Deconstructing… Nestle

Nestle SA (based in Switzerland) this week is expected to name CFO Paul Polman as its new CEO, according to numerous media reports. [Update: Oops. They picked Paul Bulcke instead. The challenges below remain relevant.] So what’s the situation that the new CEO faces? Here are some clues, gleaned from various articles in The Wall Street Journal:

Problem: Nestle is the world’s biggest food company (2006 sales of $78.6 billion) but lags the industry in profit margin (13.5% on food).

Problem: An acquisition binge — from Dreyer’s ice cream and Ralston pet food to Jenny Craig weight-loss programs and Gerber baby food — has produced a company so big that it’s unwieldy and sluggish. Weak divisions are being put on a “value destroyers” list (ouch!) that’s reviewed by the executive committee at monthly meetings.

Problem: Too many unprofitable brand variations. Current CEO Peter Brabeck discovered last year that the food maker was churning out 130,000 variations of its brands, and 30% weren’t making money. So he pushed to jettison weaker brands.

Problem: Organizational complexity; the org chart is a thicket of arrows, boxes and subsidiaries, which are being pruned.

Future decision: Whether to buy the rest of consumer-products titan L’Oreal SA (Nestle already owns 29%).

Innovation: Brabeck appointed a new head of innovation (Werner Bauer) and told him to be pickier about which ideas to pursue. The CEO now tracks Nestle’s 10 most promising innovations at monthly meetings. Bauer has slashed the number of new projects by about half.

Technology: CEO Brabeck hopes to finish one of his biggest projects: implementation of a modern ERP system (from SAP AG). The project started in 2002.

Polman’s challenge: Having “already gone after the low-hanging fruit, he could have a tough time squeezing more growth out of the huge company.”

“After Buying Binge, Nestle Goes on a Diet,” The Wall Street Journal (23 July 2007)“Nestle’s Polman, A P&G Veteran, Likely Next CEO,” The Wall Street Journal (17 September 2007)

2 Replies to “Deconstructing… Nestle”

  1. Nestlé’s long-term goal is to move away from being the world’s largest food and beverage company to the largest health and wellness company. This is part of the reason why Nestlé acquired Jenny Craig. Like you noted, Mitch, I believe that Polman does have a strong set of challenges in front of him, but most of these aren’t unique to Nestlé; they are common to many large multinationals, albeit with better margins. =) Having noted Nestlé’s financial sustainability, another challenge involves addressing environmental sustainability. It’s a matter of time before the debacle surrounding bottled water sourced from natural reservoirs reaches its boiling point and before sustainable farming becomes more the norm than the exception.

    Regarding the acquisition / divestiture front, the company’s stake in Alcon and L’Oréal offers the financial firepower necessary for another strategic acquisition. However, the question remains whether Nestlé will choose instead to hold on to these two firms or cash them in for a crack at more organic-focused brands and businesses.

    Yes, Nestlé appears quite average in its messy proactive / reactive approach to managing its businesses, but I’m betting that Polman can do as good a job as Brabeck, if not better.

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