FMCG
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Waters had a better year, in a very warm but not exceptionally hot summer in developed markets. One trend was the continued growth of the global brands, such as Nestlé Life (up double digit again), Perrier and San Pellegrino: the large collection of regional and local brands fared less well. Nestlé Nutrition, now the baby food unit that accounted for 90% of sales (plus a few bits and bobs), generated over 7% organic growth at a company-leading operating margin of 20%. This was helped by innovations such as BabyNes, which essentially translated Nespresso machine and pod technology into the baby nutrition arena. The professional unit was getting its act together by expanding distribution of the new Nescafé Alegria machine to catering operators. Nespresso, of course, continued its dizzying climb, growing more than 20%, according to its annual norm. The concept was now supported by a holistic sales system. This included boutiques, e-commerce and call centres that gave it an exceptional competitive edge. Its strong innovation programme now embraced the first ever-global launch of a new machine, PIXIE, that reduced the pre-heat time to less than 30 seconds.
Elsewhere, under the catch-all Other sales heading, the company’s three joint ventures all continued to perform well. Cereal Partners Worldwide (Nestlé and General Mills) had now garnered a global market share of over 20% in the breakfast cereal category, and grew double digit in Asia and Latin America. Beverage Partners Worldwide (Nestlé and Coca-Cola) had evolved into a sales vehicle for Nestea, which was restructured to focus on Europe and Canada. The third joint venture, Dairy Partners of America, formed with Mexican dairy company Fonterra, delivered another year of double-digit growth. Nestlé Health Science had been set up as a distinct and separate company within Nestlé, with its own board of directors and headquartered outside of the Vevey head office. It wasted no time in its first year, making some early acquisitions to add new areas of expertise, such as metabolic disorders, inflammatory bowel disease, colon cancer and oncology.
What is Their DNA?
The Nestlé DNA is very simple and consists of two complimentary elements: global and local.
Global
Nestlé is as near to being everywhere in the world as one food and beverage company can get (with the exception of the two cola giants). It has factories in 83 countries: ranging from the 81 in the United States to 29 countries, such as Bangladesh and Zimbabwe, that have one Nestlé factory. Nestle has been established for over a hundred years in at least a dozen countries. It has some gigantic brands: 4,000 cups of Nescafé are drunk every second somewhere in the world. The Vevey headquarters houses over 100 different nationalities. You cannot progress up the ranks at Nestlé without charting some of its far and wide outposts. The Nestlé name is ubiquitous; appearing on most of the billion products sold each day.
The company is managed globally in many ways. Its buying power is staggering. The forty or so billion franc brands are managed from headquarters in terms of brand positioning, quality standards and design styles. Yet Nestlé is far from a cumbersome, lumbering industrial behemoth. With the exception of tinkering with Nestlé Nutrition, the company does not spend its time endlessly redrawing boundaries of responsibility, or wrestling with the who-does-what debate that can preoccupy other global giants.
Local
The answer at Nestlé to the who-does-what question is simple: what gets done at head office is only what needs to be done at head office. Everything else is done at the local level, tightly managed by the Nestlé zone business units. The local operating autonomy, originally put in place through necessity, has been protected and nurtured to become a genuinely powerful and unique competitive advantage. This is especially so in terms of local economic performance. The rules are simple: if you are a Nescafé brand manager in Paraguay, you have no authority whatsoever to change what the brand stands for or alter any of the brand iconography. But you might get fired if the product formulation has not been tweaked, so that it was preferred, at least 60:40, against the best-selling Paraguayan competitor Likewise, your colleague managing the Kit Kat brand should have brought out a variant containing a locally popular ingredient. It is this mix of local entrepreneurialism, combined with a light but firm hand of global consistency that makes Nestlé such a successful company.
