160 years after its inception, Nestlé, the world’s biggest food company, has remained true to its founder’s principle of continually observing consumers and society’s needs to find new opportunities [for growth].
When Henri Nestlé brought an infant formula to the market in the small Swiss town of Vevey in 1860, he probably had no idea that his company would grow and become the behemoth that it is today. He was however out to create something great. Of his cereal he said, “My infant cereal has a tremendous future because there is no food to compare with it.”
His biographer Albert Pfiffner described the former pharmacist assistant as an “entrepreneur continually observing consumer and society’s needs to find new opportunities to earn his living.” 160 years later, Nestlé has remained true to its founder’s principle and has grown into the world’s biggest food company. Over a billion of its products are consumed every day in almost all corners of the world. The company has a market value of US$336 billion and annual sales of more than US$92 billion at last count.
The last decade, however, saw many food companies struggle with growth. Consumer-goods businesses were not growing as fast as shareholders of top food companies would have desired. At Nestlé, things were not looking good either, as organic sales growth had fallen from an annual 7.5% in 2011 to 2.4% in 2016. The company badly needed a caffeine shot to get back on track.
That shot was in the form of Mark Schneider who joined in 2017, becoming Nestlé’s first “outsider” CEO in since 1922. With vast experience in the healthcare industry in Europe, Schneider joined the company at an opportune time when shareholders of the company were seeking a magic wand to steer Nestlé into a new direction, even as it wanted to remain perched at the top of the world’s food industry.
For the years he has been at the helm, Schneider has managed to steer Nestlé back to growth by simply staying true to the founder’s principle of “continually observing consumer and society’s needs to find new opportunities to earn [a] living.” Under the guidance of Schneider, Nestlé has transformed from a consumer goods stalwart into a health, wellness, and nutrition empire. In this issue, we review how Nestlé has reinvented itself and managed to revive confidence in organic sales growth, a metric that had fallen to record levels before Schneider took charge of the company.
A combination of changing diets, digitalisation and deflation in parts of the rich world, as well as sluggishness in emerging markets all contributed to slowed organic growth in the consumer goods business in the past decade.
E-commerce, for instance, helped small upstart brands to elbow aside the established behemoths by selling directly to consumers. To counter this, Nestlé responded by forcing its research and development (R&D) team to bring the company’s ideas to market more quickly, often digitally. The company also significantly expanded its R&D facilities in Switzerland, China, and Ireland to enable faster launch of consumer-centric products. The result has been phenomenal, as rarely a week passes without Nestlé announcing a product launch. This has enabled the company to keep up with the changing needs of the modern consumers.
With increased innovation, Nestlé was able to report a 3.6% organic growth in 2020, the highest the company had ever recorded in 5 years. The transition to e-commerce has also proven to be successful. In 2020, E-commerce sales grew by 48.4%, reaching 12.8% of total Group sales.
Right sizing operations to unlock growth
When growth in food businesses started slowing down, skin and beauty treatments became part of a strategy for many CPG giants to accelerate growth.
Nestlé also joined this bandwagon and created Nestlé Skin Health (NSH) business with an aim of jump-starting growth. This however failed to deliver, as the unit never made any meaningful contribution to the company’s bottom line.
Realizing its mistakes, Nestlé abandoned this broad-spectrum approach like other CPG majors and has opted to pursue a nutrition, health and wellness strategy. As a result, it began selling businesses that did not align to this strategy. This included NSH, which was sold in 2020 for over US$10 billion, the U.S. ice cream and confectionery businesses, and most recently the Nestle North America Water business that was sold to a consortium of private equity funds for US$4.6 billion.
Nestlé’s right sizing has also involved acquisition of business that aligns to its new nutrition, health and wellness strategy. The company has particularly bolstered its Nestlé Health Sciences (NHS) business with acquisitions such as the 2018 acquisition of Atrium, a global leader in nutritional health products, for US$2.3 billion. The company has continued to beef up this division with acquisitions of more health and nutrition companies such as Vital Proteins, Persona, and ZenPep. Most recently, the company announced that it has agreed to acquire the core brands of US nutrition and supplement maker The Bountiful Company for US$5.75 billion, bolstering the division even further.
Investments in NHS have started paying off as the division alongside Purina Petcare and Americas were the major drivers of its historic growth recorded in 2020.
