September 5, 2003

Talk with Nestlé CEO Peter Brabeck

Peter Brabeck-Letmathe, Nestlé CEO (photo: Wildbild)
Peter Brabeck: "I'm no slave to the retailers"
"So you've come to see our film star?" asked a helpful, but somewhat overripe lady assistant, brandishing a New York business magazine with Peter Brabeck-Letmathe on the front cover.

At the head office of the world's largest food supplier in Vevey on delightful Lake Geneva, one is ushered in to the CEO of Nestlé with fitting reverence.

Certainly, Brabeck has been instrumental in developing the Swiss power house away from its former sweets bias towards a nutritional health company.

And it was refreshing not to hear a supplier fawn, cringe, and grovel at the mere mention of his major retail customers.

Peter Brabeck, born in 1944, looked lean, fit and deeply suntanned with the slightly reddish hue which betrays a passion for mountaineering at high altitudes.

Speaking with a Schwarzenegger-type Austrian accent, slightly at odds with his immediate Swiss linguistic environment, Brabeck exuded the supreme confidence of a manager with success, power, and a broadly diversified shareholder base.


INTERVIEW


Herr Brabeck, in H1 Nestlé increased organic growth by 5.5 per cent, less than 40 per cent of which was attributable real volume growth. Are you satisfied with this result?


Of course, I should have preferred to have achieved four per cent real internal volume growth rather than 2.1 per cent, but our goal since the end of last year is to optimise organic growth.

Had we only been interested in sales volume, we should have preceded a bit more cautiously in those developing countries where we operate. In these regions we were faced with currency devaluation and of course had to raise prices somewhat.

Thus, price increases did play a more important role at the beginning of the year, but, if you look at our ten year average, they only contribute around 1.5 per cent towards our annual growth.

In principle, we are still keeping to our original goal. It is simply that we have defined growth to date as so-called Real Internal Growth (RIG), i.e., sales growth adjusted for takeovers, disinvestments, price fluctuations and currency. According to this definition, our annual goal was 4 per cent.

We have now redefined our goal as annual organic growth of 5 to 6 per cent. This gives us a little more freedom as to whether we achieve our goal more by price or more by volume.

Why did you redefine your growth goals?

Our RIG figures are based on pretty demanding criteria while our competitors are content to announce just their organic growth figures which, at least optically, look better to analysts. So we scored an own goal.

Your competitors are also constantly reorganizing and some of them have made more progress than Nestlé. Does this cause alarm bells to ring and shouldn't you be accelerating your internal efficiency programmes?

Sustainability is more important to me than speed. Of course, I could made short-term decisions which would achieve spectacular results, but the question is, are they sustainable?

By the way, probably what differentiates us from all our competitors is that we  have continued to grow while the efficiency programmes were still running.

If you compare our real currency and inflation adjusted growth with that of all our competitors over the last five to ten years, you will find that we were the only ones who were able to generate sustainable growth.

Your ebita margin is slightly lower than Danone's, somewhat below that of Unilever and far below that of Kraft Foods…

Anyone who knows the difference between the US accounting regulations, GAAP, and the International Accounting Standards will immediately understand that the ebita margins of American companies always look bigger. Their sales are considerably lower because they don't include retail rebates.

Thus, the same profit looks bigger when correlated to sales. Here one must ask whether you prefer 12.2 per cent of one hundred rather than 14.6 per cent of seventy. In short, this is like comparing apples and pears.

However, it is interesting that the business media seldom mention the difference.

As regards our European competition, I congratulate Unilever on the way they have dramatically increased their ebita margin against total sales in a relatively short period of time.

Are you happy with Nestlé's share price relative to the valuation of your principal competitors?

No, I'm not because I think we do have some upward scope. Of course, as with a number of other companies, we had a very high valuation during the bull market which even took us to a price-earnings ratio of around 26.

In other words, our traditional p/e ratio of 15.5 went up to the level of a pharmaceutical group. In the subsequent bear market our valuation has also declined.

In the last few months, our share price has recuperated, however, and the very positive reaction to our H1 results has led me to believe that we are heading for a mid-range valuation.

To expect a food & beverage company to have a p/e ratio of 26 or 27 today is really exaggerated. Do I ever think we could achieve these levels? I think we could, but first we must restructure our company, which, after all, is our long-term goal.

In June the Dreyer's acquisition gave you the number one slot in the US ice cream industry. In Germany, however, Schöller and Eismann look like one big building site. Why did you authorise their purchase?