Summary
Ever since Peter Brabeck became CEO in 1998, Nestlé could not have made it clearer that it considered itself not a food and beverage company but a nutrition, health and wellness company. If we ran Nestlé, that’s what we would be telling the shareholders and the analysts too. It promises higher growth and higher margin. Current CEO Paul Bulcke concisely explained the Nestlé approach to nutrition, health and wellness: it had three elements, Nestlé Health Science to pioneer critical illness nutrition solutions, the addressing of specific consumers’ nutrition needs via Nestlé Nutrition and offering consumers healthier and tastier choices through the day via the remaining 85%-plus of the business.
But our contention would be that Nestlé is still a food and beverage company with a nutrition, health and wellness agenda, simply because too much of the company portfolio would not be classed as nutritious, overly healthy, or a key part of a wellness regime by the man or woman in the street. Consider the following categories and their 2011 sales in Swiss Francs:
· Soluble coffee9.2 billion
· Confectionery9.1 billion
· Frozen/chilled meals8.0 billion
· Ice cream4.5 billion
Over a third of company sales are accounted for by categories where the link to a positive nutrition agenda is tenuous, despite the fact that the company may be improving its nutritional components. Nestlé has not made serious M&A moves towards a total commitment to nutrition, health and wellness by, for example, selling its confectionery operations. Acquisitions have by no means been directed clearly towards the nutrition agenda. The purchase of DiGiorno was a smart, opportunistic move for a food and beverage company to make, but definitely not an acquisition driven by a nutrition crusade.
Having said all that, Nestlé is an extremely strong and very well run food and beverage company with a unique footprint, gigantic product range and entrepreneurial operating culture. These qualities combine to make it a formidable competitor in every market where it has a presence. Nestlé seems not to fail in markets or cut and run when they encounter problems. It is difficult to imagine that their reign as the world’s biggest food and beverage company ending in the foreseeable future.
Procter & Gamble
Where Did They Come From?
The founding of great empires often becomes the stuff of legend. Rome owed its origins to two boys suckled by a she-wolf and Athens to a competition between Poseidon and Athena as to who could bestow the best gift upon the residents of the Acropolis. Procter & Gamble’s was heralded by the descent of a host of angels with blond hair, playing harps and clutching boxes of Tide. Well, not quite. In fact, the beginnings of the greatest packaged goods empire the world has ever seen are a little – or shall we say a very great deal indeed? - more prosaic.
Alexander Norris, a Cincinnati candle-maker, was concerned for the financial well-being of his two daughters, Olivia and Elizabeth, during an economic downturn precipitated by a banking crisis, so he suggested to their respective husbands that they combine their struggling businesses to better weather the storm. Thus, Irish soap-maker James A. Gamble and English candle-maker William Procter dutifully pooled their collective business assets of $7,192.24 to create the firm of Procter & Gamble (P&G) on 31st October 1837. Banking crises are perhaps more useful than we may currently think.
As with virtually all businesses founded at a time before modern consumer markets, who sank and who swam was determined as much by luck as by business acumen. Which put both men Cincinnati remains unknown, but as soap- and candle-makers they were definitely in the right place: raw materials and markets were both plentiful. In 1837, Cincinnati was not known as Porkopolis for nothing. The early meat-packing capital of America, it was processing around one quarter of the hogs slaughtered annually i
n the entire country. Their surplus fat made a lot of candles and soap, prodigious volumes that the uncomplaining Ohio River could ship all the way down to New Orleans and thence to the major markets on the Eastern Seaboard.
Thus, the business prospered for four decades driven by a happy combination of advantaged location and ease of distribution serving a growing and increasingly affluent population. But the firm’s biggest breakthrough also nearly led to its demise. And it forced P&G to develop a capability that has served it well since: to swiftly change direction when needs must or new opportunities arise. The American civil war prompted huge demand for candles. Procter & Gamble, given its location, backed the winning side and was soon shipping vast quantities of candles and, to a lesser extent, soap to the Union armies. Drawing on the mass production techniques developed by its Porkopolis suppliers, P&G ramped up the business such that, at the end of the war, Dun & Bradstreet estimated it to be a million-dollar enterprise.
