Cash-Rich Nestle Has Global Sweet Tooth
March 1 1989 by John Carson-parker
It was as if the sky fell on us,” said a banker at sober Swiss Bank Corporation about NestlÃ©’s recent change in its share registration rules. In this change-characterized by the Wall Street Journal as “stunning” by the Financial Times as a “bombshell,” and by others in terms ranging from brilliant to execrable, Nestle became the first major Swiss company to welcome foreigners into ownership of its “nominal” or “ordinary” shares. And Nestle chief executive Helmut Maucher once again showed how he has transformed Nestle from a somewhat somnolent giant into one of the most dynamic of global companies: why he is almost always picked by outsiders as one of Europe’s ablest managers; and how-better than almost any other European executive -he exemplifies the effort of the very biggest European corporations to compete with those of the U.S. and Japan for global markets.
Consider, first, some facts about Nestle.; second, some moves it has made under Maucher; and finally, some U.S. opinions of Maucher’s management.
AMONG FOOD GIANTS, THE GIANT
While some commentators suggest that the Philip Morris-Kraft merger creates the world’s biggest food company, Nestle is, in fact, far bigger. The New York Times stated, in a recent editorial, that “Kraft sells $5 billion in packaged edibles, and Philip Morris’ General Foods division has revenues of $10 billion”- for a total in food sales of $15 billion; Nestle, had food sales of $23.5 billion [$1= Sw. Fr. 1.50j in 1987, and its acquisitions of Rowntree and Buitoni, and of two or three relatively small food processors in Europe and Latin America, will have added more than $4 billion in 1988-for an estimated total of $30 billion last year.
Nestle is also, by far, the most global of world wide food manufacturers. It has only $500 million of its sales in its home country and, without counting Rowntree and Buitoni, some $10 billion in the rest of Europe; it has approximately $7 billion of sales in North America, something over $3 billion in Asia, and $2 billion in Latin America. By contrast, Kraft has some $2.5 billion in total sales overseas, while those of General Foods and the Nabisco-Standard Brands side of R.J. Reynolds are estimated at the same order of magnitude-or less. Nestle's nearest rival in global reach & Anglo-Dutch Unilever-which has food sales of around $3 billion in North America, and upwards of $13 billion in the rest of the world. "I'd say that Nestle has a better handle than just about anybody on the global business," says R. Overlock Howe of the St. Louis consulting group that bears his name.
A MOST UN-SWISS AGGRESSIVENESS
Many of NestlÃ©'s recent moves are contrary to what most observers-including Swiss observers-expect from Swiss companies:
€. The most un-Swiss action, of course, was its change of policy on share registration, which, according to an executive ofZwich's Bank Julius Baer, was "the most important thing to hit the Swiss market this century." In the judgement of the Financial Times, the move made Nestle "the first big Swiss company to abandon discrimination against foreign shareholders " The key benefits to the company are described by Maucher in the interview that follows. The most significant, from the global viewpoint, is that it silences the battle cry protectionists were beginning to raise against Nestle-that Nestle could acquire just about anyone anywhere, but no one could acquire Nestle.
€. The company's acquisition of Rowntree was also supremely un-Swiss: it was "unfriendly," and, in principle, Swiss companies don't go for unfriendly acquisitions. Nonetheless, Maucher made the move-and, even more important, brought it off just as he brought off the 'friendly" acquisitions of Buitoni for $1.3 billion this year, and that of Carnation, for $3 billion, in 1985. While Maucher says he has now completed the "major" part of his acquisition program, analysts such as Jonathan Dickens, of the leading UK investment bankingfirm James Capel, are sure he'll make more: Nestle has so much cash flow that it can finance practically any purchase "out of its own pocket," Dickens maintains; he does not rule out further acquisitions by the company in Europe, and he believes them "quite probable" in the U.S.
€. The Swiss have more of a reputation for stability than for innovation-but Nestle probably introduces more new products, and more successful ones, than any other food producer. Reason: Nestle does far more research. The sheer number of its researchers has more than doubled since Maucher took over-to well over 3,000 worldwide: at its basic research center in Switzerland alone, it employs around 100 scientists with Ph.D's or post-doctoral studies to their credit. In France, the company introduced 40 new products last year. And Overlock Howe says it has had some remarkable research-driven success: Taster's Choice was "a brilliant breakthrough," he says, adding that "you'd think Hershey would be able to provide a product that was as good, and would dissolve as fast as Nestle's Quick-but they haven't."
