Stefan, thank you for the introduction, and good morning and a warm welcome to our Investor Day participants today, both here in the room and also out in the web. I think in the run up to this day, it's a fair statement to say that there was a healthy dose of interest. And so we appreciate everyone's attention. I can say that on behalf of everyone at Nestle. We really do appreciate it.
Thanks for being here. Thanks for joining us. When you look at the format of the day, Stefan outlined it, this is not going to be a top to bottom review. So this is not a format like the one that some of you attended in Switzerland in May 2016. Hence, it's not the entire executive board presenting.
We wanted to keep it short and sweet and focused. We wanted to outline the main strategic direction and the financial model behind it. But I can assure you that what we're presenting today, what you will be seeing, hearing and learning is supported by the entire executive board, by the entire leadership team, is carefully aligned. We all stand behind this. We want to make this happen.
Stefan has pointed out the safe harbor language to you, so let's go right to my summary slide with key messages for today. And the first two are really about the careful alignment in the leadership team, the Executive Board and our Board of Directors about what needs to be done. And most of all, about a sense of urgency, going about things promptly in the food and beverage industry that is changing fast. And so we're committed to this. I think that time and time again today during these presentations, you will see our strong commitment to change and taking advantage of change in the industry that we're serving.
We do believe that we know where our strategic sweet spot is. I'll be talking about this in a few minutes. And I think that strategic sweet spot is important because the market, this is the positive message, is moving in our direction. The market is moving in our direction, and I'll try to explain that to you later. In all modesty, I think and you will see this in the presentations today, particularly by the Zone CEOs, we get the new consumer.
We also get, in all modesty, the opportunities offered by the digital transformation in our industry, and we do get the need for improved efficiency, hence the margin target that we announced today that we're committed to. And I think that should put some of your concerns from the past to rest. And then at the bottom, as we go about this, we will stay true to our purpose and values. That is important to us. So things will change, but the way we do business, the way we approach business, the way we approach our business partners, that is going to not going to change.
I think that's important. That's reassuring. And as we go on this journey, I think we're poised to deliver substantial shareholder value. Now on the next few slides, what I'm trying to do is give you an overview of where I see some of our strengths, some of the areas that I think we have to work on. Then I'll try to give you an overview of what I perceive to be that changing environment for fast moving consumer goods companies, and then I'll be building up to our strategy to cope with this environment.
And this builds on my personal conviction that when you develop strategies for a large iconic company like this, you're not doing a greenfield exercise. You basically build on what's there, and then you take into account how the environment is changing and how to take best advantage of that situation. That's the approach I'm trying to take you through. I won't get into all details on all of these strengths. Let me just highlight one, which I think is key, and that's the 4th bullet point, our Nutrition, Health and Wellness strategy.
We've been at this now for 20 years, and I think it's showing specific concrete results. I think that we've been working steadily more than we get credit for on improving the nutritional profile of our food and beverage offerings. And this is exactly where the market is going very fast. And I think we're starting to get more and more credit for this. I think you get to sample some of these products today.
I think the consumer over time will appreciate we bring a lot to the table when it comes to healthier choices that are yet at the same time delicious and convenient. When it comes to areas for improvement, again, not surprisingly, this whole notion of accelerating that strategy is at the top of the list because the market is changing. I think this is the one thing that we are all learning in the food and beverage industry. It's probably surprising to even some of the old hands in the industry that this industry has started to accelerate and change of pace has picked up. And hence, we need to go in that direction even faster.
We need to execute faster than before. In this process, we're committed to boosting organic growth because I know that, that has been a source of disappointment for the last few years. We are also committed to balancing our growth aspirations with improved margin and profitability. Hence, this whole notion of efficiency, something that Francois has been spearheading now for years, this is an issue that I think gets a lot of attention inside the company. And we are also committed to improving on a constant basis capital efficiency, which I know has been another area of interest for many of you.
As we make this happen, we will need to optimize our portfolio, so there will be some portfolio changes in addition to a whole lot of internal work that we're committed to. And yes, we will need to drive speed and simplicity in our organization. That is a message that resonates very, very strongly inside Nestle, and we're fast working at it. This next slide, which describes some of my takes on the change in the fast moving consumer goods industry, I've shown this before. I've shown this in Berlin this summer as part of the Consumer Goods Forum, which is an industry gathering.
So some of you who watched that video, it may be repetition, but I think it's worthwhile to cover it again because in addition to some of these individual phenomena that we will talk about time and time again today, what I'm also trying to do is to give you some of the connections between these trends, some of the mechanisms of action that link those. So let's start at the left hand corner, the top, the change in consumer because for a fast moving consumer goods company, things do start with the consumer. And it's not only about millennials, if you're wondering, but the millennials are important. They're important because this is a group that's fast approaching their peak earning years. And one of the wisdoms in the consumer goods industry is, youth rarely goes out of fashion.
So whatever the millennials do, over time, you can count on the fact that their behaviors, their preferences also get picked up by other generations and get emulated basically. So watching what they do, what's of interest with them is very important. Catering to their needs is very important for any fast moving consumer goods company. And while I want to do a comprehensive analysis of all the facets of what constitutes a millennial need, let me highlight a few. For the first time in many markets in decades now, we're seeing an improved willingness to spend on food and beverage.
So from disposable income, spending levels on Food and Beverage are going up. This is a very discerning customer crew, but for the right product, for the right level of quality, for the right story, they're willing to spend. And I think that's very reassuring. That has not been the case for decades. 2nd, everything related to health is front, left and center.
I think this is a generation that starting from the days in school has had a totally different level of nutritional background compared to previous generations. And on top of that, the Internet makes it so easy even for those who missed it, who missed that class in school, to pick up, get it on Google. Google can be a very, very, very good nutritional adviser. And I think people have discovered that. So the whole level of awareness and knowledge of what constitutes good food and beverage has dramatically increased.
3rd, when it comes to global companies and global brands, I think there is a change. 30, 40 years ago, being global almost automatically meant this is cool. So the latest product from America or Japan automatically seemed to have a head start because it was coming from somewhere else. It had that exotic appeal. That has changed.
And I think these days, the head start belongs to a lot of the local banks that seem to be closer to us where we can build up trust. Doesn't mean that global brands, global products go out of fashion. I think Patrice will cover some of this in the afternoon. But I think global brands, global companies do have to go the extra mile to build up trust with the consumer and to get their confidence, and we're committed to doing that. And last but not least, there's a whole new level of interest in how a product is being made.
So what does the supply chain look like? What are the business practices of a company engaged in doing this? It's no longer sufficient just to be the respected quality company. You need to be liked in Facebook terms. And so people want to feel a level of sympathy towards the product and the manufacturer, then they're willing to engage.
Now moving one over to the right, digital. I think this is also a generation that digitally is very much switched on. Digital is a game changer in our industry and in particular in the retail side with our retail partners. I won't cover all aspects, but let me focus on 2, and you will get a lot more detail later on in the presentations from Wan Lin and also from Patrice, who are our thought leaders in that space. One is, when it comes to communication, this is the first time in history where at scale, you can really have a 1 to 1 communication, 2 way street with a consumer.
The old model of what I call push advertising, where you develop a product and content, you then try to select media that roughly hit that consumer, then you hope the message arrives and that consumer will act in a certain way, that model is fading fast. What you can do these days, once you have a consumer's phone number or email address, you can really target specifically to the needs of that person you can have at scale in an automated yet personal way a conversation, and you have a much, much better hit rate than any time before. And so this is a huge opportunity. We're deeply committed to making the most of this. And then second, in e commerce, I think in addition to relying on traditional channels, the opportunity of building up a direct pathway to the consumer, a direct fulfillment model, I think that also opens up whole new opportunities.
Now those two trends, the fact that you can get out word about your product so much more cheaply and directly and the fact that you also have the option of a direct online fulfillment model, that I think also had an impact on the trend on the far right, and that is the rise of small to midsized companies in our space. My personal theory is that 30, 40 years ago, it was probably just as easy or just as difficult to start up a new company in our space, to come up with a new product and then to try to market it. The difference is that at that time, you had to sit down 2 powerful barriers to entry. 1 is getting word out about your product without a massive advertising budget. And then the second one is getting listed with 1 of the key retailers.
And it was kind of a chicken or egg problem, but again, it's amounted to 2 powerful barriers to entry. These days, because of the digital change, I think it has become much easier. Once you have the product, once you have the concept, making it to market has become cheaper, has become faster. And hence, when you look at the last 10, 15 years, the other category among alongside the large established suppliers has been increasing steadily in most product categories that we serve. Initially, I think all large companies kind of ignored that trend.
I think in recent years awareness of VaroVet has been rising significantly. Now when you go to the bottom row and start again at the left, that trend, so the fact that there was collective market share loss to some of these small to midsized focused companies, Coupled with a low inflation or sometimes even deflationary environment in most Western markets, I think that led to the rise of the deep cost cutters because if your top line was suffering, it's a close step to kind of say, okay, let's take that for granted. Apparently, top line fantasy is not there anymore. Where else do we seek value? Well, we see it in the bottom line, and hence, the rise of aggressive cost cutters that basically were going after that.
Now I can understand if you take a flagging top line for granted, that might be a logical solution. It's not our approach. It's not our way of doing business. We believe that if we want to sustainably build value, it has to be within 3 elements, and that is organic growth, profitability and capital efficiency. But again, I can understand how some people got to that conclusion in that particular environment.
Stricter regulations, especially for global company, that is an issue. Regulation, when done right, when based on science, I think can be a win win for everyone. But we have also seen examples where it was based on politics and flavor of the day. And of course, it's important that regulation, when it happens, is carefully coordinated because if it's country by country, then of course it saddles the entire industry with a lot of additional cost. And last but not least, macro uncertainty.
I think we're living post this financial crisis in a day and age with gyrating currencies and a very sort of sluggish macroeconomic growth. It makes it more difficult for multinational company as you are betting on a certain level of interest rates, currencies and also macroeconomic growth in various markets, it makes it harder to achieve the same result, no question. And you can also see that it comes to the consumer, the fact that there's so much uncertainty, that transmission belt between good macroeconomic data and then spending habits, that transmission belt somehow is broken. You see that in North America. I think you're also seeing it in some Western European markets.
So uncertainty about the future naturally creates a certain hesitancy when it comes to personal spending. Now in the context of all of this, let's talk about our strategy, and let's spend quite a bit of time on this. The key statement at the top, food and beverage is core. And I do believe that it offers significant nutrition, health and wellness opportunity. This is 95% of our company.
This is what we were started on, and this is what we have to build in and win it. And if you'd like to know then, well, what is that sweet spot that Mark was talking about, let's turn to the first bullet point because I think that really captures it all. It's about healthy, delicious and convenient products for modern time constrained lifestyle. So let's go through those 1 by 1. What does healthy mean for food and beverage?
Healthy for food and beverage does not mean therapy, okay? Things get confused very fast when you're trying to treat food as therapy. When you have a therapy, when you have an active pharmaceutical ingredient, you're much better served having as a pill, as an injection or an infusion because it gives you perfect control over timing, dosage and absorption. Once you start confusing therapy and fuse, it's not a good idea. So again, we are committed to food.
And healthy and food means that you're trying to match the body's needs of the 3 macronutrients, proteins, carbohydrates and fat, and the roughly 40 micronutrients in a near perfect way. Sounds easy, but it's very hard to do. If you do it, it's inducive to good health. It doesn't cure anything, okay? It just basically improves your prognosis.
I personally believe coming from a health care background, this is the single best form of prevention you can do. But let me tell you, as simple as it sounds, it's devilishly hard because the macronutrient levels and micronutrient levels that we all need are individually different. And for each and every person alone, at any moment in time, these levels go up and down. Are we hot? Are we cold?
Have we worked out? Have we not worked out? Are we fighting off an infection? Yes or no. So actually, what we need at any given moment in time is devilishly complex.
That also means that longer term, in addition to just overall contributing to a better matching of macro and macro nutrient needs and what we give, There's lots of runway. There's lots of opportunity over time to apply science to basically accomplish that person purpose. So I think there's lots of things we can do. There's lots of runway, but it is about meeting the body's needs for macro and macro nutrients. It's not about therapy.
And that to me is a key differentiator. Next up, delicious. I use that as a proxy for all the other things why we consume food. Food is not fuel alone. And if you want to know what I mean, well, talk to former astronauts.
None of them would say, well, geez, I'm missing that food that they served me up on that space station. We were able to keep them alive, but they don't want to go back to have a meal, okay? And so clearly, to me, this whole notion of why what are the other reasons why we eat and how can we cater to those needs, in particular, the need for indulgence, for enjoyment. That is a key differentiator. Hence, this whole history of sixty-forty wins when we test products, this whole notion that a product needs to find favor in its category over and above competing products.
That's not going to go away. And then the third one, convenience. Well, if you want to maximize the first two, if you want to maximize healthy and delicious, here's my advice to you. Get an nutritionist, a personal one, get a personal trainer and also get one of those celebrated New Age West Coast Chefs. And you will have healthy and delicious food.
But you also immediately recognize the limitation. 1st of all, this is to most of us not affordable. And second, it doesn't fit a lifestyle where you have little control over your timing and exactly who serves you, which we are aware. And hence, this whole notion of playing together with health and deliciousness, some element of practicality, Once you bring those 3 together, this is exactly where our sweet spot is. This is when those three things come together, then our products really make a lasting difference.
So if you want a delicious cup of espresso in the morning, I have no doubts that a personal barista from Italy can prove you a perfect cup of coffee. I would just bet that our Nespresso machine does it faster for you, okay? So this is basically when those things come together, this is the sweet spot of the company. Anything that goes in this direction can't be wrong. Now that also goes hand with the second bullet point, and that is premiumization.
So a lot of this is consistent with premiumization that we find in emerging markets and developing markets the same. And when it comes to the poorest developing countries, I think there's also a Nutrition, Health and Wellness strategy that we can pursue. And that is one based on affordable micronutrient fortification. One Lin covers quite a few of these markets with her zone, and I think we are seeing spectacular success. To me, it's the ultimate example of doing well and doing good at the same time.
So in Food and Beverage, those areas are clearly promising to us. You'll see on the next page a quick reality check when it comes to nutrition, health and wellness. But I want you to have a clear understanding, this is our core, this is what we're building on. And then moving to the second part of the slide, consumer health care. This is something that we started 10, 15, 20 years ago initially based on medical nutrition, and we've been branching out into some other consumer OTC health care products.
And yes, like anything that you start, you start with lessons and you're starting with a mixed track record. So we've seen some spectacular successes, but also we've had a few expensive lessons, and I'll talk some of that about that later. But when you look at some of the trends that we can cater to, I think these are promising trends. One is with the aging baby boomer generation, lots of disposable income and this whole notion of healthy aging, I think there's a lot of opportunity for a company that brings science to the table that has credibility and has global reach. 2nd, this whole notion in increased self medication interest in a day and age when health care becomes so much more unaffordable around the globe.
And then, of course, for us, in addition to the grocery channel, benefiting from a larger stance, a larger footprint in the truck store and pharmacy channel, which by and large offers more growth, more margin pretty much around the world. So that's the essence of our strategy. And as I promised, just a quick health check and reality check here when it comes to NHW. This is based on our own data because we couldn't find public data on this. But what it tells you is that for products that are in line with our NHW strategy, products that meet our strict NF nutritional foundation guidelines and at the same time find sixty-forty favor with our consumers.
Those products, when it comes to growth, beat the rest by a factor of 1.8. When it comes to profitability, underlying trading operating profit margin, they meet it by 1.5. So clearly, when we go in that direction, So that concludes the section on strategy. I'm now going to be spending a lot of slides on the next section, and that is on this whole notion of organic growth. For those of you with a good memory, yes, that slide is identical to the one I showed you in mid February, including then the sequence of the actions I'm outlining here.
But what I would like to do now is really give you additional color, additional detail on how we intend to put each of these 5 in place and why. And I'm doing this and spending a lot of time on this because one of the core feedback items from our roadshows this spring and also this summer was, well, we hear about your intention of getting back to mid single digit organic growth. We'd like to believe you, but are you sure you can get there? And I understand that. And very frequently, we got asked the question, well, isn't it that 3% is the new 5%.
Aren't you permanently relegated to lower organic growth? And hence, I felt giving you detail on how we put this in place and what exactly we're pursuing is going to be important. So let's focus first on investing selectively in fast growing categories and regions, and let's hit the categories first. So you heard me talk earlier about these 4 major categories that we intend to boost in particular, and that is coffee, pet care, water and nutrition. And when we are saying that we would like to manage those more selectively for growth, by the way, that should not relegate the other categories to 2nd class citizens.
Far from it. All it means is, here, we're trying to manage for growth, which means we're aggressively spent on OpEx, CapEx and M and A to advance growth wherever we can. For the others, we're trying to manage more for a combination of growth and value. So this is basically the practical implication. Now when you look at these 4 categories, collectively, they make up more than half of the company.
So any progress we're making in that space will clearly have a tangible benefit for the OG of the entire group. Then when you look at the 2nd pie chart, these 4 product categories have an above average profitability taken together. So as we expanded those, we're not diluting profitability, we're supporting profitability. And then when you look at the bar chart on the right, clearly, the average organic growth of these 4 categories is above par when it comes to the rest of the group or the other categories we have. So clearly, as we go in this direction and as we manage to expand our growth in those areas, we will help the company average in a meaningful way.
Now quick reality check again on the next page. This is our market shares in those categories against the next largest competitor. What you're seeing is that without exception, we either lead those categories or we are a strong second 2nd strongest competitor. The core message here being, if we invest in those categories, if we invest in OpEx, CapEx and M and A, we're not investing in hopeless fights. I think we're approaching those categories from a position of strength.
We have a chance to really lift the entire market and benefit from it as the leading industry participant in each of these four segments. So what I'll be doing next is I spend 2 slides on each of these 4 categories to give you a little bit of color on their dynamics and also what specifically we would like to do in those categories. Let's start with coffee. I think few people doubt the size and attractiveness of this industry and the fact that we are the leading participant in it. And over and above the financial success and the market share, I think what we bring to the table here is industry leading brand names such as Nescafe and Nespresso, leading technologies when it comes to coffee processing deep, deep roots when it comes to sourcing the products, which I think is important for a limited agricultural product like coffee.
And hence, I think we have all the elements. We have everything we need to succeed there. Let's do more with that. That's the key message. And so the next slide describes some of those actions to you.
I won't go through all of those, but I'll focus on the bottom row. And we start from the left hand side with out of home. I know quite a few of you have heard about our Blue Bottle acquisition from just a few weeks ago. This is not our first foray into out of home. And more than you may have noticed in the past, we have had a good presence through our Nestle professional activities either directly or indirectly in lots of out of home locations.
Out of home consumption of coffee is growing faster than in home. Both are growing at very attractive rates, but out of home is growing faster. We also have started through Nespresso and Nescafe to get into coffee shops either directly or indirectly managed. And so this is a fairly consistent move now with a very strong and well loved and recognized plan to do more. So this whole notion, in addition to the in home consumption, to also, over time, make a stronger push into out of home, either by owning the coffee shop outright or by having some of the key distribution points inside someone else's coffee shop.
That is going to be a strategic picture going forward. As part of that, because some segments of out of home do require a stronger presence of roast and ground, you will also see a renewed interest from our company when it comes to the Roasting Crowns coffee category. Next up, the center, ready to drink. What I wanted to assure you is that as we approach the coffee business on a global basis, we're not going to be Eurocentric. This whole Eurocentric approach, while you can have your cup of coffee either as a small cup or a large cup, black or white sugar, no sugar, that is way too simplistic.
What you see and what's behind the premiumization drive in coffee these days is a branching out into all sorts of opportunities. And if you look at some of the hotter and more exotic climates, clearly, there's a renewed and strong interest in ready to drink cold coffee. Cold brew has been a huge success in the U. S. Market, as an example.
And this whole notion of serving something that's ready to drink right away and that's chilled is going to be very important to us, and we're pursuing it aggressively. And I think we have lots of avenues, both internal and external. Plue bottle also offered a very nice ready to drink variety that we intend to build on aggressively. So this whole notion of not missing out on that major trend that will be very, very relevant, especially when it comes to Asia, is a key notion that I want to leave you with. And last but not least, moving to the geographic analysis, the bottom right.
Just take note of that huge difference in per capita consumption between some of these emerging markets and then the rest of the world. There's plenty of upside, there's plenty of runway in the coffee business yet to come. We're poised to take advantage of it. If you're wondering, well, how can you turn around the tea drinking markets such as India and China, in all modesty, we've done it with enough perseverance. We've done it in the U.
K. We've done it in Russia. We've done it elsewhere. So with enough patience, this is where long term thinking comes in. Yes, you can turn these markets, and we will certainly do our best to turn these markets as well.
Next up, pet care. In all modesty, this is a significant success story. The beginnings of the Pet Care business came to us with the Carnation acquisition in the late 1980s. And I think since then, we've been building on it patiently, product by product, brand by brand, and we've been building it into a globally recognized competitor. And along the way, again, you're having a significantly attractive category here that we took advantage of.
And there are really 2 key drivers. I mean, in most developed Western markets, pets are seen more and more as fully entitled household members, and hence, the willingness to spend on them is significant. And then when it comes to emerging market, the name of the game is caloric conversion, and that is moving from feeding pets with household leftovers to specific pet food as a result of more convenience or health benefits that are associated with this. So these two trends really fire up the growth behind the pet care segment, and we're committed to taking advantage of it. In market after market, what you see us do is, in a sense, build our market share patiently over time, closing in on the leading competitor or in some cases building our lead where we lead the market already.
Same thing here. I won't capture all of the specific strategies we're pursuing. Let me just highlight 2. 1 is the top row, the center, this whole notion of expanding the natural portfolio. So natural in pet care is no longer just a phenomenon that's reserved for the top end of the product range.
This is really something that happens at all price points, and we are actively, aggressively converting our recipes to take advantage of that trend. So this is a big deal. This is something we're working at patiently. We're making very, very good progress. You're seeing some relaunches.
We're starting in the U. S. This year, and I think they're already starting to pay off. And then bottom row at the center, I want to point your attention to this whole notion of e commerce in pet food, which I think is really important. When you think about some of these bulky packages like that 50 pound bag of dog food for your hunting dog, it doesn't take a whole lot of convincing to convert people from carrying that home on their own to actually ordering it on the web and having it brought home.
I think here again, we're in hot pursuit. We're working very, very hard with our e commerce team to increase our footprint. We're growing above the market in those pet food e commerce activities. We have lots of initiatives underway. We've developed specific packaging with some online retailers.
We've developed lots of things that really make it easier to do e commerce with pet food products. We're deeply committed to it. And again, as part of the overall e commerce update later today, I hope we'll leave you with that confidence that the company is at the forefront of digital opportunities in pet care in particular but also in other categories that we serve. Water, another success story. Roughly the same time frame coming from the late '80s.
Now the late '80s was the time when most people were still trying to decide on who would ultimately win the Cola Wars, remember? Yes. And the answer is no one cares, okay? And at the end of the day, what happened is water wanted. And water in North America last year, bottled water consumption for the first time has increased beyond soda consumption.
And I think there's a tremendous success story that the company bet on very, very early, very patiently, and then brand by brand, location by location, was building it to the market leading position you're seeing today. Full disclosure, many of you know this. The profitability of water is not quite up at the level of the 3 other categories. I think that has a lot to do with the fixed cost that's necessary in logistics before then over time you get some scale and get some leverage into the system. But it's improving.
And I think as we're building out the scale and size of our water activities, you will see good news in the future there. So again, tremendous growth characteristics, and it's one of those examples where I think the margin alone can't be misleading, where I think a look at capital returns and a more holistic look at the financial profile of the business gives you the true picture. Two items here I would like to highlight. First, the top row, left hand corner, this whole notion of functional water. Stefan mentioned to you in the break, we'll be serving you one of the products from our test kitchen.
My personal impression, I love it, okay? So here you get your hydration, you get your caffeine fix and you get a good dose of antioxidants all in one go. And you get it also with some interesting taste. So have a try. Let me know what you think.
2nd item, bottom row, left hand corner. Here's another direct business that also benefits from digital presence that I think is often overlooked, and that's our ReadyRefresh business in the U. S. And this is basically the old fashioned water truck with a digital storefront. So on your app, you order what you want to order, you enter your subscription, whatever you want to buy, and the water truck brings it to you.
And just like with pet food, it doesn't take a whole lot of convincing. Water is a bulky product. Your weekly shopping trip gets a whole lot easier if someone else takes care of the water, and this is essentially what we're doing. Successful business, and my message to all of you who tend to think that our only real successful direct business is Nespresso, no, we have plenty more to offer, and this is one of them. And last but not least, for the food and beverage high growth categories, infant nutrition.
I think few recognize, a few doubt our leadership in this market and also the importance when it comes to sheer profitability. We did have, as you know, in the past some growth issues. I think this is something that applied to the entire category. The last few years, a lot had to do with the properties and the growth characteristics of the Chinese market. I think a lot of this is on demand, but this is the category that the company was founded on.
We're deeply committed to it. We believe that in the mid- to long term, there's a tremendous growth and profitability opportunity, and hence, we're committed to building it. And just like with the other categories, let me highlight a few items. One is the top row, left hand corner and center. This whole notion of being in those geographic areas that promises that promise to be high birth rate areas going forward, I think we do have an amazing footprint, a footprint built on history that really will capitalize on these high birth rates going forward.
And then in particular, when it comes to the Chinese market, with this deeper push now into 3rd and 4th tier cities, I think we also will have a better chance to benefit from the growth opportunity that this market offers. So that's a big deal to us. And then at the bottom, when you look at that center picture and the one on the right hand side, I would want to assure you that while we were a little slow to recognize this whole natural organic trend when it comes to baby food, We're deeply committed to making this success now. We have completely revamped our and repositioned our Gerber product line. It's being launched and rolled out in the U.
S. As we speak. And I think we're meeting market requirements now in a much better way than you see with the old range. And hence, I think this is another one of those cases where, yes, we may have been a bit slow to react, but I think we're reacting aggressively now, and we will set it right. Before moving on to the other growth initiatives, so after the 4 food and beverage high growth areas, let me describe to you the consumer health care environment in that same vein because you're seeing from the market size and from the growth rate very similar characteristics to our 4 high growth segments in Food and Beverage.
And as you know, we are 2 we're having 2 vehicles in that space. 1 is Nestle Health Science and the other one is Nestle Skin Health. On Nestle Health Science and in particular the medical nutrition rollout over the years, I think there's little doubt that this has been a spectacular success and one that has been quite accretive to the company over the years. I know with a lot of you, there's more doubt surrounding Skin Health. And I think a lot of that has also been fueled by the fact that we did not disclose results of this unit separately.
And while we're building it up, we will also not do that going forward. But I felt it was important to give you a bit of color on what went wrong. And I'd like to do this in particular because I noticed from some of the questions coming up, there was an increasing doubt like how attractive is this category. Now I can tell you it is attractive. That was not the issue.
What we were suffering from in the past few years is basically self inflicted issues. And what happened here under an old leadership team, going back to the times when this business was still run as a joint venture between us and L'Oreal. This business was over relying on the earnings stream that was coming from branded Rx prescription products, very profitable product. And on the back of that earnings stream, the company wanted to expand very aggressively into consumer skincare products. And as you know, when you're scaling something up, it's one thing to be aggressive, but if you over you don't necessarily make it so much faster.