A building site, perhaps, but not a hopeless one. I'm very confident about our strategy in Germany especially as regards Schöller. Eismann was part of the Schöller deal and we obtained it at a relatively low valuation.

The Schöller acquisition was strategically important because it is known that we haven't been active in the central European ice cream business.

In 1969 we merged Jopa with Unilever and didn't work for 20 years in this segment. Thus, we had to abandon to Unilever some very important markets in Europe. This created the vacuum in which Schöller grew.

When we returned to the European ice cream business, the German market was practically carved up. There was only one larger company available and that was Schöller.

In other words, we decided to marry, and whether we wedded the prettiest bride or not was only of secondary importance.

Do you still think the marriage will be a happy one?

Yes, definitely. Among other things the Schöller purchase has also given us a direct delivery system. Here too, Unilever and Nestlé are probably going different ways.

I support this system which, by the way, was one of the reasons we were so interested in Dreyer's because it has the best system in the world.

I think this sales model is also important for Germany, especially if you want to do business in the super-premium segment. Last but not least, buying Schöller gave us the basis to negotiate the purchase of the rights to the Mövenpick-Eiskrem brand.

Thus, we now have the super-premium brand in both Germany and Switzerland. World-wide there are really only four super-premium brands: Ben & Jerry's, Häagen Dazs, Mövenpick and Antica Gelateria del Corso. In other words we now have three of these four.

You are achieving double-digit sales growth in global mineral water, but Danone and the important newcomers, PepsiCo and Coca-Cola, aren't sleeping either. How do you deal with the challenge?

When we first entered the segment there were two big players and many smaller ones, today there are four big players and only a few smaller ones.

In the USA, where Coke has taken over Danone's distribution licence for Evian, the largest individual water brands are Pepsi's Acquafina and Coke's Dasani.

But we are market leader world-wide and are also number one in the USA, if you take all our mineral water brands together. This is because we have a broad price range strategy.

Our champagne brands, so to speak, are Perrier, Vittel and San Pellegrino, which have been doing particularly well in the HORECA business.

We also have a number of large regional brands such as Poland Spring, Arrowhead or Ozarka. In the price fighter area, we have, for example, Aberfoyle in the USA, which also has a leading position in US club stores.

Last but not least, we are currently introducing Nestlé Pure Life into the United States.

You have been Nestlé CEO for the last six years. Right from the start, you announced that nutrition, wellness and additional trade channels were high priority projects. In Germany, at least, there is little evidence that this strategy is being put into practice. Would it be fair to say that your mills make fine flour, but grind somewhat slowly?

If you want to build up an almost new product category, you can't expect to be able to do it at the press of a button. Nutrition requires a considerably longer lead time than normal food products as regards research and development.

Unlike the many opportunists who only surf on the nutrition wave and make unsubstantiated claims, which can be very dangerous, we obviously also conduct extensive clinical trials. Thus, our lead time for developing a genuine nutrition product is between four and six years.

What type of products do you mean by nutrition?

They range from infant nutrition via medical nutrition to sport nutrition for top sports people. With our PowerBar alone we already achieve annual revenues of around $450m.

If the products achieve good results in clinical trials, we patent them and use our marketing know-how to transform them into brands. Thus LC1 isn't the name of a bacteria, it's a brand.

Thus, we are able to transform a commodity product such as dried milk into a power brand with nutritional positioning.

Our children's dried milk alone achieved revenues of 1,2bn Swiss francs last year. If you add our nutrition, this amounts to a business of around 6bn francs, which isn't peanuts.

So you are transforming your image from that of a purveyor of impeccable foods to a manufacturer of food with nutritional competence?

Yes, that's my goal. Nestlé's first role was to conserve and transport food. This lead to the creation of condensed milk, powdered milk, tinned food etc. The second creator of value added was taste.

Then came, even before the Second World War, the huge field of convenience, which lead to instant coffee, hot soups, single food portions, microwave products etc.

In our opinion, nutrition is the next major dimension in value added. It was born out of the scientific realization that healthy food is essential for health and well-being, i.e., wellness.

So we are entering a field where R&D are extremely important. As we invest 1.4bn francs in R&D every year, this gives us a trump card. Much of what we are doing today is still fairly small, but it will be big in ten years time, and we must sow the seeds today.

But doesn't your strategic aim of transforming Nestlé into a nutrition company sit somewhat uneasily with your confectionary offer? If I drink your Vittel, I'll stay healthy, but if I eat too many of your smarties and kitkats long-term I might become diabetic?

Your polemical question doesn't provoke me in the least. If you drink too much orange juice, you might also become a diabetic long-term. But even Hippocrates and Paracelsus postulated the tenet: all things in moderation.

