Climber scales the health peak

In the dining room at Claridges, Peter Brabeck asks for a cup of Nescafé to wash down his hearty meal at the posh London hotel.

The waitress looks perplexed, then embarrassed. After a moment’s mutual incomprehension, the chief executive of Nestlé, the world’s biggest foods group and maker of the (nearly) ubiquitous instant coffee brand, stands down and opts for a cigar at the bar instead.

For Mr Brabeck, still the inveterate marketing man in spite of nine years at the top (since 2005, he has been chairman, too), such episodes are familiar.

Promoting Nestlé’s products against the incursions of big retailers’ “private label” brands, and pre-empting fickle consumers’ tastes have been just two of his challenges. Like other branded food groups such as Unilever and Danone, Nestlé also has to contend with a seismic shift in its industry as power has moved from manufacturers to global store chains such as Wal-Mart, Carrefour and Tesco.

The swing has coincided with declining or stable populations and slowing growth in mature markets as convenience foods have lost their novelty. More recently, rising energy prices have raised the hurdle for an industry already vulnerable to see-sawing natural commodities, such as cocoa or coffee beans.

Mr Brabeck, a silver-haired 61-year-old Austrian who has spent his entire career with Nestlé, shows no sign of strain. A keen pilot, climber and Harley-Davidson fan, he retains a charm that belies Nestlé’s reputation for stiffness and bureaucracy.

He has also developed a reputation for straight talking, such as in last year’s spat with Italy’s farm minister over allegedly contaminated baby milk.

“I’m used to [facing adversity], whether as a climber or a manager,” he says. “Headwinds don’t knock me over. It’s just part of one’s responsibility to society to say what you think, no matter which way the wind is blowing.”

In his first years since taking over from Helmut Maucher, Nestlé’s legendary chief executive for 16 years until 1997, continuity was Mr Brabeck’s main theme.

Big takeovers – Dreyers (ice cream) and Ralston Purina (pet food) – reinforced his predecessor’s drive to boost margins and expand in the US, now Nestlé’s biggest market. Pruning the portfolio also continued, as traditional but underperforming low-margin businesses, such as mainstream frozen foods, were shed.

Even the apparent change to a more relaxed management style was only skin deep. Although Nestlé, with 253,000 employees and sales of SFr91bn (£39bn), projects a more collegiate approach than in its dictatorial past, it remains very much driven by one man. Mr Brabeck’s concentration of power has been reinforced by the amalg­amation last year of the roles of chairman and chief executive. The decision was attacked by investors on corporate governance grounds. He has said he will hand over the chief executive role in 2008, with analysts speculating that his successor will be Paul Polman, the Dutchman who joined last year from Procter & Gamble and is now learning the ropes as Nestlé’s chief financial officer.

One thing that has certainly changed under Mr Brabeck has been a tighter focus on financial performance. He has committed the group to increasing sales by 5-6 per cent a year, excluding acquisitions, and to deliver sustainable improvements in profit margins – tall orders for a massive business in a low-growth sector facing cut-throat competition.

Nestlé’s size – the group trades in every country except North Korea – makes further big food takeovers virtually inconceivable on competition grounds. So Mr Brabeck has been forced to look elsewhere.

“The market is only growing by 1.5 per cent a year. You can do better than the market, but three times? I had to address the question: what could we do to achieve those targets as foods and beverages alone weren’t enough?”

His choice has been nutrition – developing healthier, added-value products and services to boost future growth. “There is a fundamental transformation of the company taking place; [nutrition] is the word that best embraces what is going on”, he says – incongruously lighting up a large cigar.

Investors were sceptical at first. Some dismissed the move as faddish or questioned whether crunchy bars or energy drinks could make much difference to a group of Nestlé’s size.

But when Nestlé reports its first-half results on Wednesday, Mr Brabeck should be able to show that the formula is working. The group’s share price has been becalmed, like that of rivals, for the past two years. Yet in recent weeks it has reached a record high based on promised buy-backs and favourable perceptions of the strategy. Jon Cox, analyst at Kepler Equities, says: “People now recognise that nutrition is addressing the fastest growing part of the market and producing results.”

Nutrition has been upgraded to full divisional status, putting it on a par with mineral waters and Nestlé’s other divisions – which are defined by geography rather than by products.

Nutrition has also progressed from just adding ingredients to yoghurt to aid digestion. Mr Brabeck highlights the recent $600m purchase of Jenny Craig, the US weight management and food-products company, as a pointer to the future.

Little known in Europe, the company is a household name in the US for its low-calorie foods and counselling services. Its acquisition is a “first step” in developing a concept of individualised nutrition, he says. “The next step is the combination of services and products.”

In Germany, the group has started a “nutritional institute” to advise consumers on dietary issues. The team now handles 300,000 calls and e-mails a month, he says. “Think of the loyalty that creates.”

Matters have gone even further in France. Nestlé runs a nutritional home-care service, providing doctors and nurses for patients with special dietary needs after surgery or chemotherapy in the Paris region. Health insurers have reacted positively, since costs are a fraction of those of keeping patients in hospital beds. The experiment could be extended, say company officials.

These businesses have manifold advantages, he says. “Every day, the impact of raw materials is being reduced. And it isolates us from other trends; there’s no dependence on the global retailer or issues with private labels. Instead, Nestlé is in direct control and I’ll be first to build my customer database.”

Mr Brabeck is too much of a realist to expect nutrition and related services ever to overshadow Nestlé’s core business. Such activities are still a niche, he says. “But it is one which is becoming more and more important.”

The IT tool for transformation

To squeeze better profits out of making and selling food and drinks, Peter Brabeck has introduced a new information technology system, called Globe, which he claims cannot be bettered anywhere in the sector.

Globe puts data for all Nestlé’s manufacturing, sales and financial operations on to one platform. For the first time in history, executives will be able to hit a button and find real-time data on performance by geography, sales channels and product categories and brands – Nestlé’s three key criteria.

“We can give our Wal-Mart global account manager a [profit and loss] responsibility. There’s nobody in the world today in consumer goods who’s been able to pull all this together,” says Mr Brabeck.

Investors have been sceptical: developing the system has taken more than five years, prompting understandable doubts over whether Globe would ever work. But it now covers 54 per cent of the business and is expected to cover almost 80 per cent by year end. Only with such a tool will Mr Brabeck really be able to manage a group that is simultaneously admired and criticised for its extreme decentralisation: for while empowering local bosses creates admirable closeness to customers, it can also mar productivity and synergies.

“Globe is the tool to organise the transformation of this company. It allows us to manage the organisational complexity of our business, to break down this supertanker that we are into an agile fleet of specialised vessels.”

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