And what happened then on top is that some of these patents that were boosting the Rx side of the business, between 2012 2017 were challenged and fell away. There goes your earnings stream. The company didn't react in time. It kept overspending on that consumer side of the business. And it all came to a head last year where basically you couldn't deny the bad news any longer.
We changed that management team. There's a new management team in place. We took fairly energetic action. The new team now, some of you have seen the public news, is aggressively rightsizing the business. That involves administrative functions across the board globally.
It involves some manufacturing. You may have seen the news that we're closing a site in Switzerland. We published that a few weeks ago. And it also involves basically a good review going forward when it comes to our R and D activities. To give you a sense of scale and to set the record straight, skincare alone, last year 2016, as a result of that really negative performance we've seen, diluted the group OG by 20 basis points.
So the 3.2% you've seen for the group without skincare would have been 3.4%. Not 5 or 6, I understand that. But nonetheless, if one business that size dilutes it that much, you can imagine, there was bad news. And on earnings, it was even worse. On earnings, our trading operating profit got diluted by 40 basis points.
So the 15.3% on trading operating profit that you saw could have been 15.7%. This is how much the business pulled it down. The reason I'm telling you is that I thought a lot of you were not giving us and the rest of the crew sufficient credit for how much we were really growing and what our true profitability was. But I felt setting the record straight and also giving you the explanation why this happened, not because of underlying lack of attractiveness, but simply because of that situation that led up to overbuilding structures and then reacting too late. I felt that really should help to set the record straight.
On the consumer side in particular and also on some of the aesthetics and corrective side and selectively on Rx products, We do see an interesting future, and we also see a strategic fit with the company. Now if you're wondering strategic fit, is this a lot of corporate hot air? Do me a favor, in your break, you Google the words anti inflammatory diet and you Google the words skin with it. And then you see that leads you back to the very same things I've been talking to you about all morning, and that is healthy food nutrition. And you see that there's actually from the inside, from the outside that there is a very close correlation between the 2.
So when it comes to the underlying science, there is a connection, believe it or not. I think it's gathering steam. I think it's getting traction. It's getting more credibility. So I believe there is a connection that we can pursue.
What we now need to do is put our restructuring program in place, make that take hold and make that work. And then once that is put in place, carefully, cautiously, prudently scale up and expand that business. That's the same approach we've been taking with our Nestle Health Science products. I think this whole notion when you're trying something new of not getting ahead of yourself, but rather taking it in cautious steps, learning the lessons you learned, digesting those and then moving on to the next thing, this is how you create value. If you're getting ahead of yourself, usually, and especially in health care, the result is predictable because then you're just drawing value.
So this is basically how we approach this business going forward. But on that basis and with that sense of realism, I would also want to assure you that we're committed to it. Same as with the other categories, here are a few strategies we're pursuing. Let me focus on just one, and that's the top left hand corner in this whole notion of active aging. Because I think both on the medical nutrition side and also on the skincare side, this is where we tap into a group of customers that does have a lot of disposable income and purchasing power, and that is aging baby boomers.
And I think we're fulfilling a real prevalent need. And just to give you a sense how you create value in this space, it's all about combination of ingredients. When you stand at a Boots pharmacy here in the U. K. Or Walgreens in the U.
S. Or CVS, in front of the dietary supplements or vitamin rack, and you see all these suppliers and they all look the same, you kind of wonder how is the parcel would make money in this space. And the answer is, it probably is hard. So if you go into individual ingredients, you get commoditized really quickly. There's very little differentiation.
Once you get, however, into combinations of some of them that are supposed to fulfill a specific purpose, Once you have the proprietary science to back that up, then things get a whole lot more interesting. So what do you need with a specific disease pattern? So for example, in medical nutrition, as you move from calories to disease specific medical nutrition, then things get really interesting. And this is what we're focusing on. So combining some of these very same ingredients, backing it up with science for a certain purpose, from pregnant mothers to basically aging diabetics, and then really getting a proprietary product that fulfills that specific purpose.
That's where you create value, and I think that's something that we're committed to. So this was a long section on the categories. Let's not forget geographies and our commitment to emerging market growth. And here again, same thing applies as with the high growth categories. Let's really selectively advance our market position in those markets that really give us above par growth and profitability.
So let's make sure from an OpEx, CapEx and M and A point of view that we capture every possible opportunity. What you're seeing here is based on 2016 numbers that our organic growth in emerging markets was beating developed markets hands down. And then the 3rd bullet point should also give you comfort. The profitability for us in emerging markets is higher than in developed markets. I think that's a unique feature.
I think that bears testament to our long standing presence in many of those emerging markets as opposed to some of the people that kind of came late to the party, mostly then overpaid to get in and are struggling to make sense of it now. When you look at the graph on the right hand side, some of that success has been masked in the recent years simply by currency development. But that's why I felt it was important to look at the organic growth comparison between emerging and developed markets because that relationship never changed. Emerging markets, whether it's now or whether it's 10 years from now, that is going to be a very, very safe bet for this company going forward. So that's the high growth categories and regions.
The second one on my list was addressing underperformance. And we covered some of these businesses already, but I just wanted to reassure you that when it comes to taking energetic action, we're very committed to it. Case in point here is Yin Liu. Wang Ling, as you know, is going to be next speaker, and I can only applaud her for the aggressive action that she has taken to set the situation right. That was clearly dilutive to our China performance in the last few years.
And as you see, the situation is on demand. And that same principle, when there is a problem to take aggressive action, do our homework, set things straight aggressively, we will uphold that principle on these other businesses and also situations that come up in the future. When you run a large company with all the best intentions, things do go wrong, It's all about how aggressively you go about setting it straight. 3rd, product and business innovation. You'll hear a lot about that later, in particular, Patrice Buller will cover some of this in the afternoon.
Let me just give you a few high level thoughts left to right. Clearly, it has to start with transforming the core portfolio, and this is what we're committed to doing, and keeping products and brands relevant against the backdrop of changing consumer tastes. 2nd, it's about scaling creating and scaling new brands where that's needed, where we clearly see a perceived new need. And then the third one is also that willingness and openness to venture into partnerships or investments or outright acquisitions where we believe that a new platform is warranted. You've seen some transactions announced over the last few months that go into this category.
I think Blue Bottle recently was one of them, Sweet Earth was one of them and also our Freshly investment that Francois is going to be talking about later. For those of you who are wondering, well, how many can the company do, let me reassure you, we have no intention of boiling the ocean, okay? So there will be no future here managing 100 and 1000 of small start up companies. We're going to be very, very selective in how we do those. And the filter looks like this.
It's either about a brand and a product that has already taken off and is right for scaling up, where clearly if we were trying to replicate the same thing, we would lose valuable time. Or it is about a skill set that we simply don't have to a sufficient extent. So think about Pru Bottle and their presence in cafes. While we had some promising efforts in other parts of the company, that full fledged focus on the service side of coffee, that clearly is new to us and there's a lot of learning for us and hence it was worthwhile to go into that relationship. So we will be quite selective.
We won't do dozens and hundreds of those, but I think where it's warranted, we will clearly be willing to invest in order to be exposed to these new trends and learn from them. But the core of the value creation clearly has to come from inside the company. This is why we invest in R and D. This is why we invest in new product marketing and launches. And this is the single biggest driver of long term profitability.
4th, embracing digital opportunities. I know this is a busy slide. No worries, I won't go through all of this. You will hear a lot about fully committed to this at all levels in all regions. I also wanted to assure you that we're quite selective in how we pursue this because Internet and digital is not a one size fits all global thing.
The way we live and work with the Internet is quite nuanced as you go from country to country. The Asian way of using the Internet is quite different from the European or American one. And hence, what we're committed to is developing the tools very aggressively, demanding from our management teams that they use these tools, but also being flexible when it comes to how exactly they're being applied in each market. But let me show you, for us, digital, we see it as a huge opportunity. And it's not just a channel.
It's basically an approach of doing business that's much more basic, much more fundamental. And then last but not least, active portfolio management. We will need to trade out of some product areas and into others. We have announced some of this with our review of the U. S.
Confectionery business, as an example. When it comes to the criteria for trading in and out, those have not changed from the past. And let me assure you that when we do trade, we will do this prudently. Unlike in your business, when a corporation trades in and out of product categories, the switching costs are much, much higher, okay? So this is not just pushing a button and trading a share.
There's usually fairly complex integration or carving out required to do a transaction, and hence, it has to be thought through carefully, and we're committed to doing it. Once we're clear, we act decisively, and I think U. S. Confectionery is a good example of that. To give you a sense of scale and also a sense of the fact that we're not talking just about polishing around the edges, I also, for the first time, at the bottom of the slide, indicated an order of magnitude.
So we're thinking, at the present time, about 10% of group sales. So this is what over time, midterm will change as a result of buying and selling. And that's really just supposed to give you some confidence here that we are actively thinking about adjusting this portfolio to be the best possible way in tune with what the market needs. While we talk about portfolio, let me also put to rest one rumor that frequently came up. Let me reaffirm our strong commitment to the U.
S. Frozen business. And I know with some of you, there was a perennial question like, isn't this bad and when are you getting out of this? We are committed to this business. And I think that unjustly, this business has a better reputation from the past when maybe some of the food offerings were not exactly NHW.
As you've seen from our Sweet Earth acquisition, which is also frozen, in frozen, it's not about the delivery, it's about what you put in. And if you freeze healthy products, you get healthy products. That's the way it is. And so the whole notion of vilifying the supply chain to me does not make sense. We have a very strong frozen supply chain in the U.
S. That's a source of competitive advantage. That's an envy to the industry. It's a huge barrier to enter the other people who would like to offer frozen. Let's use it to offer products that are in line with the market and also that offer NHW credentials.
Nothing Sweet Earth is one of them. If you have still doubts, let me give you one factoid and one little quick self test. The factoid is frozen builds on a huge installed base. 90% of U. S.
Households more than 90% of U. S. Households have a freezer and a microwave. So again, when it comes to frozen, when it comes to meeting existing equipment to actually be used, there is little like it out there that is as prevalent as a freezer in a microwave. And here comes the self test.
I call it the late winter night self test. You come home at 9 after a long day on a winter night with bad weather, and all you really want to do after a hard day is to have one quick convenient meal and then you want to go to bed, okay? There is nothing that beats the convenience of just getting it out of your fridge, put it in a microwave and then 4 or 5 minutes later having that meal ride available. Yes, you can talk about all the apps in the world, everything direct, whatever, try it. The problem is the minute you hit the send button to order something, it doesn't mean it's there.
Someone still physically has to do that. So if you had to battle bad weather on the way home, they will have to do that. If you were in traffic on the way home, well, they will be in traffic. Can assure you will not have it in 5 minutes. And you will also, more importantly, and this is important when you are squeezed for time, you will not have control over the timing.
It might be 10 minutes, it might be 15, it might be 20. That voucher that your next order is for free is not helping you, okay? So at the end of the day, the sheer convenience and control over what you do is unbeatable with this proposition. It's all about what you put in frozen. And what you see in addition to sweet Earth and what we bought there, we also have some very, very interesting developments underway.
Laurent Freckx later on will talk about a brand that we developed in house, and we're test marketing now in the Cleveland region called Wildscape. We're basically we're doing the same thing. We're going upmarket. We're going into healthier, better premium offerings, and we are committed to delivering delicious meals in a frozen way. I think we're doing this from a strong starting point with the highly successful frozen supply chain.
I know we had a checkout pass on this performance. I think we set it straight. We're now committed to building that business. So now after this long section, and this is the last slide on the organic growth section, let me try and put it all together. Again, go back to the concern that some of you had voiced in the past, this whole notion that maybe 3% is the new 5%.
Yes, in 2016, it was. But then you start correcting for some of the things that we now have to set straight, some of the things that were self inflicted. You add on top of that some of the portfolio management opportunities, and you add this whole notion of selectively going for growth in these high growth areas that constitute half the company. I didn't separate out the math because I didn't want to go into micro targeting here. I hope that's understandable on a 3 year plan.
But the rough sequence here and also the rough order of magnitude that you see on the graph more or less hits it. So the smallest contribution will come from fixing some of these internal issues. The next one will come from portfolio, and the largest one will come from selectively going for growth in these high growth areas. With that, we've done the math. We will have a path back to mid single digits by 2020.
So that's a long section on growth. Next, let's go to our financial model. And let me start that section by recapping something that has served the company extremely well over 2 decades and that I think a lot of you as long term shareholders have come to enjoy, and that's the Nestle model. And so on the left hand side, you see the key attributes of this model as it was practiced. And on the right hand side, you see a tool that we have used in house a lot.
It's called the virtuous cycle. And it basically describes the way we approach our business. You go for efficiencies, you take the benefits of that, invest in growth, build your market share. As a result, you get more efficiencies. And then the whole thing, if you do it for 20 years, it delivers pretty amazing results.
The reason why the Nestle model was so successful is that what it describes, that steady improvement, was very much in sync with how the company lived and operated inside. And so we didn't have one of those awkward situations where some outside model was bolted on something totally different on the inside. This was in harmony. And when you pursue this in harmony over long periods of time in an industry that rewards that sort of behavior, you're getting fabulous results, and we did. Now 2 shortcomings and 2 observations here after a period of tremendous change.
One is, as you all noticed, the last few years, in this period of significant structural change in this industry, getting to that 5% to 6% top line growth has been getting increasingly harder, and we missed it. There was significant structural change in this industry, and I think it also became a problem that for a model that's longer term aspirational, that 5% to 6% is a very, very narrow band. So that's one issue. 2nd issue, going to the 2nd bullet point, by focusing on trading operating profit, which includes then all restructuring expense. At a time of significant change in the industry, when you would want Latitude to react fast and restructure if needed and right size the business and adjust it to a new reality, it was putting us in a straightjacket.
It gave us all very steady, very dependable trading operating profit results. But as you know, when you do restructuring, mostly in the 1st year, restructuring cost is greater than the benefits you get from it. Hence, your leeway of reacting fast was limited. And I think that may have led also to us adjusting a little slower than we should have done to that new environment that all of us have perceived over the last few years. So we are now committed to improving efficiency.
You would have seen by now our press release from the morning and our 2020 margin target. We are committed on underlying trading operating profit. As you know, we reintroduced that measure with our Q2 results. We're committed to build that from the 16% that was the full year number for 2016 to a range of 17.5% to 18.5% in 2020. That is what we're targeting.
Francois will talk about it in more detail later. This is the margin improvement that we're attempting to do. I know some of you, while you appreciate that there is a target, we said, well, why don't you aim for more? Let me remind you, building on the previous section, this is also that period where we're trying to boost organic growth. And hence, when you put the 2 together, this is when things get really, really interesting from a shareholder point of view, but also, as you can imagine, quite challenging from a management point of view.
So the 2 together are not easy. One of them alone, maybe a different cup of tea. But this is what we're committed to. And let me also say for the sake of good order, while no one knows what the world will look like in 2020, as from what I know today, it is unlikely that this margin target will get followed by another yet higher margin target. And the reason simply is that I watch this current margin arms race the consumer goods industry with quite some apprehension.
As we discussed earlier, margin is not the only value driver. It is about the trinity of growth, profitability and capital efficiency. If you maximize margin alone over time, I don't think you have sustainable business model. Over time, I think bad things are going to happen. We have some catching up to do, hence that commitment to that margin improvement.
But I think over time, what I would like to turn to is something that I'm trying to sketch out here, and that is a new Nestle model that takes into account the new Nestle reality that is again much more in sync with how we live and feel about business. And that is a wider band on top line, so hence, mid single digits as opposed to 5% to 6%. And also, a steady improvement in underlying trading operating profit as opposed to trading operating profit, while giving you full transparency on what the fully loaded trading operating profit is. So this is not about hiding back news, but it is about improving the underlying trading operating profit and having the flexibility and the latitude to do the restructuring that's needed in a more turbulent world to stay aligned with reality. So that sort of mindset, again, captures the virtuous cycle that has never lost its relevance inside the company.
That one is in tune with how we approach business. We will go through the period of margin improvement that you've seen that we're highlighting here. We will go through the OG improvement. But I think longer term, again, rather than expecting margins to increase in leaps and bounds and creating lots of umbrellas for other people to basically drive into those markets, I think that steady improvement model is going to be a much more sustainable and Nestle like way of creating value. And so the intention is, from what I know today, to get back to that.
That next slide is more about our job on the Executive Board than yours, but I just wanted to assure you that in order to get there, internal work needs to be done. The good news is we're not thinking about a top to bottom reorganization. That is not needed. I think one of the good things is that Nestle, over the years, in a day and age when other companies over centralized, never lost its close connection to local markets. But I do think there's a consensus that inside the company and outside the company that we have to speed up, we have to drive agility, simplicity and cost consciousness at all layers in the company.
And this is basically what we're committed to. So we will make it happen. We'll do it the Nestle way. We won't lose our approach, our healthy approach to business, but I wanted to show you that work is underway and will continue. L'Oreal stake.
1st and foremost, on a personal level, let me do what we did as a company last Thursday, Friday, and that is to offer my personal condolences to the Betancourt family over the passing of Madame Bettencourt. As you see, this has been a very close and very long standing partnership. And as you also see, this has been a fabulous investment for the company. No question about it. You see that the contribution to our earnings is not that far away from the share of market cap that it represents.
And hence, this investment is not diluting anything. It has been a good thing for the company. And as for today, I just want to be very open because I know there were lots of questions coming up out of last week and over the weekend. Our approach to this investment is currently not changing. So just wanted to put that clear.
What you've seen from my presentation and what you will see from the other presentations is there's a lot of change in our main business, the other 90% of our market cap. We're fully committed to making the best out of those changes for us as a company, for U. S. Shareholders. I think this is the single biggest way for everyone to create value.
Let's focus on that. Let's keep first things first. Before closing and without going to the detail, I know a lot of our investors are very interested in sustainability issues. Since I have not spoken publicly about this before, I just wanted to affirm my And long before that term has been coined, Nestle has been practicing this approach to business. I think it's a natural way of behaving when you're dealing with sensitive agricultural communities and suppliers and when you're dealing with a product group as sensitive as nutrition, I think we've made a success of it.
I'm committed to continuing going forward. And then before my closing slide, just 2 personal comments. 1 is I wanted to assure you that the entire Executive Board leadership team is very, very deeply committed to making this happen. And this is a busy agenda. We recognize that.
In particular, this combination of going for increased organic growth and going for an improved margin at the same time amounts to what I sometimes call in jest going for a run and going for a diet at the same time. This is hard work, but we're committed to it. And I think there's a recognition at all levels of leadership that this is what we need to do. The one thing when people talk about the Nestle culture, the Nestle leadership team from the outside, the one thing that I can tell you after a year with the company that virtually all of you underestimate is that sheer pride and will to win that this company has. That you don't get.
I never hear it. I've seen it. I feel it, and I feel it personally, too. This company got for a reason to the leadership position it has today in its industry, and it's hell bent on not losing it. It's hell bent, if anything, on building it.
We're deeply committed to that. If that means taking in the changes that are happening on the outside, adjusting to it and making the most of it, yes, we will do that. On a personal level, let me say very clearly, when it comes to this opportunity, I am, to borrow a term from poker, all in on this. I have given up all outside corporate boards. I given up anything on a not for profit basis I'm doing.
I moved my family to Switzerland. I'm in for the long haul. I am all in on this. And again, while I'm the first one that recognizes that effort alone doesn't get you there, I'm also a strong believer over the course of my management career that without sheer effort and intensity, it all amounts to nothing. And so again, I can assure you the effort and the intensity is going to be there, not just personally, but I've also seen it from the entire leadership team.
Hard work is not what's missing here. It's there. And so putting these 2 together, as you go now, as you join us on this journey going forward, There will be great days when things really fall in place, and there will be days when maybe there is bad news. But I want you to have that confidence that there is a leadership team and executive board and there is a CEO that make it a matter of personal pride and a matter of ambition to succeed in this environment and make the most of it. And please, over all the hard data, over all the concerns about incentive systems, what have you, do not forget that and do not underestimate it.
It's a source of strength in this company that I found to be stronger than anywhere else I've seen. Last slide, I promise. We didn't wait for this Investor Day, okay? I'm sure you noticed we're on our journey already. And you're seeing here some of the initial steps that I think already show you the handwriting that we practice, and I think and I hope that you see that most of these steps are consistent with the messages I gave you this morning.
So on Crofen portfolio, a lot of work done already. I know that these are not investments that collectively move the needle very much for Nestle. But again, we have a pipeline. We have interesting things to work on. We have a direction, and it's commonly shared.
When it comes to efficiency, I hope you noticed that over the spring summer, hardly a week has gone by without another announcement that is about actions that we're taking to improve our efficiency, and that will continue. And on balance sheet, you've seen our commitment from late June, the intention to improve leverage. And I hope you all noticed from the press release this morning that when it comes to the spacing of our share buyback program, we're now going for an evenly distributed model over 3 years, which basically pulls forward the share buyback program from what we told you in late June. So again, we're on that journey. I think these steps, in addition with a lot of internal work we're doing, address what is important to us, and that is the need for organic growth, for efficiency and capital efficiency at the same time.
This is what we'll presume going forward. That concludes my presentation, my remarks. As Stefan said, I'll be happy to answer your questions alongside with Francois in the afternoon. Let me spend a minute to warm the stage for the next speaker, and that's One Ling. And let me say with a lot of professional admiration that what OneLink has done over the last 2 years to this zone AOA is simply amazing, absolutely outstanding.
Here is a zone that has so many good things going for itself on a fundamental level. When Asia is such a safe bet, sub Saharan Africa has been a long standing performer for our company. So these are countries, these are markets that hold so much promise, and we've had such a long track record in them. And yet, over the last few years, they've given us a good share of trouble. And she has moved about very decisively, very aggressively to set things straight, and I think we're seeing the results.
And this zone, I think, is rightly now getting the attention, getting the outside recognition and value that it truly deserves. In doing that, what I particularly admire is the combination of 3 things. One is, when things were clearly weren't going right, to take very aggressive, very decisive action and to put things straight. And I think this is in line with the approach that we're practicing elsewhere now too. 2nd, in markets that are growing naturally, when it's not about micromanaging, when it is about letting the bulls run, well, you let the balls run, and you encourage them.
And I think this is what she's been doing in a very successful way. And then 3rd, in Asia, without a good and winning digital strategy in our industry, it's over. And hence, being well versed in this digital environment, being one of the thought leaders, I think, was particularly helpful to her in navigating some of these opportunities. This is also what part of the presentation is going to be about, how we're using digital and how it's deeply embedded in those business models to drive our competitive stance there. And again, in summary, it really amounted to a stunning, stunning recovery and turnaround for that zone.
That was my stage warming for you. Looking forward to your presentation. Thank you.
Thank you, Mark. I was taking copious notes to make sure that I captured them verbatim for my upcoming performance appraisal. Good morning. Good morning to all of you here in the room and to those of you following us on the webcast. And a special good morning and a good afternoon to my team's own AOA who is watching across 3 continents.
Delivering growth, delivering growth in an extraordinary environment. I'm going to take you through why ours is an environment that is far from ordinary, not just in terms of size and scale, but in terms of the pace of change that gives us lots and lots of opportunities. I will then give you some color on the self funded recovery we have delivered. And last but not least, I will show you how digital is further enabling growth. So let me start with the environment.
Asia, Oceania and Sub Saharan Africa, a consumer base that is both diverse and complex and yes, extraordinary. 92 countries across 3 continents, 15 time zones, more than 70% of the world's population and 80% of global birth. In many of our emerging markets, more and more of our consumers are digital natives, embracing digital in all aspects of their lives. Ecom in China is a perfect example. The scale is simply huge.
One of our partners Jingdong, which is JD dotcom, reaches more than 940,000,000 Chinese consumers. They deliver 90% of their orders on the same day or the next day. But this is not just a China story. Year on year internet users grow by 23% in India, in the Philippines by 27% and in Indonesia by an impressive 50%. The lack of fixed line infrastructure means our markets are mobile first and in some places effectively mobile only.
In Africa, there are estimated to be close to a 1,000,000,000, 1,000,000,000 mobile subscriptions and in Asia Pacific, 4,000,000,000. What you may not realize is a lot of our consumers, especially in Asia are very comfortable with sharing economy. The picture here shows a Gojek driver. Gojek is a car hailing company that also delivers products and services to your home or your place of work. Meituan in China, which is a food delivery company is another example of how fast new trends can develop and get scale in AOA.
I mean, it's massive on average every day. There are over 10,000,000 orders placed on the platform, that's 10,000,000 a day delivered. This is transforming the out of home business, blurring the line between eating out and eating in. Imagine the implications for a food and beverage company like ours. This is where our Nestle professional team can play an important role.
We're also witnessing a huge expansion of urban areas across the zone. Large numbers of people are migrating from countryside to the urban areas. According to the UN, within 13 years, this will create 276 new cities of at least 500,000 people. Again, the opportunity for us is clear. In our zone, the number of older people is growing fast.
We're seeing a growing gap between the average life expectancy and healthy average life expectancy. The reality in my zone is that there are extremes. So on the one hand, you see an increasing number of elderly people. On the other hand, you see a huge population of young people, many of in our markets. And so for instance, in Africa, more than 40% of the population is under the age of 15.
I mean, that's incredible, more than 40% under the age of 15. And within those markets, extreme differences in household income. So one size fits all strategy no longer works for us. Our business models have to be tailored to the consumers we serve and clearly see these strategies in many cases rather than market strategies. One feature of our zone that we're keenly aware of is the huge challenges many families face.
Most of the world's stunted children or children who are too thin for their height, a condition known as wasting are in my zone. We can and we do help address these issues by providing affordable nutrition. The biggest product category in my zone is dairy. We serve last year over 100,000,000,000 servings of micronutrient 45 foods, helping tackle deficiencies in vitamin A, in zinc and in iron. This is what we call creating shared value, helping families at the bottom of the pyramid, a business opportunity for us by providing affordable products that offer good nutrition, but at the same time contributing to the communities that we operate in.
So I hope you can start to see why AOA is an extraordinary zone. Vast societal challenges, unprecedented pace of change, the pace of change is so fast, innovations are actually in many cases ahead of Western societies. And then there's always other issues that happens anytime in my zone, whether it's conflict and natural disasters to unrest or simply just disruption to normal life, but we are well positioned to seize these opportunities and let me show you why. We have a balanced portfolio by both category and geography, a real unique mix of global and local brands, the breadth and depth of our portfolio allows us to reach many, many consumer segments. We have the highest trust scores in most geographies and most importantly, we have the right people, hugely talented and resilient, extraordinary teams.
Let's have a look at all of this in more detail. Nestle and AOA had sales of $22,500,000,000 in 2016. You can see balance in terms of category as well as geography. Dairy, I mentioned earlier, is our biggest category representing close to 40% of our sales. Pet care, as you can see at the moment is small, but we see huge upside.
There's clearly still much more to do from a geographic standpoint. Take a look at the geographic pie chart, Southeast Asia with a population of 640,000,000, the pie is much bigger than that of India with 1,300,000,000 in population and the same size about the same size as Greater China with 1,400,000,000 folks. We have a unique mix of global and local brands. Some of this might look foreign or sound foreign to you, so let me pick out three examples. Tai Kai Le is a culinary business based out of Shanghai in China that has sales of more than $1,000,000,000 as of today.
