Nestle’s Growth Strategy
Nestle is one of the oldest of all multinational businesses. The company was founded in
Switzerland in 1866 by Heinrich Nestle, who established Nestle to distribute “milk food,” a type
of infant food he had invented that was made from powdered milk, baked food, and sugar.
From its very early days, the company looked to other countries for growth opportunities,
establishing its first foreign offices in London in 1868. In 1905, the company merged with the
Anglo-Swiss Condensed Milk, thereby broadening the company’s product line to include both
condensed milk and infant formulas.
Forced by Switzer land’s small size to look outside’ its borders for growth opportunities,
Nestle established condensed milk and infant food processing plants in the United States and
Britain in the late 19th century and in Australia, South America, Africa, and Asia in the first
three decades of the 20th century. In 1929, Nestle moved into the chocolate business when it
acquired a Swiss chocolate maker. This was fol lowed in 1938 by the development of Nestle’s
most rev olutionary product, Nescafe, the world’s first soluble coffee drink. After World War 11,
Nestle continued to expand into other areas of the food business, primarily through a series of
acquisitions that included Maggi (1947), Cross & Blackwell (1960), Findus (1962), Libby’s (1970),
Stouffer’s (1973), Carnation (1985), Rowntree (1988), and Perrier (1992). By the late 1990s,
Nestle had 500 factories in 76 countries and sold its products in a staggering 193 nations-almost
every country in the world.
In 1998, the company generated sales of close to SWF 72 billion ($51 billion), only 1
percent of which occurred in its home country. Similarly, only 3 percent of its- 210,000
employees were located in Switzerland. Nestle was the world’s biggest maker of infant formula,
powdered milk, chocolates, instant coffee, soups, and mineral waters. It was number two in ice
cream, breakfast cereals, and pet food. Roughly 38 percent of its food sales were made in
Europe, 32 percent in the Americas, and 20 percent in Africa and Asia.
Management Structure
Nestle is a decentralized organization. Responsibility for operating decisions is pushed
down to local units, which typically enjoy a high degree of autonomy with regard to decisions
involving pricing, distribution, marketing, human resources, and so on. At the same time, the
company is organized into seven worldwide strategic business units (SBUs) that have
responsibility for high-level strategic decisions and business development. For example, a
strategic business unit focuses on coffee and beverages.
Another one focuses on confectionery and ice cream. These SBUs engage in overall
strategy development, including acquisitions and market entry strategy. In recent years, two-
thirds of Nestle’s growth has come from acquisitions, so this is a critical function. Running in
parallel to this structure is a regional organization that divides the world into five major
geographical zones, such as Europe, North America and Asia. The regional organizations assist
in the overall strategy development process and are responsible for developing regional
strategies (an example would be Nestle’s strategy in the Middle East, which was discussed
earlier). Neither the SBU nor regional managers, however, get involved in local operating or
strategic decisions on anything other than an exceptional basis.
Although Nestle makes intensive use of local managers to knit its diverse worldwide
operations together, the company relies on its “expatriate army.” This consists of about 700
managers who spend the bulk of their careers on foreign assignments, moving from one
country to the next. Selected primarily on the basis of their ability, drive and willingness to live
a quasi-nomadic lifestyle, these individuals often work in half-a-dozen nations during their
careers. Nestle also uses management development programs as a strategic tool for creating
an esprit de corps among managers.
At Rive-Reine, the company’s international training center in Switzerland, the company
brings together, managers from around the world, at different stages in their careers, for
specially targetted development programs of two to three weeks’ duration. The objective of
these programs is to give the managers a better understanding of Nestle’s culture and strategy,
and to give them access to the company’s top management.
The research and development operation has a special place within Nestle, which is not
surprising for a company that was established to commercialize innovative food stuffs. The
R&D function comprises 18 different groups that operate in 11 countries throughout the world.
Nestle spends approximately 1 percent of its annual sales revenue on R&D and has 3,100
employees dedicated to the function. Around 70 percent of the R&D budget is spent on
development initiatives.
These initiatives focus on developing products and processes that fulfill market needs, as
identified by the SBUs, in concert with regional and local managers. For example, Nestle
instant noodle products were originally developed by the R&D group in response to the
perceived needs of local operating companies through the Asian region. The company also has
longer-term development projects that focus on developing new technological platforms, such
as non-animal protein sources or agricultural biotechnology products.
