Nestle: Balancing sustainability and growth, aka smart business

With a market capitalisation exceeding $200 bn dollars, and a daily product-use-base of 1 billion people—roughly the current population in India--Nestle is the biggest food company in the world. It reported sales of CHF 41.0 billion, 7.5% organic growth and 4.8% real internal growth for the first half of 2011. Nestle’s trading operating profit for the period stood at a whopping CHF 6.2bn!

In a period characterised by political and economic instability, natural disasters, rising raw material prices and, yes, a strong Swiss franc, Nestle, managed to drive growth not only in emerging markets but also in developed countries, especially in Europe.

Now how many companies can claim such a feat? The company made this happen by leveraging their competitive advantages, investing behind growth drivers and excelling in operational efficiency and effectiveness.

Nestle has been evolving for the past 140 years. (Founded in 1866 by Henri Nestlé in Vevey, Switzerland, the Head Quarters of Nestle still stands tall where it had always been.)

From baby foods to weight management to health care to pet feed, the company is simply iconic. From Cerelac to Kit Kat to Nescafe to Milo, Nestle is part of lifestyle.

The company employs around 280000 people and have factories or operations in almost every country in the world. (Nestlé sales for 2010 were almost CHF 110 bn.)

So with brands exceeding hundred in numbers, what makes Nestle what it is and what keeps Nestle what it has been and what will make Nestle what it wants to be?

One word: sustainability
In the food manufacturing segment one cannot point out a company which follows the principles of sustainability as vigorously as Nestle.

Nestlé’s front-end strategy is simple: In the words of Nestlé CEO, Paul Bulcke, it is well summarised:

Nestle strategy comprises of “…increasing distribution of Popularly Positioned Products (PPPs) and the continued roll-out of premium products in both emerging and developed countries; our focus on adding nutritional value to our products; expanding our reach in the out-of-home market; accelerating innovation and increasing our consumer–facing marketing spend.”

Nestle also “continued to strive for operational excellence from farm to fork, resulting in significant improvements in efficiency and effectiveness.”

One may not notice it initially; Nestle’s continuing efforts for operational excellence from farm to fork defines the company’s back end strategy of sustainability.

Creating Shared Value
“Creating Shared Value is a fundamental part of Nestlé's way of doing business that focuses on specific areas of the Company's core business activities – namely water, nutrition, and rural development – where value can best be created both for society and shareholders.”—says Nestle in its website

The concept originated in Nestle subsequent to a shock treatment which Nestle’s then CEO, Peter Brabeck-Letmathe delivered at World Economic Forum at Davos, five years back:

There he declared that corporate philanthropy is not warranted and corporate houses can add value to the society by default; by just doing their business. He said to Reuters:

"I was just shocked that in a very short period everybody started to say, 'Yes, I agree we have to give back to society,' and I was thinking, 'Well, we're creating value for society,…If you have to give back it means you have taken something that doesn't belong to you."

Subsequently Nestle created Creating Shared Value Advisory Board. According to Nestle, there are about 600,000 poor farmers in the world working for Nestle on an exclusive basis and these farmers earn higher income by providing quality produce to Nestle.

Most of Nestle’s 443 factories are situated in rural areas, adding value to rural economy. The company adds to rural prosperity by providing skill training to farmers, facilitating clean drinking water, providing literacy and numeracy programs.

"It was always difficult to justify the spending of an important amount of money when you had this old concept of corporate social responsibility," Brabeck said to Reuters. "Should the company get into a nonprofit situation and do it as a business purpose? I don't think my shareholders have given me money to do this."

Thus, Nestle is doing business, generating profits, creating value, helping farmers and doing no philanthropy.

Contribution to rural development
“To help farmers to increase output, improve product quality and reduce their environmental impacts, Nestlé has established world-class plant research facilities in France and Côte d’Ivoire, where higher yielding, disease-resistant varieties are being developed. The company also runs field trials and employs a large number of agronomists who provide training and consultation on farming practices.” said Nestle’s 2010 report on its contributions to rural development.

The company sometimes acts as a credit provider to rural households and has also helped farmers to produce and sell higher-value products than they previously grew.

“In Yunnan Province, China, for example, Nestlé introduced the opportunity for farmers to produce Coffee in an area with no previous history of coffee-growing.” The report adds. There, Nestlé has been encouraging and supporting coffee cultivation for almost twenty years, and nearly 4,100 farmers have received direct training on planting, quality control and processing techniques.

Nestle also runs processing and packaging facilities close to the point of raw material supply, improving food safety and reducing spoilage.

“These plants add to the local tax base, diversify the local economy and create non-farm employment opportunities close to farm households, an essential step towards eliminating rural poverty. Individuals’ earning potential increases, and the area becomes more attractive to other employers, suppliers and service providers.” the report adds.

“When the majority of the world’s poor live in rural areas and most are farmers, focusing more attention on agricultural development and rural poverty reduction will both ensure a sustainable supply of raw materials for Nestlé’s factories, and also accelerate poverty reduction and growth in demand for food products.”, the report says.

In India, Nestlé has invested close to CHF 11 mn in storage tanks, chilling centres, veterinary aid and other dairy development projects for the farmers in Moga. There, Nestle’s milk factory procures over 887 tons of milk per day from over 110 000 farmers, and works with them to increase their yields through improved farming methods, better irrigation, and scientific crop management practices.

Nestlé has been present in China for over twenty years and today operates 23 factories, two R&D Centres and employs 14,000 people. Nestlé in the China region achieved sales of CHF 2.8 billion in 2010. Nestlé buys fresh milk from thousands of farmers across the country, offering them assistance to increase the quality, quantity and efficiency of their production.

Smart business
By adopting the various sustainability measures Nestle also plays a smart business game.

Setting up factories in rural areas make good business sense as perishables like milk can be gathered at the point of origin to be processed, incurring nil logistical costs.

Buying raw materials in bulk and from rural areas is a win-win scenario for Nestle and farmers as middle-men get eliminated.

By empowering the rural households through many measures and by providing them credit, local support can be elicited in place of local dissent and protests.

Also, the company gets the lethal edge by setting its own standards and can even eliminate competition by raising the bar.

“In many countries, Nestlé was the first company to set up a wastewater treatment facility. While these investments have added to production costs in the short term, they have raised expectations and led to stricter regulations over time, thus leveling the playing field and giving Nestlé a competitive advantage.” The Nestle report says.

You can be good, and you can admit the same and you can still grow and needs to carry out no philanthropy.

As published in: http://www.commodityonline.com/news/Nestle-Balancing-sustainability-and-growth-aka-smart-business-41944-2-1.html