The just-food interview part one: Nestle China CEO sees dynamic growth
Roland Decorvet, chairman and CEO, Nestle Greater China
The potential offered by the Chinese market is nothing new. And nor is Nestle's presence in the country. The world's largest food group started trading in Hong Kong in 1874 and opened its first sales office on the mainland in 1908. In recent years Nestle has stepped up the pace with the development of a distinctive model it believes will drive expansion. In part one of the just-food interview, Roland Decorvet, chairman and CEO of Nestle's operations in Greater China, spoke to Katy Askew about the company's strategy in the market.
While Nestle has a long history of operating in China, a run of recent acquisitions and joint venture agreements - coupled with stellar organic growth - have enabled the world's largest food group to significantly beef up its presence in the country.
Last year alone, the group more that doubled its sales. According to its 2012 annual report, Nestle's Chinese revenues totalled CHF5.1bn, excluding the contribution of the Wyeth infant nutrition business, which was acquired from Pfizer Nutrition in April of that year. That compared to sales of CHF2.5bn in 2011.
And it does not stop there. The combined Nestle-Wyeth infant nutrition business, coupled with broad-based "good growth" in the country, places Nestle's Chinese sales at a "very large number" that is "quite a bit superior to CHF5bn" today, Roland Decorvet, chairman and CEO of Nestle's business in Greater China, tells just-food.
In just one year, China went from being Nestle's seventh to its third-largest market by sales. But it is not the size of Nestle's operations in China Decorvet is excited about: it is the long-term growth potential he sees in the country.
Nestle operates across a number of categories in China, from confectionery and ice cream to nutrition, bouillon and coffee. In each area, Decorvet sees a bright future.
"The great thing about China is it is such a large country that each of our categories can and will, one day, be a multi-billion dollar business by itself," he predicts.
In order to capitalise on the potential Nestle sees for its businesses in China, it has developed a model for operating in the country that leverages the power of its global brands alongside the connection its local brands are able to make with consumers.
"The Nestle brand stands for something which is basically nutrition and western heritage products. The other local brands are managed, not independently, but autonomously. This is a very typical Swiss system with Nestle very much in the background, not at the forefront," Decorvet explains.
As part of its dual approach, Nestle operates a number of joint ventures in the country. In 2011, the group took a 60% stake in local confectioner Hsu Fu Chi and, in the same year, Nestle acquired a 60% stake in congee and peanut milk firm Yinlu. The company also holds 80% stakes in bouillon and spice firms Totole and Haoj.
In all, Decorvet says, Nestle global brands account for around one-third of its business in China, while "non-Nestle brands" - joint ventures and Wyeth - account for the other two-thirds.
"Local brands are just as important as our international brands, they are just in different categories. If you take the Nestle brand, we basically have two global products: you have our coffee business and our nutrition business, which is split from infant nutrition and senior nutrition.
"On the joint venture side, you have Hsu Fu Chi, which is very strong in the modern trade in the big cities [and has] huge potential to grow out. Our Yinlu business is a very large business in dairy-based beverages, mostly peanut milk and congee, which is a type of [ready-to-eat] rice porridge."
Through its joint ventures, Nestle has sought to gain local knowledge, well-known local brands and distribution networks in a fragmented country where western companies have frequently struggled to establish sales channels. However, the group's model - which keeps management of its joint ventures at arms length - means Nestle's global brands do not piggy-back on the local companies it has acquired.
For example, confectionery products sold in China under the Nestle umbrella brand, Nestle Shark Wafer, have not been fed into Hsu Fu Chi's sales network.
"The businesses so far are kept separate. We will see in the future if we want to get some synergies or cross-selling opportunities. But at the moment people will have to do it on their own," Decorvet says. "Hsu Fu Chi used to be a very successful company, it still continues to be. We are working together with the people based there to develop the concept and recipes. But they very much work on their own.
"The secret here today is growth. Trying to work for short-term synergies is definitely not apparent. Grow the category first and then grow your market share. Because each business in itself has the potential to be a large company. It's not because it's called Nestle that it should be all under one roof."
The model, which relies heavily on the expertise of partners, means Decorvet plays down the possibility Nestle will look to take full control of its joint ventures.
"There is definitely no will or strategy to increase [our share of the ventures] for the foreseeable future. Because we appreciate our partners. They bring value. That is really the purpose of the joint venture, to combine both our strengths. We believe the combination of both is stronger than if we were doing everything ourselves or if they were doing everything ourselves. Why would we change what we think is a winning recipe?"
The distinction between Nestle's local identity and global brand strength reaches beyond its joint ventures and can also be noted in areas such as its ice cream business. The group has successfully turned around its ice cream operations in China over the past two years through a regional approach that presents a distinct offering to consumers in the north and south of the country.
"The ice cream business is doing outstandingly well, we have witnessed an amazing turnaround. The business is again very much profitable and growing big time, in both the south and north," Decorvet insists.
This turnaround was achieved by "making choices and focusing on a few products: portfolio management", he says.
In the south of the country, Nestle operates a local brand named after the Chinese symbol for the city of Guangzhou, formerly known in the West as Canton. "We have a pro-Cantonese campaign. We positioned ourselves as the ice cream of the south, the ice cream of the Cantonese people. A local brand, locally manufactured, to local tastes."
Meanwhile, in the north of China, Nestle sells ice cream under the Nestle brand. "Nestle is a bit more premium. We have rationalised the portfolio, we increased advertising, we went a bit more premium with improved recipes and strengthened products. The results are extremely encouraging."
Nowhere is Nestle's global branding more in evidence than the group's infant nutrition business. A series of health scares has prompted Chinese consumers to view domestic formula brands with a deep suspicion. Here, Nestle is keen to emphasise its international credentials and the company sells products that have either been manufactured abroad - primarily in Europe - or locally-made formula that is produced from imported milk.
The Chinese infant nutrition category is valued at somewhere north of US$7.3bn. And, while category growth has slowed, the strength of Nestle's global brands has enabled the group to continue expanding apace. As a result, Nestle is growing market share in infant formula, Decorvet says.
Nestle drastically upped its presence in the category through its acquisition of Wyeth from Pfizer last year - bringing a business that had 7% of the infant nutrition sector in China under Nestle's control. Nestle now expects 45%-plus of its growth in the category in the next five years to come from China and Hong Kong.
"We are growing very fast indeed. The category has slowed down, but although the category is growing by the single digits now we are big-time double digits," he reveals.
A slower burn for Nestle's nutrition business is its product range targeting the nutritional needs of China's ageing population. Decorvet says Nestle has identified a significant long-term opportunity.
"We have quite a large business, growing extremely fast for seniors. In China, we have over 350m people over the age of 55. People who now want to live longer, to live healthier, and have growing means. We believe this is a very large-potential, fast-growing category."
While Decorvet concedes Nestle has "much work" ahead of it as the group looks to grow the category, he remains unreservedly upbeat on its prospects.
"It is still not a very strong or well developed category. We believe there is much to do there. But the population is growing, they are getting more and more health conscious. And we believe we can offer products to help them with specific needs in terms of heart, cholesterol, protein, etc, which would fit their demands. This is a big market for the future."
These words would seem to ring true for the whole of China's food sector. It is a big market now - and will be an even bigger market in the future. Nevertheless, operating in China is not without its challenges. In part two of the just-food interview, we talk about how Nestle is meeting issues from intense competition to food safety head on.
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