And so while you'll hear some of my colleagues call it Totolay, it's actually one of the same things, it should really be pronounced as Tai Tai Le. Bear brand, which is on the second line here in the middle, that's approaching CHF 1,000,000,000 in sales, Swiss francs. And I will challenge any of you, if you know what's so unique about Bear brand in Indonesia, come to me during lunch break or during coffee break and there will be a price for you. Milo, it's already a billionaire brand, that's 1,500,000,000 across my zone and that's last year. These brands are part of people's lives every day, consumed throughout the day from morning to night, from birth to old age.
I'm a perfect example. I grew up in the Philippines drinking Milo, today I continue to enjoy drinking Milo. For many of our consumers, if you stop somebody a Filipino in Manila, they'll tell you Milo is their local brand. You stop somebody in Singapore and they'll tell you the same thing. Same thing with Maggie in Malaysia.
Portfolio that reaches all consumer segments, who else can offer the breadth of portfolio that we have? Take coffee a core business for the zone. We have coffee for every price point, coffee for every local taste variant and coffee for every style of consumption. So just fantastic. I'm happy to say that we enjoy HITRUST scores in most in many of our geographies.
And this is because in many of our markets, like Mark mentioned, we've been there, we've been part of the fabric of the local communities in the Philippines, in Japan, in Malaysia, in Singapore, in India, the line, the list goes on. We've been there more than 100 years, more than 100 years. In the fast changing environment that we see in AOA, we know it's important to be consistent. We know it's important to be reliable, committed to the highest standards of safety and quality. Trust is a foundation on which we grow our business and that trust is earned day in and day out.
I've mentioned it a couple of times already, my team, our AOA people are simply extraordinary. Every day across the zone, they face volatility and they've managed it incredibly well. Let me give you four examples in India. At least 5 of our peer group companies have already warned that the GST reform will impact the results. My team in India is not using that as an excuse, although I'll be the 1st to admit the impact is very meaningful.
This year, India's organic growth will be impacted, will be lower by 525 basis points because of GST. But they're doing a remarkable job and it's doing everything they can to offset the GST impact. A second example is Japan. Faced with an economy that's been in deflation for close to 10 years, our Japanese team has completely rewritten the rules, completely innovated in a very different way. You've seen in my presentations in the last 2 years, Chocolatore was born out of Japan.
You've heard me talk about green amatcha green tea for our Nescafe Dolce Gusto machine. You've heard about Nescafe Ambassador program. Our Japanese team in the face of deflation has delivered mid single digit growth in the last 2 years. And then there was devaluation in Nigeria. The Nigerian naira devalued by almost 35% last year and dropped a further 20% this year.
The strengths of our brands supported by strong distribution and in market activation improved resulted in improved market share and improved rig. There remains a lot of volatility across Sub Saharan Africa. In addition to devaluation, we have problems accessing hard currencies, political instability, I think there's about 14 elections in Africa this year to slow economic growth, but we continue to grow amidst this volatility. And then the last example that was flat in the Philippines beginning of this year was a massive flood in one of our big major factories. Typically in a situation like that, it would have taken 1 month for the plant to come back online.
But our team, our Filipino colleagues got it up and running in a week with 0 supply issue, 0 quality issue, just incredibly proud of the team. It is the resilience of our people that allows us to turn the many challenges into opportunities and it is their effort, their hard work that has helped us turn the corner and help us return to growth. Need I say more? So now let me turn to the second part of my presentation, which is how we have returned to growth while maintaining our margins. I stood in front of you last year and I made a few commitments.
And I'm happy to say that we are delivering against those commitments. Does anyone notice what's funny about this picture? Yes, no? The Milo boxes are upside down. So I asked the team, I'm like why is it that the boxes are upside down?
And the team told me that it's because they don't like the products to settle while they're being moved, transported in trucks. What did I tell you? Extraordinary team, they have an answer to everything. We are delivering sustainable growth. We all know several years ago top line was challenged, was under pressure.
This is no longer the case. I love this slide. More good news, growth acceleration was underpinned by market share recovery and we have done that by stepping up our consumer, our engagement with consumers, innovating beyond products, adding service layers on top and within our own house, we have improved our processes that support demand generation. So it is important to see that this recovery self funded, we have reignited growth while maintaining our margins around 20% of underlying profit margin. So let me give you a bit more color on our recovery.
I've shown you this slide before, I know it's ugly, it's our operational roadmap for the zone in 2017. And let me now highlight some of our building blocks. Yes, let us start with Yinlu. I'm pleased to say that we are making good progress. During the year, we transitioned from our minority shareholder partners to a Nestle team.
This has enabled us to have better alignment and better execution. We are also working hard to restore the relevance of our core products. So congee is now back to growth, Nescafe ready to drink is still growing at double digit and peanut milk is still wobbly, it's a bit of a challenge, but good progress with a great team in place and we still have a ways to go. Our other businesses in Greater China are also on track. We continue to grow Nescafe, which is the number one coffee brand in China through premiumization.
In our confectionery business, which is Shu Fu Chi, which you see on the slide, efforts are underway to decouple our businesses over dependence on Chinese New Year. And last but not least, in terms of Tai Tay Le, it has returned to growth and also last year we had successful transition from a Founder CEO to a Nestle colleague. This is the first time we had a Nestle person running Taytayla in the last 17 years. Sub Saharan Africa, Sub Saharan Africa is today a strong contributor of growth for the zone, double digit growth with good rig. I spoke earlier about people's needs for affordable nutrition.
Close to 700,000,000 people on the continent live on less than $10 a day. In fact, 61 percent of Africans live on less than $2 a day. We are very committed to Africa. 58% of our sales in the region are from what we call PPPs as popularly positioned products. Products like micronutrient fortified Maggi cube.
Let me pause here. I think it was 5 years ago in 2012 when I was doing my H1 presentation, I asked a question. This is how I do Q and A, I do the Q and you do the A. How many cubes of MAGI do we sell in Sior, which is Central West Africa region a day? Okay.
So come on 5 years ago you didn't know the answer, 5 years later nobody knows the answer. It's 110,000,000 cubes a day, 110. Clearly PPP segment is the growth engine for us. While we were busy with India and China, in addition to Sub Saharan Africa, our Southeast Asia region stepped up and that is Philippines, Indonesia, Malaysia, Thailand, Vietnam and delivered strong growth 7% OG in 2016. Special shout out to Vietnam who delivered 20% last year, Indonesia 14% and the Philippines 7%.
This was driven primarily by our understanding of local consumer needs. For example, ready to drink is a big trend. So we are accelerating Milo RTD in all markets behind the lunchbox consumption occasion. In the Philippines, we're launching new RTD formats, bear bran for instance, what you see on the slide, bear bran yoga was launched in February of this year and in 6 months we went from 0 market share to 16. The response has been simply overwhelming.
I was in Vietnam in May to inaugurate a new Milo RTD plant in our new Bongsing factory. It's amazing also like the plant was completed ahead of schedule and came in under budget. Amazing to see that in just a few months that plant is today operating at 85% capacity. Next one is pet care. Mark talked about pet care.
Pet care is a $7 plus 1,000,000,000 category for Mizone with increasing growth especially in emerging markets. For AOA, it's a huge potential given the low levels of pet ownership as well as caloric coverage. The category size in China is US2 $1,000,000,000 and growing very fast mostly driven by e commerce. We are clearly under scaled in Asia and this has started to change. We're giving it increased priority, investing behind the brands, accelerating in e com, especially in China.
Our early results are very encouraging. H1 growth OG was 6%, which is after this is after years of flat or negative growth. So our NPP team is off to a good start. And premiumization, Nescafe Gold mixes have been reinventing white coffee in Southeast Asia and are now being rolled out across the 3 continents. On the shelves now in South Africa and will be in Oceania next year, our Nescafe Gold mixes.
With one online concept, product and packaging, we're taking, we're maximizing the benefit of what we call above the market synergies. We are also driving distribution deeper into rural areas. We've added nearly 500,000 distribution points over the past 18 months with significant increases in China, in Thailand and Philippines. We're also looking at new models for route to market. In Pakistan, for instance, we're using our milk collection centers to sell as point of sales to promote our PPP portfolio.
We're also increasing the number of SKUs carried per outlet. So in Nigeria, for instance, we're increasing the number of SKUs from 11 to 26. So this means not only more outlets, but more profitable outlets in our markets. In Pakistan, our team in partnership with Telenor has pioneered the adoption of mobile wallet solutions. This is transforming the lives of dairy farmers.
Only it's creating a cashless supply chain in a country where only 15% of the population has access to banking, bringing the basics of digital and financial literacy, where before this was just unthinkable, empowering women in areas where only 5% of women have these opportunities. Plans like this help us reinforce financial security of farmers who supply us. It's a win win, creating shared value while securing the sources of future growth. We have reignited growth by having the courage of our convictions, having the courage to make the right people choices, having the courage to make the right investment choices, knowing when to double down and knowing when to pull back, pushing the envelope including in terms of communication. One of the markets I'm really proud of is South Africa.
They're doing a really great job in turning the business around. I want to show you an example of a communication which I think shows both thinking. This ad is helping us turn around Cremora, which is a key brand in South Africa. I think this advert is bold because it takes people back to a time when life was not so easy. Some people might say this is really a risky move.
But this is done with great understanding and empathy for our Cremora consumer. The execution has been great and the results are strong. The power of good storytelling really never fades. So have a look. Moving on to the last part of my presentation, I want to take some time to highlight to you how growth has been and will continue to be enabled by digital.
In China, I continue to challenge the team. We really have to accelerate in digital. And you can see on the slide, we are improving our market shares in e com ahead of the category in almost all cases. Today, we manage ecom in a more integrated fashion across different categories better than before and this is producing results. Data, data allows us to drive relevancy at scale in ways that were never possible before.
Let me give you an example. Alibaba has about 460,000,000 consumers on their database, at least as of the last official count. So based on their shopper behavior, some are tagged as coffee consumers. Now we at Nestle have our own profiles of consumers of Nescafe drinkers in China. So now we're matching our own data with that of Ali in the data bank.
Our targeting has become a lot more effective, in fact around 3x more effective. And so what you see this programmatic banners that's on the screen are generated automatically from different components. So there's the image, the product, the slogan. So for example, if a consumer if in our consumer profiling suggests that you as a consumer prefers milky coffee, you will the technology will make sure that you see a milky coffee product on the banner. The levels of personalization is just extraordinary.
This campaign has more than 70 banners in total. So put together, it adds up to a highly targeted campaign, a highly personalized communication, creating more impact more efficiently. Augmented reality, AR as you know is a way for us to create excitement and buzz about our brands. Today, I mean literally today in China, we are running a coffee festival on Tmall. The campaign uses AR to kind of attract and excite young consumers.
Consumer can send a friend in Nescafe gift set that includes a replica TV set. They can upload a video on Tmall and so when the friend gets it, they can watch the video on this replica TV via their smartphone. This is an example of merging digital and physical. This morning when I woke up breaking news from our team on Beijing, Beijing is 7 hours ahead of London and this program as of midday had 266,000,000 impressions, that's 266 1,000,000 not 1,000,000,000 impressions. And as of noon, the sales of our Nescafe coffee compared to the last program we ran last year has already exceeded the record they did last year.
So it's just amazing if you get it right. We are also pioneering voice, partnering with others to bring new services to our consumers. The team in China is launching what they call Xiao AI, Xiao is small, small AI, and nutrition and health assistant. So you can ask it for nutritional advice, you can ask it for recipes, you can ask for music while you enjoy a cup of Nescafe. This is very much still in its infancy.
It's really an experimentation. We have created content from 5 business units from our Nescafe business units to our nutrition, our Nestle Professional, Tai Tai Le as well as Nestle Dairy Business. Consumers are getting Nestle branded advice and so you can ask, is it healthy, is it good for you to be drinking coffee and you know what the answer is. So voice is a new frontier and we want to be in right at the very start. Content creation, we are creating long form content to capture the hearts and minds of our consumers.
In Siwa, our Central West Africa region, our Maggie team created a web series, which ran for 30 days during Ramadan. It was more popular than any other series in the French speaking region, which is just like unbelievable. A truly integrated campaign, combining product launch, in this case, it's Maggi Arum, multi channel, multi format activation. The investment in the web series and media buying were a fraction of what would have caused us by doing a traditional campaign. The takeaways for me, smaller markets can innovate just as well as bigger markets.
In fact, smaller budgets stretch you to get a lot more creative. And to me, great ideas are everywhere. And don't let anyone tell you that analog is dead, it is not dead. People still collect vinyl records, well, I don't. But people still want real world experiences.
The experience economy is both a combination of offline and online. This connect to connect, this was the campaign behind our pop up cafe in Taiwan featuring Nescafe mug that blocked out signals to mobile phones. Here it is, killer give me the I came prepared with my show and tell. So this coffee mug will basically without any signal. So when I don't want to answer any calls, I put my phone in here and tell my colleagues, oh, I'm not getting any signals.
But we challenge young people to stop the internet to be a real friend. This, ladies and gentlemen, is breaking conventional wisdom because conventional wisdom would tell you that you cannot possibly get millennials to disconnect with their phone. This is a digital campaign with an offline experience. Over 3 weekends of our pop up cafe, thousands of Taiwanese, 7,000 to be exact fought their way through the rain, the wind and the cold to join our call to make real connections. And people say big brands cannot connect with young people.
This shows you we can. Participatory advertising, first to know, first to tell. Earlier this year, Nestle India launched a limited edition range of noodles with local flavors, topping into a growing interest that younger consumers in India want for tourism, for local food, for food festivals. We partnered with Google to help us build buzz for the launch, at first by an F and B company, a food and beverage company on the subcontinent. So for a month, when you type in Maggie in Google, you will be asked invited to participate in a survey on which of the 8 flavors should be launched.
I mean it's amazing, 50,000,000 impressions, 200,000 people participated in the survey. We created a lot of excitement, a lot of anticipation, 150,000 pre orders for boxes of 12 noodles, pre orders via e com, much like you and I would reserve an iPhone online. At this point, the consumers didn't even know what flavors they will get in the box. This campaign delivered an incremental 130 basis points of market share, 130 basis points of market share. Online excitement held both online sales and offline sales.
We sold 1,000,000 packs. Q2 volume for our total noodle business in India rose 22% in the quarter. So we created news and excitement for the category and not just for the special SKUs. This example show that we can attract younger consumers when we push the envelope creatively. So digital is clearly further enabling our growth, but of course, it's not just digital alone, we're combining these efforts with product innovation.
Nestle Wellness, Nestle Wellness is a new program in Japan. Subscribers provide information about their health condition and then receive matcha green tea capsules for their Nescafe Dolce Gusto fortified to match their nutritional needs. This has tapped into an area that people are really interested in. We launched this in March on TV and soon had to pull the ads because we reached capacity. While we were off the air, the number of subscribers grew by 50% just by word-of-mouth alone.
So far we have 15,000 subscribers, the rollout has far exceeded our expectations. Increasingly, we work on merging online and offline experience. I've talked to you about Chocolatore many times and how much excitement it has brought to rejuvenate and premiumize our Kit Kat franchise in Japan. I'm happy to report that it's also successful doing really well in Malaysia as well as in Australia. Chocolatore and it's actually testing, we had a first test in Thailand.
Chocolatore has created an offline and an online and offline ecosystem that drives growth. So for example, in Australia, Chocolatore inspires innovation in retail, which has new concepts and whatever resonates well with the consumer, we bring it to retail. You see this example of the 3 tablets, Kit Kat tablets on the slide. We've also launched corporate gifting. And so with an online catalog bringing the best from Chocolatore plus some imports from either Malaysia or Japan.
It is no surprise that Kit Kat today is the number one confectionery brand in Australia, so kudos to the team there. The key takeaway for me in terms of how digital is further enabling our growth, 4 things. First, data is at the center of everything, everything. 2nd, the blending of e commerce and all forms of communication 3rd, it's the convergence of online and offline and last but not least, analog still matters, it really matters. But amidst the transformation, there are some enduring truth, the power of a great idea.
The ability of a successful brands to brighten your day. And while some things never change and this ad from Australia reminds us of that. It's hard to follow that, right? To sum up where we are today, my zone is very committed to remain one of the growth engines for Nestle. I still get questions today whether growth in emerging markets is dilutive.
The answer is no, no, no. We are I mean, we are accretive to the zone in all to the group in all dimensions. Our margins are 140 basis points accretive to the group. Cash flow as a percent of sales were accretive 600 basis points and ROIC 700 basis points. We are bullish about our prospects because we've got the fundamentals in place to sustain our positive momentum.
But we are not satisfied, we're challenging ourselves to do more. And we know this is possible because of the scale of the opportunity. Now this is a different way to look at zone AOA. The map here shows Nestle zone AOA sales per capital across the zone. The light pink shows where sales are less than CHF1 per day per person.
Now some might argue that look, where the per capita sales is CHF3 to CHF5 per day, that's in yellow. Our brands are part of consumers' life every day. We help address issues, nutritional issues like lack of iron or iodine in their daily diets. This has allowed us to build a very sizable business of CHF 600,000,000 today. Then go to East Africa and you see our presence there is more modest in light pink.
And our team I know in Equatorial Africa is doing a great job trying to change that and this year is growing a double digit. You go further east to Southeast Asia and one can beg the question, can you accelerate brand penetration in Indonesia the way we've done it in Malaysia and in the Philippines. And clearly, there's a lot more we can do in China or India. I started by introducing you to some of our consumers across the zone. By keeping ourselves relevant, relevant in this fast moving world called AOA, we can continue to deliver sustainable growth.
What gets us excited is not just the size and the price, the millions of potential consumers for our products or our services. What gets us excited is delivering affordable nutrition, helping the African mother, so she does not have to choose which one of her children to feed. What gets us excited is developing personalized nutrition for older consumers to help them live healthier lives. Above all, what gets us excited is making a difference in people's lives. This ladies and gentlemen is Zone AOA.
I close by thanking my team, an extraordinary team that makes me extraordinarily proud. Thank you.
Thank you.
Patrick Schwendyvan, Silicon Valley Bank. Could you please touch the regulation in infant formula in China? What's going on there? What are your chances and risks?
I think, yes, I think for I mean, I can say something about nutrition, but I want to make sure that you give more color maybe later in the nutrition business is run by GMV, by globally managed business, it's run by HEICO. HEICO is not here, but I'm sure between Mark and Francois, they will cover that in their Q and A section. Hi, James. Good
morning. You've obviously done a fantastic job with you and Lou. Could you perhaps give a bit more detail about what went wrong and how you sorted it out?
I think it's a couple of a few it's really like a convergence of a few things with Yinlu. First of all, I want to go back to the reason we bought the company is it provides us with a fantastic ready to drink platform. As you went as you heard my presentation earlier how ready to drink has really taken off and it's done that not just in Southeast Asia, but also in China. And so the liquid platform is an important platform for us to have. The beauty about China, both a challenge as well as an opportunity is if you get something right, it takes off really fast.
I mean, the scale is massive. But when a product starts to lose relevance, it also sort of like drops really quickly. And peanut milk went through in the last couple of years when dairy prices went down and milk becomes a lot more affordable for the Chinese consumers. They shifted to drinking milk versus peanut milk, getting their protein from milk. And so we had to step it up in terms of keeping renovating our formula in peanut milk.
And so we're in the midst of doing that. And so we'll see. But also I talked about alignment within the team. This was run by our 5 minuteority partners, shareholder partners and now there's better alignment given that we have a Nestle team installed. Hi, Alain.
Some mic, please.
Thank you very much. A question regarding the eastern part of Africa. A couple of years ago, I remember about 18 months ago, there was an interview in the one of the U. K. Press that this area is not performing as good as it should.
There is restructuring. Could you highlight a little bit more what you did recently in that area
and that you improved there
as well, given all these positive trends we've seen currently?
Yes. No, our team in what we call EAR, which is Equatorial Africa, is doing a a fantastic job. We're focusing on PPP, which is popularly positioned products that I talked about earlier. They have done a nice job resizing the infrastructure. Team.
Thanks. John Cox, Kepler Cheuvreux. Obviously, Mark has given some targets for 2020 about mid single digit. I'm wondering as a result of that, is there some sort of target for you guys in AOA? Is it like high single digit or even double digit?
And I wonder where you are on that journey because obviously you sorted out the dud as it were with Yinlu. Obviously, there's other parts in terms of portfolio change and potential M and A. Just wondering what your thoughts are on that for your zone? Thank you.
John, John, John, you know we don't give guidance in terms of individual business units or categories. You know that. So but listen, I said we're not satisfied. I mean, this is a zone that has a lot of potential and our team is excited and we are and like last, what's amazing about the team is last year for instance, so many of my market heads, so many of my teams even though they have delivered the maximum of their bonus target kept going. And for the markets who sort of like we're not even going to make the minimum threshold of their bonus also kept going.
And so you'll find in Zone AO a team that just we just keep going. It's just so we have obviously within the zone, within my team, we have our own internal targets, we have our own aspiration in order to guide us and where we want to go, But it's not something that we share publicly. In terms of what was the second question?
In terms of how to get there because obviously you've sorted out Yinlu, but other parts of it are portfolio optimization
and Yes. I mean I said it earlier, Yinlu, it's still ways to go. 2 of the 3 products in the portfolio are clearly back, but peanut milk is still wobbly. So I'm happy that the business has stabilized, really proud of the team, great team installed, but still has a ways to go for Yinlu. But look, Sub Saharan Africa double digit, Southeast Asia doing really well, China is now back to growth, Yinlu has been stabilized, India given the GST impact this year, next year should next year by middle of the year, it should start to come back.
The India team has launched so many new products. And so Japan continues to be firing on all cylinders. And so a lot of the businesses within the zone are really doing really well. Celine?
Regarding maybe on the So could you give us an outlook of what the growth, the market growth is at the moment in Asia? It seems at the beginning of the year, we thought it was doing better. Is it something that you also see on the ground? If you could as well qualify the pricing in general that's happening in this region. And then there was a lot thank you for the presentation.
It was very broad. I understand that pet care is one of the white space opportunity. Are there any other white space in terms of category or regions that we should come after your plantation, we should really think of as well in Asia?
Yes. I mean, clearly, in Asia, we have pet care, like you said. But we it's funny, it's a zone that has sort of like extremes. On the one hand, you've got PPP, on the other hand, you have premiumization. So in China, for instance, this idea of e comm being big and the impact of that, it's not just people going, people buying in a different channel, it's changing the business model completely.
Because with e com, you get infinite price transparency, you get infinite shelf space. And so you're competing with a lot of other businesses, not just locally, but also imported products. And so what we're seeing for instance in China is a lot of our consumers are also wanting to try premium, are also going up the premiumization scale. So a product like Nescafe Dolce Gusto that has really done well in Europe, that's doing well in Latin America can do well also in China. But in Asia, just in general, it's we're seeing a lot of interesting changes because consumers are moving really fast and they're embracing technology.
The lines I talked about between eating out and eating in because of all these companies like Meituan, Gojek, it's also having implications for out of home businesses versus in home consumption. So it's just China for FMCG Companies has seen sort of like a rebound. Asia continues to grow. And so no, we're happy about the dynamics that we're seeing today.
Hello.
Wondering on this same topic of e commerce in China, wondering how market share of your top ten products compares online versus offline in China specifically? Yes. I mean, first of all, I go back to our ecom business is growing really fast. But having said that, I'm not happy because when my team tells me, well, we're growing at 74%, I always tell them like, who cares if the base is so small, so go back. So our business is growing really fast.
You saw my earlier slide where in specific categories, we're growing on e comm faster than the category, so that's important. But having said that, if you compare Nescafe for instance, our share offline is much bigger than online. I mean, I'll tell you our share offline for Nescafe is in the 70 some percent, online is lower than 40%, because online you're competing not only with a lot of people, but also the imported coffee brands. So getting online, communicating with consumers, engaging with consumers in a very different way from an online perspective is important and also targeting. You heard me talk about targeting and that's why what I'm really happy to see the example I showed earlier to be able to get targets 3 times more effective than before is going to be really key.
Thank you.
Thank you very much, Stefan. Good morning to everyone and welcome to the Americas, a region which is facing some headwinds, but where we got everything it takes, the critical mass, the talent and the determination to keep winning over the long run. You can see consumer focus, you can see innovation and premiumization and you will see an increased focus on productivity and cost efficiency to keep driving a strategic better circle of sustainable value creation. Zona Americas Nestle in the Americas is the largest region for Nestle. It accounts for 45% of group sales and it's accretive, so that's roughly 50% of the cash flow.
The zone managed, the part that I lead, 70% of that, dollars 28,000,000,000 in sales and you can see the weight of the 2 major U. S. Businesses, Nestle U. S. And PetCare North America that accounts for roughly twothree of the total, which means that we got sizable business in Latin America with roughly 35% of total.
You can see the categories. Pet care is not a white spot for us. It's a big green spot and we got and that's related of course to our U. S. Portfolio, a big frozen and a big ice cream business in the region, dairy, confectionery, coffee being the most relevant categories apart from those 3.
To qualify the context in the region and to put it simple, I would say that it's deflationary in North America on the back of soft consumer demand, wage stagnation, fundamentally available income is still below precrisis levels and intense competition, of course. And LatAm is fundamentally recessionary with Brazil for the 3rd year in a row in a recession. Some light out of the tunnel, but which points more to a slow recovery than to a quick and strong dynamic in the region. The region has not yet fully recovered from the end of the commodity super cycle. Focusing on Zone Americas in the state of the nation, say 1% of group sales, 40% of the total free cash flow.
And I'd like to highlight again the 3rd number, which is the share of our sales where we are number 1 or number 2. 93% of our sales, we are number 1 and number 2. And if I exclude Confectionery U. S, it's virtually 100% of our sales where we are number 1 and number 2, which highlights the strengths of our footprint in the Americas. The U.
S. Business is resilient in a challenging environment. I'll come back to that, but transforming rapidly into an agile and productive platform. Mexico is strong despite weak consumer confidence and has to do with what's happening in the northern border. Brazil is improving.
Our business is improving, but strong again, strong macro headwinds. And I'd like to highlight as well, we don't talk so much about them. Three geographies where we see potential for future growth, Argentina, 40,000,000 inhabitants, The country is back into the global economy and we see opportunities. We got a good footprint there and good teams with a good focus. Colombia, 50,000,000 inhabitants on the path to the peace, which has everything it takes to really take off.
And we are discussing as we speak and finalizing with the Cuban government our 3rd joint venture, which will manufacture and sell coffee, biscuits and culinary products in Cuba. The industry and consumer trends are not so different from what has been highlighted previously. Are
going
going to e commerce. Regulatory environment, especially in Latin America, is demanding. The downside is that this is fragmenting somewhat the markets in the sense that every country has got their own schemes. The positive side is that it creates a level playing field where we can valorize our efforts to reformulate our products. Small is winning, but a good thing is that we got a nice mix of the global blockbusters of Leslie combined with the small local iconic brands and it's a lot about cost cutting, which of course we are embracing as well, but with the determination to keep investing in the business to sustainably deliver value creation.
