Nestle: An Elephant Dances
The tranquil town of Vevey, Switzerland, perches among the vineyards above glimmering Lake Geneva. Wealthy retirees take in Alpine vistas as they pass their afternoons strolling along the peaceful waterfront. The most exciting event is the annual grape harvest. Silicon Valley and the hubbub of high technology seem worlds away.
But this bucolic setting is the epicenter of one of Europe's most ambitious Internet initiatives. At the town's edge stands the glass and steel global headquarters of the world's largest food producer, Nestle (NSRGY)--which plans to invest as much as $1.8 billion over the next three years to become one of the world's Web-smart elite. The venerable company wants to overhaul everything from buying raw materials such as cocoa beans to producing, marketing, and selling products such as KitKat chocolate bars and Nescafe instant coffee. Peter Brabeck-Letmathe, Nestle's chief executive, calls the process "an e-revolution"--albeit one that will take several more years to fully bear fruit. "This might sound slow for Silicon Valley, but it's very fast" for a company like Nestle, Brabeck says.
Dot-com companies may capture the headlines, but Europe's real New Economy litmus test will come from slow, old-line multinationals striving to transform themselves into e-businesses. It's a Herculean task. The Continent's giants suffer from elephantine structures and the weight of decades or even centuries of management tradition. The 134-year-old Nestle, for instance, booked $46.6 billion in revenues in 1999. It employs 230,000 people and runs 509 factories in 83 countries, producing an astounding 8,000-plus different products, ranging from Friskies cat food to Perrier bottled water.
The Web promises to make this lumbering behemoth more agile--and put a serious dent in the cash Nestle lays out for everything from supplies to marketing. "For big companies like us, the Internet is particularly good because it shakes you up," says Mario Corti, Nestle's chief financial officer and head of its Internet offensive. Early results are promising: Because of new e-commerce initiatives as well as other restructuring efforts, Nestle's net profit rose nearly 35% in the first half of this year, to $1.7 billion. Its net margins grew almost a full point, to 7.2%. And after years of stagnation, its shares have outperformed the top 300 European stocks by about a third this year, rising some 30% to more than $2,100 per share. Says analyst John Keele of BNP Paribas in London: "Brabeck is really pushing Nestle into the 21st century."
The Swiss giant isn't the only European industrial titan attempting to become a nimble New Economy sprinter. Old-line Continental conglomerates from the Swedish-Swiss group ABB Asea Brown Boveri Ltd. to Germany's Siemens (SMAWY) are planning ambitious Internet investments. Unlike ABB's power stations or the trains and electronics that Siemens builds, food remains a local product that's hard to globalize. As Brabeck says: "You can't sell a Bavarian soup to a Taiwanese noodle-lover." So Nestle must practice a delicate balancing act: wielding the Net to gain economies of scale, while catering to a wide variety of cultural preferences.
Quick response. Because its task is so daunting, the Swiss food conglomerate's experiment is being watched across the globe. "This is about taking the world's largest elephant and making it dance," says Thomas Baur, a vice-president at software maker SAP (SAP). Nestle inked a $200 million contract last June with SAP--the German company's largest sale ever--to streamline its technology operations and give far-flung employees quick access to information from around the globe. That should speed up financial reporting by more than a month. And it will let Nestle know, for the first time, how much it buys from various suppliers around the world. As information flows more smoothly, Brabeck says underperforming business units should be detected more quickly--and responses formulated faster.
Although Nestle is a consumer-driven company, most of the changes will be invisible to diners guzzling Perrier or kids munching Nestle Crunch bars. You won't see a Nestle.com selling direct. But behind the scenes, the way Nestle buys, manufactures, and delivers its everyday products is going digital. The company is a founder of online food-supply marketplaces Transora and CPGmarket.com, which aim to use the Web to streamline purchasing. The emphasis, though, won't be on leveraging the Web to slash raw-material prices or eliminate distributors. Instead, Nestle wants to tie together its disparate operations, partner with suppliers and customers to cut waste, and move its food products more quickly from farm to factory to the family dinner table. "This isn't about squeezing suppliers as much as about increasing our own internal productivity," says Brabeck.
