McKinsey: How did Nestlé begin?

Peter Brabeck-Letmathe: A hundred and thirty years ago, infant mortality was high in Switzerland—higher than in most emerging countries today. Henri Nestlé was a pharmacist who was worried about children dying. He developed an infant cereal to help feed them. This was the first Nestlé product.

Henri Nestlé had two big visions. First, he immediately went international: the product was in five European countries four months after launch. Second, he wanted his own brand. Store brands—private labels—already existed, but he was one of the first to create a manufacturer's brand.

He also established a strong identity for his company through the nest image that Nestlé still uses today. It happens that Nestlé in Germany means "little nest," symbolizing all the good values of nurturing such as family, warmth, and caring. When distributors asked him why he did not put the Swiss flag on his product, he is said to have replied, "Anyone can use the Swiss flag, but only I can use my coat of arms. It will be my seal of quality." His house and first factories were in Vevey, Nestlé's headquarters. We also have another head office in Cham, near Zurich, which is where the other part of the company, a sweetened condensed milk factory, began.

Was it condensed milk that carried you around the world?

Milk at the beginning, then chocolate, then Nescafé. From the outset, we were an outward-looking company. When you make less than 2 percent of your turnover at home, you don't concentrate too much on your domestic market. Our Swiss operating company is only 2 or 3 kilometers from worldwide headquarters, but we visit them as frequently as that of any other market.

Unlike US companies, which try to transform local hires into American businessmen, we are not trying to export a lifestyle. We recognize we are foreigners; we don't try to disguise the fact that we are a multinational company based in Switzerland.

Many countries are more comfortable with the fact that we are Swiss than if we were from the United States. Coming from Switzerland gives us a definite advantage as we are considered politically more neutral. It would be foolish to pretend to be a Chilean company, or a Chinese company, just because we have a very strong local presence in those markets.

Before the arrival of our current chairman, Helmut Maucher, however, our companies looked very local. They were called Indulac or Chiprodal, for example—names connected with the local environment. In many markets, Nestlé as a company name didn't exist.

Then we said, this is absurd. If governments or activists want to attack one of our companies, they only have to look at our annual report to know its true identity. What's wrong with presenting ourselves as we are? We should be proud we are Nestlé, not hide away making believe that we don't want to be a multinational. So we changed our policy and gave every company in the group our own name.

Another distinctive aspect of your culture seems to be that you take a long view. You were one of the few that did not bail out of India, for instance.

We didn't bail out of India in the 1970s; we stayed in Chile under Allende. We don't normally quit just because there is a change in the political situation. When you are forever looking out for your short-term interests, you are not a reliable partner. Look at the way American money flowed in and out of Mexico if you want to see what devastating effects short-term speculative investment can have on a country. It is bad enough for the investor who loses a lot of money; for the local people, it is even worse.

But the company that stays, and carries on investing when things look bleak, and builds up a business, and creates jobs—its relationship with the country is quite different from that of a company that is forever coming and going.

Do you also take a long view financially?

Clearly, we are not driven by quarterly profits. Indeed, our current chairman, Mr Maucher, has given a clear message: we want to be sure our people think long term in order to keep Nestlé the world's leading food company. Short-term performance is important, but we have to balance it against the long-term development of the company.

If we wanted to, we could improve our short-term performance overnight. We spend more on food technology and research than anyone else—about SFr700 million per year. We also put a lot of money into marketing activities to build up our brands, and we invest heavily in new products.

Our first priority is to ensure enough growth to double our turnover every ten years, currency shifts aside. Of course, we have to watch our financial performance too, and if we can improve it without jeopardizing growth, fine. But we won't fix financial performance first and then adjust everything else. We have made it clear that we don't intend to be driven by short-term financial pressure, but that we will equilibrate it with our long-term goals.

We regard our shareholders as investors for the long term. We don't want to become just an item in a financial investor's speculative basket of holdings. Some people buy and sell our shares and that's legitimate, but their speculative behavior is not necessarily in our interest. Shareholder value, economic value analysis, economic profit, and so on are of course all well and good, as long as these are combined with the long-term view.

