Winning and Maintaining Leadership

Transcription

1 News Conference Zurich 19 October 2001 Mr. P. Brabeck Winning and Maintaining Leadership Today, we present our sales figures for the first nine months and give you an outlook for the year as whole. In addition, I will mention a number of specific projects and issues. With sales of CHF 62.4 billion we have achieved, at the end of September, a strong real internal growth in a rather difficult year. If our Swiss franc sales growth amounts to "only" 4.9 percent, this is due to the strong revaluation of the Swiss franc and to the impact of our aggressive business portfolio streamlining. Therefore, sales at comparable structure and constant exchange rates have grown by a more than satisfactory 9.7 percent. Let me now broaden the discussion beyond the numbers. I have often stated that both growth and performance of a company in a competitive environment depend on winning and maintaining leadership in the key categories in which it competes. In our case, this is true in most businesses in which we are active, such as bottled water, infant formula, milk powders, chocolate and confectionery and - very clearly - soluble coffee. But leadership does not come for free; to stay in front of the field you need innovation and renovation, an efficient production set-up and proprietary technology, marketing that translates products into strong brands and an efficient and effective sales organization that brings these products to the consumer whenever, wherever and however they want them. Nescafé Let me illustrate our approach by taking Nescafé as an example. Our soluble coffee business amounted to about CHF 9 billion in 2000 with Nescafé being on sale in every country on earth. Nestlé produces in excess of tons of soluble coffee of all types and descriptions in 27 factories in 24 countries. This corresponds to 115 billion cups of Nescafé drunk per year, or if you prefer, to 3650 cups of Nescafé consumed per second! It is no secret that profitability in Nescafé has traditionally been higher than the Group average, reflecting both our leadership position, as well as the progress realized in all areas of the business, from purchasing, through production and marketing. It is no wonder then that the Nescafé brand counts among the world's top global brands and was valued, in 2000, at CHF 28 billion by Interbrand. Branded goods prosper and grow through innovation. If we look at the history of soluble coffee since 1938, when Nestlé invented this revolutionary process, we can see that it is punctuated by technological breakthroughs, accounting for both the quality improvement of the product, as well as the efficiency increase of the production process. Today, I would like to inform you about yet another major innovative step in the soluble coffee area. It is a result of a multimillion research and development effort in the process area, spanning six years. This breakthrough will:

2 1. bring the product to a new quality level in terms of taste and aroma 2. significantly differentiate our products from those of our competitors 3. and will cement our category leadership for the years to come. Indeed, the technology is proprietary to Nestlé, protected by patents and will clearly set a new benchmark that competition will find hard to match. Without going into too many technical details, let me briefly sketch the key elements of the two new technologies that are being introduced. Through the new technology, the gradient extraction process (GES) as we call it internally, we are now able to capture more of the delicate and complex coffee aroma. By re-integrating these flavor elements after concentration, we avoid exposing these aromas to any degrading effect from further thermal treatment. Nescafé now offers a cup of coffee that two thirds of the consumers recognize as clearly superior to competition, as proven by many 60: 40 preference tests. This technology is applied for the sophisticated premium freeze-dried products in Europe and in Japan and it represents a quantum leap in quality. The other process, vacuum extraction (VAX) produces a more complete aroma profile, bringing a roasty note and therefore a richer, fuller-bodied cup. The work was done in our US Research Center in Marysville and in our Product Technology Center in Orbe, and the total investment at the R&D level amounted to more than CHF 50 million. That of course is only the beginning, as by necessity the processes must be rolled out on an industrial scale. At this level, however, applying the GES technology in all Nescafé factories worldwide would be prohibitively expensive, as the investment per production line amounts to CHF 40 million. This is why we have made the decision to select a number of key Nescafé factories which will in turn supply entire regions with the product. Trade liberalization and globalization are the necessary prerequisites for such a strategy and they are the key drivers of much of our industrial restructuring, not the pursuit of some minor cost savings due to lower salaries or less constrictive regulation. Presently, our coffee factories in Hayes in the UK and in Himeji, in Japan, are already fully equipped with the GES technology. Other coffee factories are following suit and within the next three years we expect to market products based on this technology in all countries where there is a significant market for the premium soluble coffee segment. As for Europe, you will be interested to learn that after an in-depth study of costs and productivity, we have decided to expand our facility in Orbe in Switzerland! Productivity, infrastructure, accumulated know-how account for that decision, showing that salary and cost levels by themselves say very little about true comparative advantages. As for the VAX process which requires less capital investment, it is progressively introduced in many Nescafé factories around the world, to further enhance our competitive position. At the same time we are well aware of the necessity to adapt our products to differing regional or national tastes and needs. This seems to contradict our efforts at streamlining production. The solution to this dilemma is the application of modern information technology in the area of production planning and supply chain management.

