Deutsche Bank dbAccess 2018 Annual Global Consumer Conference

Jun 13, 2018

Slides

Summary

Growth plans centered on reinvesting cost efficiencies in brands, innovation and digital, with coffee and pet care as major pillars. Underlying trading operating profit improved 60 bps in 2017, with a 150–250 bps improvement target by 2020.

Okay. As the doors are closing, I will introduce our next speaker this afternoon. My name is Gerry Gallagher of Deutsche Bank, one of the consumer team here in Europe for Deutsche Bank. It is my very great pleasure to introduce the next company presenting to you today, which is Nestlé and Laurent Freixe, who is the CEO of Nestlé's North American business. With that, I will pass over to Laurent. Thank you very much, Gerry. Good afternoon to everyone, and welcome to Nestlé in the Americas, which is the largest region for Nestlé, operating in a huge economic space, North America, Latin America, which has been experiencing slower economic growth in the last couple of years, and where we are driving a comprehensive and holistic growth agenda. That is CHF 41 billion in sales from Nestlé, CHF 41 billion Swiss franc, dollars, the same. That is total Nestlé. If you look at what is zone managed, locally and regionally, this is CHF 31 billion in sales. If you take into account U.S. food and beverages, the Purina business, nutrition business, Gerber, and the professional business, this is two-thirds of Nestlé in the Americas. One-third, of course, is LATAM. When we look at it by product category, you can see the dominant weight and role of the pet care category. You can see as well that further to the Starbucks deal, the coffee and beverage category becomes even more prominent, 15% of our sales compounded, second category. We will have, going forward, two big pillars, the traditional pet care one plus coffee. Then you can see also the rest of the Nestlé portfolio, frozen, nutrition, dairy, and confection. What makes Nestlé certainly unique, and I think in this respect, we are an industry benchmark, is the strength of the portfolio, the strength of the footprint. We got 88% of our sales in the region where we are number 1. If you take into account number 1, number 2 positions, this is 94% of the portfolio. We are virtually leading in, and practically leading in every space where we operate. This is based on a unique portfolio. Of course, you know the global brands like Nescafé, Nido, Kit Kat, Purina, and many others. I like to highlight that even the global brands like Nescafé in Mexico, they have a Mexican touch. Mexican consumers would consider that they are Mexican brands, or Nido in Brazil, the same. We got also a large portfolio of big, iconic local brands, and I think this is extremely relevant in the current context, where everything which is local is in fashion. Just a few examples there, like Garoto in Brazil, DiGiorno in the U.S., Stouffer's, Nestlé Toll House, Ormala in Guatemala, for instance. Those are really local iconic jewels. Increasingly, we got as well in the portfolio, Born Pure brands. Some of them have been born organically as part of our portfolio, like Cultive, for instance, in Brazil, or Outshine in the U.S. or Wildscape on the premium frozen segment. Nature's Heart, for instance, has been recently acquired. We got this uniqueness of very strong footprint with the global brands, with iconic local jewels, and a nice portfolio also of growing Born Pure brands. What are the industry trends and what is driving industry transformation? First, a few words about how growth is developing in the region. North America remains fundamentally a low-growth environment. Brazil is challenging, unpredictable, and volatile, and the recent strike end of May, 10 days between the 21st and the 31st, which has basically virtually or practically put at stop the entire Brazilian economy, is the best example of that. Fortunately, the rest of LATAM continues to grow. Now, if you look at the consumer trends, it's a lot about natural, authentic, locally sourced, organic, vegetarian, flexitarian also are in fashion, gluten free, plant-based proteins. All those are consumer trends shaping the industry, and of course, we are embracing each and every one of them. If you look at the market structure dynamic, you see and is visible the proliferation of startups, especially in the U.S., which are increasingly playing in the space and have easier access through internet to the end consumers. You see also the channels evolution. Grocery and mass continue to be under pressure. Specialty channel, club convenience, proximity value are growing. E-commerce, of course, continues to experience very high levels of growth. This is not only in the U.S., it's also really emerging in the rest of Latin America. E-commerce is increasingly giving price transparency. Of course, there is also an industry-wide cost cutting in the low-growth environment, and we are, of course, no exception. What I would like to highlight is that in our case, the cost agenda is not only a margin agenda. We really want to drive what I call a strategic virtuous circle of sustainable and profitable growth. The objective is to get the growth as part of the equation. So we put a lot of focus on achieving efficiencies in our value chain and in our cost structure, not only to fuel margins, that is part of the agenda, but also to generate the resources, the fuel for the growth that we can invest behind our brands, that we can invest behind innovation to drive market share gains. If you want to grow in a low-growth environment, you have to gain market share, drive category growth. Through that, our objective is to achieve sustainable and profitable growth. So that's the model that we are driving. Few words about the cost agenda, which is, of course, being large part of the group, high on the agenda of the zone. I'd like to highlight that on top of the focus on total delivered cost and our objective to improve 