Obviously there are many pieces to Nestlé. Do you see it as a portfolio and trim it every now and then if it isn't performing in line with your plans?

We never talk about a portfolio. Portfolio management is alien to our culture. Instead, we look at the businesses themselves, which is why we have set up our strategic business units—confectionery and ice-cream, coffee and beverages, pet food, milk and nutrition, and so on. Every one of our products has a home in one of these units. We take each business and ask how much growth potential is still there; we look at the shareholder value it creates. We think along the lines of, "If this business were an independent company, what would we do with it?" Recently, we decided that our investment in the wine business was not strategic. Though our financial performance was good, we had no core competence. For us, core competence means knowing more about some areas of a business than anyone else in the world. We make this judgment by comparing ourselves with the market leader. To be a major player in pet food, for instance—even to be number 2 after Mars—we needed core competence.

We reckon we have to spend SFr500 million to 1 billion on R&D to build up core competence in any major activity

We reckon we have to spend between SFr500 million and SFr1 billion on research and development to build up core competence in any major activity over time. If you want to enter a new business, you had better make up your mind whether you want to spend this kind of money or not. If you don't, forget it.

Do you still have any businesses in which you have not yet achieved core competence?

In principle, I can say that we now have a well balanced and focused group of businesses, which covers the main areas of the food and drink business in which we are interested. There are a few minor sectors where we still can improve and increase our core competences.

How do you make basic decisions? Are they part of corporate strategic planning?

We don't do corporate-level strategic planning in a separate corporate planning department. Instead, we use a combination of bottom-up and top-down approaches in markets, regions, and strategic product groups.

We meet once a year at corporate level to discuss the future strategic outline of the group. Dealing with the figures doesn't take more than five minutes; we know they are wrong. Mainly, we talk about the way our different top managers see the future in their respective area. How do you view developments in Asia? What are the Europeans saying? What is your political environment? What product areas are on the priority list? It's all very informal.

Then my colleagues and I stand up and say, "The strategy we agreed in the food businesses is fine, so we can forget about them." Three or four years ago, I explained that I felt fine with the main strategies in my area, but I wanted to talk about ice-cream. What opportunities were there? Could we use our core competences from milk and other areas?

A lot of questions arose. The Europeans pointed out that Unilever was selling 880 million liters; ourselves, 80 million. The Latin Americans declared, "In our market, we are the leaders. Unilever isn't here yet." The Asians said they had never thought about it. So we started a discussion.

Eventually, we agreed to explore the idea in more detail. We asked the research manager if we could make a KitKat ice-cream. A lot of technology was involved. How much would it cost? As a team, we decided what direction to follow. Then it was up to the strategic business manager to go to each zone and say, "Now we have decided in principle to go forward, let's sit down together and establish a plan for your area." That January, we told the markets to consider how we might get into the ice-cream business. They had to come back to us in the summer and tell us what the options were locally. If they needed help, the SBU head would visit them. But we had to have some response, whether it was yes, no, it's a crazy idea, or it's not a priority.

Once we got this bottom-up feedback, the SBU had to consolidate all the discussions it had had with the zones and markets, and produce a plan for our November general meeting. Then we were able to say, "Last year we decided to investigate the prospects for ice-cream. What we now have is three or four markets here, two there, an option here," and so on. And that's how we started to move.

We respond to what the local markets say, and they may take another look and change their mind. But if they don't want to do something, we don't force them. We might send a couple of people to offer encouragement, but that's as far as it goes, except in some few cases where general management feels that these issues are not negotiable.

We had to persuade the United States to get more involved in ice-cream; they classed it as a dairy product, whereas we see it more as a frozen confectionery. They produced machines and cones, and licensed the brands to dairies; we wanted to move over to self-manufacture and direct store delivery. It was a long learning process on both sides, but finally we convinced them. Today, we are a strong number 2 in the profitable impulse ice segment, have a 17 percent stake in Dreyer, the company with the best DSD system, and the machinery and cone business has been sold.

Who absorbs the necessary marketing and R&D investments for a corporate strategic priority like ice-cream?