€. Nestle has also become aggressively unSwiss in its response to major criticisms. When the infant formula controversy developed in the 1970s, the company's response was almost passive. Under Maucher, it has developed a policy of defense, or even of vigorous counter attack. For instance, it inspired the, formation of a Washington committee, under the chairmanship of former Senator Edmund Muskie, to audit matters related to infant formula; and when the anti-Nestle campaign-characterized by Fortune as "spread by American church groups always eager for witch hunts"-came to lift again in 1988, the Muskie Committee shot it down. The redoubtable and unimpeachable senator announced last November that the Commission had reviewed the charges against Nestle, "and found them to be inaccurate."
It is impossible to state exactly how much of Nestle's growth and aggressiveness are due to Helmut Maucher, but the answer is certainly "very much indeed."
Since he became CEO, in the early '80s, sales have risen 45 percent in Swiss francs-and net profits almost 80 percent. More important, in Maucher's view, has been the increase in return on equity-from 8.4 percent at the start of his term to a consistent 1415 percent over the past three years. While this is not particularly high in U.S. terms-it's about the same, for instance, as that of Kraft before its takeover-top securities analyst Nomi Ghez of Goldman Sachs says three factors that do not apply to most U.S. corporations hold the ROE of Nestle down. One is that "they depreciate more conservatively than most food companies-so the quality of their earnings is higher." A second is that "many of the U.S. food companies have been buying shares back or spinning off assets." And a third is that Nestle "has more equity and less debt in its capital structure, which penalizes it in this [ROE] respect”
The financial performance points to good management-and observers consider Maucher an exceptionally good manager. “From the sidelines,” says Overlock Howe, “I’d say [Nestle is] a very well-managed company.” The international consumer goods analyst of one top brokerage firm says it is “extraordinarily well-managed” And Ghez observes that “this is a very well-managed industry, with Nestle clearly among the better managed companies”
Maucher, she continues, “has taken some very aggressive steps, and capitalizes very quickly on opportunities”-but the object of these encomiums is so self-effacing that he told Euromoney he “did the obvious.” Maucher, a genial West German of 61, who speaks good English and excellent French, also insisted, 7 am not an unusual man.” Considering his record, some may disagree.
In the seven or eight years you’ve been running a global organization, what have you found to be the toughest generic problems?
Number one is the exchange rate situation. Dollar-related currencies account for around 50 percent of our business, and the dollar has gone from less than 2 Swiss francs to more than 2.50, and back to less than 1.50 in the last five years. Since we consolidate our accounts in Swiss francs, these fluctuations have tremendous effects, and part of our progress is not reflected in our consolidated figures.
We are also very much affected by international commodity prices, because coffee, cocoa, and other raw materials are a major factor in our cost structure. These fluctuations affect both consumption and the “P&L,” because when commodities fall, competition usually forces you to lower your prices, and when commodities rise, competition often forces you to hold prices down.
What are the most important developments on the positive side of the business?
From a long-term global viewpoint, there is one underlying trend which is not particularly dramatic, although very positive, especially within the last few years. The debate about multinational companies and private enterprise is much more positive. This is quite apparent when speaking with Socialist governments, and everyone in the Eastern s1 bloc is starting to recognize the role private enterprise and multinationals can play in development and prosperity. I
A second positive development is in world cooperation on financial matters: we went from Bretton Woods and clearly defined I currency values to the Chicago-type philosophy and erratic fluctuations, and I’m happy to see the world come back to a more pragmatic stance, where market forces play within a certain framework of cooperation.
Does the addition of Paul Volcker to your board presage an effort by Nestle to get closer to the international financial community?
In general terms, that’s not the objective. While we don’t exclude the use of board members for their particular contacts, that is not their primary role which is rather to contribute with their experience to overall discussions of business strategy.
Here of course, Mr. Volcker is a very valuable addition: not only does he represent the U.S., but he contributes all his experience from the Federal Reserve and from his knowledge of many countries.
What was your rationale to start registering foreign producers of Nestle “ordinary” shares, and what are the key benefits to Nestle?
First, this is considered a logical part of our multinational activities. We cannot be generally in favor of a liberal world, of the free flow of capital, people, and money, and at the same time of a sort of discrimination on our shareholding side.
Second, we broaden the possibilities of financing our business, because the move enables us to list in many markets outside Switzerland, and for a company as big as Nestle [with a market capitalization of more than $15 billion at end 1988] the Swiss market alone is too small and too narrow.