3 Evidently, a few factories supplying entire regions of the world requires coordination and direction. In other words, those factories working for all of the markets of a given Zone cannot belong to an individual country anymore. Here a degree of centralization in decision-making is necessary in order to ensure a rational use of capital and capacity utilization. As an example, freeze-dried coffee for most of Zone AOA will exclusively come out of Japan and Korea whereas we had to close down coffee-lines in Australia. A similar process is on-going in South America, where we have shut down factories in Argentina, Uruguay, Trinidad and Peru to expand production in Brazil. Overall then, we use our R&D and our production know-how in order to raise the competitive barrier. It is clearly going to be difficult to dislodge us from the number one position in the soluble coffee business. We are actually growing our market share and we have an estimated 59 percent share in soluble retail on a worldwide basis, or, to put it differently, one out of every five cups of coffee sold in retail, whether soluble or roast & ground, is a Nescafé product! Centralization is very much the coming thing in production. I remain adamant, however, that consumers, products and communication will always be local. These are elements that the consumer can taste, see and feel, and here we need to remain as possible to her or to him. And that is not at all in contradiction with the USD 40 million international Nescafé campaign, touching more than 50 countries, that I mentioned to you in the spring of this year. The reason why we could launch it simultaneously and with a common concept in so many countries, is that we are talking here about a very rare phenomenon in food and beverage marketing - namely a very homogeneous target group. This campaign is targeted at youth, in our vocabulary the 16 to 24 year old, who as we know have an extraordinarily uniform musical taste. Our campaign is linked to a sponsorship program in MTV, which is visible in most countries around the earth and which draws large numbers of young viewers. The campaign aims at familiarizing young consumers with the Nescafé brand. We want coffee to remain an important part of beverage consumption in this age group also. Furthermore, tomorrow this group will join the world of adults, of work and family, in other words our key consumer population. Other activities and sponsorships include for instance snow-boarding where we are the sponsor for some of the main events in Switzerland. As you know, we have for several years now moved the brand Nescafé from a black instant cup of coffee to a broader concept, embracing coffee-based beverages of all sorts and descriptions. Consumption need not be limited to the home or the workplace. As in other areas, we are making a determined effort to broaden consumption opportunities for coffee and thus give practical meaning to one of our four pillars of growth, which is getting the product to the consumer whenever, wherever, however. In coffee this means: ready to drink coffee beverages in Japan as well as in other countries in Asia and Europe; 92 coffee shops to which we supply a broad range of Nescafé products, coffee dispensers in filling stations, in university libraries, on the ski slopes, in sports stadiums or on the beach, or yet at large events drawing big crowds.

