Nestlé's Recipe for Juggling Volatile Commodity Costs

When then-26-year-old Paul Bulcke moved to Peru in 1980 to help market Maggi bouillon for food giant Nestlé, it wasn't a plum assignment. Hyperinflation was battering the country's economy, forcing the Swiss company to raise prices almost every other day. Some months, inflation reached 1,000 percent. Then the Andean nation in 1985 froze prices at a time when shops were offering holiday discounts. "There's no business school that can prepare you for that," says Bulcke, now 56 and Nestlé's chief executive officer. "What you learn there is how to reconnect the dots very fast."

Bulcke is again using the quick-response skills he honed in Latin America, this time to cope with the volatility in food and raw material costs that's buffeting the world's largest food and beverage company. Few corporations are more exposed to the vicissitudes of fast-changing commodity prices than the maker of everything from Crunch chocolate bars to Nescafé coffee to Purina pet food. Nestlé spends more than $30 billion a year on raw materials, including about 10 percent of the world's coffee crop, 12 million metric tons of milk, and more than 300,000 tons of cocoa. Prices for those ingredients have been anything but stable. "Have you seen the sugar prices? Have you seen grain prices? Have you seen milk prices?" Bulcke asks excitedly. Almost every one of its major commodities has at least doubled within the past four years. Nestlé expects its raw materials bill to rise by as much as $3 billion this year, its biggest increase ever. The International Monetary Fund said this month that it may take years before agricultural output increases enough to put a substantial dent in worldwide food prices.