Third, we should be able to raise capital at a more reasonable cost, because we have expanded the market for our nominal shares [which, in fact, rose 40 percent in the 24 hours after Nestle announced its shift].
The move should make it easier for you to make foreign acquisitions-but some analysts say that you have in fact completed the major parts of your acquisitions program.
This is a fair comment. We have achieved our main goals in terms of overall distribution, geography, product, and in terms of 1992.
Of course, we always have plans for further development, but we have reached a certain Ã©tape [translate: stage].
One reason for your purchase of Carnation, though, was that the percentage of your sales in North America was relatively low. With the depreciation of the dollar, it was down to 28.5 percent in 1987, and with your purchases of Rowntree and Buitoni it will now be lower still.
That’s true, but I don’t really focus on that percentage as much as the position we need to have in a given country, in order to be one of the major players.
In that sense, the fall in the dollar doesn’t change the situation. On the other hand, it also means we can invest more in the U.S. without reaching a disproportionately large reliance on North America. And a second factor is that we have to watch how the competition develops-some of these mergers and acquisitions in the U.S. have raised the level you need for a strategic position.
You need to be in the top three in a market for long-term sucess and to get a good return on your investment. We were right to make some acquisitions before some of the recent big mergers, otherwise we’d just be a nice company of medium size [in America]. As it is, we can make another acquisition if there is an attractive opportunity, but there isn’t a need for one.
Were you, or are you bidders in the RJR Nabisco “auction?”
We were and are certainly interested in parts of its food business, especially in the U.S., but not in the whole company, nor in its food business en bloc.
How do you feel about the ethics of some acquisitions and associated activities that have recently arisen?
Ethics is perhaps too big a word.
Our own policy is usually not in favor of hostile bids, but we do not exclude them-as in the case of Rowntree-and I don’t think there is anything unethical in hostile bids: that’s part of the capitalist system.
I do have problems though, in three aspects of these activities:
First, if it’s a purely financial move, which has nothing to do with the production, industry, strategy, and with the constructive ideas of your firm, but which is done only in order to make money out of the financial consequences, that is, in my opinion, the abuse of the capitalist system-as well as if the move results in companies being broken up and sold in pieces when there is no real strategic reason for doing so. Sometimes, it’s a worthwhile endeavor because you end up with more efficient units-but, if it’s simply done to make money, then you have a problem.
Third, there is the financing method. If somebody is financing 10 percent of the money needed with equity, a huge percentage with junk bonds, and bank credits filling the hole, I have problems.
In view of 1992, do you see any danger that, as a Swiss company, you’ll be disadvantaged?
I don’t see any dangers for Nestle, because in all the EC countries we have factories and organizations which will go on as before. Indeed, I see a lot of new opportunities, developing out of common substructure in Europe, or in North America as we have with the new U.S.-Canada trade agreement, we can build a regional product structure: we can move in an optimum way between our different subsidiaries, structuring production to be most economical.
When you talk with senior executives of U.S. operations, what aspects of Nestle, and of the way you run Nestle, do they find surprising?
They are amazed at how such a small staff can operate a firm of this size, and are also surprised by the very limited number of reports we get from our subsidiaries [one a month, on a single sheet of paper.]
They are also taken by the decentralization of our management: we don’t impose many ideas or practices on our subsidiaries rather, we try to put in good managers, and-within certain frameworks and policies-we allow them to run the businesses themselves.
Finally, the international nature of our management comes to them as a bit of a shock. Even when companies pretend to be multinational, their top management, and much of the top management of their subsidiaries, comes from their home country. They’re always surprised when we tell them we have people of 50 nationalities here at headquarters, that four of our eight general managers [the top-ranking executives who include, and report to, Maucher] are non-Swiss, and that the overwhelming majority of our subsidiaries are run by nationals of the countries concerned.
When you retire do you believe your position-which has been occupied by other non-Swiss beside yourself-could go to a non-Continental European?
That’s very possible, but less probable for reasons which have nothing to do with nationality. It’s not a question of whether you’re Swiss, German, French or American, but that you represent the culture and attitude of the company.
I was appointed partly because the board thought I could do the job, and because I fit in with the Nestle culture. We would have to check all nominees, not only on their professional qualities, but also on how they would express and represent our philosophy.
If seen in this light, an American who has lived 10 years in Europe might be appropriate, whereas an American who spent all his life in Texas, except for yearly visits to New York, might not.