4 Developing alternative channels to the supermarket is one of the tasks of our Food Service Division which works closely with the companies developing new vending technologies in order to offer products that result in high quality hot or cold beverages. Nestlé does not intend to run a chain of coffee shops on its own. They are all operated by third parties and serve to anchor the idea of Nestlé and its Nescafé brand as the coffee specialist for all occasions amongst younger consumers. Overall, we have good reason to be pleased with the results so far. It is true that R&G coffee consumption tends to be stable or grow very slowly in industrialized countries. But the slack is more than compensated for by strong sales increase in emerging countries, where soluble coffee is making big inroads in what often used to be tea-drinking cultures. It is true that the similarity of preparation between tea and soluble coffee helps; as does the fact that our long presence in these countries gives us a very strong platform to introduce a product that was often known only to a very small segment of the population. Our extremely high market shares in countries such as Japan, China, Mexico, Thailand and the Philippines are good indicators of the growth yet to come: per capita consumption is still modest or almost non-existent as in China. But with rising incomes, that potential will eventually become a reality. And here lies the long-term solution for a persistent and increasingly worrying problem, namely the imbalance between supply and demand on the green coffee market. For over three years now, green coffee prices have trended down. Nestlé is well aware of the often dramatic impact of this on coffee growers in developing countries. As a responsible long-term user of coffee we see this development with great concern. Apart from the socially negative consequences of a purchasing power reduction for the populations concerned, continued low coffee prices will first lead to quality deterioration and at a later stage to supply problems. Low prices result in the grower reducing labor and farm inputs, taking less care when drying and hulling the coffee - a vital element in the preparation of good quality coffee - and if the slump continues, some will simply make the decision to get out of coffee production altogether. We assist coffee growers in a concrete way through our direct procurement activities in countries such as Mexico, the Ivory Coast, Thailand, China, the Philippines and Indonesia. Not only do farmers get a premium price for higher quality beans, but we offer them, free of charge, the services of 30 agricultural advisors who help them with all aspects of coffee production. Clearly, avoiding intermediary coffee traders presents a real economic advantage for these farmers, as does access to free and up-to-date advice. In the longer term, we believe the solution must lie in a better balance between supply and demand. As one of the key users, we can and do act on the demand side, by accelerating coffee consumption around the world. While consumption worldwide is growing at one to two percent, our business shows growth rates that are four or five times higher than that. It is even more significant if you look at the figures over a longer time-span. In 1980, Nestlé purchased 6.5 million 60-kg bags of coffee. By the year 2000, usage within Nestlé has grown to 12.2 million bags, an increase of 88 percent. Moreover, ours is a long-term commitment: Nestlé will always be a buyer of coffee, whether prices are high or low. And this is why the issues of quality and supply are of concern to us. As a matter of fact, the often heard suspicion that low coffee prices are positive for Nestlé does not correspond to reality. True: since we are mainly in the soluble coffee business, where the

5 value added part is much higher than for someone simply producing roast and ground, the impact of raw material prices on our selling price is less dramatic. We are therefore less vulnerable to short-term price fluctuations, but there is no doubt that a longer-term slump, bringing down prices of soluble coffee as well, will negatively impact our revenues. As a Corporation, that in addition is present in many coffeeproducing countries with many other products, we have no interest in seeing coffee prices depressed. I have shown you some of the efforts we are making in creating long-term, profitable shareholder value through growth, which is the cornerstone of our business strategy. As I have often said, we are also well aware of the necessity of optimizing conditions for delivering good financial performance in the short-term and we remain very much aware of our shareholders' interests. Alcon It is in this context that I would like to talk about the possible IPO for a minority stake in Alcon. You have all seen the press release on this matter. You will also appreciate that for regulatory reasons I cannot go beyond the information given there and beyond the elements that were published previously about Alcon. Since 1977, when Nestlé bought what was then a small pharmaceutical company in Forth Worth, Alcon has seen an extraordinary development. Its sales increased from USD 70 million in 1977 to USD 2.6 billion in 2000 and, with the benefit of the steady support by Nestlé, Alcon has become the undisputed leader in ophthalmic products worldwide. Both product range and geographic presence have grown extensively over those 24 years. Today, with a staff of over in more than 170 countries, Alcon is at the forefront of research, development, production and marketing of ophthalmic surgical instruments, prescription drugs, intraocular lenses, refractive surgery lasers and contact lens care solutions. With its strong focus on ophthalmics, its traditional and carefully nurtured relationships with the medical community and its highly experienced and long-tenured management team, Alcon has emerged as the key player in a clearly defined niche in the pharmaceutical field, achieving a very profitable annual compound growth of 10 percent over the past 10 years. I have often said that Alcon's strategic interest for Nestlé does not lie in the product sector or in R&D synergies, but clearly in the financial area. Indeed, by any standard this has been a hugely successful investment for the Group and its strategic dimension remains unchanged. This is why we are not thinking of offering all of Alcon shares. We believe, however, that an IPO for a minority stake will really make that value more evident and create, for potential investors, an attractive investment opportunity in a specialty health care business. An IPO would be beneficial for the financial flexibility of Nestlé as well as Alcon. It will also strengthen the Nestlé's AAA credit rating by highlighting the intrinsic value of the Alcon business. We have clearly stated that for the time being we are just exploring the possibility of an IPO; no decision has been made and a possible IPO would not happen before You have also found in the press release the mention of the corporate venture capital fund of up to CHF 200 million. Nestlé Corporate Venture Capital Fund I thought it useful to give you that information since it illustrates an innovative way to

