Nestle's size, diversity allows company to better do large-scale R&D and helps with innovation, especially when company can use health sciences research in developing its food products, CEO says

Nevin Barich

PARIS , June 20, 2014 (Thomson Reuters Corp.) – Nestle is trimming its huge range of businesses and pushing deeper into niche medical products to improve returns, but the food and beverage giant still likes its heft.

The world's largest consumer goods firm, with nearly $103 billion in sales, has benefited from its diversity, with products ranging from Gerber baby food and Nescafe coffee to Kit Kat chocolate and Maggi soups.

But last year Nestle missed its long-term forecast for sales growth of 5 to 6 percent. And many analysts think that even with investments in faster-growing areas like medical nutrition and dermatology, Nestle is just too big to move the needle.

Its market value of $248 billion is 15 percent larger than the No. 2 consumer products firm, Procter & Gamble , and compared with other food makers, Nestle is 86 percent bigger than its nearest rival Unilever , according to Thomson Reuters data.

In an interview with Reuters this week, CEO Paul Bulcke defended the company's structure, saying it allows Nestle to scale up functions such as research and development that aid the entire group. Size works well, he said, as long as the front end of the businesses can operate independently.

"That’s the capability of a company to be very central in certain dimensions and decentralised in others," Bulcke said. For example, research at its health sciences unit, which makes nutritional products for sick people, could help the food division, he said, such as by improving the process of iron fortification, used in baby food and in stock cubes in Africa.

"There is quite a lot of gravity that keeps it together," he said on the sidelines of the annual summit of the Consumer Goods Forum, a network of some 400 retailers and big brands from 70 countries.

Bulcke said Nestle's R&D budget is increasing with its expansion into dermatology products but he declined to say by how much. “It’s more intensive ... It is definitely moving quite dramatically," he said.

PRUNING PROCESS

The 60-year-old Belgian CEO, who has run Nestle for 6 years, has also stepped up an internal effort to improve returns by dumping underperforming brands like Jenny Craig and Powerbar, reducing the number of product variations and being more disciplined about where it spends its money.

While he extolled the virtues of size, he acknowledged that the pruning process was inevitable and ongoing.

"I like size," Bulcke said. "But at the end of the day, business is day to day, a very tangible thing ... so we have to see the dynamics of the different categories."

Nestle agreed in February to take over Galderma, a skin health joint venture it had with L'Oreal , and last month bought the rights to several injectable wrinkle treatments for $1.4 billion.

It also agreed to sell 8 percent of its holding in L'Oreal, loosening the companies' 40-year partnership, but said it remained committed to the cosmetics maker for the long haul. That dampened speculation it would sell the remaining 23 percent stake any time soon.

Even though Nestle clearly believes there are connections between what goes in the mouth and on the skin, Bulcke said L'Oreal may not quite fit. "Galderma is all about skin health," he said. "L’Oreal has defined, ‘we are about beauty’."

On the February deal, Bulcke said "everybody left the table happy." He did not say if there would be future ownership changes.

In 2013, Nestle's nutrition and health sciences division made up about 13 percent of its total sales. Sources have told Reuters that Danone is selling a similar business, which Nestle has shown interest in acquiring. Bulcke declined to comment on that.

BIG CUPS OF COFFEE, FANTASTIC PIZZA

In beverages, Nestle's biggest business which generates 22 percent of sales, the company has stepped up investment in its Nespresso brand, launching a new machine in the United States that makes the large cups of coffee favoured by Americans.

This aims to take market share from U.S. market leader Keurig Green Mountain . It also allows Nestle to better compete against a new rival Jacobs Douwe Egberts, made up of the combined coffee operations of Mondelez International and D.E Master Blenders.

"We feel the players are starting to be much more interesting," Bulcke said. In response, he said Nestle had to "stay humble" and "intensify".

All the company's brands are under review with the aim of either improving good performance, fixing weak performance or selling them. Nestle's U.S. frozen foods brands Stouffer's and Lean Cuisine for example, have been declining, but Bulcke thinks they can be turned around.

"If we have answers, I do believe this is a fantastic category, not only pizza but frozen in general. It has the best technology to capture all the nutrients of a product and to bring it to a consumer."

For this year, Nestle is targeting sales growth of around 5 percent, based on expectations that trading will pick up in the next few quarters after slowing to 4.2 percent in the first.

Since the start of the year, Nestle's shares are up 6 percent. Out of the 31 analysts who rate the stock, 15 give it a "buy" or "strong buy" rating, according to Thomson Reuters data.

(Reporting by Martinne Geller. Editing by Jane Merriman)

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