Nestle's reinvention is a work in progress. The company's margins, while improving, remain a third lower than those of competitors H.J. Heinz (HNZ), Cadbury (CSG), or Procter & Gamble (PG). The giant SAP deal is at least three years away from giving all Nestle employees access to information from other countries' divisions. Transora and CPGmarket.com are only now beginning operations, and online marketplaces in many other industries are encountering severe teething problems. Under Brabeck, Nestle already has slashed spending by $1.6 billion. Within a few years, he aims to whack costs by an additional $1.4 billion. But he says he can't even estimate what part of those savings will come from factory closings and eliminating redundant brands versus how much from the Net. "I would be lying if I said otherwise," he admits.
Baby steps. Still, the Internet represents a key lever in bringing order to an unwieldy organization. Henri Nestle founded the company in 1867 to market the baby formula he had developed. In 1938, Nestle scientists were the first to produce instant coffee. The two products fueled much of the company's growth for its first century. Then two decades ago, Nestle embarked on a $40 billion buying spree, acquiring Friskies in 1985, saucemaker Buitoni in 1988, Perrier in 1992, and ice cream producer Motta in 1993. Suddenly, Nestle was the world's No. 1 food and beverage company--but one of the least efficient, with unimpressive returns and a stagnating stock price. "Brabeck must concentrate on improving efficiency," says analyst Kieran Mahon of Schroder Salomon Smith Barney.
That's where the Web comes in. The first order of business has been to make it easier for retailers to stay in touch with Nestle. Since July, store owners in the U.S. have been able to order Nestle chocolates and other products online at NestleEZOrder.com. The company hopes the system will eliminate most of the 100,000 phoned or faxed orders it gets annually from mom-and-pop shops. The benefit for Nestle: The new system cuts out expensive manual data entry and slashes processing costs for each order from $2.35 to 21 cents. Similar initiatives are on tap for most countries where Nestle operates, which could trim as much as 20% from the company's $3 billion in yearly worldwide logistics and administrative costs.
The Net helps cut inventories, too. In the past, when Nestle held promotions it had to guess at demand. By linking up electronically with its retail partners, it can now adjust production fast. In Britain, supermarket chains Sainsbury and Tesco send in daily sales reports and demand forecasts over the Web to Nestle headquarters, while Nestle managers can check inventory levels on the supermarkets' computer systems. "It's been a revolution in the way we work together," says Tom McGuffog, director of e-business at Nestle UK.
Nestle is seeing similar results from sharing information online inside the company. Pietro Senna, a buyer for Nestle Switzerland, recently was having trouble getting kosher meat. He posted a message online, and a colleague in the U.S. found him just the right supplier--in Uruguay. And when he saw that a Nestle buyer in Italy needed to get some mustard, he put her in contact with a Nestle factory in Basel that could deliver.
Time savings are immense. Each country's hazelnut buyer, for example, used to visit processing plants in Italy and Turkey. Hazelnuts, a key ingredient in chocolate bars, are prone to wild price swings and uneven quality. But after Senna stopped by Turkish plants, he posted his report on the Web--and within a week, 73 other Nestle buyers from around the globe had read it, saving them the trouble of a trip to Turkey. Senna also is eagerly awaiting the reports from colleagues who will visit producers in Azerbaijan. "For the first time, I get to take advantage of Nestle's size," he says. At the same time, to stay close to local markets, no individual buyer is forced to change suppliers. "We don't want a hazelnut czar here in Vevey," says CFO Corti.
He might want to reconsider that. When leveraged, Nestle's size can slash procurement costs dramatically. Until recently, Nestle had 12 buyers throughout Europe, dealing with 14 suppliers of lactose, a key ingredient in infant formula and chocolate bars. Although the 12 buyers remain--their knowledge of local demand is essential--the company now uses only four suppliers on the Continent. "We can only do this because of online information," Senna says. Lactose costs have come down by 20% in countries such as Switzerland, where buyers used to purchase smaller quantities on their own. And the company is doing similar group purchasing with dozens of products ranging from citric acid to tomato paste, resulting in average savings of 10% on those supplies.