The R&D investments are carried by the central organization, whereas the marketing, production, and distribution investment is the responsibility of the local operating company.

How long is your investment horizon?

Again we are looking for a good match between long-term growth opportunity and short-term profit performance. With ice-cream, we are up to 580 million liters after one and a half years, mostly from acquisition, partly from internal growth. We are now reaching critical mass, which has to come fairly quickly if we are to build core competence. Once you have that, you can start to look at your financial performance.

If a business performs poorly for a long period, it usually means that core competence is lacking and that the product might have downgraded to a commodity item where a strong number 1 has an overwhelming market share with basically no room for a second manufacturer brand. Take baked beans in the United Kingdom. Crosse & Blackwell is a beautiful brand—huge, with a whole range of products. But we did not get the performance in the canned food area. We tried repositioning, new technology, research; no improvement.

When we analyzed the problem, we realized that the specific line of products didn't offer the consumer any understandable advantage and that somebody else had a real market dominance. So we closed it. There was nothing else we could do; the value-adding core competence wasn't there.

Consider another business, ravioli. You might think, baked beans, canned ravioli, what's the difference? The difference is that we have core competence in the dough that goes into ravioli. This makes us by far the leaders in Europe, which gives us the volume and scale economies we need. And we get this critical mass through not just canned pasta, but refrigerated pasta and the dry pasta we acquired with Buitoni. Add to this the creative positioning of the Buitoni brand "Share the Italian Love of Food" in innovative promotions and add more specialized types of products and you can understand the economic success of Buitoni canned ravioli.

We have an entire research center devoted to pasta. When you have such a big presence, you learn about wheat—and so we get competitive advantage

We have an entire research center devoted to pasta. When you have such a big presence, you learn about wheat, how it behaves under different conditions, what you can do with it. And so we get our competitive advantage and consequently good financial results.

Is research and development a corporate function?

The R&D function is one of the few things we haven't decentralized, although over 18 R&D centers are physically located all over the world. All our research centers, wherever they are, are financed and controlled by headquarters and receive the necessary input mainly from the strategic business units, based upon requests from the markets.

The SBUs do two things. First, they look at an R&D proposal and make sure it fits within our long-term strategic framework, so that we do not spend corporate time on something we have not agreed. Second, they decide, in conjunction with R&D management, which research center will work on the project. A proposal from the American market might be researched in Singapore; one from Japan, in the United States.

All the research centers have 15 percent of their time free to pursue anything they like, whether it is working with local markets or doing their own creative thinking. We don't want them to do only what head office tells them, but also encourage their own initiatives.

At country level, we have smaller applications groups that adapt our products. They might change the flavor of macaroni cheese to suit local tastes, or put in more or less sauce. All this is done locally.

What other functions are driven from the center?

Financial aspects, such as decisions about how a company is financed; branding; quality management; some human resource policies; and certain core competences which are made available to our markets.

How big is your head office staff and what is the role of the SBUs?

We have 1,600 people here in Vevey. The SBUs, as part of them, serve two functions: helping to design the future of the business, and providing support to the operating companies. They propose the long-term strategies for their corresponding businesses and advise local operating companies on all issues like process performance, new products, distribution and logistics issues. To be an SBU manager, you should normally have been a market head, or have run a major division in one of our bigger markets.

How important is international experience?

In general, it is difficult to find somebody in a top management position at HQ or local level, without substantial experience outside their home country

In general, it is difficult to find somebody in a top management position at head office or local level without substantial experience outside their home country. I started in Austria, went to Spain, Chile, Switzerland, back to Chile, Switzerland again, then Ecuador, Venezuela, and now I am here. I realize it is hard to uproot your family and move every three or four years, but we get at least three or four people a day asking if they can go and work for us somewhere else.

You mentioned that branding is one of your centralized functions. How do you manage so many brands?

The first principle is to consolidate all our resources behind the key corporate strategic brands. Whatever the product brand or range brand, it has to be supported by one of our corporate brands. Let me give you an example. Rowntree had a "one product, one brand" policy: KitKat, Smarties, Rolo, After Eight. No mention of Rowntree. When we acquired the company, we applied our system, and KitKat became Nestlé KitKat.