A Growth Strategy for the 21st Century
Despite its undisputed success, Nestle realized by the early 1990s, that it faced significant
challenges in maintaining its growth rate. The large Western European and North American
markets were mature. In several countries, population growth had stagnated and in some,
there had been a small decline in food consumption. The retail environment in many Western
nations had become increasingly challenging and the balance of power was shifting away from
the large-scale manufacturers of branded foods and beverages, and toward nationwide
supermarket and discount chains. Increasingly, retailers found themselves in the unfamiliar
position of playing off against each other – manufacturers of branded foods, thus bargaining
down prices. Particularly in Europe, this trend was enhanced by the successful introduction of
private-label brands by several of Europe’s leading supermarket chains. The results included
increased price competition in several key segments of the food and beverage market, such as
cereals, coffee and soft drinks.
At Nestle, one response has been to look toward emerging markets in Eastern Europe, Asia
and Latin America for growth possibilities. The logic is simple and obvious – a combination of
economic and population growth, when coupled with the widespread adoption of market-
oriented economic policies by the governments of many developing nations, makes for
attractive business opportunities. Many of these countries are still relatively poor, but their
economies are growing rapidly. For example, if current economic growth forecasts occur, by
2010, there will be 700 million people in China and India that have income levels approaching
those of Spain in the mid-1990s. As income levels rise, it is increasingly likely that consumers in
these nations will start to substitute branded food products for basic foodstuffs, creating a large
market opportunity for companies such as Nestle.
In general, Nestle’s growth strategy had been to enter emerging markets early – before
competitors – and build a substantial position by selling basic food items that appeal to the
local population base, such as infant formula, condensed milk, noodles and tofu. By narrowing
its initial market focus to just a handful of strategic brands, Nestle claims it can simplify life,
reduce risk, and concentrate its marketing resources and managerial effort on a limited number
of key niches. The goal is to build a commanding market position in each of these niches. By
pursuing such a strategy, Nestle has taken as much as 85 percent of the market for instant
coffee in Mexico, 66 percent of the market for powdered milk in the Philippines, and 70 percent
of the markets for soups in Chile. As income levels rise, the company progressively moves out
from these niches, introducing more upscale items, such as mineral water, chocolate, cookies,
and prepared foodstuffs.
Although the company is known worldwide for several key brands, such as Nescafe, it uses
local brands in many markets. The company owns 8,500 brands, but only 750 of them are
registered in more than one country, and only 80 are registered in more than 10 countries.
While the company will use the same “global brands” in multiple developed markets, in the
developing world it focuses on trying to optimize ingredients and processing technology to local
conditions and then using a brand name that resonates locally. Customization rather
than globalization is the key to the Nestle’s growth strategy in emerging markets.
Executing the Strategy
Successful execution of the strategy for developing markets requires a degree of flexibility,
an ability to adapt in often unforeseen ways to local conditions, and a long-term perspective
that puts building a sustainable business before short-term profitability. In Nigeria, for
example, a crumbling road system, aging trucks, and the danger of violence forced the company
to re-think its traditional distribution methods. Instead of operating a central warehouse, as is
its preference in most nations, the country. For safety reasons, trucks carrying Nestle goods
are allowed to travel only during the day and frequently under-armed guard. Marketing also
poses challenges in Nigeria. With little opportunity for typical Western-style advertising on
television of billboards, the company hired local singers to go to towns and villages offering a
mix of entertainment and product demonstrations.
China provides another interesting example of local adaptation and long-term focus. After
13 years of talks, Nestle was formally invited into China in 1987, by the Government of
Heilongjiang province. Nestle opened a plant to produce powdered milk and infant formula
there in 1990, but quickly realized that the local rail and road infrastructure was inadequate
and inhibited the collection of milk and delivery of finished products.
