Nestles Market Wars

The food giant is drawing on local expertise to put marketing at the heart of its global growth strategy.

April 1 2005 by Chief Executive


 

Peter Brabeck?s office in Nestle?s headquarters in Vevey, a small town in French-speaking Switzerland, overlooks the glassy waters of Lake Geneva and the snow-topped peaks of the Haute-Savoie Alps. It is a fitting setting for the CEO- and chairman-designate of the world?s largest food company. But it also seems a world away from the outcry that erupted in Britain recently over Nestle?s decision to alter the packaging of its popular Smarties candies.

After 67 years of being packaged in cardboard tubes, the M&M-like coated chocolates are to be sold in a hexagon-shaped box. It is part of a revamp that, if successful, could extend across the globe. A similar outcry came in 1999 when Nestlæ#169; reinvented the Kit Kat chocolate bar by giving it a chunkier shape.

Hullabaloo over candy packaging? It?s true. Consumer attachment to the way a product looks on shelves underlines the significance of brand identity and marketing to Nestle’s;. Indeed, Brabeck, 61, is standing in for Ed Marra, the company?s senior marketer, who is on long-term disability leave. The fact that the task is delegated upwards is an indication of how central marketing and brands are to Nestle;, which boasts about 8,000 products with up to 20,000 variants and an annual marketing budget of $2.5 billion. ?We are a branded consumer-goods company,? says Brabeck. ?Marketing is important because it is the engine of growth and brands play a key role in this.?

The Nestle’s; empire is so vast that, were it a country, its sales last year of $65.5 billion would make it the 67th largest economy in the world,about the size of Syria. Its work force numbers 250,000, and it has production facilities in 80 countries.

Spurred by the $57 billion purchase of Gillette by Procter & Gamble, there is a widespread view that branded goods groups, such as Nestle, will lose in confrontations with large retailers such as Wal-Mart. Brabeck argues against a shift among some food producers toward becoming suppliers for big retailers by making own-label and private-label items. ?Private label is, for me, the expression of the industry?s failure to create value,? he says.

For Brabeck, the growth of groups such as Wal-Mart, Carrefour and Tesco has helped both sides, as well as consumers, by cutting the complexity of distribution, one of the biggest costs in the business.

With such an enormous product portfolio, Nestle; uses six umbrella brands: Nestle;, which accounts for 40 percent of the business, Purina pet foods, Maggi, Nescafe;, Nestea, and Buitoni. Brabeck, himself a former marketer, confesses that in the past he was frustrated by the peripheral role played by marketing and the lack of accountability that arises in ?matrix organizations? where managers with other responsibilities overlap with local market management. ?We had marketing to one side,? he says. ?It was responsible for some innovation, but it wasn?t responsible for country [performance]. For too long, marketing was just one part of the business.?

Brabeck addressed this problem by making his head of marketing responsible for the company?s seven strategic business units,dairy, confectionery, beverages, ice cream, food, pet care and food services. These units establish global business strategy and are also responsible for research and development, production expertise and systems control. Out of this comes a regional strategy, which is in turn the starting point for local market business strategies. This means, he says, that not only does marketing thinking permeate the business, but business thinking permeates marketing. ?The marketer has a much broader range of responsibilities. For instance, he has to sign off on every new factory opened because he has to assure me of global capacity utilization and return on investment,? he says.

Brabeck stresses there will be no upheavals with his taking on the additional role of chairman in April, although it does buck the worldwide trend in corporate governance that increasingly splits the roles of chairman and CEO. ?The overall responsibility rests with the board, not just the chairman,? he says. ?In that sense, nothing is going to change.? Nestle?s heavyweight board, with company veterans from a wide variety of national backgrounds, includes Peter Bockli, one of Switzerland?s top corporate lawyers, and Eddie George, former governor of the Bank of England. ?I?m not taking these big decisions alone,? he says.

Under Brabeck?s leadership, Nestle; has expanded with purchases of Ralston Purina pet foods and Dreyer?s Grand Ice Cream in the U.S.

One way in which Nestle; distinguishes itself from its rivals, says Brabeck, is by giving responsibility to foreign subsidiaries. ?The consumer is paramount. Every decision has to be made as close to the consumer as possible. It makes no sense for us in Vevey to decide on the taste profile of a soup to be sold in China.?

But in line with a growing emphasis on productivity improvements, he adds that ?everything the consumer can?t perceive? must be handled regionally or even globally. Nestle;?s profit margins, once thin, remain below those of some competitors, although programs to improve efficiency appear to be taking effect.

For all Nestle;?s global reach, Brabeck dismisses the idea of global brands. ?We believe there is no such thing as a global consumer, especially in a sector as psychologically and culturally loaded as food.? As a result, Nestle; retains its brand strength by using local brands, such as Rolo in the U.K. or the Rossyia confectionary range in Russia. Moreover, product formulations also vary from market to market to reflect local tastes. ?Every single day, billions of customers have to make the choice to pick our [products],? he says. ?This means having a local character.? For this reason, he dismisses the notion of global advertising. ?Yes, we tried once to make a global Nescafe; campaign. On paper it was efficient, but it was a flop. Either they are not relevant or they are offensive.?

The measure of marketing success will be whether Nestle; can deliver its stated goal of 5 to 6 percent growth over the next decade. Brabeck sees the target as realistic, even in a mature market. ?There are no mature markets, only mature managers,? he says. The question is, What is the next driver of growth going to be? ?It is my conviction that the next value creation, and it will be huge, is going to be nutritional aspects. That is what allows you to ask 40 percent more for a product.?

Foods with medical benefits, known as ?functional foods? or ?nutraceuticals,? are expected to be the big growth source for the next 15 to 20 years. After that, the company is looking to the area of ?well-being? and already has established a joint venture with L?Oreal (itself 26 percent owned by Nestle;) to develop nutritional products with a cosmetic effect.

Sophisticated new products are all very well, but is Brabeck concerned that his company has acquired a reputation as an insensitive global corporation? He bats aside the suggestion that Nestle; has been damaged by the baby formula controversy in the developing world and its push for compensation from impoverished Ethiopia for a company nationalized 27 years ago. Criticism is limited to the chattering classes, he insists. ?We have to recognize that Nestle; has had a problem in the U.K., but around the world you get a completely different picture. If I didn?t have the trust and confidence of billions of consumers, I couldn?t have the business I have.?

Additional reporting by Haig Simonian. Adapted with permission from the Financial Times.