We have ten worldwide corporate strategic brands, including Nestlé, Nescafé, Maggi, Friskies, Buitoni, and Carnation. Additionally, we have 45 different strategic worldwide product brands, among them KitKat, Coffee-mate, and Crunch. Then there are 25 regional corporate strategic brands, such as Perugina, Findus, and Stouffer's, together with about a hundred regional product brands—Eskimo, Taster's Choice, Go-Cat, and so on.

The worldwide brands are under the responsibility of SBUs and general management, which establish a framework for each one in the form of a planning policy document, a minimum labeling standard, a brand positioning statement and communications platform, and a packaging handbook. The regional brands are the responsibility of the SBUs and regional management. They are international, but not worldwide.

We also have some 700 local strategic brands that are important to particular countries, like Brigadeiro in Brazil. These are managed by the local markets and only monitored by the SBUs. We want to know their positioning and minimum labeling standard in order to protect them; then we can forget about them.

That leaves us with another appreciable amount of local brands in which the center does not intervene.

How do your people in the markets decide which corporate brand to attach to their local brand?

Each corporate brand has its own "territory" into which the local brand will fall.

How does your branding strategy relate to your corporate structure?

As I said earlier, each strategic brand is monitored by one of the SBUs. Polo is under the chocolate and confectionery SBU, for instance. It's all very simple. We had to find a way of having fully decentralized management that allowed us to manage corporate assets without intervening from day to day. That's the challenge—plus the complexity of Nestlé, which is unique among food companies.

Are you gradually consolidating your brands, moving them toward regional and ultimately worldwide strategic brands?

Yes, but some are going the opposite way. Findus was a worldwide strategic brand for frozen food for thirty years. It has just been redefined as a regional strategic brand. The market had moved so far that in the emerging markets, and where Findus had no presence, we could launch our frozen food products under the prevailing culinary brand!

If one day we take frozen food into Eastern Europe, I'm sure we will use Maggi, not Findus. In Germany, Maggi is a powerhouse. When we launched under Maggi, we got a unanimous reaction from the trade that finally we understood branding.

Chambourcy is another example. It covers all of our white refrigerated products in Europe—more than a billion dollars. From an image point of view, it is perhaps the most advanced, nutritional, and "cool" of all our brands. But it did nothing to build the overall Nestlé identity.

So we are dropping the Chambourcy corporate strategic brand altogether and using Nestlé instead.

Does this mean you want the company name to play a bigger role in final consumer choices in the future?

Nestlé is a brand in its own right. For consumers, relevance of Nestlé as a company comes first of all through contact with products that are branded Nestlé. If we want to be perceived as the world's leading food company, we have to offer consumers an increasing amount of products that they can identify as Nestlé's.

The choice of products that we will club under the Nestlé brand depends on the way these products enhance the Nestlé image—not on what Nestlé brings to their products. Therefore each of these products has to have deep roots. Take infant cereals, for example. This is the only product that has an automatic right to the Nestlé brand because it is with infant cereals that Nestlé began. Next come baby food and infant formula, powdered, condensed, and refrigerated milk products, chocolate, confectionery, breakfast cereals, and ice-cream. All are basic Nestlé territory, positioned under nourishment and enjoyment. They have earned the Nestlé brand too.

Today, about 40 percent of total turnover is from products covered by the Nestlé corporate brand, which makes our company very relevant to consumers. Every day, they are in contact with a Nestlé-branded product.

How do you deal with products that do not carry the Nestlé brand?

Where we have a relevant core competence, as we do with Maggi and Buitoni, it is better to keep a separate brand identity

For products that don't carry the Nestlé brand, we have been creating a Nestlé Seal of Guarantee to put on the back, and linked to Nestlé by a short note like: "All Maggi products benefit from Nestlé's experience in producing quality foods all over the world." But we have to strike a balance between making purchasers aware of Nestlé and preserving the distinct personalities of our other strategic corporate brands. Where we have a relevant core competence combined with a specific brand territory, as we do with Maggi and Buitoni for example, it is better to keep a separate brand identity.