U. S. Is decelerating. That's the question that I got more or less every day. And what is that?
And indeed, now not only in volume but also in value, U. S. Food and Bev Retail is in negative territory, has to do with, as I highlighted it, disposable income, which is under pressure. The fact as well that the government over the last years has massively reduced the food stamps program and the weak subsidies that impacts, of course, the business. There is no inflation in the no growth environment.
And in this respect, U. S. Looks a little bit like Europe and the dynamics in Europe. We see accelerated shifts in the way consumers shop, eat and engage with the brands and the growth of auto phone keeps its dynamic and now having passed the 50% mark. And that's also one thing which is not to be undermined, the basket size and impulsivity are down because the growing channels are not in favor, especially the convenience stores or the dollar stores of big basket sizes and certainly not in favor like e commerce of impulsivity.
Emerging retailers are the winners. The store openings are in the dollar convenience and drugstores. We see more e commerce options being made available to the consumers, offering retail products, but also ready to eat solutions, and we see more omni channel solutions being developed. So that's part of the context. And of course, the key question for us is how do we grow and keep growing and how do we deliver sustainable value creation in that kind of context.
And of course, the concept of the strategic virtuous circle remains absolutely valid, relevant and core to the equation. It's just that we have to put even more intensity in the current context when it comes to achieving efficiencies, productivity, taking every part of the equation end to end and trying to get the most of our operation, sweating our assets, partly to fund the margin expansion, but partly as well to invest into growth platforms to drive market share gains because if we want to grow and we want to grow in a new growth environment, we need to gain market share to drive category growth and expand our categories to deliver sustainable value creation. Growth is essential to the sustainability of the value creation. So that's the model that we are pursuing. And of course, there is a big, big focus on the cost equation.
Simplification is top of the agenda. Operational costs are core to the equation. We are tackling as well our structural costs to get leaner and leaner, and we are also focusing on improving our portfolio. Achieving operational and structural efficiency, this is the start of the strategic virtuous circle. This is the main focus of the teams as we speak because we know where to invest.
We got the innovations. We got the growth platforms. So the key point is to be capable to generate the resources to fund partly the margin expansion and partly investments into the growth platform. We got 100 lean value stream initiatives up and running in my zone as we speak. That means that every business unit has got a lean value stream initiative ongoing.
Downstream, we are looking with intensity at the strategic revenue management, but we are looking as well at leveraging scale in procurement that's part of MB and this is the famous Procurement Acceleration 2.0 initiative and we have a specific project as well to improve our footprint in LATAM. Simplification, top of the agenda, specifications, we have reduced 50%, but we want to achieve 100% smart and shared specifications by the end of 2020. That gives us the possibility to leverage our scale in procurement and as well to leverage our scale across our manufacturing footprint. Structural cost reduction, we got projects up and running across the continent in each and every market. We are working on 1 ISIT organization in North America from 4 today.
And of course, NB is addressing the end to end flows with critical focus on order to cash and source to pay. Portfolio strategy is part of the equation, of course, and we continue to focus on 6% total delivered cost improvement year on year, part of that being cost reduction, part of that being cost avoidance. Let me highlight what we are doing specifically in the case of the U. S. That's the main geography and there is a lot happening, of course.
You see the same focus in the structural cost reduction part, and I'll come back to that. We got the headquarter footprint being reorganized and being redesigned and you can see the one ASIT structure and the one foot division also being in the focus. There is a lot happening in terms of simplification, including leveraging digital into the workspace, but simplifying as well the reporting. And you see that we have been quite active in the last couple of years when it comes to portfolio management with acquisition of Merrick, which is well ahead of acquisition plans, as we speak, great acquisition, sweeteners that we just acquired, the blue bottle, this equity stake in Freshly and the Confectionery review, which should lead to a conclusion by the end of the year. The total cost improvement in the U.
S. By 2020 over 2016 are in the range of $350,000,000 to $450,000,000 And we try to get to the highest level of the bracket, of course. Few words on the Nestle U. S. Headquarter repositioning that has been a major move.
We were historically in the early 80s East Coast. We moved after the Carnation acquisition West Coast. We are moving back to the center of gravity of our business, our consumers, our customers. Our industrial footprint is primarily East Coast, so we get closer with this new headquarter in Arlington. It's also a better basket when it comes to talent attraction.
We can see that we can recruit from the broader basket of talent. And let me report that the project is ahead of plan. That was a high risk project in terms of its execution, but we are 6 months ahead of the timing initially scheduled. We got 70% retention of high potentials moving west to East Coast, that was not completely obvious. And when we look at total retention, we're in the range of 40% to 50%, which is twice above industry benchmarks.
That means that we will have a nice combination of experience and fresh blood and the payback of the project is now below 2 years. We are also focusing a lot on the ice cream business. It's very sizable, and we got a lot of assets in this activity with the DSD organization and we target an underlying trading operating profit of mid teen by the end of 2020. There is a big focus on the 3 Cs, cost, cash and cases. We are streamlining the factory structure and basically keeping in the factory people that have something to do with manufacturing ice creams.
The people that have nothing to do with manufacturing ice creams will be leveraged above the factories. Lots of investments going into line level optimization. We are reducing the portfolio complexity, but accommodating also for some complexity because we need to cater for the needs of specific channels. We want to leverage more in sourcing. We can supply some of the products internally, some of the products that we are buying from the outside and we want to apply also the principles of smart recipes so that we can get some flexibility while making sure that we deliver, of course, the best quality at all times.
So there is a big program ongoing in U. S. Ice cream, and I'm confident that we'll get to that level in that given time frame. Of course, those efficiencies that we are generating part again will be channeled behind the margin expansion, but a big part also is to be focused behind growth platform. We want to stay relevant to our consumers.
We want to be attractive to our consumers and to our customers and innovation and renovation is, of course, essential to that equation. We got zone wide priorities. We got also new health benefits innovation and I estimate that in the next 3 years, we should have €3,000,000,000 incremental sales coming from those. And pet care, of course, is a big part of that equation, both in the natural segment and in Latin America, but we got also Dolce Gusto, and I'll come back to that and many initiatives also across segments that should contribute to that equation. You see also the focus on the new health benefits innovation and that's not only the U.
S, many initiatives also are deployed in Latin America. And again, the opportunity market should bring us a couple $100,000,000 additional sales in the same time frame. We are investing to win with millennials. We know the relevance of the target group, and we do it with a digital first engagement model, digital at the core. We invest in organic, plant based, ethnic and local and of course natural, all those resonate with this target group and are essential to our equation.
You can see some of the initiatives that we are deploying as we speak. We are also investing into new consumption experiences. We see significant value creation being generated in the retail coffee arena. In the case of Blue Bottle, it's a different consumption experience. This is also an omnichannel opportunity between the retail cafes, between the direct to consumer e commerce solution and also the consumer packaged goods side of the business.
Nestle U. S. Has also many breakthrough initiatives in food. Food is a core category to the portfolio of Nestle U. S.
It's when you include everything, including chilled and dry culinary, a 4,000,000,000 dollars sales business. So that's massive. We that's center of the plate. We have a high ability to win with leading market positions across segments and we got also a strong pipeline. We are investing into new territories, that's sweet earth with plant based and a big focus on the millennials.
That's freshly, of course. And interestingly enough, we got also the concept of internal incubators. We are putting teams aside of the core Nestle with working on their own to develop new approaches. And you can see that they have developed this Outsiders Pizza Company brand and they are coming up with very disruptive and very different kinds of innovation. And we got also in the premium frozen food area, this wildscape concept, which is being tested and deployed as we speak.
So we want to replicate what's happening in the ecosystem of the food industry with those small startups generating new ideas and coming up to the market with new ideas. We want to replicate this as well internally with our own teams, but put aside and working as internal incubators. It's an interesting experience and we'll report, of course, on the development of those. We are also recognizing that innovation takes place outside of our boundaries and open innovation is core to our equation. So we got this Silicon Valley Innovation Outpost, which is connected to the ecosystem and many good ideas are coming up from that side.
We have also signed this agreement with Terra, Rabobank and Rocket Space to work with startups in the food and agriculture area. And we got these 9 Square Ventures, which is making early stage equity, small equity investments into startups in the paid care area. And that has been also bringing very interesting innovations or new ideas into the equation. Of course, investments is critical, but driving market share is also critical and the channel piece of the equation is essential. We want to win with the winner.
We want to grow with the high growth channels. We are developing as well new business models, cafe, ice cream bars. We're investing also in the grab and go solutions in retail, leveraging our Nestle professional capabilities. We want to achieve e business leadership and leverage on our marketing talent. We are through the FE recognitions, FE awards have been recognized as the most effective market year in LatAm in 2017.
Winning in e commerce is critical. Most of the growth is coming from e commerce, pet care on the left and you can see the size and the scale. It's frequent purchase, it's bulky products. Of course, it indexes well in e commerce. You can see our growth in first half, 97% in Pet Care North America.
This is 1.3x the industry. We are leading in the space, but we want to keep leading in the space, of course. You see the growth in Nestle U. S, 61 percent on a smaller scale, of course, 42% in Mexico and 71% in Brazil. We recognize that there is something more different to be done with Amazon and we are setting up, as we speak, a global Amazon acceleration team, which will be based in Seattle and which will work with the Amazon teams at making sure that we get the basics right on the one hand, but that's just the starting point, making sure as well that we drive new initiatives across our portfolio and globally across country boundaries.
Pet Care North America. Of course, for Pet Care North America, e commerce and the leadership in e business is essential. The business has doubled 97% in H1 and our vision is that it will triple, further triple by 2020. We are investing in all the dimension. We want to get the best in class content.
We are also developing our own direct to consumer models with the Just right concept customizing the solution to your pets. We are looking very carefully at the pricing equation because it's a sensitive point when it comes to channel management and e commerce management with the price transparency. We are customizing products and packaging solutions. So a bit of complexity, managing well the complexity will be essential on the manufacturing side and we are getting ready for that. We are also working with Walmart on the store based solution and Click and Collect and of course Amazon.
I'd like to highlight that with Pathfinder, we got also a unique source of unique data on pet owners, which we are, of course, leveraging and which we will continue to leverage for the future. A few highlights on the Latin American markets. In Brazil, in spite of the crisis, we are focusing on growth platforms and have a great success with Nescafe do Segusto. You can see that it's already a €100,000,000 business in Brazil. It's growing it's been growing 41% CAGR in the last couple of years.
And e commerce, that's interestingly enough as well e commerce, so the direct to consumer model is 40% of our sales. So that's not that far away from the Nespresso numbers. And that's, of course, a light house for the rest of the zone. And our ambition, our vision is that we should be able to achieve €500,000,000 in sales with Neste Cafe del Che Gousto by 2020. Neste Mexico is also investing in all dimensions.
Innovation, of course, in things that are relevant to the consumers, leveraging the coffee made platform, the modern cooking platform, organic, local recipes, lactose free and so on and so forth. They are pushing also very strongly the e commerce capabilities and driving in a market where e commerce is emerging, driving very strongly the channel developments, but they're also working on new business model. It's very interesting to see what local creativity can bring. Look at Nescafe Dolce Gousto, which is a brand managed globally. They came up with that very interesting vending machine, which we are testing and deploying in a few outlets and which is giving very promising results.
We are working also on recipe personalization. We got a big dairy culinary business and a big culinary business. And of course, being relevant with recipes is part of engaging well and giving recipe solution, engaging in the best possible way with the consumers. And of course, we are also applying the principle of open innovation to make sure that we tap into the capabilities of the Mexican entrepreneurs. Value Creation is critical, but we want to do it in a way which is sustainable.
We have this long term focus, of course, and creating share value is essential. So economic value creation, of course, is absolutely central core to the equation, but we want to make sure that we do it in a way which is environmentally friendly and socially. And on top of that, in doing it, by the way, that also work for us on the economic side of the equation. So I just would like to highlight a few things that we are doing. In NHW, we are the continent which is probably the most exposed to obesity and overweight.
So we pursue the aggressive reformulation of our products to make sure that we deliver at all times the best nutritional option for our consumers, but we put also a great emphasis on educating the children to healthy lifestyle and good nutrition habits. We are putting a lot of focus on youth employment and you know that now it's been deployed globally, pushing the vocational training principles, readiness for work. We have alliances with hundreds of companies. And when it comes to the U. S, the focus is on the veterans, which have to be reintegrated into society, provide them with a qualification and the job, of course, is the best way to make them part of society.
We are working on water stewardship in each and every factory of Zone Americas, 150. We will have, we have and we will have a water strategy program, working with the community beyond the boundaries of our factories to make sure that we make the best possible use of the water resource. And there is a big focus on environmental sustainability and it's, of course, economically sound as well reducing greenhouse gas emission. We put a big focus on coal elimination, 0 waste to landfill and using also renewable energy like Mexico, Brazil and Chile. And we got our first triple 0 factory up and running in Brazil.
This is 0 carbon footprint, 0 water withdrawal and 0 waste to landfill. So we got that and of course, that's a model that we would like to replicate. Winning is also winning with people and teams. And we are working on making every day the organization even more entrepreneurial and building up on the DNA of the organization, agile, flexible, connected. That's the name of the game.
Safety is part of the equation. We want the best people. So being the best place to work and focusing on the U. S. Certainly one of the conditions to get the best people and the best teams on board.
And you can see that we rank very, very well in those classifications. We focus on top and emerging talent and we want also diversity to be part of the equation. And there, the focus is on the management committees, operations and sales where we got generally a lower representation, but we want also to embrace and do something when it comes to disability. So those are the elements we got in our equation. If we look at the results over the long run, in the last years, we have sustainably improved our bottom line.
Trading operating profit has increased 110 basis points and the zone is also accretive to the group and with ups and downs. But over a long term period, we have improved our market share positions from a very, very strong footprint, 93%, 97%. If I exclude Confectioner U. S, number 1, number 2 positions compounded, that's an industry benchmark that's unique and that's a great asset for the future. What are the key things to keep mind, the zone is at scale.
This is the biggest zone for the group. It's also accretive in profitability. It's dynamic. We got strong capabilities and scale across market. That's not only the U.
S, that's Brazil, that's Mexico, that's Canada, that's Chile, Colombia, Argentina and Cuba, which I mentioned. We are determined to address our cost structure to be productive, to be cost efficient, to drive a sustainable strategic virtuous circle of value creation, focusing investment on growth platforms, new channel and new business models to be relevant and competitive in the marketplace and the focus is on market share because to grow in the low growth environment implies to gain market shares and drive calorie growth. Volume growth in a context where there is low inflation or deflation is also very, very critical and of course profitability. So those are the focus points. For the zone, and we are determined to keep contributing to the group and to the question that Mark has exposed in the morning.
Thank you very much. And we may have time for a few questions.
Think you talked about 50% reduction in specs in 2017, specifications in 2017 versus 2015. So my question is, how is there still so much to do here so long after the introduction of Globe, which was supposed to give visibility about this kind of area?
Yes. Globe gives the visibility, but you have to have in mind that it's not because you got the visibility that you redo the specs immediately. After the reduction of 50% of the specs and looking at the complexity and dimension of our business, we still have 10,000 specs, 40% of that is raw material, 60% is pack material. And what we want to make sure is that we got more shared specifications. We want also to eliminate unique specifications as much as we can to make sure that we can leverage our scale.
It's not so much the element is not so much in reducing the specs, reducing the impact on the working capital than to make sure that we can concentrate our purchasing power and our focus on the reduced number of specs. And there is a lot of work to do because when you eliminate specs, when you move from 10 vanilla flavor, natural flavor to 1, You need to that's work for the R and D network. This is checking with the consumer that there
is no
impact on the organolytic preference
and so
on and so forth. So it's not that just you look at it, you decide and you eliminate them. You look at them, you look at what is the best for the business going forward and then you need to renovate, reformulate the products and so on and so forth. So it takes a little bit of time. Probably the focus has been post globe in the 1st period more on the SKUs and we move more recently into the specs and to make sure that we can leverage our scale in procurement.
Jeremy?
Hi there. Can I just ask a couple of questions? So the first one is you showed the graph with the volume and value growth in the U. S. Market.
Is it your expectation that the sort of the 2017 numbers continue for the next couple
of years?
Or do you think that we'll
be looking at maybe sort of near a flat rather than declines? And then the second question is on hard discount, which is something you didn't talk about so much in your presentation. So can you just talk about how you view that trend playing out over the next few years and what your response to it is going to be? Thanks.
Yes. So what we see and actually the slide is quite illustrative. We see the trend and we see where is the industry today. We see the dynamics also of the consumption. We see the deflationary pressure.
So every seed points to low growth, no growth environment for the foreseeable future. That looks very much like what we got in the rest of the developed market, but that doesn't mean that we cannot grow in that kind of environment. We can grow if we manage to be more relevant to the consumers, if we drive meaningful innovations. And of course, if you focus on the areas of the portfolio where the listed growth is not because the F and B retail industry is kind of flat today that some categories like pet care for instance are not growing. Pet care is growing 4% as we speak.
So there are pockets of growth and we need to focus on those. That's what has been explained in the morning. And we need to drive innovation and renovation like we have been doing it in frozen food to drive make our offering even more relevant to the consumer, even more appealing to the consumer and make sure that no growth for growth environment, we can still grow. Looking at it and I've worked 6 years in Europe, so I've been exposed to that kind of environment for a long period of time. At the end of the day, if you want to grow in a no growth environment, there are not 20 ways you can do it.
There are fundamentally 2 ways you can do it. 1 is to gain market share. The pie is not growing. So if you want to grow, you have to take a bigger share of the pie. And the second thing is to innovate to make the pie bigger to grow your categories.
The 2 require something. They require intensity in the investments and productivity in the investments behind the innovation and growth platforms. Hence, this concept of the strategic circle of value creation, the make or break for this, of course, to happen is being capable to drive efficiencies and productivity to both enhance margins and invest in future growth. Investments and innovation is future growth.
Patrick Schwindel, Zurikantenalbank. You have mentioned that you want to improve the U. S. Ice cream margin to a mid teen level by 2020. What's the current margin then for the U.
S. Ice cream? That's my first question.
You do that.
I assume high single digit then or?
It's below that. Yes, it's more in the single digit, high single digit.
Level. Okay. And second question, will be the U. S. Ice cream business still part of the Nestle family, let's say, in 5 to 10 years' time?
Well, if we succeed with that plan and if we bring that business to that level and considering the capabilities we got and if there is a path to beyond that to being accretive to Nestle, I don't see any reason why it shouldn't be a part of the Nestle family. So if it delivers, if it's at par in terms of profitability or beyond, don't see any reason why it shouldn't be. So that's the focus. That's the bet. And if we are confident to put it on the table is that not only we have the ambition, but we got the plans and the path to get to there.
We should be already in 2018 at double digit.
Steve Price had a question.
Two questions regarding the Merrick, the U. S. Business. In the case of pet care, you have Merrick's and Castor and Pollux brands in the specialty channel, but a lot of the growth in natural pet food is now taking place in the mass market. Do you need to bring those brands into mass or do you just work with Beyond there?
Yes. And then in the case of sparkling water, there's this explosive growth in terms of essence, what they call natural and sweetened sparkling water. You've tried to extend Poland Spring, Perrier, Sample and Green into that category, but all the growth is taking place with brands like Polar and LaCroix, which are very specific to that niche. How is your sparkling water strategy working out? Thanks.
So I will leave the sparkling water question for later today because I'm not the one managing the business. But yes, there is big growth taking place in that category and we are uniquely positioned. When it comes to pet care, I think we got a unique portfolio of brands that are well positioned according to different channels and very well suited to serve the needs of specific channels. We see that as a plus. Of course, in the ultra premium natural organic segment, we got Merrick, which is the best of what can be done and that's focused on primarily pet specialty and e commerce as well, part of Pet Specialty.
So it's already big only targeting part of Pet Specialty. So there is massive potential for expansion with Merrick and we are discussing those plans as we speak. But we are also leveraging the rest of our portfolio of brands to integrate those natural organic arguments, meat as the first ingredient. We make that big move on dog chow, which is our main premium brand for dog food, putting meat as the first ingredient. That looks obvious.
But I can tell you that it's a massive effort from a supply chain standpoint and a massive deployment to be able to bring those arguments at scale. We got Beyond as well for Purina. We got lots of brands that are well positioned and I think we are uniquely positioned to leverage all those strengths, not only with one brand, but with our portfolio of brands and options to deliver sustainable value creation to our consumers, but also to our customers. And that's, I think, the recipe for long term success.
Okay. I would say thank you very much, Laurent. Excellent. And with that, our next presenter is Markus Zetembre, our CEO of Sonae Menna.
Thank you, Stefan. Good morning, everybody. Good morning. It's a pleasure to be here today to advise all of you and I thanks all of you for your presence and to your listening today and also for all the people that are following me on the webcast. So for those that don't know me, my name is Marco Zetembre.
I'm managing since 9 months the Zone EMEA, but I'm 30 years in Nestle. So the perspective that I'm going to give you today is focusing on category growth. And when I talk about category growth, 1st of all, I want to explain what does it mean for me. Of course, it's an obvious statement, but for me, the focus of today's presentation is on the concept of winning, winning in the Zona Mena. So my focus will be mainly on 4 categories that count for the most part or the major part of the business in Zona Mena.
And we have 4 categories in which we have different situation. We have Nescafe, coffee in which we are clearly leading. We can say that we are winning because Nescafe is keep on growing after many, many years. Rosas has been able, Nescafe, to reinvent itself. We Laurent talked about Nescafe Dolce Augusto And Nescafe Dolce Augusto got a remarkable achievement last year because we went from in 10 years from 0 to 1,000,000,000 euros This is born brand concept that we have created internally.
We are winning in Pet Care. We are not leading, but we are winning. If you can see the our history in the last 20 years in that we have constantly from a very distant number 2, we are constantly growing share and now we are very close to the leadership in retail. And that's a story that I could go on and tell you about it, but it's a very successful story in which we are winning. Then we have 2 other categories in which we will focus later on is confectionery and food.
I would say for these two categories, my focus will be and our focus will be to create the condition to win because in these two categories, yes, we are winning in several countries, in several sub segments of these two categories. But overall, we can do even better. We can really have the base to win in the future even further. So how we are going to do it? How we have done it so far?
Mark and Lorraine has explained to you the virtual circle. That's exactly the Nestle model, the virtual circle is the way we work in a very disciplined way in the past 20 years. What I want to convey today that we want to go beyond
also.
I mean, this is very good. It's very disciplined. It's giving us continuous improvement. But in certain elements of the Zona Mena, we need to really accelerate and go beyond the normal cycle of the virtuous circle. So we'll do that also and not only also I would say mainly focusing and starting from the unbelievable, unbeatable footprint that we have in Zona Mena.
And that's one of our strengths. Our presence and our number one position or number 2 position in almost the big part of the Zona Mena is a strong starting point. So we combine this footprint with the focus expertise, the unique expertise that we have in the people that work in the different categories. But we'll do that with the people, with the people that work in this zone. And I have to say that the more and more I meet in different people in the zone in MENA it's unbelievable the passion that all our people in the zone put in the business.
So if we take the picture, you see €27,000,000,000 of the business in Zona Mena. As you have seen before, the total picture is €27,000,000,000 The area of my responsibilities, so the categories that are managed at the zone level is €17,000,000,000 16,000,000,000 dollars If you took the geography, still Western Europe is 2 third of the business in the zone, so it's an important part. But Eastern Europe and MENA where we have different dynamics also start to be a very material part of the zone. In terms of categories, you also understand why I'm focusing on those 4 categories. We have coffee, pet care, confectionery and food that are quite balanced in terms of weight for the zone.
And this is where I'm going to focus in my presentation. Just one slide on the dynamics. Most of you live in Europe. Everybody knows the dynamics of Zona Mena. So I don't want to spend too much time because you know the trends.
What I want just to I will not spend time on political instability, the constant election and the impacts of what can be happen on the different election last Sunday or the previous one. The most important one obviously for Zona Mena will be the Brexit. The huge opportunity that we have and that we had in the past as a big company is the common market and that's what we really believe will be also for the future for the strength of Europe, especially the common market is still something that we strongly believe and advocate. But overall in terms of plans, there are different plans. Western Europe demographic is stable, while in Middle East and North Africa newborn and also Eastern Europe is a factor.
What is good for Zona Mena overall including Western Europe is the fact that the consumer confidence is rising. So we see that people are more confident to spend money also for the food and beverage and for overall. So that's something that is quite important. We have the pattern of the market category competition is changing. Local players are growing faster than
the market.
That's a fact that you can judge this fact as bad or good. It really depends on where you see it. I just want to highlight the fact that if you look at our growth pattern and market share, Nestle is extremely well positioned to capture also the local trend because Nestle is a good combination. I'm pretty sure Patrice will expand this today is extremely good combination of global or regional brand and local brands. So this is something that is happening.
What is key is to be very agile in intercepts the consumer plans and to anticipate some consumer plans. Where we are able to do that, we win in the marketplace. So I'm talking about the growth. If I in my transparency analysis, I look at the last 6 years, you can see that in a zone that in which the growth in terms of category is not very high, the zone has been able to always have a positive growth and the average growth in the last 6 years has been of 2.3%. So I would say quite remarkable, especially when you compare with the industry peers that are not enjoying the same growth patterns.
So why in Zona Mena we are growing in this way? Why we are growing faster than competition? First of all, because we do the right category choices. We have decided to play and to compete in categories that overall in Zone and MENA have a higher growth than the average of the category growth in the market. So this is not only the 4 big categories, but also some sub segments that are growing very fast in which we are competing in different way.
The second element is also the resource allocation. Just to give you an example in capital investment, we invest almost half of our CapEx available capsules in 2 categories coffee and pet care, where we are winning, where we are growing much faster than the market when our growth rate is close to the single mid single digit. So the 3rd element in addition to the virtual circle that we are applying, you can see from the results or thanks to the virtual circle, we have been able to grow market share in more than 60% of the sales, the business sales that we consider markets category combination we are growing share. We spend much more money in consumer marketing and we have been able in the last 3 years to improve our trading operating profit by 120 basis points also doing portfolio active portfolio management because we did some transformation in the last 2 years. And about transformation, I just wanted to put in this slide what Zone EMEA has experienced in the last 20 years is quite remarkable.
So you can say that Zona Mena is a traditional zone in which nothing is happening is exactly the opposite. We have been able in the Zona Mena to continue to adapt our business model to what is necessary to win and to compete in the different categories. And I really put there just examples in reality we did much more than that. And if we analyze now the business of Nestle overall in Zona Mena, you know that we have 4 main business model. We have the joint ventures, globally managed business, the regionally managed business and the locally managed business.
And when we do the joint ventures, it's not because we are not interested in a certain category. You have Fronery ice cream because it's the best way to compete in ice cream is on the MENA. Lactali, LNPF, joint venture for chilled cereal partners for breakfast cereals. And today I'm pretty sure Francois also will expand on the Fronery experience that is very, very is doing very well. So then we have different business model.
The last part, the locally managed and the regionally managed business is the area in which I'm going to focus now. But the message that I want to give you at the end of the transparency overall is the fact that we are performing well in the Zona Mena. We are adapting to the necessity of the different categories and we are also opening to new possibility to make business in the zone. So the message that I gave you at the very beginning is okay, but what is the way, how we can go beyond, how we can accelerate. And I say that in the point the key points for our future will be to create the condition to grow in all the categories in which we want to stay, we want to compete and we'll do it with, 1st of all, even more active portfolio management.
