Chairman and CEO of Nestle, Peter Brabeck-Letmathe, gestures during the annual shareholders meeting of the Swiss based giant food company in Lausanne.
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In Nestle's case, the risks lurk literally everywhere. The company dates back to 1867--when Henri Nestle started selling a cereal he had invented for infants--and is still based in his hometown, Vevey, Switzerland, on Lake Geneva. But it has long outgrown its Swiss roots and is today perhaps the most multinational of multinationals. Its products are available in almost every nation in the world, and its executive board is made up of two Americans, two Austrians, a Briton, a Dutchman, a German, a Mexican, two Spaniards and a Swede. Yet its corporate culture remains firmly grounded in the Swiss tradition, favoring modesty and consensual change over American-style brashness. Joe Weller, 57, the head of Nestle USA, calls it a "global company with a Germanic personality." And Brabeck nurtures "the Nestle spirit," even co-writing a nine-page brochure that tries to explain it. "Nestle people do not show off" is one definition. Another: "Nestle is skeptical of short-term fads and self-appointed gurus."
The result is that for all his ambition to usher in a new era of growth, Brabeck is not about to follow the radical--and financially successful--example of one of Nestle's main rivals, the Anglo-Dutch Unilever group. Unilever has taken a machete to its operations over the past three years, cutting the number of its brands by half to focus on 400 key products and shutting 83 of its 250 manufacturing facilities. Those efforts have widened its operating margins by 45%, and its earnings per share were up 27% last year, despite the sluggish economy. During Brabeck's tenure, Nestle has closed 156 factories, but it has acquired or opened 183 new ones, increasing the total to 516. And it continues to nurture some 8,000 product brands. That's about the same number as when Brabeck became CEO, although he has been putting more emphasis on the company's six global brands, including Nescafe and Nestle itself, which account for about 70% of sales.
Brabeck pooh-poohs the notion that a company should focus tightly on its core competency. Nestle's big challenge, he says, "is that we have to be able to learn how to get operational efficiency with a relatively complex business structure. This is what I think real management is all about. The other thing is much too easy." Rather than narrow its focus, he believes that a well-managed and flexibly organized consumer-goods company can sell dog food and ice cream--as well as coffee, water and candy--and gain advantages in marketing, purchasing and distribution over more specialized firms.
Nestle's complexity, though, comes at a price. While the company's long-term growth has outstripped that of many rivals, its margins are lower; "subpar profitability" is how Morgan Stanley analyst Sylvain Massot describes it. Its stock trades at about 15 times estimated 2002 earnings, less than that of Kraft Foods, Kellogg or Hershey Foods, which all trade at price-earnings multiples of about 20. And Nestle ranks far behind Unilever, which trades at 35. Brabeck isn't fazed. "If I had run the company based on the opinion of financial analysts, it would already have been bankrupt," he says, half jokingly. He points out that some of the company's current best growth markets, including Russia and China, required a decade of investment before they bore fruit.