At Carnation, Nestle Makes The Very Best...Cutbacks

For years, Timm F. Crull enjoyed his independence. Indeed, in the five years following Nestle's 1985 acquisition of Carnation Co., Crull, who was then Carnation's president, spoke by phone only twice to Nestle Chairman Helmut Maucher. Called back to Vevey headquarters for only two visits each year, Crull ran Carnation with minimal interference from his new boss. "We would go months, and I wouldn't hear from him," Crull recalls.

Those days are gone. In late 1990, Nestle folded Carnation and other U.S. businesses into a $7.4 billion-a-year food giant. And for the past year, Crull, 62, has been spending one week every month at Vevey. As chairman and CEO of Nestle USA Inc., he is scrambling to reshape what had been a sprawling, inefficient organization.

PRICE WARS. Nestle got tough because life was getting tough for its U.S. units. Rivals such as Procter & Gamble Co. and Philip Morris Cos. were slashing costs. And in 1990, nasty price wars in pet food and frozen food cut Nestle USA's operating income by 3%, to about $516 million, estimates Goldman, Sachs & Co. analyst Nomi Ghez. "We knew if we didn't act quickly we weren't going to be competitive," Crull admits.

Breaking with Nestle's tradition of keeping executives of acquired companies in place, Maucher turned over all U.S. operations to Crull. Eased into retirement was James M. Biggar, a son-in-law of the founder of Stouffer Corp. "Timm believed more in centralization than I do," Biggar says.

With Maucher's blessing, Crull reorganized the company along six product lines. Nestle's $3 billion-a-year business in nonfrozen foods, which includes Carnation Evaporated Milk, Nestle Crunch bars, and Friskies pet food, was put under one roof in Glendale, Calif. Crull is also slashing the number of distribution centers from 20 to 8 and has cut what had been 115 sales offices nationwide to 22.

The streamlining prompted a $240 million charge in 1991, but it has already cut Nestle USA's annual costs by $100 million, Crull estimates. Media buying, for example, is now done through one agency instead of 12, and Nestle is squeezing price savings out of suppliers such as boxboard providers, pared to 3 from 43.

Now Crull faces the tougher task of turning Nestle, an also-ran in many products, into an industry leader. To regain lost market share in frozen dinners and entrees, its Stouffer and Lean Cuisine lines waged a bloody price war against ConAgra Inc.'s Healthy Choice. Nestle is now in a dead heat with ConAgra for first place.

Still, Nestle USA remains third or fourth in cutthroat markets such as infant formula, coffee, and chocolate candy, according to Information Resources Inc. With mass merchants such as Wal-Mart Stores Inc. increasingly shunning also-ran brands, that can spell trouble. "In this business, the No.1 brand makes good money, No.2 struggles, and No.3 has a tough time making any money at all," says Booz Allen & Hamilton consultant Marc C. Particelli.

TOUGH TIMES. That's why Crull is constantly on the prowl for big game. "We would love to do a big acquisition," he says. But many possible targets are either overpriced or would present Nestle with antitrust problems, so Crull has to do smaller deals. In 1987, he bought tiny New York City-based Pasta & Cheese Inc., repackaging the $17 million refrigerated pasta brand under the Contadina name and building it into a $138 million national business.

Not bad--but such additions alone won't fuel sales enough to overcome the industry's glacial growth. "They'll have to find a lot of $50 million acquisitions to make a difference," warns one consultant. And new-product successes in food are about as plentiful as shelf space at the local market. So Crull is trying to wring every last dollar out of the brands he does have. In 1991, Nestle successfully introduced an ice-cream bar named for its Butterfinger candy bar. But its Lean Cuisine ice cream has flopped.

That shows how tough it will be for Nestle USA to gain new ground in the U.S. supermarket. Even an economic recovery isn't likely to bring back the good old days of price hikes in today's era of value-oriented consumers. But whatever news he brings from the U.S. front, the well-traveled Timm Crull will find his once aloof Vevey boss listening intently.

Before it's here, it's on the Bloomberg Terminal.