Marc in the very beginning talked about that and this apply also to all business and especially to the Zona Mena. I want we want to really base everything we win when we are able to create, understand consumer insights to intercept the insights to create and anticipate solution for the plans that consumer is having and we are doing that. We are already doing in many different places. So we had to do it in every single category. We need to unlock resources to win.
We need to spend money. We need to invest in the right place, but we need to really generate the resource and we have to address our structural costs because in many places in the zone, we have to say that we can do better in structural costs. Last but really last point is also to have the right and the most efficient organization is putting at the end the focus of empowering the decision point and the right level of the organization. And this is the way I'm going to talk in the future about category and geography. At the end of the day, we really feel that the cost improvement that we can generate through the entire value chain from structural cost to procurement to also the other parts of the value chain is around in the next years around CHF 400,000,000 CHF 500,000,000 Very briefly on the learning on the 2 categories in which is the main area of focus for the company and also for Zonema, for Purina and Nescafe.
Purina is a very interesting business model that we establish since more than 20 years in the zone and in the globe, in which we create expertise, total expertise, total focus, the group of people that work in Porin and just think about pets, pet centricity, consumer insights and so on It's about model, it's the model that allow us to take decision for really the common market to optimize resources for the benefit of the zone and for the benefit of the group. And there's also passion, passion means also that pet market is about engagement. Mark talked about that. It's about consumer engagement, it's about having the right brands that engage with the consumer. And we are really creating now ecosystems in order to capture the consumer at the very early stage and to really satisfy the consumer needs in all these stages.
We have launched probably you read on the press last week, the Purina Studios in Barcelona in which we have a digital app really working for all single country in Zona Mena to really enable this engagement connection with our consumer. The results are quite impressive. You saw before the share, but I want also talk about the profitability. The profitability is growing constantly by I mean, also not taking into account or taking into account the big investment that we are doing. So we try for our profitability in the last 10 years.
2nd that I want to talk, 2nd category is coffee. I talked already about Nescafe Dolce Augusto impressive results community is a business unit, is a business unit that is responsible for gross profit and business at the Zona Mena level. This is also to accelerate the innovation. I'll just give you the example on Nescafe Azira, I think Patrice will talk about it, But it's a strong innovation that we started in U. K.
Thanks also to the creation of group of people that work together. We are rolling out now in every country in Zonema in 6 months. So extremely good first results. And this is just to capture one time the coffee to go that you know very well. Azira is the right solution to really have the best possible soluble coffee and instant coffee when you are on the go.
The second element that this is something starting is also even in a category that is extremely profitable, very successful, there are huge part of improvement that we can do. And this is also what we are going to do, thanks to harmonization of coffee blends, thanks to leveraging the communication platform. You will see various you will see today the new communication for the new innovation of Enes Cafe Gold that will be rolled out in all countries in Zona Mena in the next 3 months. So coffee pet care, we are I'm feeling we are feeling that we are in the good track to capture all the opportunities that we have in these two categories. Going to food and confectionery, three questions, are we that I have and that I also putting on my teams, are we winning in these 3 categories, Are we making the best choices for the benefit of the group and the benefit of the zone?
Are we optimizing the resources? I believe that we can have opportunity of addressing that. And by the way, these two categories are on the double digit profitability. So it's not a problem per se for the company. It's good, it's growing, it's good profitability.
But the real question is not just to be satisfied on what you have today, what these 2 huge category for the zone can bring in the future. So what we need to recognize that these two businesses are managed locally and this is good because these 2 confectionery, chocolate food is very local in terms of taste, but we missed opportunities to really roll out big innovation that we do in certain countries in the zone in a fast way. We need to address some business cells that are dilutive. If you look at the my data, we had 2 thirds of the portfolio in food that is more than accretive to the company, more than 20% level of profitability. So 1 third as below 0.
So of course, it's obvious that by addressing this dilutive cell, fixing the profitability, growing or exiting some of them, we can improve the overall attractiveness of the food in Zonemaena. And last but not least big point is opportunity to address structural costs because in the food area, because of the local footprint that has been created very nicely in the last 30 years, we have areas of opportunity that is coming from the common market, coming from the fact that we and the distances that in especially in Europe are allowing us to make some choices. So in the future, the category when I talk about category approach means to having clearly what is my portfolio, what is our portfolio and we can streamline and simplify our portfolio in many areas. It's not just simple SKUs, it's also which is the brand in which I want really to spend money, which are the countries in which and the equation between the countries and brands. Industrial and Logistic Infrastructure, I'm talking about common market, we do believe that we have huge opportunity also in the logistic infrastructure also to serve big customer that are competing in many different places, especially I'm talking about e commerce.
We are doing already in PetCare extremely successful with dedicated e commerce customers. Of course, also in food, we want to do and we want to enhance even further what we have in reality in the company, the category expertise, the consumer insights that we have. We want to have an approach not only at the local level, but also at the regional level. We have already big ideas that can work in different food culture in the zone. And also we are open to consider some selected acquisition to complement our portfolio.
But I want to start from what is extremely good. Wang Ling talked extensively about Maggi. Maggi is a fantastic brand. It's fantastic brand because you combine the global footprint, the expertise with the positioning. Mag is about solution, is about homemade cooking, is really giving the answer to what the current consumer needs to have the right solution to cook what I want with the right help coming from the Maggi solution.
And this is also about engagement. I just want to show you the Maggi diaries from Middle East example, just to show you how the Maggi brand can be in the connected way with the consumer, with the people that want to cook, give immediate answer to them. Maggie Dyeris has won this campaign another award last week in London, the M and M award. But it's important to understand which kind of award is winning on top of everything that is winning is because is empowering women through food and creating change in the community. And this is what we are doing in the total in all the communities in Middle East.
MAG is also a very good brand to embrace the authenticity plan. You will see now with the innovation that we are doing for this year already in some countries and rolling it out in every country next year is how we are doing that with new products and with the panola product that you will taste in the lunch and also with other products. We are doing also of leveraging other brands and other concept that we have with pizza. In pizza, we are covering with Boitoni and Wagner the different segments of the category. And also the vegetarian, again, you will test the product, The Garden Gourmet vegetarian and flexitarian offer that we have rollout now in more than 12 countries in Zone EMEA.
But also food is also very interesting for me because as I said before, is also based on strong local brands that connect very strongly with the local consumer. And again, I give an example of market and look at how we can capture the authenticity and the origin of the product. So Diener is an example, Tommy and sauces in Germany, Switzerland is another example. Wagner Pizza is an extremely successful acquisition that we did a few years ago in Germany. So we have a very good footprint to be able to succeed in food.
But again, my message is very good, we can go beyond. Opportunities also is We have opportunity to address the complexity that we have in this category. This category we are is a huge category for Zona Mena, is a huge business for the Zona Mena in terms of turnover, but it's also a category in which we have grown also thanks to many acquisition in the past, especially after the possibility to acquire business in Eastern Europe. And we have an opportunity also to leverage what is really working in this category. On the other hand, we have opportunity on the cost side because overall we are not extremely competitive in terms of cost, in terms of structural cost, in total delivered cost.
But I would say the most important thing is also to decide what and where we can win. So making choices, making choices will be the work that we do in this category in order to really win where it matters, where we can really win. And we are for instance in the U. K, a market in which confession is huge and which we have a fantastic footprint in a market in which we clearly we want to win. So base again, the base is very strong.
We have fantastic strength. As I said before, lots of acquisition. In this acquisition, we also acquire very good master brand, local brand that connects very well with the local taste. And I give you an example of Oregon, the leader in Czechia to give you this example. So exploiting the best of the local brands that can really convey with the local taste what consumer wants in the different places, but also premiumized.
And premiumization we've done through innovation and La Reseda D'Atelier is a strong innovation that we are now rolling out around Europe is unique chocolate tablets with a unique technology that we are producing in a couple of factories at the zone level, but also premiumizing KitKat. You know better than me the pricing power in Zona Mena is limited. The real price in Zona Mena in Zona Europe, I would say, especially Western Europe is the mix. So the ability that we had in coffee and pet care to work with the mix, the price per kilo increase is a way to increase the margins and to increase the profit. KitKat now embarked since a few years in this journey and you can see that the results in KitKat profitability also is growing and will grow thanks to the premiumization strategy coming from obviously innovation, renovation and new way to connect with consumer and to give better product to consumer.
So overall, in the zone, we especially in food and confection, but I would say in the zone what we are trying to do is to evolve from a purely local to local choices and the resource optimization to combine the local expertise, the local execution, the local strong taste with a regional approach in which all the decision also will be taken together, markets and categories. So we want to obviously start especially in some areas of our business from the structural cost, we have huge opportunity to improve, not only because we are inefficient per se, but because the world is changing. The zone Europe is changing, the European part of the zone is changing. So we can grab much more opportunities in addressing the structural cost. The last element that I want to say is about I have not touched a lot about route to market and customers because it's been covered and will be covered also today.
I just want to give you 2 messages. We are winning with the winners, discounters, our growth in the 1st part of the year is almost double digit. We are extremely well positioned, especially in some categories we have been able to connect with the discounters and to give the right offer with the right price in a way that we are competing very effectively and very happy on what we are doing in that sense. And also in the e commerce online, I mean, again, pet I told you before pure players and so on, but also with brick and mortars with direct to consumer. Now direct to consumer is a strong area that we are pursuing and we see very soon some strong results.
I just want to tell you that for every category in Zona Mena, the online share is higher than offline share. So we have seen already that we are extremely well positioned in the e commerce engagement and with the new trends that's undoubtedly also in Zona Mena will be important. In conclusion, Zone Emena is performing. We are performing in the zone. We want to win in every category in which we want to play and by winning again we'll expect the rules of the game of each category.
We are winning and determined to win in coffee and pet care. We want really to create the condition to win in food and confectionery. These 2 the people that work in these two categories have the same right wing and they are extremely passionate and they have the same passion that I see in pet care and in waters. I have to say that I'm extremely proud to lead the Zone Emena team is a very strong team, is probably our biggest strength that we have. And what I had to tell you that people are just willing to work together.
Now in the moment in which we see divisions between either in the countries between countries and so on, the people of Zona Mena are already embracing the zone messages. They really want to enhance people quality of life in the future by working together.
Alain, please, first question.
Thank you very much. Anna, hope you're open, MainFirst. I have a question regarding this onethree of the portfolio, which has below average margins. Could you help us a little bit what are the factors you look at? And secondly, how long time do you give them to improve to come to a similar level?
It's a very good question. In reality, the dilution level very often not related to the market proposition. The market proposition in terms of innovation price market share is very similar market to market. But the condition, the cost equation of the different cells can be extremely different if the supply area is not optimal for this specific cell. So what we are doing is not only giving challenge, you have to improve, that's it, But it's really to work together to create the condition in which some cells in which we can win can be extremely profitable.
We are working now, I would say that the strategy in food and confectionery is probably, I don't like to say that is we are strictly based on phases, but the first phase in the next 18 to 24 months will be strongly biased to simplify, streamline, reduce cost and so on. And the second phase will be more on the growth, innovation and growing. So that's the timeframe. So we are talking about the same timeframe that Mark has expressed. I would say this is more the phases that we want to follow in this.
And many action is not in the marketplace, but is on the zone level because we take decision also in terms of where to put resources in the future.
James, please.
There. A question for me, James Toggen from Berenberg. On online, e commerce in Europe, some of your big customers, Tesco, Amazon, they're not making much money online. So where do you see the role of large suppliers like Nestle in letting them achieve profitability online considering the size of the growth there?
I would say this is we are looking at the evolution of e commerce and clearly there are some winners in e commerce. That's why winning with the winners is also to see if a certain retailer has decided to put online e commerce as a priority and they want really to win or they want just to participate. If they want to win, we can be with them and we can help them also in a certain way giving the right offer, the right price, the right promotion, I would say engagement in order to do it. So there are some winners, some are less winning, some so we are clearly working especially with the winners and we are doing extremely well. With Amazon as Laurent was saying, we created an acceleration team that will work also with our team that we have in Zonema in order to understand health and also accompany the Amazon future evolution.
We at the end of the day, we are not privileging anybody. It's just a question to really continue to win with the winners.
James, right here.
Can I come back to as it relates to previous presentation and Stuart's question, do you have this issue of inconsistent specifications in Zone Europe as well and a need to reduce the number of specifications? Or is that purely an issue in the Americas?
No, it's a topic also for Sun Europe, especially in some categories. I was looking at now the Christmas promotion for chocolate, Santa Claus promotion. And then the factory wrote to me and wrote to my people and say, look, why we should produce 17 kind of Santa Claus for 17 different countries with 17 different dimension, with 17 different cases and so on. Can we do better? That's when I talk about harmonization is also that.
Do we really need 17 Santa Claus? Probably not. If I ask the market to optimize, they will always say, yes, but my Santa Claus of 20 centimeters is better than the German one that is of course, we'll listen. I will listen. I will be I want really to perform, but I want to harmonize, I want to give the factory the possibility to reach 80% of asset intensity as soon as possible.
And this is when I said it's me also, it's not only fixing the market objective and just do it, but also me creating the condition for the factories, for the market to win. Yes, there is a big opportunity.
I realize you weren't in charge when we were told this was happening 15 years ago. But why didn't it happen 15 years ago? And why is it going to happen this time?
Well, it's normal. If you ask 25 different people to win and they do it, people do it with a very good faith. They really try to optimize their resources. They will really always try to win looking at their own situation. If you don't ask a different question they will continue to do and they will continue to do differently because in their market place, in their specific situation, that's the best solution.
Nothing wrong, it's fantastic. But it's also our responsibility. That's why I'm saying combining category and market. Leveraging the 2 elements, the expertise, the logic, I mean the logic is amortization is obviously logic. Amortization is not done for in every single element.
Coffee blends, it doesn't mean that the English consumer likes the Russian taste or like the Italian kind of coffee. We know, we know very well. We have absolutely a patent of all consumer what they want. That doesn't mean that we'll have fortified coffee blends because this is unmanageable. So we can adapt, we can combine, we can clusterize.
I mean, when we talk about money, the money is there. The money is in our ability to win but also to harmonize.
Yes, please.
If the U. S. Has decided to sell the confectionery business, why is that not an option in the case of Europe? And the reason I ask that, as you say, is lower margin complexity. I believe that in some markets you don't have scale either.
And it's why not, why is that not an option?
That's always an option but why doing that? It's a huge category, it's huge business, we are winning in many different places. By the way, we are good double digit profitability. I'm not at all saying that confession is single digit. We have spots.
We have different countriesbrands in which we have even 20 plus level of profitability. And this is the same situation when I was in charge of pet care 20 years ago, we were very distant number 2, we are doing 5% profit, would have been very easy to decide to exit pet care in that moment. And I mean, you can also, if you fix and if you focus on the right things, you can win. And I tell you, if we do it is because, Mark can answer better than me later today, we believe that in confectionery we can win. That doesn't mean that we will not take some decision in some sales or some brands and so on because it's not sustainable managing the number of brands and cells that we have today.
Absolutely. But overall, confectionery category remain very attractive for the company. This has been confirmed by Mark recently and also today. And we believe that we can even improve what I'm saying is a very extremely good level of profitability. We can really become accretive also to the zone.
I'm definitely sure.
We can take one more question, if there is one. Yes, Warren.
It's Warren Ackerman of SocGen. Can you just talk about taking out structural costs in Europe more holistically? It's never been easy to reduce costs in Europe or close factories in Europe given Works Council's issues. I mean, how many do you have in Zone Amino at the moment? And how many do you think you need to have in the next 5 years?
And that $400,000,000 to $500,000,000 number of structural cost savings, how was that number arrived at? And do you expect to actually retain any of that to the margin? Thanks.
The number of factory, I think we added in one of the first slides is more than 150 factories, but this is for Nestle in Zona Mena overall. There are opportunities also to consider the equation of factories. Sometimes you think about the physical place that is necessary or not necessary, but very often is the technology and number of lines and the capacity utilization of different lines. If you don't harmonize, one of the things that we have done in the coffee and the pet care is also to harmonize technology to have one technology that can be run-in every single place with patent technology with something that is unique for us that can give us the sixty-forty or seventy-thirty in terms of profitability. In the other areas in confectionery food, we have very different technologies coming from the different acquisition that we need especially in confectionery.
We have different situation. We have many lines, many lines that are producing the same kind of product. If you tell me, if you ask me, probably it's more in a dedicated lines in where we have the best conversion cost and the best total delivered cost to produce for sub region, not only for Zonema. Of course, I'm not looking to have one line producing for Zona Mena, but having more, I would say, harmonized technology, fuel lines and so on. Factories will always I mean as Mark presented before, we are also having a global manufacturing footprint analysis.
We are examining the different plus and minus of our manufacturing footprint. There are areas of improvement also in terms of factory future. We have already done many factory sales or closure in the past 10 years, 5 to 10 years in all the categories by the way. We have done it in the Nestle way. We have done it extremely well.
In full transparency with social partners, guarantee to people all the best possible condition, guarantee the future of work and so on. And this is happening unfortunately because we don't need certain duplication of factor. We'll continue to do it, but we'll continue to do it with full sense of responsibility when needed.
Thank you very much. That brings us to lunch. Please be back here at 1:45. So you got 1 hour 15 for lunch because I told you there are so many Nestle options for lunch, you have time to sample them all. And I see you back here at a quarter to 2.
Thank you. So when we're ready to get restarted, I have the great pleasure to introduce Patrice Beulah, our Global Head of the Strategic Business Units, Marketing and Sales and Nespresso. And Patrice, please. Thank you. It works.
You had a good lunch? Mark called this moment the Des Valais moment. It's my objective to keep you interested and to realize all what we are trying to do. In the next 30 to 40 minutes, what I want to show you is how we at Nestle is trying to capture all these new health and wellness trends that have been appearing for the last 5 or 7 years on the market in a fast changing landscape with a consumer that is also changing. What is it all about?
It's about being relevant. It's about being relevant to what is truly a new generation of consumers, especially in the United States. And I will not go through all what is written here, but a generation that is looking for new different dimension in food than what we have had before. And it's about for us and I will show you that later, how we work on the intrinsic of our product delivery, the benefit we offer to them, but also the messaging to them, how we connect to them, how we start dialoguing with this new generation and bring this into a holistic experience sometime and you've seen that in some of the presentation with ecosystem built around digital data and trying to build experience beyond the product and just the communication. So if we look at this new dimension and some of them are already huge because a lot of different elements are put in there.
If you look natural at €195,000,000,000 it's a sum of a lot of thing in a lot of industry and so but you see the size of this, you have also the what we call the free from or reduce and there you have 2 trends. You have strong decline in artificial sugar, artificial sugar and there you have declined, but also quite a growth in all other dimension. I will show you some product. Then plant based organic lactose free, high protein and gluten free product and I will show you a bit what we are doing there. This is Euromonitor.
The way consumers see it is far more holistic, it's far more multidimensional, it's far more intertwined. And some of the products I'll show you are not only organic, natural gluten free and so because this is what they expect from us and this is what we will strive to offer them across our whole portfolio. What is our core strategy? The core strategy is to bring this new dimension in the geography where it's very prevalent at the core of our core brands. We believe our brands, our billionaire brands, our local brand, our regional brand have the authority to deliver also this natural dimension in a very specific way.
This is the core of what we do. The second part is we are launching new brands. Sometime under the umbrella brand of our core brand And we do this when we want to offer very specific benefit or in a very specific channel. We were in discussion on Beyond. Beyond is the 1st natural pet food that went into mass and that's important.
The third part of course is the acquisition of what we call Born Pure brand and accelerating their growth contributing in the whole portfolio enhancement and so. So this is how all these trends of broadly called naturality, we intend to bring them across all what we do. I show you here the example of pet food where we have brought that at scale. You have this core brand, it's a billionaire brand and Laurent talked about dog show and cat Chow where we have launched natural version of it. We have brought meat as the first ingredient.
We have launched Benefit Grain Free. We have launched in the Purina 1, one of our core brands, a range called True Instinct, which is made with game meat. And you see below how much we have achieved in a few years with massive growth into this natural dimension. These are these new brands I talked about beyond, but adventurous, this is a snack brands in Europe. And you see also the achievement which is already quite sizable.
The last part being the Merrick, the Tera Canis of this world where we have acquired this Bonhoe brand that we let be managed separately and are mostly active in specialized channel and delivering in super premium their naturality. And you see here already the segmentation that is appearing. All of this is more than $1,000,000,000 already this year. All of this in the U. S.
Is about 14% share where the leader has 18%. So it's just to show you that what does not show in market share because this is across the whole portfolio and this would be accounted for in Doge Shao or Cat Shao. We are already there and we are moving very fast and you see the kind of growth we are achieving by implementing this strategy. Let me get to you to some example of set of what I showed you before. Organic, organic is not really a new.
Organic is all about sourcing the right ingredient. It's also about the integrity of the supply chain. I'll show you example. I will not comment on all what I show you. I will comment here on the far left of the it's part of the infant formula and baby food because this is a very important product.
We are the 1st company to launch in Asia and especially in China an organic infant formula and the Eluma. Eluma is our super premium brand, but we are launching a product on top of what we have done so far and this will be a first. Below that you have Gerber. We have worked very hard to review our whole range to bring new dimension, organoleptic, visual on all dimension to catch up unfortunately in a market which is developing fast into organic product. This for us today is about 200,000,000 sales organic with 30% CAGR.
Within natural also, you have something far more simple and I call that our born pure brand and they are born pure unfortunately or fortunately for more than 100 years for some of them. But this is where also we do work a lot on communication to bring back the story of these brands where they come from, the purity of what they are and the way we market them today. The first brand here is San Pellegrino, which by the way was voted last month by a study of Goldman Sachs and Conde Nast as the preferred love brand from the millennial. The number 6 being Nespresso. So it shows that brands that have been there for a while can also passionate the millennial.
The millennial can connect with this brand. You have here San Pellegrino. I put here an escafe. This is 100% pure coffee, in this case coming from an origin in Chiapas in Mexico. Farmer Peak is product in Australia, which is made from oats from a very specific part from Australia.
And the last one is Movember Peak ice cream, which has always been natural. And in some country we can claim 100% natural here it's the case in Switzerland. So we are bringing this story what we call romancing the truth of our product more and more to signal to our consumer that these brands have not born in the factory. These brands are born in the real world and they are just a bit older than the new brands coming up today on the market. Another important part in naturality is the sourcing from ingredients that are in the proximity of where we produce.
I show you here three example of Caillier, our Swiss chocolate brand, where all the milk, the fresh milk is collected within 20 kilometer of the factories. Lin cuisine, I think is a very good example of a product that was a few years ago just a mac and cheese. This product is made today with pasta we do ourselves and with a story about cheddar coming from Vermont and that allow us to price up and that allow us to get double digit growth on a very simple product, but this is the difference of telling the stories, taking care of your ingredient and repositioning sometime what is fairly mainstream product. Last one is Bon Paris, Hirta made in France. I want to take you also through what we call the new free from or highways diet.
And here you have the gluten free, which we believe is a trend that is likely to stay, which today is between $3,000,000,000 and $6,000,000,000 size. Lactose free about $7,000,000,000 but lactose free has been here for a while, but over the last few years have started to enjoy a renewal of interest. I will talk about reduced sugar to tell you where we are out there and high protein which has moved from being of the interest of sports people to become far more of a mainstream diet for some people. Gluten free, we have done a lot of work and the main issue for consumer gluten free is taste. We have done a lot of work to win sixty-forty on blind test with a lot of products that you see here.
This is, we believe the people, while there is no scientific reason to say that gluten free will make you feel better, people do actually feel better when they eat gluten free. And we see no reason why we should not offer this throughout our dough and pasta business, but of course also in cereal and you see here cereal for family and cereal for children. We have also developed a full range of gluten free cooking aids for Chef, which we are marketing in quite a few markets. Today, gluten free for us is growing at 9%, but it's already reaching close to 500,000,000 sales for us. So we will continue to do this where consumer demand it, where products we are able to do this and deliver a very, very good tasting product against what exists from specialized brands.
Lactose 3, I said we always had lactose 3 in a lot of our portfolio. It's enjoying a renewal for people that feel that they do not need the lactose to get a great dairy product. We are doing this and you see this very much so under our core brands, the Nido brand across the world, Nescau in Brazil, a very, very important brand for us but also in Nestle Nutrition for babies and more recently also in ice cream. This is about 200,000,000 sales for us if I take lactose free growing at close to 20%. Two words on sugar.
We have been you heard Laurent, we are continuing to reduce sugar across our product range and across the world. We are committed to what the WHO has asked the industry to do and we are achieving this. I show you here example of Nesquik where we have launched in Europe now with a 30% reduced sugar product and you will see this appearing across Europe and beyond. Next to it is a Milo product where we have also no sucrose added and this is these 2 products have per se a lower sugar, a lower sweetness profile than what we offered before. And we believe this is also what we have to do to help children so having less taste for sweet product.
On the right side, and I hope you had the chance to test the facet technology that we put into a small milky bar bites for the break. We are advancing with Faucette. The objective with Faucette is to offer 30% reduced sugar industrialize the product I think I can say that we will have a few products on markets in the next 12 to 18 months. So this is a breakthrough, this is a technology, it's all natural. And I come back to what I say, well, there is a pushback towards all artificial sweetener.
There is a desire, especially also for children to offer products for the mother to have the available product that have per se reducing sugar naturally and reduced in sweetness. Hypertane product, again here you see it being developed across a range of products, Milo, Nesquik, Fit Kitchen, fitness and what we'll do next year following a move that surprised us but is interesting, ice cream with high protein. We'll be launching this very early next year to get into this segment. Two words on Fit Kitchen because this has been a key product to rejuvenate Stauffer and to give what some consumer were looking for the benefit of satiety while having a high level of protein. This is we're launching now bold product, but this is a product that we targeted to mail, but it's the consumer seems to be expanding on that basis.
This is the product that sell more than 50 $1,000,000 already and has captured more than 1.5% market share in this very large entries category in the United States. Plant based diet, plant based diet, you have 3 consumers in this large 33,000,000,000 categories. The flexitarian which are of most interest for us because they are more of them, But these are the people who are trying to reduce their intake of animal protein and trying to find a new balance in their diet. Then you have vegetarian and the vegan, which are also growing in numbers, but are in the smaller numbers. We start from a base at Nestle which was mostly in Asia where we have had under the Yinlu brand, but also Pac Fook in Hong Kong, soya milk and other almond or nuts milk.
You see Nesfit that we have launched in Brazil successfully, the congee from Inlu. This first part represents about $600,000,000 sales and unfortunately today we are not having growth in that category because also of the Inlu effect. So we have to reenergize Inlu to start to grow again in that part. The 2 others are in the middle, you have the innovation we are bringing again under our core brands. You see here the milk, the coffee mate with almond milk, coconut milk.
This is all plant based range that we just introduced the market. Haagen Dazs, non dairy product and Nescafe Dolce Gusto, a soya milk based cappuccino. That's non milk and on lesson you've tested that at lunch. Garden Gourmet which we are rolling out across Europe, this is a snack or center plate based purely vegetarian product. And in Erta, we do what we call meat analog, meaning product that looks like meat but are entirely made out of vegetables.
