions. We are a global company with deep local roots, which gives us a unique ability to understand local consumers and adapt fast to their preferences. We have powerful, valuable brands, which consumers trust. Our products reach more than 1 billion consumers every day across the world. We also have industry-leading R&D capabilities that support our Nutrition, Health and Wellness strategy and our innovation initiatives.
Our Nutrition, Health and Wellness strategy
Our success is built on our Nutrition, Health and Wellness strategy. Food and beverages are core to Nestlé. We aim to provide the tastiest and healthiest choices, for all times of the day and for all stages of life, delivered in a convenient manner. We aim to capture premiumization opportunities and, at the other end of the spectrum, offer affordable, high-quality nutrition. We add value to our brands and products through meaningful differentiation and innovation. We do this by continually improving the taste, convenience and nutritional qualities of our products. We are also well-positioned to build and share nutrition knowledge from the first 1000 days of life through to healthy aging, and benefit from increased interest in nutrition to support good health.
How do we create long-term value?
Our long-term value creation model is based on the balanced pursuit of resource efficient top- and bottom-line growth. We create value by:
- Increasing growth through innovation, differentiation and by being relevant to our consumers. We have committed to reach mid single-digit organic growth by 2020.
- Improving operational efficiency with the goal to increase our underlying trading operating profit margin to between 17.5% and 18.5% (from 16.0% in 2016), and
- Allocating our resources and capital with discipline and clear priorities, including through acquisitions and divestitures.
Our portfolio is well positioned for growth. In the past, we have consistently delivered organic growth at the high end of the industry. We have a clear path to achieving mid single-digit organic growth by 2020.
Investing in high-growth categories and regions
We have identified five high-growth food and beverages categories with attractive growth rates: coffee, petcare, nutrition, water and Nestlé Health Science. Together, they represent 57% of sales and 61% of underlying trading operating profit *. In 2018, organic growth was +4.0%. In these key categories, we have strong market positions and highly-differentiated offerings. They receive particular emphasis from a capital allocation standpoint, with significant investments in R&D, marketing, capital expenditure and external growth whenever appropriate. The other categories continue to be important contributors and had 1.9% organic growth in 2018. These businesses are managed for a combination of growth and value.
We are also focused on expanding our presence in high-growth regions. Emerging markets represent 42% of sales. In 2018, they grew organically by +4.9%, three times faster than developed markets and with a higher underlying trading operating profit margin. In most of these emerging markets, Nestlé has been present for many decades and our brands enjoy a high level of trust and are rightly viewed as local.
Fixing underperforming businesses
We have taken decisive actions to improve underperforming businesses through innovation, better consumer understanding and, when needed, management changes and restructuring. In 2018, turnaround examples included Nestlé Skin Health and Yinlu in China.
Innovating products and business models
Rapid innovation and bringing products to market faster are key dimensions of our growth agenda. At the same time, we continue to invest in cutting-edge science and technology to address evolving consumer expectations through new offerings and product reformulations. Innovation also helps us to premiumize our offering and contributes to margin improvement. In 2018, 22% of our sales came from premium products. We are not just innovating with new products but also new business models. In particular, we have a strong focus on personalized and Direct-to-Consumer offerings. In 2018, 8.2% of our sales came from Direct-to-Consumer business models.
Embracing digital opportunities
Our digital transformation focuses on delivering personalized messaging, services and products to consumers at scale. Powered by data and technology, we are modernizing our existing brands and business operations while developing new, digitally-centric business models. Already 10% of all consumer contacts are personalized. In addition, in 2018, our e-commerce sales grew five times faster than the Group average and reached 7.4% of total Nestlé sales.
Managing our portfolio
We continue to actively evolve our portfolio towards attractive, high-growth businesses. In 2018, we strengthened our position in coffee through the acquisition of the perpetual global license of Starbucks consumer packaged goods and foodservice products. We also divested our USA confectionery and Gerber Life Insurance businesses. While much work has been done, we are not yet finished. We recognize that acquisitions can provide access to new technologies, brands, categories and geographies. Similarly, small to medium-sized acquisitions can offer a fast and cost-effective way to embrace new capabilities or business models. We are also actively divesting businesses that are non-core and where we have limited ability to win. We do this in a disciplined way with an aim to minimize potential disruption and maximize the value of existing businesses.