I eat a small bar of dark chocolate every morning for breakfast, and I don't think you could call me fat.

Why do I eat this and nothing else for breakfast? Because it gives me a good supply of calories and, what is more important still, there are good nutritional elements in the chocolate which also feed the nerves. It also has vitamins and even reduces cholesterol.

Of course, it would be wrong to have one hundred grams of dark chocolate for breakfast, three hundred grams of milk chocolate for lunch and then to continue eating chocolate in the evening.

The same principle applies even to water. There comes a point when you drink too much that you flush out many of the minerals and vitamins in your body. It's good to drink a lot of water, but, even here, you shouldn't drink too much.

You have accorded the development of additional trade channels a top priority. In Germany, we haven't seen much progress in this field to date except an initial debate when local retailers thought that Nestlé wanted to set itself up into competition with them?

The fact that additional trade channels are a priority project for us does not mean that we can't nurture good partnerships with our retail customers.

Quite independently of this subject, our relations with many retailers have improved. We have now created genuine partnerships with many regional and international retailers.

We once had, for example, a lot of trouble with Carrefour and Migros. Carrefour even temporarily delisted all our products world-wide, and Migros, which is increasingly stocking our brands, first had to have almost philosophic debates within its own ranks before they could list us.

Today, we have very good relationships with Wal-Mart, Metro Group, Rewe and Edeka.

That said, I don't want 90 per cent of our revenues to come from just five customers. In order to be an adequate partner, you have to act from a position of strength. If you aren't strong, you're nobody's sparring partner, and we want to meet our retail customers eye to eye.

Earlier this year, you supported the opinions of your UK manager Alastair Sykes who didn't want to see any further concentration in British food retailing. Indirectly, you seemed to be saying that you wouldn't like your largest customer, Wal-Mart/Asda, to win the current bidding war for Safeway. What are you afraid of? Are you scared the UK will become a second Germany?

We should never interfere with the concentration of our retail partners, in the same way that I do not appreciate some retail partners commenting on our own acquisitions.

However, it's not our job to discuss the matter; it's for the national and European competition authorities to decide.

But let me say it again: We see retailers as partners, but I am not their slave. That's a big difference. We want to develop our business through our brands and through innovation.

That's different to saying we are just suppliers. Partnership is one thing; a delivery contract is something completely different.

As regards the situation in German retailing: If German consumers are happy with shops containing 800 own label lines, so well and good. But Germany is neither typical nor reproducible. Seen from a global perspective, Germany is not the centre of the world.

You've got a lot quieter recently on the subject of genetically modified foods. Why so?

Of course, I can't defend a whole technology, but I can speak for the products we know, and we have always held the same opinion on this subject.

I think genetically modified foods are of eminent importance for the world because they enable a product to be marketed with great ecological benefits.

Already today their use saves more than 30,000 tonnes of pesticides from contaminating the world's water supplies. Before GM foods were used, more than 15,000 people died in China alone every year from spraying cotton fields with pesticides.

In Europe the situation is different. Instead of food shortages, we have overproduction on our farms because our agricultural policy subsidies scale in a most ridiculous way.

This results in too many products which then have to be re-subsidised in order to dump them on the world market.

Europe therefore has no possible need for a technology which enables us to produce still more. However, I find it somewhat selfish to say the world shouldn't have this technology just because we don't need it ourselves.

Your predecessor, Helmut Maucher, once said: "Whoever is content to follow in his predecessor's footsteps, doesn't leave any mark behind him." What mark do you want to leave?

When I started, my first priority was to improve group performance. We had an historic ebita margin of 9.5 per cent and a net margin of 5 to 5.5 per cent. To date, we have improved these margins to over 12 per cent and 7 per cent, respectively.

My second priority was, and is, to prepare the company for the future. In this context, I should particularly mention our huge Globe Project which is intended to convert the corporate culture which some wag once called a federation of independent kingdoms into a truly global group.

The success of this project is crucial for the long-term development of this company. In order to be able to introduce best practices, we need a unified reporting system. In order to achieve this, we must unify our infrastructure.

The third priority was to give the company a new orientation and is now to give the boat strategic direction. During the first four or five years the boat continued in the same direction because I was already personally involved in developing this strategy five years before I became CEO.

Why should I have changed the very thing I was creating at the time? Thus our boat should run more quickly, but on the same course. Now the time has come to change course.

 
Related article in German: Interview by Mike Dawson & Gabriel von Pilars in Lebensmittel Zeitung, no. 36, 05.09.2003


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