So this is where we expect we want to bring vegetarian offer to consumer in Europe and the Western world and continue to do this and ride on this trend which we believe is here to stay and to amplify. The last part is Sweet Earth, I will not talk about that. This is again an acquisition of a Born Pure brand where we think we can learn a lot from them that we will leave alone to develop the way they have done it so far and continue to support them in the very important American frozen food market. We complement plant based with grain based offering. These are product where if you usually people who are flexitarian also do want to have products that are grain based.
These are example of products, a lot of them in Asia, but also Australia and on the right side, the whole range of wrapped offers by Sweet Earth. This complements the range and our whole strategic advance into plant based flexitarian diet offering. Beyond this, we continue to premiumize and this is where also this recoup all these trends recoup each other. Premiumization is still important and it allows us also in conjunction with the other trends to offer to consumer novel ingredient, simpler recipes, clean label recipes in a very, very authentic way. I just put here a few examples Haagen Dazs, this is simplification of recipe of packaging also relaunch this year with very solid results where we'll just enhance visually and in the taste simple ingredients offer.
I put here also culinary because we can also premiumize product as simple as soups or instant noodle by offering better product, by offering better ingredients and we have had here in Southeast Asia some success with this type of product. Next to it is a continuation of Latelier, a This is a continuation that will be launched throughout MENA of a very thin tablet, dark chocolate of single origin and with encrusted ingredients on top. Last but not least, the launch the relaunch of Nescafe Gold Blend with a much improved blends with new technology, aroma technology with new packaging and so on. I will show you later on the TV commercial link to that. Premiumization in coffee also in the capsule coffee, We while we have been we have more than 2 50 competitors today in capsule coffee, we continue to premiumize.
We continue to offer to people, consumer who want an exclusive offer, who are looking for the next level of quality, some new product. This is Nespresso Exploration 1, a product coming from Laos, from Ethiopia, from new origin or new places within Colombia where we continue on our push to show to people that coffee can be wine, like wine and offer more granularity than just being a Colombian coffee. Below that you have Nescafe Dolce Gusto where we are launching also single origin product premiumizing also our range in this category. Next to that cold coffee, again here Nespresso for the first time launching cold coffee worldwide, a product launched in Australia. This is a concentrate of coffee to make cold coffee easily by adding water.
And our entry in cold brew, this is out of home products. This is a product that we deliver to bar owner or restaurants to reconstitute cold brew out of these products. And blue bottle, of course, Blue Bottle is a super premium product. Blue Bottle is a typical hipster millennial brand, but it's also selling at high prices because it offers a very unique single origin and excellence in what they do In coffee delivery that is different than what we do because Blue Bottle is passionate about filter coffee, which is very, very interesting new or not so new, but to refresh and rejuvenate the whole beauty of preparing coffee from filter coffee. We also delivering and you have seen this throughout the presentation, trying to bring our product to the naturalize our product and more and more at scale.
And we are experimenting with new delivery model like Freshly. Wang Lin talked about chocolatry. We are progressively getting to some scale with that. This is no more coming from Japan and a few short collaterie in Japan. This is expanding to Asia, but also beyond.
We opened here in U. K. And we have also pop up store there. The whole objective here is to connect to make people have a chance to make their own Kit Kat at a price that is significantly a premium to what a normal KitKat is and to get the brand flare, a new interest and we have interest and we will continue to develop this. So from a very simple brand, we have been able, thanks to our Japanese, let's say, courage, passion for that product to create a real theater for this wonderful product.
I put here in the middle Nespresso. Nespresso has completely refurbished its club offer among subscription model. And that's the first time we do this, we are doing this at scale. It allow us, of course, to increase loyalty to our product at a time where the temptation to try other brands is higher. And I think Freshly you've heard about there this is also an experiment for us to understand what's happening on full meal delivery at home.
Ecosystem, ecosystem between consumer, product, services, digital powered services. We talked to you last time about Mylo. This is getting to some scale. This is a system by which the mother can monitor the children intake of calorie as she can put inside what the children has eaten on the cell phone device and the child has also a wearable that gives the level of activities. We are testing that, we are getting to a 2.0 and so and we will be also testing in Europe a similar device, a similar ecosystem with Nesquik.
Just Right, we talked also about this project last year. This is about personalized nutrition for your dog. We continue to experiment. This is data powered. We talk about pet finders.
But this allow us as consumer, as owner give us data about their dogs or cats for us to tailor made the food that we believe is the most appropriate nutritionally for the cat and dog. And we'll send you this in a pack with a picture of your dog on it. Wang Lin talked about nutrition for senior delivered via tea in Japan. And the last one, Nespresso is getting ready starting next year to deliver personalized blend, co developed with some chef for the out of home market and this has necessitated that we not only look at the product offer but have factories lines that are able to do that level of tailor made manufacturing. This is linked of course to what we do with connecting with them.
This was the tangible part of our product, how we try to be relevant to the millennial, how our brands core regional local are showing that they can deliver on this dimension that the millennial are looking for. We link this of course very much so in the ecosystem with connecting with them via digital. And we are over indexing towards the FMCG industry in digital. And this digital should not be understood as just YouTube and Facebook. This is a lot more than that.
This is a lot more of what was also mentioned by Wang Lin. So local platform, specialized platform in different languages. And so in fact, more than 50% of what we spend in digital today is with local platform and this includes e commerce platform when we talk about search, what is driving search, we are also present in there. This is linked also to a very important part is that for a lot of what we do, our creativity has to be made for mobile first and you see here an example of talking about sustainability and recycling on espresso. But mobile first, this is a different screen, 40% of the kids below 20 years old see our ads for the first time on mobile.
So we have to be mobile friendly. This is a different format. This is different attention span and we are forcing all our operation to think first mobile and no more large TV screen in the living room. This is our result in creative effectiveness. This is data from Milroy Brown.
Yes, from Milroy Brown and it shows that we are indexing over and above the average of the FMCG norm. And we are over indexing quite a lot. This gave us this result on FE. The EFI award is measuring effectiveness, business effectiveness of what is aired, not the creativity per se, which is what CAN does. And this is our ranking last year.
I show you two examples here because there is a lot of debate sometime on non working media. Within this non working budget, they are extraordinarily well working element of this and that's the creativity, that's the brand equity, this is how it is put to work. I show you Felix Europe. You saw the market share gain we have had in Europe in pet care a lot, a lot has been also achieved. Thanks to Felix.
And you see here share voice before the expected share voice and the net result after airing the ads, which means the difference is the effectiveness of the media use and the quality of the creative. This is another very telling example, the launch in the U. S. Of Vertu also this link new product launch, this Vertu line new system tailor made for the American consumer and the launch of TV of a full campaign and full ecosystem based on the platform that we have had in Europe for quite some time with George Clooney endorsing the product and you see the result against category growth. If you allow me, I will show you now a series of works that has been aired.
The first one is Nescafe Gold. This is a relaunch of Gold brand. It's very much tailor made to the millennial. This is a change as a set of product. It's also a change of the communication platform that we want to use.
And while you will see a film, this is a full orchestration on this launch. After that, you have 2 ads which are talking to working women. 1 is lady in Brazil, single mother struggling tattoo artist and she's using Ideal Milk to feed the family. This is a popularly priced product. Then Contrex, Contrex is a water that is naturally high in magnesium and we address to working women.
Then Milo in India, Milo is a mega brand for us. It's not well known in this part of the brand, but it's a phenomenal brand. This one market we were not in, we're entering India and I want to show you this tailor made localization of Milo penetrating India which is a strategic entry for us. Then Purina beyond, this is natural in the U. S, ILLUMA, China and 2 Nespresso, 1 is a mainstream USA commercial, the other one is a global campaign on sustainability of what we do or what is behind the what else of what when Nespresso told or what it takes to get to the quality there and how we impact the life of people from farmers to the cap.
So I start. Okay. Thank you. I forgot to talk about coffee Mate. This is the natural Bliss product where we show all the natural ingredients.
We talked about creativity and creativity that works and make a difference and help connect with millennial. This is now 2 or 3 slides about effectiveness. And we are striving consistent constantly to improve the effectiveness of what we do. And of course, technology, highly targeted marketing and media allows us to continuously strive for this and achieve some result. This is a result monitored third party.
This is Accenture and ubiquity on our score where if you believe this, we are at 20% lower cost advantage versus the industry benchmark. Linked to that and very important is the integrity of these views. Since 2015, Nestle had decided that to have much tougher KPIs on what consists of a view. And if you remember, some of the controversy there has been with Facebook and so what constitute viewership, We started that. This is monitored by a company called Mote.
This company is the one of choice from the media rating agency. And it shows our score against the industry overage of what we call viewability, which is the reality that you have viewed this for more than 2 or 3 seconds and you have had a full screen because again, a lot of this variability is on a mobile screen or smaller thing and we want to pay for what we really get. So this is the 2 dimension And we'll continue to work at this because we believe with technology and the ability to high per target and you show a few comment that Wang Lin made on Alibaba, the ability to target really, really consumer very, very thinly is becoming incredible. This led me to programmatic media buying. This is where we do this based on data.
We achieve very high level, not surprisingly in China, where all our digital media is programmatically bought and you see other score in key market. And so we believe this because it allows us to personalize messages and to get effectiveness. Today, we work with a base of about $80,000,000 of what we call first party data. So these are the data of people that are connected with Nestle, of which about $50,000,000 we believe we can activate. And of course, a big part of our marketing going forward is to achieve this personalization connection dialogue with consumer that we are striving to achieve.
So this is in a nutshell over the last 3 years, we have saved about CHF 500,000,000. This has been reinvested in brand building. We have saved in non working media, but we have saved also in working media and I think I hope I convinced you of what we have done. I don't want to go into all the detail of that, but we are constantly reviewing this with media agency, with vendors, with publishers. You get a lot of detail, including some time having our own content production because it become very effective and frankly very inexpensive to produce wonderful things ourselves in simple studio in our offices.
So this is to be continued and we think we can achieve more than that. So in summary, we will and we will continue to integrate this new dimension as an addition to all what we do on our core brand. This is important to us to stay completely relevant to the consumer of today and tomorrow. We acquired BonePure Business. It's also part of the strategy.
It brings us source of growth, of high growth. It's also a source of inspiration for organization. We'll continue to strive to be for creative excellence to be able to connect, explain our story and enter into a dialogue with the consumers. This includes digital layers of service and personalization at scale. We will continue to gain efficiencies in all what we do and there is as much efficiency to be gained in that part of our business than there is in all other parts and we'll continue to strive for this day after day.
Finally, and maybe as a final word, this is we believe far less about big brand or big food versus small brand than it is about great brands. It's about great brand doing their job like they have done before. And we are absolutely convinced for us that we can do that, our brands can do this for the future and the consumer expectation of tomorrow. So thank you very much for your time.
Okay. With that, we move on to Q and A for Patrice. Who's got the first question? Yes, Stuart, please.
So maybe two questions, one leading to the other. So in a lot of this product innovation around health, natural, all that kind of stuff, it seems that you're adding new complexity into your products potentially or at least how is your supply chain able to react to this? And maybe you can talk about it specifically with respect to the Flavors and Fragrances where obviously there's been huge consolidation. You all have core lists of 2 or 4 suppliers for many of your products. But are they able to meet your expectations in this area?
And then second question, if there is more complexity or cost to the ingredients, what happens to the gross margin of your these products?
Thank you. Thank you. I think I did not talk, of course, that the culling of SKUs on the other part of portfolio is also happening. There is a reality of the shelf and there is a reality even in e commerce, there is a reality of shelf. So of course, this is new trend.
This is what consumers, the millennials today wants to see in their product. We're delivering. We will continue, of course, to get rid of SKUs that do not work and do that. On fragrance, so well, we expect to use less and less of this. We are of course, the whole trend here is to bring product as natural as possible, is to use our science to get natural product to the people.
A lot of product you saw that Marco showed in even in Maggie, what we call kitchen own kitchen cabot, because millennial is also looking at the ingredient list of our product. And we know that we have to get rid of flavor, fragrance and e numbers and so on and we are doing this at scale. Laurent mentioned that when we say, well, meat as a first ingredient in a pet food thing, it's an effort, it's there. So I believe we are not going to increase SKU's numbers. I think we can manage that complexity.
And very importantly also and one of the beauty of what is happening to the food industry now is the premiumization going with this. These products are premiumizing over what existed there. ILLUMA, which was a 60% premium over any other brand, the organic is being launched at another 20% above this. If you look at the price of Merit per kilo, the price of capsule coffee per kilo and so I think this is, of course, giving us a lot of oxygen for doing this. And this is very rewarding for our people also because we work with noble ingredient and consumer and that's also a key feature of this generation.
They are recognizing the value of food, of great food. And if we deliver it the proper way, I think we will be rewarded also in margin.
Yes, Warren, please.
Hi, Patrice. It's Warren Ackerman of SocGen. On this big brand versus small brand dynamic, I think of Nestle as a big brand portfolio. I think you've got almost 30 brands with almost CHF 1,000,000,000 or more of sales. And given that dynamic seems to be accelerating quite rapidly, I'm struggling to see how your big brands won't suffer as the world fragments.
How are you going to eat your big brands to continue to grow when millennials want smaller, more local, more authentic perhaps brands? How do you address that challenge?
Yes. I think this is the core challenge. This is what I try to convince you that we are going to be able to do at scale. I believe that, of course, today, the smaller brands are grabbing little piece of market share to larger brand. What we are what we what I tried to show you here is how we are going to react and bring some of what this new generation or new consumer is looking for on power brand, on large brand and using our scale and the ability to deliver what they want to regain our share.
And I think this is doable. I believe what we are doing in pet food, we will talk about this 2 or 3 years ago in 2 or 3 years' time, I think we can do. This is the challenge. It means a lot of work for us, but I do not see any reason why our brands do that. You see, I also pointed out this on San Pellegrino.
San Pellegrino, is it a millennial brand? And so well, probably in Italy, I don't know, but less than it seems to be in the U. S. But they think it's their number one love brand, if I trust Goldman Sachs and Conde Nast. So we have sorry?
This is a challenge. I think we fully understand this is a challenge. I think it's why acquiring Born Pure brand and see how they market and how they do is a great inspiration for us because we will have to do this. But I of course, this is a challenge that's why we try today to show to convince you that we can do and we want to do. And we're going to spend a lot of effort to convince our consumer that we can do.
There's a question, Sheryl?
Good afternoon. Richard Taylor from Morgan Stanley. Correct me if I'm wrong, but I think Nestle have had a venture capital investment since 2002. So I wonder if you could highlight any major successes from that investment over the last 15 years. And maybe if there haven't been any, perhaps you could reflect on why there haven't been any?
Maybe we can park this question for later on for the CFO, I think, because he will address some of it in his presentation and then we'll come back to that, is that okay? With that, we move to Michael.
I'd be interested in the new digital online e commerce world. Do you think the size of Nestle as the biggest global food company gives you as much of an advantage as it did in the traditional, call it, offline world?
It's the people talk about the infinite shelf on e commerce. The reality is also people rarely pass page 2 on Amazon. So it's not so as much of a big difference than what it is. But of course, no, I think the consumer has incredible choice, has incredible choice. And all what is happening and there are far more trends around it is there to offer choice.
So the time of you went to the large retailers and you pay listing fees and only those who could pay would get the business is a part of the business, but it's no more the future. So no, we will have to compete. That's why I say it's all about being absolutely relevant, absolutely relevant. The reason Nespresso still has incredible market share in markets where you have 250 competitors available everywhere is because we are relevant, because we offer better coffee, better brand image, whatever, it is a combination. So I think, yes, entry barriers have come down, then it gets to brands, technology, innovation, emotion, connecting and all what they're so yes, I think you're right.
Celine, please?
Yes. I would like to understand what is the strategy with the Born Pure Brands? In the sense, is it it's small brands that are managed by the founders or whatever? But at which point are those going to be really integrated in the business? Or it's just like you kind of incubator of ideas for yourself and then you do that?
So just to try to understand, because I think where many big businesses fail is to integrate the small business and if you have a multitude of those, it will multiply as well the challenges. Thank you.
Yes, yes. I think that's I think and maybe Marc will talk about that. But our philosophy, and this is not new, has been when we acquired a company, this is usually because we have not been able to do what they do. And we have done this before. We talk about Title A in China.
Title A in China was 17 years managed by the founder. It became a massive business in China. Mr. Rong was the founder and the owner and developed it, received the full support of Nestle. But he chose what he wanted to do.
He chose the best of Nestle, but we kept his entrepreneurial spirit. I think the view if you look at Merrick and you saw some number, Merrick is already at scale. But Merrick works with a different philosophy, a different way of doing things. And it is our view that we're here to help them, but we'll keep them separate. It will be the same with the companies you have seen there.
I think if you acquired companies, which have this different way of working, what made them successful and integrate them, you will lose them. And there are cases like this among our some of our peers. So we'll have to do that. So it means we'll have to manage the complexity of being there to help them and guide them when they want, but leave them develop the business. Title A is a quite outstanding example of a success like this in a culture that is not so simple.
But we have had this in us to be able to delegate and still guide and through the same value help them to develop the right way.
There was a question from John back there.
Thank you. Just a question on the renovation of the portfolio overall. I think typically every year you say about 30% or 31% is renovated of the overall Nestle Food and Bev portfolio. Just wondering what share of that is actually what we should say on trend whether that's organic or natural. Is it a big proportion?
And if it isn't, why isn't it a much bigger proportion given these are all the key drivers going on within the Food and Beverage business at the moment? Because obviously, you've highlighted quite a few. Is this organic? This is all natural? This is whatever it may be?
Do you have a sort of a figure of how much of that is on trend that you're doing every year?
No. Of course, we monitor constantly what is happening, not only what is on trend, but what we believe will be on trend a few years down the road. No, I do not have a number like this because I could put other trends in other geographies that are very, very powerful. We talked about liquefaction in the whole of Asia and other trends in there. But this is fundamental to what's happening in some of our key markets of this new health and wellness dimension.
And we are not monitoring numbers because sometime and very importantly, it's more important for us to roll it out, to roll it out to another 10 or 20 markets than to launch yet another product. And with finite resources, that part is very important. I think this is what Mark also highlighted. We need this category driver. When we have success in a market, how fast can we roll it out versus reinventing and saying, well, that's another innovation of percentage point.
Mitch, you didn't have a question today.
Thank you. It's Mitch Collett from Goldman Sachs. To ask a similar question in a slightly different way, I guess R and D can be directed towards better tasting products, better for you products and also cheaper products. Is there a way you can give a broad brush estimation of how your efforts are directed amongst those 3 groups or maybe more? And whether that effort has changed over the last 9 months or so?
And then secondly, as a group, you have a new margin target today. Is R and D ring fenced as an investment within that?
It's about R and D being ring fenced as an investment. I would say we touched that later with Francois because he's going to give more detail about an update about the savings programs. I would say we park the question for them. But I
would just say this is a continuous effort. A large proportion of what we have been doing quite well has been about recipes improvement. When we talk about lowering sugar, fat, etcetera, etcetera, still winning sixty-forty on blind test. When we talk about this new dimension, I talked about gluten free, if you taste some of our product versus some of what exists, you there is no comparison. This is a lot of work R and D and these are new dimension because dimension of naturality is very important.
Before we would have found other way today, naturality that the ingredient list is very clean is important. So it's a significant part of what we do.
But is it possible to have an innovation that doesn't fulfill any health and wellness agenda that is purely about making a product that tastes better or is cheaper? Is that possible
in Nestle today? I do not understand.
Innovation that does not improve in the nutrition and health awareness, it just makes it cheaper or taste better? Did we have that as well?
Of course, you saw Ideal Milk. You saw Ideal Milk in Brazil. This is a very good tasting product. It's not milk as per legal definition, but it's an excellent tasting product with high nutrition at a low cost. And when we talk about Africa, when we talk about new markets, and there were my colleague talks a lot of that.
Of course, the Popular Price Position product is a big part of the agenda that I did not cover in this presentation. Thank you.
One last question,
Patrick.
What's your share of sales with premium products? Are you satisfied with it? Or what potential do you see in the long term from Nestle?
We are never satisfied with premium product. No, I think we are very satisfied in some categories. We are less satisfied in other. I think you know that we are less satisfied in Confectionery that we could have grabbed that trend long time ago more firmly. But I think it's a the very rewarding part of this is that we have brands.
We have so many brands that we can activate and we are pushing now more to do that. And I think when we do it, we are rewarded by consumers. So we'll continue to push it. A lot of this product, which we call Nutrition, Health and Wellness are in fact very premium. If you look at Illumina, it's Health and Wellness, but it's very premium.
It's also true for American and other products. So it's a matter of definition. That's why I also try to show a chart that this is very holistic. And once consumer see that this is relevant to them, whatever dimension they prepare to pay a higher price for it, we can call that premium or health and wellness as long as they are satisfied, I think it's a good
choice. Okay. Thank you very much, Patrice. Thank you. And then next up is our CFO, Francois Roger.
Thank you, Patrice. You're lucky you're in the business of emotion. I am not. So I won't yes, I will not show any commercial unfortunately, but your commercials are wonderful. Good afternoon, everybody.
I'm very fortunate. I saw most of you actually last month. So we did spend some time. I understand some of you told me that the story we talked about last month was fairly consistent with what we shared already today, so with more information obviously today. And I will cover 3 main topics today, margin improvement that includes cost discipline, portfolio management and capital structure, and I will end up my presentation with some other items like working capital, ROIC and disclosure.
Starting with margin improvement, I will start my presentation by returning back to one of the slides that Mark presented this morning. So our target for 2020 is to increase our underlying trading operating margin by 150 basis points to 250 basis points. We are talking of underlying trading operating margin, which means before restructuring costs and cost associated with restructuring as well. So moving from 16% in 2016 to between 17.5% to 18.5% in 2020. I'm sure you have noticed that we have provided that target at on a reported basis, which means that we will aim at getting we will get to that target without any restriction as far as foreign exchange is concerned.
So it is regardless of foreign exchange evolution. In the next couple of slides, I will illustrate how we intend to get to that target with very well identified saving programs with clear and actionable plans without embedding our ability to grow. Please bear in mind that most of the examples that I will provide you with are different by nature, they are different by scope, by impact and obviously, by timing. When we the main driver of our margin improvement is structural cost saving program. When we started the program a year ago, we insisted on the fact that we will focus essentially on structural cost, which means manufacturing, procurement and general and administrative functions.
This represents about CHF 18,000,000,000 of sales and this is about 20% of sales. That doesn't mean just answering to one of the question that was asked to Patrice that activities like marketing or like marketing like R and D or like sales force, for example, which represent as well tens of 1,000,000,000 of Swiss francs are immune on the part of the program. They are part of the program, but we will continue investing in consumer facing activities, while our structural cost program aims at attacking essentially non consumer facing activities like manufacturing, procurement and G and A. I will detail now the main program that we have, and I will start with manufacturing. The objective there is really to sweat our assets.
By sweating our assets, I mean reducing our conversion costs, optimize our industrial footprint and increase our capacity utilization. We have already achieved made significant progress. If we look over the last 18 months, we have completed the entire review of our manufacturing footprint. That is not a small exercise. We have 4 18 plants overall, and we produce on a daily basis about what we produce on ship and sell about 1,200,000,000 servings a day, which is a massive exercise.
So it's not a small exercise, but we completed it already last year. And we have already achieved some interesting results. We have closed already over the last 18 months 11 factories, and we have announced the closure of another 6 factories. Once again, this project is not only about factory closure, but this is one part of it. I will not elaborate further on the rest of the program because this is very sensitive by nature as you can understand.
Be aware of the fact that we have a very, very clear plan going forward of what we have to do and this is part of the exercise that we did last year. Moving to procurement. We deliver significant savings on a yearly basis, which is very much about improving our efficiency in terms of purchasing. Most of these savings, which are significant, are going into what we call NCE, Nestle Continuous Excellence. And as you know, most of it is reinvested for growth.
I will come back to this concept of reinvesting for growth as far as NCE is concerned later on. The project we have there, which I detail on this page, is different. This is what Laurent presented this morning, which is called procurement acceleration, which has to do with the fact of consolidating more of our procurement activities for goods and services above markets. When we were buying about 40% of our goods and services in 2016 above markets, we aim at reaching 60% by 2020. This has 2 of our 2 benefits.
1st of all, avoid replicating in our 190 market the same organization. And obviously, the main benefit is the fact that we will leverage on scale and generate some savings as a consequence. This is what we have already achieved. If we look at the result for 2016 2017, we have completed the creation of these 3 hubs in Malaysia, in Switzerland and in Panama. We have about close to 4.50 people who are already working in these 3 centers.
And we should deliver as a consequence of this project alone about CHF160 1,000,000 in 2017. I'm very confident about it because we already achieved more than half of it in the first half of twenty seventeen. This same amount should bring us about CHF 500,000,000 to CHF 600,000,000 of savings by 2020 compared to 2016. That includes, obviously, the CHF 160,000,000 of 2017. Moving now to our administrative functions.
I will start with Nestle Business Excellence that encompasses mainly 2 areas: our globe, our IT platform, as well as our shared services. This is about simplifying, this is about standardizing, this is about sharing activities above market. We had outside of IT a relatively low penetration of shared services. We were at 13% in 2015. We are, as we speak, around 17%.
We should be close to 20% by the end of the year, And we aim at being at 50% by 2020, which will position us more or less where most of our peers are. By the way, since we talked about IT, in IT, we are at a much higher level. We are already at 65%. But outside of IT, we were a little bit lagging behind our peers. Part of what we have to do as well has to do with the redesign of our end to end flows as we call them.
This is for example, source to pay or higher to retire or this is about even R and Ds involved in it. We have 6 of these floors, which had been designed as part of the globe architecture about 15 years ago, but we are redesigning everything in order to be best in class. What had been done 15 years ago was essentially about best in Nestle. What we are aiming at getting today is best in class. So we are redesigning everything.
We have completed 4 out of these 6 floors, and we have already entered into the execution phase. There are many, many examples of what we can achieve in terms of standardization, in terms of sharing and simplifying. I just put 2 other ones, but there are dozens of them. For example, we are developing very strongly e invoicing. We are automating as well many of our purchasing activities.
Moving further with our administrative functions, I will give you some other examples starting with real estate. We started with last year, we were operating from 3,000 different sites worldwide, serviced by 22,000 suppliers. We have we are redoing a comprehensive review of our sites. Laurent talked, for example, of the initiative that we are taking in the U. S, where we are consolidating our head offices in Southern Ohio and near Washington D.
C. In Paris, you heard about it as well. We are currently reviewing the opportunity to consolidate our 7 different sites in Paris into one single one. We had 7 sites mainly for historical reason. But it's we are doing exactly the same thing as well in the Voeve region where our head office is in Switzerland.
Last year, we were operating from 21 different sites in the Voeve area. In 2021, we will have only 6 sites. So even if you come and visit our office today, you can see that we have quite a lot of construction going there. So there are many more with significant savings coming in. Nestle has a business which is predominantly managed locally, about 50% to 60% of our business is managed locally, which means that we have sizable organization locally.
We are looking at optimizing This is very much about delayering. You heard about it, Laurent mentioned it. Some projects that have already been completed in Mexico, in Brazil. We are doing a comprehensive review as well of skin health worldwide. Many more is coming, but once again, given the sensitive nature of these projects, I can't tell you more at this stage, but we have clear plans.
