Nestle is witnessing dynamic growth in China thanks to a combination of M&A and organic growth. As we discovered in part one of this two part interview, regional chief Roland Decorvet attributes much of its success to Nestle’s use of local and global brands. But operating in China is not without its challenges. Katy Askew caught up with Decorvet to find out more about why he believes Nestle is best-placed of all the multinationals to succeed in China.
Looking at the footprint of Nestle in China, one is struck by the fact the company locally produces over 90% of the 35,000-plus products it sells daily in the country.
The global giant packs a considerable local punch: Nestle employs more than 47,000 people in the country, where it operates 31 factories that manufacture lines from dairy products to confectionery and ice cream.
However, producing food in China means Nestle has to grapple with the thorny issue of food safety. China’s food industry has been rocked by a series of safety scandals in recent years, which has undermined confidence in the safety of food made in the country.
Particularly after the melamine scandal of 2008, when contaminated infant formula resulted in the death of six babies, the Chinese government made some strides to tighten regulations and step up inspections. Nevertheless, a plethora of regulatory bodies overseeing a befuddling mix of businesses means there are plenty of holes in the net.
Conscious of the impact safety scandals can have on brands, large food manufacturers are moving ahead of government regulations and working to improve food safety in their own supply chains.
“We believe one of the ways to control food safety is to go to the source and to control your value chain. I don’t mean to own your value chain, but to control it from the farm all the way to the finished product,” Roland Decorvet, CEO of Nestle’s operations in Greater China, tells just-food.
The company has worked to tighten control of its dairy supply. Nestle operates three large Chinese dairy facilities that use a system of procurement that means 100% of the milk Nestle processes is purchased at the farm.
“We track over 20,000 farmers. We have a small army of agronomists who give advice to the farmers. We have contracts with farmers directly, we are not going to any intermediary. The farmer either brings [the milk] or we go and pick it up at the farm. Every farmer’s milk is checked every day,” Decorvet emphasises.
The milk is used as an ingredient in an array of products manufactured for the local market. “We source a lot of milk here for family milks, senior milk, nutrition, ingredients in ice cream or dairy drinks.”
However, given the intense consumer concern over the safety of dairy-based products, Nestle does not source any of milk destined for infant formula from within China. “For all infant formula products we have either completely imported finished product, mostly from Europe, or we manufacture locally the product but using imported milk. Infant nutrition is so sensitive – we can guarantee the safety but from a marketing point of view people really want imported milk.”
By going straight to the source and moving down the value chain, Nestle believes it can control the quality of the raw ingredients it is supplied with. However, the group is having to adapt in response to the evolution of the Chinese dairy industry.
“Our model was mostly based on small farmers. Economic growth in China has led many small farmers to close down and move as workers to factories and big cities. That forced us to slightly adapt our model,” Decorvet reveals. “We are moving from very small farms to medium and large farms.” According to Decorvet, the farming methods employed on a small farm are “completely different” to those of an industrial-sized farm. “One of the challenges we are facing – or the country is facing indeed – is that there is no institution to train these farmers.”
Nestle has responded by building three demonstration farms that will be linked to training institutes. These farms will provide a learning experience where “students will be able to see and learn by doing”, Decorvet says.
“We will train literally hundreds to thousands of farmers a year about what to know in terms of artificial insemination, feed, about mechanisation, labs, economics, etc. We will manage this alongside outside partners, both local and international.”
The approach is in line with Nestle’s corporate principle to “create shared value” by investing in the communities in which it operates. The company believes by contributing to the economic health of local communities it will see a business benefit in secure lines of supply and an expanded customer base.
“We are there for the long term, we believe that the control of the supply chain is best if there is a well-equipped infrastructure. We are doing it because nothing now exists so it becomes our role to do so,” Decorvet explains.
In China, Nestle has worked to tighten control over its supply chain in dairy and coffee. The group intends to develop similar schemes in other sectors. “We are working on some projects to do it for other types of raw materials which are important for us, like peanuts and chicken. That is the trend more and more towards going up the value scale, get to the source and work with the raw material producers,” Decorvet says.
Supporting Nestle’s production facilities in the market is its Chinese research and development. The company operates two R&D centres in China in Beijing and Shanghai. Two further facilities are scheduled to be opened this year: one in Xiamen to facilitate the development of dairy beverages as part of Nestle’s Yinlu joint venture and one in Dongguan that will specialise in baked products and will work closely with confectioner Hsu Fu Chi, in which Nestle owns a 60% stake.
These facilities are part of Nestle’s worldwide R&D network, but “for the time being” the “majority of the products, the majority of the intention, the majority of the development is for China and these local products”, Decorvet says.
For a global company, local innovation is of prime importance, Decorvet argues.
“At Nestle we strongly believe in local products, local tastes. If you were tasting some of these products with sweetened rice porridge with black sesame and red dates, I’m not sure many Europeans would come up with such products – but it happens that 1.3bn Chinese love it.
“Chinese insight in food R&D is absolutely key. I have been here 15 years and I would be completely incapable to judge if this product tastes good or not for the Chinese. I am not Chinese. We have to ask the Chinese people. No neo-food colonialism. We are not here to impose anything, to dictate or to get a certain way of life. We are here to sell good nutrition and safe food products to the Chinese people.”
Through country-specific R&D – and its joint ventures with Chinese companies – Nestle is able to compete with local players who have a deep understanding of Chinese consumers and taste preferences, Decorvet suggests.
“I believe we have developed a different type of model with our specific brands and with really local partners. We haven’t just acquired businesses, we went into joint ventures where the founding families are still with us – and they understand the market. When I say local players I include ourselves.”
The approach, Decorvet claims, means Nestle is better-placed to prosper in China than any other multinational food company.
“If you come as a western company with a western approach and selling your western products you are in for a short run,” he insists. “If you look at most of the big food companies in China, with the exception of Nestle and a bit of Coca-Cola, they are all Chinese.”
He adds: “Local companies who don’t buy anybody just keep growing and getting into new categories. What other multinationals are doing in comparison is very modest. Nestle being an exception.”
As the Chinese food sector matures, competition is likely to result in consolidation, Decorvet suggests. “There will be more consolidation, but we have seen a lot over the last few years. I would see less big mergers in the future and more very small players disappearing due to pressure in terms of food safety and competition becoming fiercer. This is by far the most competitive market in the world in terms of number of competitors.”
As the procress of consolidation gathers pace, Decorvet does not rule out the possibility Nestle could expand its business through M&A. “We are always open to great ideas and good suggestions,” he says.
In recent years, the company has grown its infant nutrition business by acquiring Pfizer Nutrition. It has also bought up majority stakes in local firms Yinlu and Hsu Fu Chi.
“For the time being the priority is really to digest what we have done over the past two years. There is tremendous potential for organic growth with the companies and the categories that we are in. This will be the main focus for the next few years,” Decorvet adds.
As the group moves to an organic growth phase, it is nonetheless generating strong top-line results and has consistently booked double-digit sales gains for a number of quarters. Decorvet shrugs off concerns the high level of investment needed to drive sales growth in emerging markets could mean the expansion is not translating to the bottom line.
“Nestle does not give away any figures on profitability by market, but yes we are having profitable growth. I would love to tell you things because it is rather good news. But we don’t disclose that.”
For details on Nestle’s strategy in China – which focuses on leveraging local and international brand strength – click here.