We do not combine Nestlé/Buitoni, because Buitoni is more than a product: it represents the authentic Italian lifestyle. Nor do we have Nestlé/ Maggi. Maggi offers local recipes to suit local tastes, even though it belongs to a multinational. A Maggi bouillon in China tastes different from one in Chile.

There are a few exceptions to our brand strategy, like pet food. For many reasons, including cultural aspects, we are not using our Nestlé Seal of Guarantee on products destined for animal consumption.

After a long discussion, we also decided to drop the symbol from mineral water. We felt that people buying water are looking for the purity of the source, whereas our seal is that of a manufacturer. So we set up a special institute, Perrier-Vittel, which puts its own guarantee on mineral water.

What are the implications for corporate responsibility? What if the purity problem with Perrier had occurred under your ownership?

Either you are responsible, or you are not responsible. You belong to a family, or you don't. If your son is successful, and you go around proudly saying, "This is my son," you can't turn round and say, "Who is this? I have never seen him before," when he does something bad. That's no way to behave.

The responsibility behind what we do is huge, and we accept it.

You have established consistent frameworks for your major brands, but how do you get things executed in so vast an organization?

Let me give you an example. When I took this job, we all agreed that we should further intensify the visibility of the Nestlé brand.

We could have run a campaign on CNN, but we didn't think that was the answer. We formulated a comprehensive brand positioning and communication architecture under the guidance of Mr Maucher.

Next came the worldwide market heads meeting, which happens every second year. It brings together all the top managers from over 70 markets and head office. We gave a presentation, and afterward the managers had an hour to work through the ideas before they asked questions. When the meeting finished, they took a set of documents with them.

Eventually, the new branding approach became part of our training system. Whenever I travel, I get all the local marketing people together and go through the charts. In key markets, there is also a communications director who acts as my local counterpart, making sure that change is implemented. In the United States, for example, the communications director looked at our plans, asked how they applied to his market, put in a brand equity system, and trained 470 people in six weeks. And so it goes on.

In addition, we issue positioning statements to the whole group. They describe our long-term vision of a brand's personality: how Smarties should work, why we have Nestlé on top, what the product's core values are, what Smarties means to the consumer. We also include an ethical guide to make sure markets don't take creative excellence into areas which don't fit the Nestlé corporate image.

We have produced positioning documents for our worldwide brands and the key regional ones—about a hundred in all. They are compiled by the SBUs in conjunction with marketing and communications staff from the markets, and approved by general management. That's how we manage our brands across the world.

What happens if you find local teams doing things that are inconsistent with the positioning documents?

We have to correct them. In this sense, the SBUs have a direct responsibility over the operational company.

We also have labeling standards to protect our brands. There is no discussion; the local markets must apply the minimum standard, and that's that.

But brands do vary in the amount of freedom they have. Maggi has a lot. How can the center say how Maggi's "borscht soup" should be presented in Russia? We only need to know that in all communications related to Maggi, we have a red bubble on a yellow background, and "You and Maggi ... make the best meals," or whatever. I prefer all Maggi communications begin "You and Maggi ... " as it positions the brand as a friend of the person cooking, but the rest is up to the market.

KitKat is another matter. It is basically the same product in the same packaging all over the world, so we can't give local markets so much freedom.

Does this apply to advertising too? Are you trying to encourage more multi-country campaigns for products like KitKat?

Not at all. Most of our products are food products, and food is extremely local. If you try to be too global, you lose efficiency in communication.

Some time ago, Chile produced an outstanding Nescafé commercial. In a little house by a lake, a man gets up early and tries to wake his son (who prefers to stay in bed) to go fishing. We see the disappointed father sitting in the morning mist at the lake. Then the son reconsiders his decision, gets up and makes a cup of coffee and brings it to his father for a moment of spontaneous renewal. Their whole relationship is built up through coffee.