How Did It Evolve?
The end of the war brought a sudden end to gigantic orders for candles from the one colossal buyer that had driven the company’s growth: the Union army. This short-term disaster – candles the accounted for three-quarters of the company’s sales – was compounded by two other insidious but just as disruptive changes. John D. Rockefeller’s Standard Oil had begun using its scale to market cheap kerosene so the kerosene lamp was rapidly replacing candles as the night time illumination of choice. Simultaneously, Chicago was well on the way to putting Cincinnati out of business in the meat-packing trade. Thus, a firm that had specialised almost exclusively in turning local excess pork fat into tallow candles now faced the loss of its biggest customer, a rapidly shrinking market for its number-one line and diminishing raw materials at increased cost. P&G needed to get out of the animal fat candle business. Its saviour was to be Ivory soap.
Contrary to the company’s own subsequent lore, Ivory did not come about solely because a gormless workman left a soap-mixing machine switched on all weekend (although he may well have done). Ivory’s genesis was actually driven by three features of how the early company’s business style that have become entrenched into its very core then and live on to this day: a focus on base science, an embrace of open innovation and a drive to reinvent premium luxury products as product anyone could buy.
James Norris Gamble, son of the co-founder, had studied chemistry and was an obsessive experimenter, always keeping his results in a journal. He was also a student of the soap industry at large. The animal-fat soaps turned out by P&G and its many competitors were in reality little better than the lye soaps many women still made at home; the manufactured versions were simply more convenient. But the elite used a different kind of soap altogether, Castile soap, an expensive luxury that used olive oil as the fat component. James Norris had long dreamt of producing soap as fine as Castile but making it affordable.
His breakthrough came when he met a young man who had been experimenting with vegetable oil soap. Procter bought the formula and, playing around with it, decided to combine it with another soap feature he had been experimenting with himself: floatability, which stopped the bar getting lost in murky bathwater. The outcome, launched in 1879, was Ivory. For the next 30 years, P&G concentrated most of its efforts in developing an unrivalled competence in soaps, and a related activity which would again stand it in good stead for the entirety of its subsequent existence: consumer advertising.
Its initial marketing for Ivory was neither different from nor better than the norms for the time. It focused on the fact that the soap floated: the first slogan proclaimed It floats! and went on to suggest that this floating soap could, moreover, could be used for anything from fine lace to the family dog: you only need one soap. Not expensive. Will wash anything. No chapping. Segmentation would be a skill P&G developed later. But it was good enough to get by on until James Norris, having conducted multiple tests to compare Ivory soap with Castile soaps, came up with the fact that informed the company’s most famous advertising slogan: 99% Pure.
P&G could have remained as one of America’s hundreds of soap companies and would almost certainly have been swallowed in the great series of interwar industry consolidations with, for example, James S. Kirk & Co. They had been Chicago’s leading soap manufacturer until P&G acquired them in 1930 to cement its national leadership. What made the difference, and gave P&G the extra leverage it needed, was that it had already moved from being just a bar soap company into a broad-based fats company, giving it much greater scale and scope. This was the beginning of another P&G definitive skill-set: the ability to manipulate its core ingredients and skills into new product categories.
Its first foray beyond bars of soap came in 1901 when, to protect its supplies of cottonseed oil - the increasingly difficult to obtain core raw ingredient for Ivory - P&G formed the Buckeye Cotton Oil Co. to acquire and/or build cottonseed oil mills. Six years later, in one of the most dramatic examples of avoiding Not Invented Here syndrome, a scientist, E. C. Kayser, literally walked into its office with the technology for hydrogenation, which enables liquid oils to be solidified at room temperature. P&G bought it in short order, patented it four years later and launched of Crisco, the world’s first shortening made entirely from vegetable oil. The Crisco launch demanded a much more considered and disciplined marketing approach; after all, the company was building an entirely new category, something it would need to do many times in the future, from disposable diapers to Febrezing the sofa.