Improving operational efficiency
In addition to our growth agenda, we have committed to increase our underlying trading operating profit margin from 16.0% in 2016 to between 17.5% and 18.5% by 2020.
We are actively executing several cost-saving initiatives to reduce non-consumer facing structural costs by between CHF 2.0 and 2.5 billion. These are primarily focused on the areas of administration, procurement and manufacturing.
We continued to strengthen our business focus through our Nestlé Business Excellence program to simplify and standardize processes, which helped reduce administrative costs. We have increased the penetration of our shared service centers from 17% to 35% and are on track to reach 50% by 2020. We have also generated efficiencies in facility management, and real estate through site closure and consolidations.
In procurement we have realized significant savings by leveraging our size and scale through three global purchasing hubs. We now source 55% of our requirements through these hubs, and this will reach 60% by 2020.
In manufacturing we have further simplified our factory footprint and increased capacity utilization.
The savings generated in these three areas so far have made a significant contribution to the improvement in our underlying trading operating profit margin by 50 basis points to 17.0% in 2018, and there is more to come.
Freeing up resources
We have also continued to deliver efficiencies in R&D and marketing. The primary focus of these programs is to free up resources to provide fuel for growth and innovation. As an example, in the last three years, more than CHF 500 million in marketing savings have been reinvested in building our brands.
A balanced value creation model
At Nestlé, we believe the best way to guarantee long‑term sustainable value creation is through a balanced pursuit of growth, profitability and capital efficiency. Growth is the primary driver of value creation. At the same time, we pursue efficiency and profitable growth because we recognize that our competitiveness is what ensures our sustainability. We are disciplined in our capital allocation and committed to increasing shareholder returns, while investing for the long‑term and Creating Shared Value.
Adjusting management structures and systems
We have continued to adapt our organization to be simpler and faster. We are empowering our market and regional teams to drive growth. To support them, we have implemented initiatives to delayer our organization and speed up decision making at a local level. In parallel, we have tailored compensation to prioritize profitable growth and improved capital efficiency.
Allocating capital with discipline and clear priorities
We follow prudent financial policies designed to strike the right balance between capital allocation and flexible access to financial markets. We have well-defined priorities in this regard.
Investing in organic growth
We invest in our business through R&D, brand support and capital expenditure to support top-line growth. Our approach is rigorous and discerning. We are allocating more resources behind those businesses with the highest potential to create economic profit. We have also continued to focus on reducing working capital. The five-quarter average working capital in % of sales reached 1.4% at the end of 2018, –20 bps versus the restated figure for 2017.
For 2019, the Board of Directors has proposed a 24th consecutive dividend increase amounting to CHF 2.45. This underlines our commitment to continually return capital to shareholders.
Disciplined approach to acquisitions
This is based on strategic and cultural fit, as well as financial returns. We pursue a disciplined acquisition policy, particularly in terms of the price that we are prepared to pay. We prioritize our high-growth categories and regions, particularly coffee, nutrition, petcare, water and Nestlé Health Science. For the companies we acquire, we have solid integration plans with clear accountability and precise targets.
We have returned CHF 6.8 billion of capital to shareholders in 2018 through share repurchases. This is part of the three-year CHF 20 billion share buyback program announced in July 2017. This brings the total returned to shareholders over the last ten years to 104 billion.
We also regularly review our capital structure to ensure it is appropriate in the context of market conditions and our strategic priorities.
Creating Shared Value
Creating Shared Value (CSV) is fundamental to how we do business. We believe that our company will only be successful for the long term by creating value for both our shareholders and for society.
Business benefits and positive societal impact are mutually reinforcing. In practical terms, our products must provide a nutritional benefit to the consumer. They must also contribute to the development of the local communities where we operate and protect the environment for future generations through the practice of resource stewardship.
* Before unallocated items.