Another topic that was not on the list last year is pension fund management. We used to be involved in the direct management of our assets for our pension fund. We manage about CHF 30,000,000,000 of asset, but we had a team managing that directly. We have decided to outsource our functions and to really focus all our resources on the liability side where we can extract much more value. That will deliver, for example, already CHF 25,000,000 of saving in 2017.
And we will add another CHF100 million close to CHF100 million on the top of it next year in 2016. Obviously, all of these savings are permanent savings on a yearly basis. Just to wrap up on the cost savings initiative. A year ago, when we announced the program, we talked of 200 basis points, which was equivalent to about CHF 1,800,000,000 for the program. We are upgrading the program now to between CHF 2,000,000,000 and CHF 2,500,000,000 by 2020 over 2016, which means that if you look at the midpoint, it's actually an increase of about 20%.
We have a little bit less than we said a year ago That's not that we have a more negative view of what we can achieve. The only difference is that it may take a little bit more time than we thought initially, given the complexity of some of these projects and some of them will probably be completed in 2021. Procurement, we have about the same amount. On G and A, we have found quite a lot of new projects, which means that the amount is significantly higher. This permanent savings, we have gained quite a lot of confidence recently.
Just one thing I wanted to share with you, if you look over the last couple of years, we were increasing the amount of structural costs in absolute value year on year. And if I look at over the last couple of months, we have reached an inflection point because we start seeing the structural cost being negative year on year. So we are moving negative territories in absolute value for the structural cost worldwide. To get there to reach this margin improvement, we'll need to spend some restructuring amount. So we plan to spend about €2,500,000,000 between 2016 2020.
In 2016, we have spent €300,000,000 which was already the double of what we had the year before. This year, we said about €500,000,000 it might be more. We may come back to you at the occasion of our Q3 results. We are still waiting for the confirmation on the timing of some projects, but it will be at least €500,000,000 for 2017. And overall, for the period 2016 to 2020, it will be €2,500,000,000 euros The governance on this saving program is extremely important.
First of all, we have clear owners for each and every single of these projects, including at executive level. So this is very important. We have aligned the incentive schemes in order to make sure that people are incentivized as well on that front to drive these saving programs. We have a full alignment with the Board, which is clearly supporting us and getting some regular feedback on the progress that we make. What gets measured gets down usually.
So we pay very much attention to the tracking and the monitoring of these projects to make sure that we will deliver on due time, both in terms of restructuring costs as well as in terms of benefits. And we keep on looking at new initiatives. As you could see, we have found quite a lot of new ones since we talked last year. The structural cost saving initiative, it will be the main driver of our margin improvement. So which is good news because it's a relatively limited number of projects, which means that it is relatively easy to identify, to track, to monitor and to check how we are progressing.
So this will be the main driver of our margin improvement. In parallel, NCE will continue to grow in the same way as it has been in the future. Most of what we do with NCE, as you know, it's Nestle Continuous Excellence, which is much more about operational saving. It's a 6 Sigma process, which is very important. But most of it, as you know, historically and it will continue to be the case in the future, will be reinvested for growth.
Reinvested for growth means what? Means price competitiveness in a certain number of cases. Means for example, we talked about it, there was a question earlier, when we reformulate some of our products, when we take away sugar, salt, fat, when we improve the nutritional product profile of some of our products, it does have a cost usually and part of it is coming from NCE savings. NCE savings help us as well to absorb some of the additional input costs that we may have. Let's move now to portfolio management.
Just want to start by reminding you that we have a tool that we call internally Atlas that gives us a lot of opportunity to manage our portfolio in a very active way and to make the right decision. This tool Atlas provides us information both on an historical and prospective basis. We look at it by category. We look at it by market. We look at commercial data like market share.
We look at financial data from P and L to balance sheet to cash flow and so forth. And we look at, to start with, 2 dimension. And there you have the view of our portfolio at group level. By the way, this slide is not something that I designed just for you today. This is a slide that we use whenever we do a strategic review of a category, whenever we do a strategic review of a given market, that's exactly what we look at.
We look at 2 dimensions to start with. The first one is market attractiveness, which has to do mainly with the growth of the category. And as we can see, we are well positioned in the upper part of the chart, which means that most of our categories are offering growth opportunities. And then we look at the other dimension, which we call ability to win, which is on the horizontal axis, which has very much to do with our market share to simplify. And you can see that most of our categories worldwide are on the right hand side.
That means clearly that we have a portfolio when we look at it on a global basis by category where we play in the right categories with clear leading position. Another way to look at our portfolio is to look at the consistency of the growth of our portfolio. If you review what we have published last year, with 3.2% of growth, organic growth on average. You can see that we don't have any categories that would be falling apart at minus 5% or minus 10% or even lower. We have a very consistent portfolio in terms of growth because from 3.2% on average, it moves from 1.6% for meal products and ice cream, which by the way was even impacted by INLU to 5.3% as far as pet care is concerned.
So very, very consistent portfolio. We have, as you know, a very dynamic view of our portfolio. We look at it in 2 dimension, internal and external. The external part, I'll cover a little bit later. This is very much about M and A, the classical way that you are all familiar with.
It's about making acquisition. It's about making disposals. Can be about combination, I'll talk about fronery, but it can be can take different shapes and form as well. It can be about access to innovation and external innovation. Internal resources, I won't say too much, but this is because I covered it largely last year.
This is about allocating our resources. I'm talking CapEx, I'm talking marketing spend, I'm talking human resources, R and D technology. We are talking of tens of 1,000,000,000 of Swiss francs, which obviously, if we put them to the right or to the left, if we put them in a given geography or in another one, may bring different reasons. So we are extremely active in that. Once again, I don't want to cover it.
I just want to cover one piece of it because I have a lot of questions from you guys when I meet you during roadshow, which is why don't you follow the same strategy as some of your competitors, which is invest less in your products, even if it impacts your top line growth so as to maximize your profitability. First of all, our portfolio overall, as I just described, is not really oriented towards that kind of strategy. Why? Because we have a portfolio which is mainly geared for growth. As I showed earlier, most of our categories or 60% of our categories, which is what Mark presented this morning, are categories where the growth is about at mid single digits.
So we have to put ourselves in an investment position. That being said, that strategy of, let's say, what we call harvesting some of our categories, we do follow that strategy. And I just took an extract of this Atlas database that we have for last year. In this category, harvest, we have CHF 6,300,000,000 of sales. We find there some parts of culinary, some parts of ice cream, some parts of Nestle Professional, some parts of confectionery, for example, I'm saying some parts of these businesses.
Last year, what we did is that we reduced our marketing investments in these categories. We still grew, but as you can see, we grew at about half of the level of the average growth that we had. We lost a little bit of market share, overall about 100 basis points of market share, but we did increase significantly our margin. So we can create value with differentiated strategies whenever it is appropriate. But once again, it is not that appropriate for a significant part of our portfolio.
Just moving back to the, I would say, more traditional way of portfolio that you are familiar with, which is more on the M and A side. Obviously, whenever we have, let's say, gaps in our portfolio, we do not hesitate to make acquisition. That's what we did with Merrick, where we addressed one segment that's where we were a little bit weaker, which is organic and natural pet care, fast growing segment. We invested in it in the U. S.
With Merrick. By the way, Merrick grew by 70% since we bought it. We left it as an independent organization, as we said earlier. We did the same kind of acquisition as well recently in Germany with a company called TeraChemis. Portfolio management may mean as well combination.
So that's what we do we did with Fronery. We created a joint venture in October last year. We combined our ice cream business in Europe and in some emerging countries with a company called R&R to create this company, Froneri, with a superb complementarity both in terms of geography as well as in terms of skill sets. We brought in strong capabilities in marketing. They were much better than we were in manufacturing.
We contributed brands. They contributed private labels. As you can see, the results is quite outstanding. In the 1st part of 2017, we experienced double digit growth. Our profit was better than what we expected, and we gained market share.
So very good success stories. In other cases, what we can do is to reconsider our position in a certain number of categories. That's what we did for U. S. Confectionery.
Just want to make it very clear, this decision is specific to the U. S. Where we have strong local brands. You can see some of them, Baby Roos, Butterfinger, Crunch and Other. That being said, we don't have the right for Kit Kat in the U.
S, as we know, but we have a weak market share. And I'm referring again to what I presented earlier, which is our limited ability to win with about 4% market share. And we believe that we better use our resources in other categories, which is the reason why we decided to move in with a strategic review. In other cases, getting access to innovation or fill gaps that we may have in our portfolio may mean to get access to external innovation as well. So we have to work in a very open innovation mode.
That's what we do, collaborating a lot with universities, public research association, with startups and biotechs. I will mention 2 there where we have done significant progress, Glycom for infant nutrition, our flagship venture, where we got access to CERES. We do a lot of innovation partnership as well with other corporates. So it complements extremely well what we do internally in terms of R and D. Just rebounding on what has been discussed earlier, we had created an innovation fund more than 10 years ago, which is still operating.
We have invested in about 45 different projects. The fund is still going on, but we created a new fund because we will eventually close the original fund. So we created a new one at the beginning of the year with a clear focus to invest in innovative companies like what we did in with Freshly with new food and beverage business models, which is exactly what Freshly is about in Nutrition Finance, Food Technology, but very much as well interested in investing in digital technologies. It can take different shapes and form. We can either do direct investments, minority investments in innovative companies.
That's what we did with Freshly. We can invest alongside external VC funds. To work with VC funds is interesting because they have capabilities that we do not necessarily have. They have capabilities to identify, to scout, to value a lot of innovative companies. We don't necessarily always have these capabilities internally and it's good to invest alongside with them.
Some examples of what we did, you heard about Freshly, clearly a new business model, which is ready to eat meals delivered at home. This is not a competency we have. So we took minority stake. We have a seat on the board. It's a good way to access to direct to consumer capabilities.
It's a different technology. It's a different mindset as well. So there is a lot of learning as far as we are concerned. We can potentially contribute a couple of things as well to this company. We have R and D capabilities, technology, science, nutrition knowledge or sourcing capabilities that they can that maybe we can support them if they want to.
This is typical, by the way, of the small companies as well. Many of them do not always have the capacity to scale their business or to globalize it, and we can help some of these companies to do it, which is, by the way, what we do with Merrick because we will launch their products in Europe pretty soon. So in other in some cases, as we just saw with Freshly, we take minority stake. In some other cases, we can make straight acquisition, which is what we did with Sweet Earth to complement our frozen food franchise in the U. S, very much leveraging on millennial trends, which is a fast growing segment that we were not necessarily present or we did not have necessarily the right brands in order to address it.
So in that case, we did a straight acquisition. Moving now to the 3rd part of my agenda, which is about capital structure. Just want to discuss with you the factors that we took into consideration when discussing our capital structure at the beginning of the year with the Board. By the way, the discussion that we had with the Board was not only about capital structure. It was a much more comprehensive agenda that included our growth agenda.
Overall, we discussed about investing more in our fast growing categories, what Mark discussed this morning. We discussed about M and A appetite. We discussed about portfolio. We discussed about dividend. We discussed about dividend policy, we discussed about capital structure as well.
More specifically, what we looked at when we had that discussion with the board regarding the capital structure is we took into consideration the cost of debt. Even if it is relatively limited today, it might increase in the future. One thing that is important to us is our access to capital markets. And there, to be specific, we want to maintain our access to the commercial paper program in the U. S, which has some implication in terms of rating.
We want to keep some flexibility for external growth. We took into consideration of cash flow generation, our sales growth. That includes, obviously, the direction that we have shared with you for the medium term, our margin improvement, what we have disclosed today as well as our working capital, and I will cover that specific point in one of my slides later on. And we looked at our expectations in terms of EPS growth and competitive shareholder return. The conclusion, you know them.
We agreed to leverage our balance sheet, while keeping some flexibility for external growth. In substance, what we have what we are saying is that as well that we are comfortable with the single layer rating. You know the decision that have been made. Share buyback approved for up to €20,000,000,000 with which we could reconsider if we were doing some significant M and A. And as you heard this morning, we have decided to change a little bit the timing of the share buyback to spread it evenly over the last 3 years.
Just I had the question of our launch. Obviously, this decision has absolutely nothing to do with the negative view that we would have on our margin or growth capability. On the contrary, because we have today with what we disclosed, we have said that we expect to increase our margin. So it goes rather in the direction or even as you know, we did a very significant made a very significant progress over the last couple of years. We were at 8.5% of sales in terms of working capital in 2012.
We were last year at 2.8%. This is not just one single point on December 31. This is the average of the last 5 quarters. There are very solid foundations there. We can go even further.
We have building blocks in order to get there. It will come mainly from payables, but we can still do some efforts as well on the receivable side as well as in inventory. That being said, don't expect that the improvement going forward will be as large as what we have experienced over the last couple of years. We start seeing a little bit of softening in the improvement in terms of working capital. I have said many, many times that I don't think that we will be able to go to negative working capital because of the categories we are playing into, which structurally probably do not facilitate it.
Return on invested capital. This is one of our area of focus. We'll start with the bottom line, which is return on invested capital after Woodwind and Intangible. You can see that we are at a level around 10% to 11%. We are clearly focusing quite a lot on it.
It's a little bit difficult to move that KPI in the very short term, given that we are carrying CHF 55,000,000,000 of goodwill. So obviously, when the denominator is relatively high, it's a little bit complicated, but we are making some progress there and it is one of our key priority. You can see that ROIC before goodwill and intangible bond, we have made some progress. The value in 2015 is a little bit lower, is only linked to foreign exchange when the Swiss franc revalued, but you can see that we are making progress with the ambition in terms of sales growth as well as our ambition in terms of margin improvement as well as what I said with further improvement in working capital, obviously, you should continue seeing the lines making some further progress. Disclosure.
As from 2018, we will provide our guidance at underlying trading operating profit level, which means before restructuring cost. We will this is good. We heard you. We know that many of you were interested in getting to that point given that obviously there is an alignment between the underlying EPS and the underlying trading operating profit, so it makes sense. That being said, we want to be very clear.
We will continue providing the details of restructuring cost as well as the numbers for trading operating profit. We want to make sure that it's not just a margin before bad news, but we want to be accountable as well for anything that we invest in terms of restructuring. So to close my presentation, our areas of focus clearly improve margins and returns. So we have a clear plan in terms of structural cost savings, well identified savings with clear and actionable plans to drive between CHF 2,500,000,000 of structural savings, which will be the main driver of our margin improvement. Obviously, this will impact positively EPS and return on invested capital.
Cash flow and more specifically working capital remains one of our top priority with some further improvement even if they will not be as big as what we have achieved over the last 5 years. Capital structure, we have a clear path there with the share buyback. Once again, that will be spread evenly from non. Portfolio Management, we are spending a lot of time on it, both on the internal side of it and the external side of it with differentiated strategies whenever relevant and disclosure will move to underlying trading operating profit. Thank you very much.
Good. Thank you very much, Francois. We're running ahead of time now. So from being a bit behind, we're running a bit ahead. I would propose we go into the break now before we do the Q and A, but maybe we can be back here at 10 to 450, 350 and then we go straight into it, do a 30 minutes break and then we'll save some time at the back end maybe.
Okay? So I'll see you in 30 minutes back. Thanks a lot. Okay. Welcome back.
Before we go into Q and A, I think Mark would like to say a couple of words.
Yes. Just one quick comment. As we went through the day, I noticed that there is one piece of information missing based on some of the questions that you were asking us. And so when we went through the 3 CEO Zone CEO presentations this morning, what I asked each of them to do in addition to reporting on their zone was to cover with a certain degree of depth one particular item. And so that was different by zone.
And so that's why each of them sort of had a different area of emphasis. And clearly, as you probably guessed, Phoe Phuong Ling, given all the digital activity that's going on in Asia and her thought leadership in that area, it was digital, hence the emphasis on that. For Laurent, I think Laurent has been spearheading some of our efforts when it comes to that new food scene in the U. S. And how to get our arms around that, both with internal efforts, internal developments, like some of those off-site developments that you mentioned, but then also with some of the acquisitions that we saw this year.
And finally, for Marco, I think given Nestle's history, this category led approach for Europe, it may be late in the coming, but that's news and that's major because I mean these are the markets where Nestle has the strongest industrial heritage. And when you can imagine there's a 150 year history of a country by country approach. In the future, yes, of course, we want to do each country and each consumer justice. But as he said, we want to win by category across Europe, And this is the approach that he is spearheading. And those were the 3 topics that you basically saw covered with some degree of emphasis.
I just wanted to be sure so that you understand how it all fits together. That's in addition to the regional reporting that was part of their presentations. I didn't want to steal too much time from the Q and A, but I felt it took that clarification.
Okay. With that, we go. Michael, please.
It's a fair question. And let me comment
yes.
Okay. Let me just repeat the question. So it was about whether the organizational structure of the company with three zones and then in addition to that several globally managed businesses, whether that organization is appropriate going forward. And it's a fair question. When you go back to my presentation this morning, one of the underlying messages was that, yes, we will have some changes to do when it comes to advancing speed and simplicity and agility.
But what we don't need to do is a top to bottom reorganization. And that should give you comfort because when a large company with our scale starts to do that, well, you'll see each other 2 years later because you're talking about a whole lot of lost time before then actually you get back to doing productive work. And one of the things I convinced myself about early is that, I think within the present organizational structure, we have the latitude and we have the flexibility to do what we need to do. I specifically think that that interplay between strongly led zones and I think we have 3 very capable, 3 very strong zone leaders. And then there's very strong SBU leadership.
And with Patrice, we have a real natural product SAAR when it comes to that. That's the powerhouse. That's the center of the company. And then where we have special circumstances, where we have a special situation where a globally managed business is warranted because it has a totally different business model like for example Nespresso or because it benefits from some degree of global coordination that really creates tangible value, yes, I think in that case, it is worthwhile to deviate from that fundamental zone SBU architecture and then break it out in a different unit. But so I think there are some clear rules why and how that is.
Overall, I think both of these structural designs have their merit.
Please, Cedric. Sorry, I
Yes, sorry. It's Eddie Hargreaves from Investec. You've committed yourself to consumer healthcare as another sort of leg of your business. That's obviously could cover quite a broad definition of different subsectors within it. I haven't got it in front of me, but I think there was reference to 118,000,000,000 OTC categories, for example, which will include, I think from memory, VMS, analgesics, all sorts of things which you may or may not be interested in.
I just wonder whether you could sort of scope it out for us as to what parts of consumer healthcare are of particular interest and which, if any, are of no interest to you going forward?
1st and foremost, it's important to me to underline that this is not something new. And as I said this morning, I mean, this is basically a 15, 20 year effort that I'm building on and that has seen, especially when it comes to Nestle Health Science, some real good successes. Rather than focusing on these two labels, health science and skin health, we deliberately tried to give ourselves a bit of flexibility by trying to find a label, find a placeholder that really covers both of these and hence the consumer OTC Healthcare label that gives us some flexibility when it comes to opportunities going forward, what we're going to be pursuing. What I can promise you is that this should not be a carte blanche for reckless diversification in that space because you're quite right, it's a very large category, but it's also one that is quite diversified. So you will see us stay reasonably close to the themes that we have played already.
But again, I wanted to have some flexibility in the wiggle room because not every opportunity in this space comes as a plug and play pure play. And hence, I wanted to have some flexibility here to explore. I think anything that is close enough to our core skill sets around nutrition and around skin and anything that gives us a stronger presence in the truck store and pharmacy channel per se is worthwhile looking at. And then we need to do the final work on how does it exactly fit, how does it add value and can we handle it. And also do keep in mind what I said in the morning, When you have a scaled up area like this that is new, do it prudently.
Don't get ahead of yourself. Make sure that the lessons, if you have to pay for lessons, are affordable.
Two quick questions, if I may. First, the growth categories that you've talked about with the very big exception of coffee, they're all low return categories. They're amongst your lowest return well, they are your lowest return categories. So if you're stepping up investment in categories that are already very low return, how can you be so confident that group ROIC is going to continue to increase? Well, not continue to increase, to increase.
And secondly, are you able to quantify the Nestle Continuous Excellence savings? You've given us a lot of detail I guess on the restructuring program, excuse me, the restructuring program and savings you expect there. But I'd like to get an idea of the overall retention rates.
Why don't you take the second one? I'll answer the first one.
On NCE, we have said in the past that we were generating about CHF 1,500,000,000 of savings, which once again, as we said in the past, have been reinvested for growth for about 85 percent of it. So you can consider that the amount of savings that we will generate in the future is probably in that along those lines as well in terms of amount for the future. Once again, as I said earlier, we expect to reinvest most of it for growth. And I gave some examples such as product reformulation, price competitiveness, it go as well. In the past, we did quite a lot of marketing investment as well.
It might be a little bit different. You heard what Patrice said about achieving efficiencies as well in marketing, so it might be a little bit different. I indicated as well that we then see it's a good way to handle as well some commodity fluctuation that we have on a regular basis. So but you can expect that the amount will be pretty similar to what we had in the past.
I would dispute this notion that only coffee is the high return activity. And I think it may have something to do with the fact that here is a business that by and large we have built up internally over 80 years. Hence, there were little acquisitions and there's little goodwill that was built up. Whereas in the other ones, we did have over time some meaningful acquisitions. I think that should not cloud your judgment going forward because even though you may have paid a large amount of goodwill to get into this space and get your ticket punched, going forward then to grow this now with OpEx and CapEx and do more of the good things that we're doing, maybe actually very high return activity.
So that's why I think looking at the margin, looking at the cash generation is more important than looking at some of the past behavior that led to those goodwill numbers.
Alain, please.
Thank you. I have a question, which are two points. First, regarding cost savings. Some of your competitors, they outsource quite a lot of their activities, I. E, distribution or also the production side.
Isn't that we didn't hear a lot about outsourcing today. Wouldn't that be another cost saving path you could go? And the other thing is regarding all these joint ventures you have. Isn't it increasing your complexity in order to reduce it?
So first, on the manufacturing side, I mentioned that we have 4 18 plants, but we do have quite a lot of co packers as well. So this is something that we use extensively as well, which is not part of our program. So we do not hesitate to do it. Obviously, whenever we do it, it means less CapEx, but it means usually you have a lower margin because obviously the co manufacturer needs to make his own margin. But we do use it extensively as well.
When we use it, it is more with flexibility in mind or to acquire a certain skill that we may not have the way available right at that moment. But look, over time, especially the competitive setting, you want to be sure that you control some of your core activities. So when it comes to asset light models where you actually do not fulfill some of your core activities, I'm always a little suspicious of that. So again, I think that mixed model that Francois is describing is a good one. On joint ventures, look, it depends on what both sides bring to the table, how that partnership goes.
Joint ventures can be great or they can be time consuming. So I think being pragmatic on this is the best approach.
Mitch?
Two questions, if I may. Firstly, I've noticed in the slides from today, you haven't given the 1.5 times net debt to EBITDA target you gave in the review in the summer. Is that still a valid target? And then secondly, can you talk about R and D and marketing investment? Are those two lines of the P and L ring fenced in your new margin target?
Thank you.
Okay. Just on the first one. So the net debt to EBITDA ratio of around 1.5 that we indicated when we did the announcement for the share buyback is not a target. It is a consequence of the share buyback announcement. So read it as we are ready to move from the current 0.7 times to around 1.5 times.
But once again, it's not a target in the consequence. Just on the cost sides, we do not exclude any area from the cost saving program, so which means that marketing and R and D are part of it. You heard Patrice talking about some initiatives that he's taking in order to improve the efficiency of our marketing spend. In R and D, you might have heard in the media that we have taken a certain number of initiatives as well that are involving some of our R and D facilities. That being said, as far as R and D and marketing is concerned, we will pay a special care not to hit in any way our capacity to grow today or tomorrow.
So which is the reason why we want to focus essentially on structural cost, which are non consumer facing activities. But there is no sacred cows. There are no savings to smalls and there are no areas that are immune to this program.
Thank you. Okay. There's Warren right there, Luca. Maybe you can pass the mic.
Two questions. First one's for Mark. You've been quite clear with us that once you get to the 17.5% to 18.5% margin by 2020, Don't expect any further margin expansion beyond 2020. I get the point you don't buy into the U. S.
Style outsized margin model, but why do you think 17.5 percent to 18.5 percent should represent the ceiling? Why wouldn't we expect that number beyond 2020 to gradually increase maybe to 20% or a bit higher? And then secondly, the question around marketing spend for Francois Xavier. I think in the past, you've been spending marketing at roughly twice the level of organic growth, and that's been maybe a reason why your rig has been so good. Can you tell us, do you think your marketing spend has peaked?
And if marketing does sort of come down, is there any risks around the rig momentum, which at the moment is very good? Thank you.
Yes. Thanks for giving me a chance to clarify. The point I was trying to bring across is, first of all, made it very clear, just like anyone in the room, I don't know what the specific circumstances will be in the year 2020, and so we'll decide then. But I wanted to caution you that given that we are now taking a step change here from 'seventeen to 'twenty, that is unlikely that we'll be taking another step change over and above that from there to some period in the future. And that rather what I would like to do is follow what I outlined as the new model, and that is something that's in line with that virtuous cycle that you heard about that again goes back to a consistent value creation in line with organic growth and ongoing profit improvements, but this time measured in underlying trading operating profit margin.
So that is my preference. But again, what the world in 2020 is like, we'll see then. And so you're absolutely right. Can I pinpoint 17.5 to 18.5 for then on forever? No, I can't.
So in this one, we have to stay flexible. But I wanted to manage expectations. And one of my experiences from the past is, when you feel about something, be upfront about it, okay? And so I'd rather tell you now than tell you in 2020, and hence, this is where
I'm coming from. Just on the marketing side, it is true that we have increased our marketing spend over the last couple of years at a rate that was higher than sales. So it started to slow down already a couple of years back. But there were mainly two reasons for it. The first one is that we were increasing our digital capabilities.
So today, we spend about a third of what we spend goes into digital, which is one thing. And we don't need to build that capability because we have it today. And I think that doesn't mean that the share of digital will not increase. But let's say, we had to do that, which was kind of a one off investment over the last couple of years. The second thing is that, as you heard in Patrick's presentation, we are looking at executing some efficiency within marketing as well.
And you might have seen as well that, for example, in H1, our marketing spend in absolute value did not grow anymore. It actually declined, I think, by 2%. I think we mentioned that it was down by 2 percentage points in Swiss francs.
Okay. Yes, please, Vincent.
Just a question about the price environment, especially in the U. S. Market, because you're expecting to be able to have some organic growth overall. So why don't you think the price pressure may increase in this market? And what is your vision regarding Europe and maybe China also for the price?
You mean product pricing?
Product pricing, yes. Because in the U. S, you have a big pressure from the retailers, from the e commerce. Do you think it is the end? Or maybe we can have some acceleration to this price pressure?
Look, I think as a general observation, with the rise of digital and this easy comparability of prices, I think on the margin, price pressure is more likely to increase than decrease. But I think as Patrice and some of the other presenters pointed out, one thing is to look at in very general, everything else being equal terms. And the other one is to look at must have products and strong brands and attributes that people want and that people are willing to pay for. And hence, we're not selling averages. We're selling products that people want.
And so our job plans and products in a way that we can eke out a premium for them because people want them. So this is this whole notion that even in the day and age of perfect digital comparability, strong brands and high quality products behind them will prosper.
Adam?