At the same time, P&G had been expanding laterally in the soap market. The days when one brand such as Ivory could be sold to meet all washing needs were ending: hundreds of companies were piling into the market. In 1890, P&G had 577 direct soap competitors, which kept prices low and profits elusive. So, in 1903, P&G entered laundry powder. It acquired Shultz & Company, and it particularly acquired Star, its leading brand, a well-known and successful product. P&G immediately improved it by adding naphtha. Until then, P&G’s second-biggest brand after Ivory had been Lennox, a laundry bar that needed shaving into flakes to be used. Brands like Star and Lever Brothers’ Lux were just boxes of soap shavings - Lux had been invented to make use of the waste from the machines that cut its Sunlight bars into shape. P&G was learning that competitors, consumers or even external forces could prompt shifts in demand that adversely affected P&G’s sales.
As the soap industry began to consolidate, P&G, bolstered by the success of Crisco, was able to lead the charge, swallowing up many local, regional and even national players. It was closely followed by Lever Brothers and Palmolive, although Palmolive, having finished a distant third in the race for scale, had joined forces with Colgate. But the outcome for P&G was mixed, literally and metaphorically. It had acquired scale, but in the process a vast portfolio of undifferentiated soap brands, many launched as copies of each other. The result was chaos. The product range was mostly generic and the supply chain through America’s vast army of wholesalers, jobbers and drummers made production planning a nightmare. The twin solutions to this problem in the 1920s would be P&G’s greatest gifts to the world of packaged goods: in-store merchandising and brand segmentation, although both came about serendipitously.
P&G had been experimenting with direct distribution to retailers as a means of smoothing out its manufacturing peaks and troughs since a 1913, when it ran kind of distribution test in New York City. The results were promising but New York and its geographic concentration made it probably the easiest part of the country to try work in. So, in 1919, the same idea was tried across New England with similarly encouraging response. In a un-P&G-like fit of haste, the company rapidly rolled out the idea nationally in 1920 to pre-empt Lever Brothers copying the plan; the outcome nearly sank the company.
The implementation of direct order taking and fulfilment on a national scale was staggeringly complex. The number of accounts shot up from 20,000 to 400,000 overnight. Hundreds of warehouses and thousands of transportation agreements had to be set up. All this was difficult enough, but
the hammer blow was organised resistance by the nation’s wholesalers, who not only boycotted P&G products but did their best to persuade their customers, who still relied on the wholesaler for everything but P&G products, to do exactly the same. The results were catastrophic. Pre-rollout sales of $188 million in 1919 fell to $106 million by 1922 and did not reach their original level until 1926. Perhaps it was this drive to direct distribution that forged P&G’s famous tenacity.
The goal of going direct had been to remove the production inefficiencies of wholesaler orders: vast, random and unannounced. But the true value of the move would came from P&G’s realisation that the salesmen it now sent into every store could not only report demand in the form of orders but also influence sales on the ground through personal focus and in-store merchandising- much more than any wholesaler could do. The value of this breakthrough would be further enhanced by P&G’s other great contribution during the interwar period: brand segmentation, administered by brand management and informed by market research.
The essential idea was simple but revolutionary: focus each brand on serving a well-defined consumer need. General Motors had first adopted this approach first. The folly of taking on Ford with a single model was apparent to all, whilst the structure of GM as a conglomeration of manufacturers and brands made it an obvious marketing gambit, boosted by the fact that Ford itself, constrained by the need to make and sell ever-cheaper Model Ts, was unable properly to respond to advances in automotive engineering. The soap market had neither of these stimuli. All the manufacturers were employing exactly the same strategies, with the soap technology of the time a technical backwater. So it was a brilliant insight for P&G to segment soap category. Now the company could market a range in which each brand was aimed not at different buyers, as had Chevrolet, Buicks and Cadillac had done, but at different cleansing tasks or differing water conditions, as opposed to Ivory’s historic claim to be the Model T of soap – ideal for all needs.