Now, the same commercial, projected in a different market can bring completely different connotations. In Paris, you might even provoke ecological feelings that look almost like an environmental statement. The same images are perceived totally differently.

Taking a spot that is successful in one place and playing it in another just doesn't work. I am struggling to prevent us oversimplifying our world in communications.

How do you manage your advertising?

We used to use over a hundred different agencies; then we decided we needed partners who truly understood us

We used to use over a hundred different agencies; then we decided that if we wanted to address branding and communications globally, we needed partners who truly understood us. There's a strong link between your culture and the way you communicate, and you have to know someone very well to have them communicate on your behalf. So we eventually chose five advertising agencies—McCann Erickson, Lintas, Ogilvy & Mather, JWT, and Publicis/FCB—and came to a worldwide alignment to which we recently added the Japanese agency Dentsu for our Asian markets.

I look for communications partners, not advertising agencies.

Do you mind if an agency has a competitive relationship?

No; we are pretty relaxed about it. Anyway, agencies change personnel all the time. An individual is here one week, somewhere else the next. What can you do about confidentiality then? But if an agency feels like a real partner, it will protect us internally as much as possible. It's not something I worry about too much, but I still remind them constantly of their confidentiality agreement.

To us, the important thing is to have dedicated teams. McCann, for instance, has 10 people working only with Nestlé. I see them as an extended arm of my communications team. They visit every six weeks to tell us what they are doing around the world. And they brief their people internally just as we brief ours so that we get the same understanding on both sides.

Our five communications partners are aligned with our categories and strategic brands: for instance, Publicis is aligned with Perrier, JWT and Lintas with chocolates, and O&M with Milo. In some categories, we keep things away from an agency because it is engaged with a competitor. Then there are open categories where local markets can decide who they want to work with. Charts show the alignment policy for each agency so that country managers can see immediately how much scope they have in choosing their communications partners.

Normally, we try to have at least two partners aligned for each category. In coffee, for instance, McCann and Publicis sat down with the SBU and selected markets to establish the positioning and labeling documents for the brands. This made them part of the process and helped them understand what every word in the documents means.

Your communications partners are competitors in their own right. Doesn't that cause problems with alignment?

Not really. As long as their billings go up every year, they are happy. They do good business, with potential for growth. We pay them well, but we ask a lot of them. I want Nestlé to be their most favored customer so that they put all their best people to our work.

One area that is becoming important is combining brands. We did a Nestlé breakfast promotion with Libby juice, Nescafé coffee, breakfast cereals, Herta ham, Gloria condensed milk, and so on. One agency is starting to specialize in these joint promotions and build up core competence. Similarly, we have a strategic alliance with Disney that gives us exclusivity for all foods in Europe and the Middle East, and for some categories in the United States. When Pocahontas was launched, we supported it with a range of products and promotional activities for the benefit of both parties.

Before, with our business split into brands on the one hand and operational divisions on the other, we could never summon the full power of Nestlé against the might of the retailer. What we are doing now by bundling products and brands, especially in promotions, under one thematic roof is something very few, if anybody else, can match.

In many ways, the biggest challenge for marketing today is presented by the developed markets. How are you addressing this challenge?

I think the difference between emerging and developed market is, among others, a psychological one. In the emerging markets, the consumer wants something; in the developed markets, it is as if he or she doesn't want anything. It has almost become fashionable to have less and care more, say, about ecology. In this environment, our old axiom of being a customer-driven company is not sufficient.

What kinds of enticements are needed to stimulate consumer demand?

Convenience, taste, and health are driving forces; so is value. I think people are willing to spend more if you can show them perceptible differences. In the past, innovations in the food industry weren't always understandable to the consumer, and sometimes a premium price was much too high for the actual difference involved. Another problem was that the industry concentrated on final products, so innovations were relatively easy to imitate; anyone can make frozen ready-to-eat dishes.

What we have to do is refocus on R&D to produce real technological innovation. We must develop products with characteristics I can patent and protect, and benefits that will genuinely interest the consumer. One example is LC1, a special dairy food containing a bacillus that reinforces the immune system. Another product unique to Nestlé is hyperallergenic infant formula. The almost SFr700 million we now spend on R&D is aimed at developing more patentable and highly differentiable base technologies that are hard to imitate.

