Nestle has set out a clear growth trajectory. Across its global operations, the world’s largest food group aims to deliver 5-6% organic revenue growth. At the same time, Nestle has targeted improved operating margins and higher underlying earnings. And key to the “Nestle Model” is the fact that the company believes it can achieve this year-in, year-out, for the foreseeable future. Katy Askew spoke to Nestle group chief executive Paul Bulcke to find out how.
Nestle has not had an easy run of late. For the first time in more than a decade, the Swiss food giant has missed market expectations for organic sales growth for three straight quarters.
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The group saw sales softness across a number of its markets in the back half of last year. Concerns were raised this trend could continue into the current fiscal when Nestle’s first-quarter numbers, released in April, showed the firm’s lowest real internal growth rate (which strips out M&A and pricing) since the global downturn peaked in 2009. Significantly, Nestle once again missed its target under the “Nestle Model” for organic growth of 5-6% in the period, with organic revenue rising just 4.3%.
Given the tough macro-economic environment and down consumer sentiment, perhaps this apparent slowdown should come as little surprise. But Nestle chief executive Paul Bulcke appears confident the firm will deliver growth in line with the Nestle Model, whatever conditions it comes up against.
Key for Nestle is a measure of patience that seems to stem from the firm’s long-term view of expansion. Management shuns efforts to drive short-term gains or obtain quick wins, instead focusing on growth that can be built upon year after year, Bulcke says.
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“We don’t go after growth, for growth, for growth. We go after quality growth. That means where we can add value, where we can add to our strategic direction, where we can have sustainable profitable growth,” the Belgian reveals.
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By GlobalDataThat is not to say Nestle is targeting slow growth. Given the group’s size, 5-6% added to the top line carries a significant weight.
“We have quite a size. If we want to grow 5-6% that is actually adding CHF5bn (US$5.28bn) to the business. You have to do that in the right way. That means you have to install the capacity to do that, you have to create a relationship with consumers to do that, you have to have good ingredients, you have to have the right people. We feel that, in an economy that [fluctuates] 3%, we want to add value to what we do. That is how we come to our growth line.”
Nestle operates in 86 countries globally. Through this broad geographic spread the company attempts to “build stability into the whole company” as it comes up against different headwinds in different markets, Bulcke observes.
“We believe you have headwinds, you have tailwinds. As a company you have to have a strong enough engine to maintain speed, in spite of tail or headwinds and that is what we do. We are not paranoid about it – sometimes you have 7-8% growth because of A, B or C. Sometimes you are a little bit slower because of factors like major innovations getting up to steam or bigger countries that slowed down for a while.”
Nestle is facing soft sales in its largest market, the US, which generated a turnover of CHF23.7bn in 2012, Bulcke concedes.
“We are in some soft categories,” he tells just-food. In particular, Bulcke emphasises that frozen – where Nestle offers brands including Lean Cuisine and Stouffer’s – is a soft category “for the time being”.
“We have been lacking something a little bit [in frozen]. It is very strange, there is nothing more nutritional than frozen food because you freeze it and it keeps all the ingredients. Lean Cuisine is suffering because it is the housewife that says “that is for me” and, in a situation like today, priorities are “first my kids”. It is a very direct relationship.”
Nestle is also coming up against increased competition in the baby food category in the US, with the likes of Danone, Hain Celestial and Campbell Soup Co. eyeing growth in the market through a recent spate of M&A.
Bulcke remains undaunted. “We have quite a few initiatives [in baby food] with more scientific data. We have done the Fit study, which is a study for knowing the dietary habits of kids in general. Quite a few staggering conclusions came out of that. But we can give solutions… The Gerber Graduates brand is a very good example of that. It works quite well.”
Indeed, Bulcke is upbeat on the prospects for the US market over the next year. “We have to inspire people again. People are holding back in the US. But you do see it is coming back there: the colour is coming back in the face of North America. Some categories are faster into that. We had very good growth in many areas. We have Nespresso starting there now, we have coffee, confectionery, we have very good brands.”
Europe is a region that is likely to witness a more prolonged period of weak economic conditions. Nevertheless, Bulcke emphasises Nestle has been able to expand sales there.
“We have growth in Europe. You have poor years there, it is a little bit harder here and a little bit harder there. But what we said is Nestle in Europe wants to grow,” Bulcke observes. “Certain parts of Europe are very much with the crisis – like the southern part of Europe. No one is growing there, but we have growth there.”
While the immediate future for Europe’s economies looks relatively bleak, Bulcke appears confident the region will bounce back.
“We see potential in Europe. Eastern and central Europe too. It is going to flourish again, when the first bad clothes and rainy days are over in Europe. It is going to take a few years though. We knew that but we are going to be ready with young people motivated to be part of a solution for society.”
Bulcke argues the private sector can act as a positive force in society and Nestle has pledged to tackle youth unemployment in Europe by offering jobs to 20,000 people under the age of 30 over the next three years.
On the one hand, Bulcke says the move pre-empts any potential legislative action from European governments. On the other, it also seems to be borne out of a genuine desire to help tackle a growing social issue.
“If you have 55% of youth unemployment, like in Spain, or 27% in France, what we actually create is a lot of tension in society and that is going to explode in our faces,” Bulcke warns.
“We owe our children a job. That is not a thought we have created. There is some awareness from all stakeholders: employers, employees and unions. We should be honest to that generation…. Governments always think they have to do it themselves, that the private sector is a bad thing. Well, they better start embracing the private sector because it is the only long-term thinking dimension in society today. Politicians, they [don’t think beyond] the next election.”
Nestle’s lacklustre growth in the developed markets of the US and Europe has prompted the company to increasingly focus on expanding sales in high-growth emerging markets. The company aims to increase the proportion of sales generated in emerging markets to 45% by 2020 and last September the group said that it wants to treble sales in its Asia, Africa and Oceania region to about CHF50bn on a constant currency basis over the next decade.
However, here again progress has been slower than the market might have hoped. Growth in the region, which generates 21% of sales and 26% of profits, decelerated sharply in the second-half of fiscal 2012 and is seemingly yet to recover momentum. First-quarter organic sales were up 4.4%, the company revealed back in April, a sharp deceleration from the 11-12% growth booked for six quarters leading up to the third quarter of 2012.
Bulcke remains characteristically confident, insisting the company is focused on developing a strong footprint supported by local production capabilities.
“In emerging markets we have many bright spots,” Bulcke argues. “China is a bright spot. I would say Africa [is also a bright spot]. What we have been able to do in recent years in Africa, combining a complex area but enjoying the environment of growth, is invest in capacity, in factories and capabilities. We are building a fantastically good base for future growth in Africa.”
In short, Bulcke maintains Nestle is continuing to perform in accordance with its long-term ambitions. “Basically, I think that we are in quite a consistent growth mode. And I would say quality growth.”
In order to drive consistent, sustainable growth, Nestle aims to leverage what it sees as its competitive advantages. In particular, Bulcke says Nestle is focused on delivering science-based nutrition solutions. For more on Nestle’s focus on health and wellness, click here for part 2 of the just-food interview.