Nestle's Web charge is being led by its Net-savvy U.S. division. At weekly training sessions for employees on a converted dairy farm in Carnation, Wash., Nestle's U.S. CEO Joe Weller asks workers what needs to be done to unify Nestle. The answer: e-business. If the Net was to be an important driver of change, though, it would have to be incorporated into every employee's daily responsibilities. "We did not want a stand-alone e-biz operation," Weller says. "I want all 19,000 [U.S.] employees to get off the sidelines and into the game."
If the U.S. division leads, the rest of the giant is likely to follow. The sheer weight of the U.S. operation has wallop: It clocked revenues of more than $10 billion last year, nearly a quarter of the company's total sales. More important, the North American unit is headquartered in Glendale, Calif., near the Internet heartland of Silicon Valley, and isn't mired in the low-tech, old-world ethos of Vevey. In Switzerland, Brabeck doesn't even have a computer in his Spartan office, and his e-mail messages have to go through his secretary.
That's typical of Brabeck. Sure, he speeds over the mountain roads around Vevey in his Jaguar sedan, but he's hardly flashy. He favors dull gray suits and has the bearing and ruddy complexion of a mountain climber. Indeed, far from passing his leisure time surfing the Net, 56-year-old Brabeck spends his weekends climbing the Alps that tower over Vevey. A native of another mountain town, Villach, Austria, Brabeck joined Nestle in 1968 after finishing an economics degree in Vienna. His first job was driving an ice-cream truck and selling to stores and kiosks in the Austrian Alps.
He didn't stay there long. Just two years later, Brabeck landed in Latin America, where he shepherded various Nestle operations through a coup, economic hard times, and plant nationalizations. In all, he spent 18 years there--enough to harden the Austrian ice-cream salesman into a determined corporate leader. "I learned to manage through turmoil," he says. Living in such diverse cultures also taught him to listen and learn from others. When SAP board member Claus E. Heinrich explained his company's plans for linking Nestle to the Net, he was impressed with Brabeck's down-to-earth style. "In many companies, the leader comes in and says, in so many words: `I am the Big Kahuna,"' says Heinrich. "Brabeck listened and understood what we were saying."
He has also long been interested in the power of technology--his computerless office notwithstanding. In 1992, Brabeck joined Nestle's executive board and flew to New York to see a virtual supermarket. "This opened my eyes," he says. Two years later, Brabeck pushed Nestle to participate in an interactive-TV experiment in Orlando, Fla. In Switzerland that same year, he joined another trial that let consumers buy groceries through their TV sets.
These projects convinced Brabeck that e-tailing wasn't Nestle's future. The company risked upsetting its traditional retail partners, and consumers preferred a choice of brands. "They just didn't want a Nestle supermarket," he says. Nestle got out of Orlando when the experiment's backers pulled the plug. And when the Swiss television operation spun off Geneva grocery e-tailer Le Shop, Nestle declined to take a stake.
That doesn't mean Nestle won't have a presence on the consumer Web. Instead of using the Net as a direct retail channel, Brabeck plans to harness its potential as a marketing vehicle. Within two years, more than 20% of Nestle's $2.4 billion in annual ad spending will go to the Web. Much of that will fund sites such as VeryBestBaby.com, which offers articles about parenting and baby nutrition, as well as banners advertising Nestle baby formulas. Nestle has a similar site for coffee lovers, which has 250,000 registered members, and a Club Buitoni site--aimed at people who are passionate about Italian food. The sites, Brabeck says, will help Nestle discover more about consumers. "Eventually," he says, "we will incorporate their desires in products."
Together, Nestle's disparate Internet ventures present a mountain of opportunity that will require all the strength and savvy Brabeck can muster. He doesn't underestimate the challenges ahead. But he doesn't seem fazed either, as he looks out his office window at the snow-capped Alpine vista across Lake Geneva. After all, he's used to long and difficult climbs. He scales those peaks every weekend.
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