How do you view products like Olestra?

They worry me. If manufacturers are starting to make food artificial so that consumers can digest it without getting anything out of it, we are back in Roman times, when people got rid of what they had just eaten.

It's not what food should be about. I believe that food intake is the substance of life—not just physically, but emotionally. There is no important event in our lives that is not connected with food. Whether it is Christmas, or a birthday, or Ramadan, food is at the center of social interactions.

Olestra is a fat substitute that transforms food into a physiologically unnecessary thing. It allows you to consume something that you know you shouldn't. Instead of deciding, "I'm going to have a more balanced diet with less fat," you start to say, "I'm going to eat more and more of this, and it's not going to harm me." Would you use Olestra as an ingredient in your products?

I don't know yet. It's under discussion but I have some problems with it. If we put it in chocolate, for instance, we would have to decide how to fortify the product to compensate for the minerals that Olestra supposedly takes out of the body.

There are two different ways of looking at this. One is, "What's the problem? Too much fat? Fine, we'll develop a fat-free fat." The other is to ask, "What can nutrition do for you?" I think it can do a lot. Nutrition is not just a load of chemicals. If I take wheatcorn and analyze it, and then put it through a mill and analyze the flour again, the results are the same in chemical terms. But if I put a little of each in the soil, what do I get? From the wheatcorn, a plant. From the flour, nothing.

Food is more than the sum of its chemical parts. You can substitute the chemicals, but you can't replace the life that's in the food

Food is more than the sum of its chemical parts. You can substitute the chemicals, but you can't replace the life that's in the food.

How far do you see Nestlé being able to use nontraditional channels to mitigate pressure from the trade?

Most people agree that the mass consumer is slowly dying out. Trade concentration and the mass media are both about the mass consumer. But the more the consumer is segmented, the more you have segmented distribution channels.

Your approach to these segmented distribution channels depends on your product portfolio. The strongest retailers are only a small part of our total business in some areas. With ice-cream, most of our profits come from street sales, swimming pools, and suchlike, where we control and stock our own freezers. It's much the same with confectionery.

Traditionally, our products were grocery items that needed preparation at home: milk powder, condensed milk, Nescafé, frozen food. But more and more consumption is taking place outside the home. So our challenge now is to convert the home preparation items into products that are available on the move. Ready-to-drink beverages are an example; we are working with Coca-Cola to distribute our canned Nescafé and Nestea.

"Nobody goes more than a hundred steps for a chocolate bar or an ice-cream." You are there, or your competitor is there, or nobody buys anything

Recently, we introduced global availability as a measure into our strategic thinking. We want to make Nestlé products available to people whenever and wherever they want them. There's a saying in the chocolate SBU: "Nobody goes more than a hundred steps for a chocolate bar or an ice-cream." You are there, or your competitor is there, or nobody buys anything.

What role does the retailer play?

The retailers, in the widest sense, are our most important partners to bring the products to the consumers and this function is and will be of utmost importance.

However, today we have retail channels developing for core grocery products that are not dependent exclusively on traditional supermarket channels. Take home delivery, for example. In Switzerland, many frozen foods and beverages are home delivered. Germany too has a fantastic system—38 percent of all ice-cream there is home delivered.

Nowadays, you need an investment of up to $50 to $60 million to build a new supermarket in the UK. If you are a retailer, you have got to wonder how you can recoup your costs from this supermarket when the trend is toward alternate channels like home delivery, gas stations, and even virtual shopping.

Instead of focusing their efforts in developing some of these channels and increased services for consumers, some retailers still focus only on price. Now, there are retailers and there are retailers. Some create value, but there are also those that destroy it. They take the best brands—brands that represent many years of investment—and use them as loss-making items in their own repertoire. For a brand, nothing is worse than being a loss leader. As a manufacturer, we spend hundreds of millions on brand equity and advertising; if someone comes along and tells consumers they can have our product at 60 percent off, all that investment goes down the drain.