6 broaden our R&D potential while at the same time benefiting from the good yield which a well-managed fund of this type produces. Rather than developing all the know-how and the skills in the area of food and life sciences, packaging and so on ourselves, we intend to cooperate financially with the highly motivated and creative founders of start-up companies. If the results obtained are of particular relevance to us, we then have the possibility of using them through acquisition, minority participation, licensing or jointventures. The fund will be managed by an independent management team, acting within the guidelines issued by an Investment Committee composed of Nestlé executives. In order to closely align the Fund's operation with Nestlé's strategic business and research interests, we will appoint a Nestlé liaison officer who will be in charge of the flow of information between the Fund managers and the Nestlé business and research units. The management team will also have access to a Scientific Advisory Board. The Fund will further give us the possibility to bring Nestlé Research & Development projects to the market as start-ups, especially those that are of a high-risk nature or that do not fit the Group's strategic priorities. Altogether then, we feel confident this capital venture fund will broaden our R&D potential, accelerate the change process already launched in the research system and offer a good return on the capital invested. Finally, we have good news on the acquisition front. Today, we are signing the agreement for the acquisition of Schöller Holding in Germany. This acquisition will allow us to accelerate our growth in the strategic ice-cream market in Northern and Central Europe. For Nestlé, this is an important step, as we were clearly under-represented in ice-cream in this part of Europe. Let me briefly give you an outlook on the current year and on the year to come. The social, political and economic climate has clearly deteriorated and none of the tragic events that have happened since September 11 are of a nature to instill confidence in the consumer. They came on top of a slow-down in a number of national economies. Governments and international institutions seem to have recognized the danger and are reacting more quickly than in the past. For a Company like ours, the risks of a sharp down-turn are relatively minor. Again, our broad geographic base allows us to balance regional set-backs and the product portfolio covers virtually all consumption models. As an example amongst many, there is a reduction in out-of-home food consumption in the US. But simultaneously, our sales of prepared frozen dishes have gone up significantly, as the atmosphere induces people to again give greater importance to family life and therefore to meals taken at home. This is why I look at the full year 2001 with cautious optimism. I see good reasons why we should be able to reach our ambitious growth target of four percent - or perhaps even outperform it - and we should once more deliver clearly higher sales and profits for the year as a whole, in spite of the very strong Swiss franc. Outlook for 2002 For 2002, it is almost impossible to make a reasoned forecast at this stage. There are very serious political uncertainties, while simultaneously aggressive measures are taken by several governments to get the economies back to growth. At present, no one can tell which of these elements is going to mark the months to come. In this situation, we have decided to maintain a strategy of operational flexibility, but at the same time to maintain our strategic real internal growth objective of four percent for At the beginning of the year we will launch a new efficiency program, Target 2004, which will produce at a

7 minimum savings of CHF 500 million per year. We will also push ahead with the implementation of GLOBE in order to take advantage of the expected benefits as soon as possible. Generally, in periods of uncertainty consumers to turn to companies they feel they can trust. I am confident that our traditional concern for quality and safety in our products will once again constitute a key element of our success in the coming months. Add to this our long-standing experience in steering the Nestlé ship through difficult market conditions which we have mastered in many of the emerging markets, and you will understand that we have a great deal of confidence in the long-term prospects of our Company.