Nestlé CEO Schneider believes the company is yet to achieve the right portfolio mix that delivers on its strategy. He promised at the start of his tenure as CEO to replace 10% of Nestlé’s portfolio by the end of 2021. We therefore expect Nestlé to continue unloading unfashionable brands even as it focuses more on investments in ventures that align to its health and wellness strategy.
Betting big on a plant-based future
The plant-based food market is the fastest growing category in the food industry at the moment in the US and other leading economies.
According to a recent report by Meticulous Research, the plant-based food market is expected to grow at a CAGR of 11.9% from 2020 to 2027 to reach US$74.2 billion by 2027. The double-digit growth potential that this market offers is simply too irresistible for any food company more so Nestlé, which has its eyes on ventures that offer higher growth, higher margin, and appeal more to health and sustainability.
The company in 2017 acquired Sweet Earth Foods, gaining an immediate entry into the plant-based foods segment in the US. Since the acquisition, the brand has debuted more than 45 vegetarian and plant-based products, expanding into faux beef, chicken, sausage and deli meats, as well as bowls and burritos.
In Europe, the Swiss conglomerate has also been aggressively expanding its plant-based offerings under the Gourmet brand, launching plant-based sausages and burgers to the delight of customers who have readily embraced the plant-based option, if the 40% growth achieved by the brand is anything to go by. The company also recently expanded its operations in China, announcing plans to set up its first plant-based facility in Asia, as part of efforts to grab a share of the country’s meat-free market, which has skyrocketed by 33.5% since 2014 and is predicted to be worth a staggering US$11.9 billion by 2023, as reported by Euromonitor.
CEO Mark Schneider has bigger plans for the company’s plant-based market. “This story is way, way, way, beyond the burgers,” he said. To Schneider, this is “a once in a generation opportunity to revive, rejuvenate, re-energize” its US$13.15 billion prepared dishes and cooking category, which has not been performing exceptionally well. Consequently, the company has started incorporating plant-based options to items that traditionally use the animal-based protein such as in its DiGiorno Rising Crust and Meatless Supreme and Stouffer’s Meatless Lasagna.
Of plant-based foods, Ryan Riddle, R&D specialist of vegetarian meal solutions at Nestlé USA said: “It’s one of most important spaces that Nestlé is really investing heavily in. I don’t think that it’s a short-term fad that we’re trying to chase. We really believe that it’s the future of food.”
Sustainability at the core of operations
According to Saint-Francis Tohlang, Nestlé’s Corporate Communications & Public Affairs Director – East & Southern Africa Region, protecting the planet is key to Nestlé’s operations, and thus the company’s existence is directly dependent on the survival of the planet.
To this end, Nestlé has made several pledges aimed at ensuring that the company has a positive impact on the environment. The firm has, for instance, pledged to halve its greenhouse gas emissions by 2030 and to achieve net zero carbon emissions by 2050. The company has further pledged to make 100% of its packaging recyclable or reusable and to reduce virgin plastic use by a third by 2025.
To achieve these ambitious pledges, the company in 2020 said it will invest CHF1.2bn ($1.32b) over the next five years in regenerative agricultural practices as part of a CHF3.2bn (US$3.51bn) to combat climate change. Nestlé also expects to complete the transition of its 800 sites in the 187 countries where it operates to 100% renewable electricity within the next five years and is reformulating its products to make them more environmentally friendly.
Delivering on the promise
Nestlé’s performance has been impressive. The company has been able to reinvent itself, shake off underperforming businesses, invest in high growth enterprises and amid a pandemic, deliver its highest growth in 5 years.
In Q1 2021, the Swiss food giant delivered a 7.7% organic growth, a testimony that it is on course to deliver the 4-6% a year sales growth that the firm promised in 2017. The business is currently well diversified with 42% of its revenue coming from emerging markets and 58% from developed markets. Moreover, the “high growth” segments of the business represent 61% of revenue, meaning that although Nestlé is not immune to industry-wide problems such as slowing growth in emerging markets, low incomes among the young that will depress their purchasing power, and a pandemic that is threatening to tear economies apart, it certainly will survive. Needless to say, Nestlé, has been around for more than 160 years, it has certainly survived worse.