Rather than make do with the local infrastructure, Nestle embarked on an ambitious plan
to establish its own distribution network, known as milk roads, between 27 villages in the
region and factory collection points, called chilling centres. Farmers brought their milk – often
on bicycles or carts – to the centres where it was weighed and analysed. Unlike the
government, Nestle paid the farmers promptly. Suddenly the farmers had an incentive to
produce milk and many bought a second cow, increasing the cow population in the district by
3,000 to 9,000 in 18 months. Area managers then organized a delivery system that used
dedicated vans to deliver the milk to Nestle’s factory.
Although at first glance this might seem to be a very costly solution, Nestle calculated that
the long-term benefits would be substantial. Nestle’s strategy is similar to that undertaken by
many European and American companies during the first waves of industrialization in those
countries. Companies often had to invest in infrastructure that we now take for granted to get
production off the ground. Once the infrastructure was in place, in China, Nestle’s production
took off. In 1990, 316 tons of powdered milk and infant formula were produced. By 1994,
output exceeded 10,000 tons and the company decided to triple capacity. Based on this
experience, Nestle decided to build another two powdered milk factories in China and was
aiming to generate sales of $700 million by 2000.
Nestle is pursuing a similar long-term bet in the Middle East, an area in which most
multinational food companies have little presence. Collectively, the Middle East accounts for
only about 2 percent of Nestle’s worldwide sales and the individual markets are very small.
However, Nestle’s long-term strategy is based on the assumption that regional conflicts will
subside and intra-regional trade will expand as trade barriers between countries in the region
come down. Once that happens, Nestle’s factories in the Middle East should be able to sell
throughout the region, thereby realizing scale economies. In anticipation of this development,
Nestle has established a network of factories in five countries, in the hope that each will,
someday, supply the entire region with different products. The company, currently makes ice-
cream in Dubai, soups and cereals in Saudi Arabia, yogurt and bouillon in Egypt, chocolate in
Turkey, and ketchup and instant noodles in Syria. For the present, Nestle can survive in these
markets by using local materials and focusing on local demand. The Syrian factory, for
example, relies on products that use tomatoes, a major local agricultural product. Syria also
produces wheat, which is the main ingredient in instant noodles. Even if trade barriers don’t
come down soon, Nestle has indicated it will remain committed to the region. By using local
inputs and focussing on local consumer needs, it has earned a good rate of return in the region,
even though the individual markets are small.
Despite its successes in places such as China and parts of the Middle East, not all of
Nestle’s moves have worked out so well. Like several other Western companies, Nestle has
had its problems in Japan, where a failure to adapt its coffee brand to local conditions meant
the loss of a significant market opportunity to another Western company, Coca Cola. For
years, Nestle’s instant coffee brand was the dominant coffee product in Japan. In the 1960s,
cold canned coffee (which can be purchased from soda vending machines) started to gain a
following in Japan. Nestle dismissed the product as just a coffee-flavoured drink rather than the
real thing and declined to enter the market.
Nestle’s local partner at the time, Kirin Beer, was so incensed at Nestle’s refusal to enter
the canned coffee market that it broke off its relationship with the company. In contrast, Coca
Cola entered the market with Georgia, a product developed specifically for this segment of the
Japanese market. By leveraging its existing distribution channel, Coca Cola captured a 40
percent share of the $4 billion a year, market for canned coffee in Japan. Nestle, which failed
to enter the market until the 1980s, has only a 4 percent share.
While Nestle has built businesses from the ground up, in many emerging markets, such as
Nigeria and China, in others it will purchase local companies if suitable candidates can be found.
The company pursued such a strategy in Poland, which it entered in 1994, by purchasing
Goplana, the country’s second largest chocolate manufacturer. With the collapse of
communism and the opening of the Polish market, income levels in Poland have started to rise
and so has chocolate consumption. Once a scarce item, the market grew by 8 percent a year,
throughout the 1990s.
To take advantage of this opportunity, Nestle has pursued a strategy of evolution, rather
than revolution. It has kept the top management of the company staffed with locals – as it
does in most of its operations around the world – and carefully adjusted Goplana’s product line
to better match local opportunities. At the same time, it has pumped money into Goplana’s
marketing, which has enabled the unit to gain share from several other chocolate makers in the
country. Still, competition in the market is intense. Eight companies, including several
foreign-owned enterprises, such as the market leader, Wedel, which is owned by PepsiCo, are
vying for market share, and this has depressed prices and profit margins, despite the healthy
volume growth.