So just two questions. Just to go back on capital allocation, there's not there wasn't a lot of talk about return on capital. Does it bother you that, A, your ROIC is fairly mediocre at 11% for a large company and that's not an operating ROIC because obviously your operating ROIC is much higher. So that's mostly due from acquisitions which have been not very accretive from an ROI perspective. And my second question is, I understand L'Oreal hasn't been a bad investment, but what's the value to actually having a stake in L'Oreal when it's a public company that anybody can buy on the market?
Look, on the first one, it's one of those situations where going forward, we can look at prudent capital allocation, we can look at prudent M and A, we can look at prudent execution when it comes to capturing the value that we pay for. For whatever is done, it's done. And I mean, this was the significance of the change in accounting rules earlier in the past decade under U. S. GAAP and at some point IAS that unless you have a real goodwill impairment, you're stuck with this for a long period of time, okay?
So we can't walk away from that. That's the way it is. And so if you are in a situation where you may not reach all the targets that you were hoping for, but it's also not a downright train wreck, then you're stuck with this and you're stuck with all in ROIC numbers that may not be meeting your expectations. That's why I think featuring both numbers is important because you wouldn't want as you compare categories, as you compare products, you wouldn't want to penalize a business just because of M and A activity that may have happened 5 or 10 or 15 years ago. So you need to be that's why I was saying going forward, it's important, if you earn good margins, good cash in this business, build it in spite of what may have happened in the past.
And so this is the approach I'm taking with it. Going forward, what I want to show you about is that we are very prudent when it comes to capital allocation, and that's the only thing we can do. On L'Oreal, I think I was trying to clear in the morning. Over and above what I said, I have nothing to add. John?
Maybe as a bit of a follow on from that question. Previously you said you wouldn't do an acquisition unless you were able to get the cost of capital back within 5 years I. E. ROIC above WACC within 5 years. Is that still the case when you're thinking about M and A?
As an add on, what do you think your WACC is instantly at the moment? And then maybe one for Mark. We haven't talked about medical nutrition and potentially acquisitions or expansion into Medical Nutrition. It's obviously a business you know very well. Is it just sort of competition concerns that stop me talking about maybe doing deals in that area?
Or is it an area where you think actually is not really the focus for you? Thank you.
The ROIC is obviously one of the dimension that we look at when we make an acquisition. We indicated a few years back indeed that we were targeting directionally to have return on invested capital above our WACC within 5 to 7 years, which I think is a reasonable assumption, which is certainly one of the KPIs that we look at. It's not the only one we look at other KPIs like internal rate of return. We look at the contribution in terms of growth and so forth. So that's one of the indicator that we are using.
You were asking where do we see our WACC today, so it's around 7%.
In terms of Medical Nutrition, look, it's a highly attractive category, no question, but it's also a fairly concentrated category. So when it comes to larger targets, that's going to be hard. When it comes to bolt on acquisitions, when it comes to technologies to bolster our footprint in this space, yes, absolutely, any day. Okay. Celine, please.
Thank you. On the mid single digit growth by 2020, you have given us some ideas of where there was white space opportunity, and you provided that chart with the building blocks of what drives that and the biggest block was the growth of your core categories. So question is, how long do you think it will take to reenergize that when we have had already year to date, rather, a deceleration of the growth and disappointment rather than so how long it takes for that uptick to happen? My first question. 2nd, can you just clarify the 10% of disposal or business that could be disposed of, whether that's disposed and M and A or if you could clarify that?
And finally, how the target structures through the organization are being changed to empower and as well bring accountability for delivery?
Yes. On the first one, I don't have a precise breaking point for you where all of these measures are paying off, but I do have a large amount of confidence that with this midterm target by the year 2020, that there will be tangible improvement on this. So that was the whole purpose behind the time frame we've chosen. It's important to me, and I'm glad you're bringing it up, when it comes to portfolio changes, we're talking about buying and selling. So this is not only selling, and I just wanted to be clear on that.
And then when it comes to some of the organizational changes, again, the good news is what we don't have to go through is some sort of wholesale reorganization. But yes, I do think we have some initiatives underway that just strengthen decision rights at the fringes of the organization because that is in line with a theme that you heard over and over again today, and that is the importance of all things local in food and beverage. We're doing that with prudence. I think we've never gone to the extreme of over centralizing in the past, and hence, we don't have to do a massive correction now. There's also, of course, a difference in the sort of approach you're taking for global brand as opposed to a local brand because with a global brand, if someone locally totally behaves out of line, there is a chance here that globally that brand gets damaged, whereas with a local brand, the downside is much more limited.
So we'll be very cautious about the chance that we're doing there. No big deal, but I think going forward, this whole notion of being locally responsive is going to be important.
I think Martin, you had your hand up back there.
Thank you, Stefan. It's Martin Deboo with Jefferies. I'd just like to ask a question, I think Celine asked it earlier. I think it's important we ask it again in this forum, which is your strategy is moving towards in part buying businesses like Blue Bottle and Sweet Earth. But the question is, how do you ensure that you leverage the growth of those businesses by getting them embedded in the organization?
I realize that's not something you want to do immediately, but over time to leverage them, you've got to get them embedded. And your track record there with Jenny Craig and PowerBar in the past has not been great. So what are you going to change going forward to ensure that those acquisitions unlock value for you? And the question is an organizational one as much as anything.
Yes. And look, in fairness, you're now singling out 2 deals that have been often described as some of those problem areas. Let's talk about the good ones. Let's talk about Tata Lee that Wanling mentioned this morning. Let's talk about Merrick, where I think for a few years now, we've been significantly scaling up this business.
And both have been acquired on the same notion that you leave a founder or a management team a lot of latitude, you create a set of incentives around them to be sure they're behaving the right way and that there's alignment when it comes to the goals you want to accomplish. And then you create some touch points between the acquired company and Nestle, but make it more of an on demand model where we're there to help if they need help, but we don't kind of smog it on them. And I think that model has been working quite well in the past. It's not a new invention of this year. As you said, there's also been some areas where we didn't meet our objectives.
That's the way business goes. And now we are honing and practicing that model again with the likes of Sweet Earth and Blue Bottle. So it's not news to us. We've done this before. I think it's an easy model to come to us given Nestle's decentralized past and culture.
And we're learning with each and every deal, but it's not like we're complete novices at it. So this has been going on for decades, if you will.
Alan Haskett from Credit Suisse. Just going back to the sort of the zones and the globally managed businesses, I'm conscious that within the businesses that are more local, there are important global platforms KitKat, Dolce Gusto, parts of Maggie, where there is a kind of more of a global platform. And I'm just my question is, do you think that if it's the SBU heads who are the guardians of those global platforms that they have enough power within the organization or well, that's my question really. Do you think the SBU heads are powerful enough to make sure that yes, a lot of these products are local, they need that local touch, but within those zone managed businesses or regionally managed businesses are global platforms as well?
Look, when you have that interplay between an SBU and a zone, it is one of these artificially constructed intentional productive conflicts. I mean that's the way it's designed to be and that's behind any metric structure. And depending on the people involved and depending on the category, in some cases, that's producing better results, in other cases, worse. But by and large, over by now, what is it, almost 30 years, I think the experience with it has been very, very positive. And it makes sure that over and above any local needs, there is some sort of guard railing, if you will, about areas that we would want to go to and that we wouldn't want to go to.
And it goes way beyond just brand attributes and visual appearance. It's also about the content of the product. It's about some of the product attributes like NF that we talked about. So I think when it comes to the underlying content of what we want to be in and where we want to be going, that SBU guidance is going to be really, really important. And then you want that balanced and you want that healthy constructive discussion that comes from the territory know how that comes from the organization, there are wonderful circumstances where you get a better result.
And yes, sometimes you pay the price that decisions may get delayed or you may not be as responsive as someone that can make decisions immediately on the ground. But by and large, that pattern has served us well, and I'm very interested in our Poland.
I would like to come back on the return of this capital question. And we have seen this morning that capital spending, working capital, factor closures, disposals play a big role in the or big part of the equation in your strategy. So I wonder why you stick to a margin target instead of giving some return on this capital target, which is my view is a better measurement of value creation.
It's an excellent question. And I think in addition to comparability, in addition to also showing you some visible progress, don't forget, we just talked a minute ago about that portfolio change, the roughly 10%. And with that, it's very hard to estimate exactly what amount of goodwill is leaving, what amount of goodwill is coming. And so I felt to use something that's closer to the actual operations in this case, like an underlying trading operating profit margin, it's easier for you to follow, easier to understand. If that points the right direction and if we exercise prudence when it comes to deploying capital, then ROIC
Jeremy?
And so I've got a question on the contribution of gross margins to your operating margin improvement. Now in the bucket of cost savings, you outlined procurement of as CHF 500,000,000 to CHF 600,000,000. So logically, would that mean that the kind of gross margin expansion would be, let's say, a quarter to a third of the operating margin expansion? And then following on from that, you obviously talk about how you expect premiumization and mix to be important contributors to your growth. Is the implication that the mix and premiumization benefits to your gross margin are essentially offset by the ongoing pricing and competitive pressures you expect in the business over the next few years?
Or is that overly conservative sort of viewpoint on how things will evolve? Thanks.
Our gross margin has increased significantly over the last couple of years. I think over the last 4 years, it has increased by 4.5 percentage points, which is a consequence of many factors. You mentioned many of them. It can be commodities, which went up on average over the last couple of years, but it was only a third of the improvement. It is impacted by sales price.
It is impacted by mix. It's impacted by premiumization, obviously. So you said it all. That being said, you may have seen that our gross margin has started to decline moderately in the 1st part of 2017, which is largely impacted by the commodity headwind that we had this year, which has not been fully reflected in sales price for the time being. But as you said, part of the saving program will flow into the gross margin.
But once again, it is influenced by many, many different factors from pricing to commodity to premiumization mix and so forth. We are what is interesting to see as well is that our gross margin is that more than 50% is reasonably high when you compare it against our peers, which really illustrate very well our pricing power, which illustrates very well as well our capacity to premiumize, to manage our mix and to manage our portfolio as a whole.
Yes, please.
Hello. I think you mentioned in your presentation that you changed some of the incentives in order to align with the cost savings plans. Could you give us a little bit more color on that? And also how you balance incentives on both efficiency and growth? It's quite tricky to do.
That's my first question. And then may I come back to my part question, please, on the venture capital fund and the major successes that have been achieved there? And perhaps if there aren't any, why there aren't any? Thank you.
Maybe I can take the first one, and then Francois can answer the second one. So the one change we've done effective this year already is that we emphasized what we call trading operating profit 1, which is underlying trading operating profit, more strongly than what we call internally trading operating profit 2, which is then the all in. So this is in line with what we communicated this morning that this is the number that we want to manage towards in the future. We felt it was important to make that change. By still keeping trading operating profit too or the all in number, are also intending to show you that this is not a free for all, okay?
So people cannot gorge on restructuring expenses going forward. Hence, Francois's comment, which I very much ascribe to, one of the reasons why transparency in this space is important that you don't want to get back to a situation that some of you criticized years ago and that is there's a trading operating profit margin before all bad news. That's not helpful. And so I feel that both of these need to be reflected in incentive system and both of them need to be reflected going forward in our public disclosure. So full transparency on that.
The comment I made about the incentive systems in general is in a day and age when we need to manage some of these businesses more selectively for growth against the 4 big businesses I talked about this morning. And then on some of the others, it's going to be more a combination of growth and value. Then yes, we need to have flexibility inside our systems to either target to 1 or the other. And so one of the things early on I did with HR is to convince myself that without changing the system overall, that bosses basically have the latitude inside the organization to actually do that. Because if you can't incentivize your people with a proper mix, then yes, I mean, it's pretty hard to get them to move in this direction.
But so the good news is that the systems have that flexibility inside the company, and hence, it was not necessary to go for a complete reengineering.
So the Innovation Fund, as I mentioned earlier, we have created this Innovation Fund, I think, about 10 years ago. We have invested in, I think, 41 different projects over the last 10 years. The fund is still operating. Some of these investments, all of them have been minority investment or the vast very vast majority have been minority investment. Some of them have been taken over within Nestle and especially by Nestle Health Science.
Some of the companies have been IPO ed, some of them have been sold and most of them are still within the front. We do not communicate on it because it's not really material related to the size of Nestle.
Stefan, since we parked some questions from this morning, I remember there was another one on water in the U. S. And I just wanted to confirm, yes, we're highly interested in expanding our footprint in sparkling in the U. S. Because that's clearly a growing area.
And the other one where ideally, in the long we'd like to improve our footprint is in premium still because we have lots of still offerings. We have some that are borderline towards premium, but having a stronger footprint in that space is very dishonorable to us.
While we're at park questions, the last park one was on nutrition in China. Maybe you could elaborate on that.
And what was that question again?
The question was our outlook on nutrition in China and the current regulation.
Yes. And I think that's very consistent with what we communicated in prior quarters, and that is that with the 2 child policy now taking effect and also the stronger awareness on quality that I think the news is good for us. I think this plays to our strength, hence, we're reasonably optimistic when it comes to 2018, 2019. There was also, until recently, a lack of clarity about some of the e commerce traded products because it was unclear to what extent that is actually something that is tolerated and supported by the Chinese government. They recently clarified that, and hence, this whole notion of supporting product that's traded on e commerce, which includes a lot of imported products, is also very important to us.
So we'll adjust accordingly and take advantage of that situation.
Good. Next. I think there's a question there. Maybe first, Stuart, and then you pass the mic over.
Can I just come back to U? S. Frozen? So if you look at your portfolio, you often talk about owning things where there's clear health or wellness benefits or something you could communicate. And I understand the science around frozen, but the consumer often doesn't seem to believe it.
And I think many of us in the audience are struggling to understand what you see as the strategic benefit of being in that segment. So perhaps you could just talk to that a bit. Yes.
Look, I think this is one of those where you do not change perception from 1 year to another. I think that Lean Cuisine example where we have been in a decline for 5 years from 2010 to 2015, it's been accelerating because of consumer perception. And then as a result of some of the repositioning and also change of recipes and change of content, we managed to turn around that brand. These things do take a while to take hold. And I think overall, if we multiply our healthy and convenient offerings in that space, then I have confidence that over time, consumers will learn and understand and that consumer perception will follow.
Let's also be realistic. I mean, we have sufficient we have a large number of frozen offerings that are not exactly NHW and hence and I'm realistic about that. But to me, to vilify then the entire category doesn't make sense because I think with our very efficient frozen supply chain, we have a source of competitive advantage. We have the skills and the know how to bring to you very healthy, very delicious frozen products. And so let's play on that strength.
I mean, that's one of those that we really like to advance going forward. And hence, it was important to me not only to point to Sweet Earth as much as I like that company and I like the products, but also to those internal developments that Laurent also referenced, where we're playing to the same direction, and that is to offer delicious, healthy, frozen offerings that, over time, I think will get consumer confidence.
Yes. I have two questions. One is regarding your target of 2020. The 17.5%, 18.5%, is that based on the asset base of 2016? So if you were to divest in the meantime, will you then adjust accordingly your margin target?
And then my second question is, I'm quite intrigued by the Harvest portfolio of €6,000,000,000 What is the margin on that portfolio currently? Thank you.
If I could take the first one. So clearly, we trade between now and 2020, then that's part of the 2020 number. I mean, if we're trying to reengineer what the margin would have been with the assets of 2016, we're getting to all sorts of hopeless non verifiable math for you. So basically, it's the 2020 margin based on what we own and operate in 2020 that we're targeting towards.
On the harvest category, so we do not disclose the margin. As you could see, the margin improvement was quite significant, but it was not from a very low basis. So it's a real improvement, which is linked partly to the fact that we invested less in marketing spend during that period in 2016, but it is linked to a certain number of initiatives as well, such as the one that we described today. For example, this project that Laurent described for ice cream in the U. S, this type of initiatives that we are taking are contributing to the margin improvement as well.
But once again, it was not that small to start with.
Can you clarify the comment you made in the morning about entering more actively roast and ground coffee and out of home? And the question comes from the angle that how far can you really go in with instant coffee? I understand that the Commonwealth countries and emerging markets drink that, but Starbucks is developing China, Chinese consumer is developing the roast and ground taste and really and then you see what's happening in that market. Jaff Holdings has come out of nowhere consolidating coffee chains as well as brands in roasting ground. I look at the U.
S. Business, the brands that are growing are all coffee chain brands. So if you're going to if you're thinking long term in coffee, can you afford to just be limited to instant coffee and instant coffee and instant you have an espresso, but so if you can comment about that in terms of how far do you go in rost and ground and out of home and you have to go far and compete with jobs in terms of acquisitions and things? And the second one, I understand why the interesting water, I suppose, because although it's low margin, it's because of the growth potential. But although most of your brands are on the lower margin side in terms of plain water, but why not confectionery?
And the reason I ask that, to me, confectionery is like water in the sense that it's fragmented at the global level, local somewhat. There's a lot of family owned companies. You could be more aggressive there and consolidate that category. And if it's because you don't believe in health and wellness for chocolate and confectionery and that the category doesn't have growth, why not just exit the category altogether?
Yes. Let me comment first on roast and ground coffee and the out of home situation. We have learned over the years that there are out of home segments that simply insist on roast and ground. And it may not always be taste or product attribute driven. A lot of it is experience driven.
You just want to see how the coffee is being prepared. You want to smell it and you want to experience this. Having said that, well, from an experience point of view, Roasted Crown may have advantages over soluble, There's also a big downside, and that is when it comes to the simple timing of filling an order. Think about a gas station that has a coffee machine or think about some office environments, clearly, soluble does have strong advantages. And so we've recognized this a few years ago, and we started to develop out of home machines that actually can play both sides of the street.
And so over and above having access to the coffee, I think having the machines, having the equipment that goes into office settings or goes into the astronomy settings that can satisfy both requirements is really important. Roast and Crowned, not every segment of roast and Crowned is for us. There is a low price segment that clearly is not of interest to us where I believe we could not add enough value. But when it comes to premium and super premium, I believe, look, there's always a sufficient number of opportunities, and I think there is enough margin and enough differentiation to be had in this space to make it attractive to us. And the world is certainly not running out of targets when it comes to that.
So very interested in this, but I think for the essential tools that we need to compete in the Nestle Professional out of home environment, we've been at this for a while. And I think now with our new machine generation, we're quite well equipped to take advantage of both sides, roast and ground and soluble. So I wouldn't comment too much here on the moves of our competitor. As you know, not all of this is only coffee related. We are by and large, we're interested in the coffee and succeeding in that and very focused on that product as this at the center of what we offer.
Regarding confectionery, look, I have no hesitation about the category per se, okay? So this is what I was trying to try at home this morning when I was talking about food is not fuel alone. So when it comes to healthy enjoyment, when it comes to healthy indulgence, I'm more in favor of that. And confectionery can fulfill that purpose. But I'm also recognizing the reality that when I look at our recent track record and when I look at our current growth numbers that this is not a product category that I could rightfully elevate to that level.
Having said that, I'm one of the believers that you have to earn the right to be one of the stars every day. And that also means that if confectionery over time improves its growth and earnings profile that, yes, this can grow into an important category. I'm totally clear what Marco said, and that is that especially when it comes to Europe and the multitude of promising, deeply connected local brands, this is a very different situation from what we found in the U. S. I think in the U.
S, we reacted very decisively by exploring options. I think in Europe, we're well advised to try and develop this category and make more out of it. And that applies also to I mean, not just exclusively talking about EMEA here, this also applies to our activities in Latin America and in zone AOA.
Okay. James?
Mark, you transformed Fresenius basically through M and A as a non Fresenius funnel, at least that's the way it seemed. You've made it relatively clear today that's not going to happen at Nestle. Is that just a function of Nestle's size? Or is there anything more to it than that?
At the risk of being a little impolite, you have no idea how much change there was beyond M and A, okay?
No, I accept that.
Okay. And in all modesty aside from the M and A, look at the organic growth numbers, look at margin development, This was a lean and mean fighting machine, and I'm proud of it.
But you did do quite a lot of M and A.
On top of it, yes. I'm proud of that also.
It's a serious question. And is there anything about Nestle compared to Fresenius that is not that makes you think it's not susceptible to M and A in the same way?
I wouldn't work by analogy here. Again, different circumstance. This is the past. Happy and proud about it. This is the future.
I'm excited about it.
Patrick, Shada, sorry.
You will increase restructuring costs for the next couple of years. What would be a fair assumption for the long term, so meaning after 2020? Would it be again, let's say, 50 basis points? Or what's your assumption here? And second question, regarding large customers like Walmart, they are pushing private label.
How do you cope with this situation? I guess you never will produce private label products.
Yes. Let me focus on the second question and then Francois can comment on the first one. Look, private label is a way of life. And if anything, the U. S.
Was coming to that later than some of the European markets. And to me, it's all about this new anytime, anywhere environment where, yes, just like we are free in some cases to use multiple channels to reach the consumer, the retailer is also free to develop private label. And so this is a factor of life we have to deal with. We have to differentiate our brands in ways that are meaningful and that consumers want them and go the extra mile for getting them. And so to me, the actions of one specific retailer in that don't change that picture.
On restructuring costs, as you can see, we are planning to spend €2,500,000,000 over a 5 year period, which means about €500,000,000 a year. So obviously, we're in at the time of relatively intense restructuring, so which means that post 2020, it should be lower than that amount. So I think it's a reasonable assumption.
So lower than 50 basis points? Yes. Okay. Thank you. Good.
There's a question back there. I'm sorry, I can't really see it well in against the light.
Thank you. I think it was Patrice's presentation, which indicated that in a couple of places, you were late to megatrends, be it natural or organics. Can you explain why this was? Is it the size and scale of the Nestle business or potentially back to the complexity of the organizational structure? And what confidence can you give us that you won't be late to the next megatrend?
And then my second question is really about the new growth channels you've talked about, be it drugstore, out of home, e commerce, home delivery. Can you give us an overview of what the potential change in delivery cost or cost to serve might beef those models as many of them don't actually make
any money?
On the first question, look, it's always hard to summarize these things because depending on the product and depending on the category, it may always be a different story. But by and large, if I try to summarize it, I don't think that we seriously missed anything in the sense that it didn't hit our antennas. I think we were sometimes slower than we wanted to be in terms of meeting things and really rolling things out and being there when other people were starting to develop that market. And that is something we have to work on. Will we hit everything on time going forward?
Probably not. There's too much going on. Are we committed to doing better? Yes, we are. In terms of the e commerce and anything that's related to direct distribution in this, yes, you're absolutely right.
This is one of those where you see shining success stories and also some pretty bad examples. And I think we have to be selective about this. Some of the people asked me in the break, like, for example, why could it be that we profitably operate a water truck in the U. S, but why don't we have a pet food truck? And yes, when you look at the routing that would be possible, the sheer density that you can serve with the water truck as opposed to pet food customers, yes, I mean, the economics clearly prove that one of them can work right and the other one would have a problem.
So I think you need to stay flexible. And rather than doing a one size fits all experiment, learn from it, try to take your lessons and then apply it. What we're not going to be doing is hopeless dances. This whole idea of when you really see that there's no way to make money, then yes, at some point, we take things off the table and do something else. I mean, this is this whole notion of more rapid learning and trying and doing and adjusting to new reality.
But we're not going to do hopeless dances.
Yes.
Thanks. Maybe a related question again on the issue of the complexity of the organizational structure. But you mentioned delayering, I think, a couple of times, which and then speeding Nestle up as a consequence of it, which sounds pretty interesting, but I guess you haven't had that much detail on that. I appreciate it's quite a sensitive area. But I was just wondering if you could share your thoughts on the prospects for delayering at Nestle speeding the business up and how meaningful that could be in terms of improving growth?
Yes. Look, several things at work. One clearly is about decision rights. And so that has nothing to do with delayering. And then by brand, by category and also by zone and market, you're trying to understand what gets decided where in the interest of speed and clarity.
And then the other one, yes, we are reviewing in various groups and departments spans of control. There is no as I said, there is no wholesale reorganization for the entire company. I think we would not be well served with this. It's not necessary. But yes, department by department, group by group, this whole notion of analyzing spends of control and being sure that you're competitive and that your SG and A overall is in line with best in class, I think that's ongoing activity.
And that's our duty to do that and be sure that we are efficient on that front.
Joanna?
So I have a question on innovation and it's been a common thread in the presentation how that will is a key to supporting future growth. And I had the opportunity to try this water caffeine, caffeinated water. So specifically in a product like this, how did that come into being? One question is caffeinated water, will that cannibalize some of coffee demand? Was the idea from the water business unit?
And did the coffee business unit have a say in that? Have you analyzed cannibalization rates? So what happens when this process progresses? Where are the decision making points?
Let me put for a second my salesman hat on. This is not just caffeinated water. Pull out your Google and you'll see that caffeinated water has been around for 20 years in the U. S, okay? So caffeinated water alone doesn't do it.
You will also see that as hard as you try, if you just try to add a little bit of caffeine to water, what you can't quite avoid is that tinge of a little aftertaste because caffeine is not completely taste free, okay? So this is not doing it. This is caffeinated water. On top of that, you get those polyphenols And you have, I think, a nice and pleasant taste that's not overly sweet. And so it's really the complete set of attributes that make this product very attractive to us.
This was developed at a very short time frame because looking at the market and looking at some other samples, we felt this is one that builds on a lot of inherent strengths that we have about caffeine processing, polyphenols. And so this is the reason I feature this over and above the fact that water is one of our core categories is simply that I think here we brought something to a proof of concept in a very short time frame. And so it's a good example of this type of rapid innovation that will be ready for market entry in a short period of time.
There's another question from Alan.
I'm sorry, just to return to the subject of complexity. You said, Mark, that you felt that your antenna had picked up some of these megatrends, but you'd been somewhat slow to react and roll out. I think it'd just be helpful to understand what were the internal impediments to a quicker reaction And what can be done to speed that up? And I hear what you say about you don't need wholesale change, you just need a better understanding of who owns the decision. But where are we in that process?
And other than just banging heads together and saying do the right thing, what is changing?
Look, I think we're talking about not one silver bullet, but we're talking about a set of minute changes, also about a different attitude and really something that over time will take hold. I can't point you to a specific moment in time where we're saying, as of now, it's all going to be different. This is a gradual process. And I mean, this is how change happens in large organizations. And let me say very clearly, this started way before me.
I think this whole realization, this is why I pointed out this will to win this morning. This realization that the world around us is changing, that we're losing share to this other category. What do they have that really puts them ahead of us? And this whole analysis, how do we need to change and what do we need to do? That started years ago, and I'm having now the benefit of actually seeing some of those changes come to fruition.
So in a sense, this is a collateral process. This is not something that started at a given point in time. We're on our way. We're serious about this, and we'll make it happen. But if you're trying to distill it to something, okay, here exactly is the problem.
It got fixed in July 20 16, and now it's showing benefits as of fall 2017. No, the world doesn't work that simply.
Good.
Thank you very much, both of you. Mark, Francois, thank you all very much for being with us all day long, for being interactive, for asking so many questions. I hope you found it worthwhile. I hope you had a great day. And we're going to take a bit of a longer break now for those who subscribed for dinner.
We meet back here at 6:30 for cocktails and then the vegan dinner that you all look forward to. And we're going to have a special surprise over dinner. We have but I won't say more. We have a special speaker for you. And with that, I say thank you again and I'll see you later.
Thank you. I hope you enjoyed the program.