6% year on year, every year through cost reduction and cost avoidance, our total delivered cost. On top of that and on top of the structural cost efforts, we are also putting an emphasis on agility, reducing the numbers of layers in the organization. Objective is to reduce at least one and increasing the spans of control, so as to increase agility and speed across the organization. On the structural cost side, I'd like to highlight that integration of Nestlé Professional and Nestlé Nutrition into the zone structure is working well. The transfer of the head office in the U.S. from Glendale, California to Arlington, Virginia is also absolutely on track. The latest news is that we have decided to move the Gerber U.S. head office from Florham Park, New Jersey, down to Arlington, Virginia. All this is on track, delivering expected benefits and creating a modern and collaborative workspace environment. We have similar projects across LATAM, Mexico, Brazil, Chile, in the critical geographies as well as in Canada. We are putting as part of the Nestlé Business Excellence project, increased emphasis on shared services, centers of scale and centers of competence. The latest initiative is that in LATAM, we'll be opening a new hub in Paraguay, which is one of the lowest cost countries. It's a good idea when you want to have a shared service to put it in the lowest possible cost environment, and Paraguay is a good fit for that. We got a good presence. We got good access to talent, and this is also definitely a low-cost environment. We are on track, generally speaking, with all targets that we have been communicating in the last months and year. One word about the model which we are pursuing in terms of organization. What we want is to have category-focused business units, and it can be globally managed or regionally or locally. You can see that we got different models according to the category. All of those supported by a common back office and with common shared services and centers of scale organized around the critical end-to-end processes like source to pay or order to cash. We are implementing NB and those new processes across the business as we speak. We are putting also increased emphasis on Factory 2020 and leveraging the experience which we have been through in the ice cream North America area. We want to have as lean as possible structures in the factory and the people in the factory to focus on three fundamental things, cost, cash, and cases. Everyone in the factory has to have something to do with one of the three. We are leveraging the administrative part above factory so that we got really focused and empowered shop floor organization across our factories. We expect significant benefit from these transformation. What we are pursuing at the end of the day, leveraging all the efficiencies that we are generating, or most of them, is a holistic growth model. Starting with reviewing the portfolio, innovating our brands, investing in new capabilities, and leveraging digital across the value chain. Reviewing the portfolio, we have made a number of significant steps in the last year. Very impactful one has been, and visible one has been the disposal of the confectionary business in the U.S. We announced recently that we are reviewing the Gerber Life Insurance business. The process is ongoing, and we have been active on the acquisition front, strengthening the portfolio in the core categories and acquiring companies that have a nice and motivating growth profile, like Atrium, Sweet Earth, Blue Bottle, Chameleon, and the Terrafertil business in Latin America, and of course, recently announced the deal with Starbucks. This is the transformation ongoing, which will have a significant impact. A few words about the acquisition of the Starbucks CPG business to say that we are building up a formidable and unique coffee portfolio with three of the major global brands in the coffee arena. Nescafé, which is the world's preferred coffee brand, ubiquitous and strong across geography. This is also a brand that has, with Nescafé Dolce Gusto, a coffee shop portion coffee system, very successful in excess of 1 billion with 20 million consumers. This is also Nespresso, which has really transformed the coffee industry and leading the premium portion coffee category. We add on top Starbucks, which I do not need to introduce, which is the iconic coffee shop brand, leveraging the modern American lifestyle. We will be combining, of course, all three, and that gives us increased exposure to North America, potentially to Brazil, number one, number two coffee market in the world, and also an opening into the premium R&G category. Big step and really strengthens our portfolio. On top of that, of course, we got Blue Bottle and Chameleon and a few other local iconic brands in Europe. Innovating our brands to leverage key trends. That is, of course, leveraging nutrition, digestive health, and cognitive health with pet care. But it is also the introduction of HMOs, human milk oligosaccharides, across our infant formula portfolio. We are the first company moving at scale to introduce HMOs across our portfolio and across geographies. This is the third most important component in human milk, and is playing a role in the healthy development of the baby and the protection. We are also, of course, investing in the organic and natural space. We have a number of initiatives to address food intolerances. We have been very active in the lactose-free area, for instance, or gluten-free. We are expanding our portfolio of plant-based protein products in dairy or in non-dairy plant-based and in ice cream primarily. We are also leveraging the trend towards local origins, and it is particularly visible in the coffee space. We are pushing ready-to-drink in beverages. In the U.S., it has been on the agenda for a while. It is now very strong on the agenda in Latam. We are pushing super premium, and we are also investing on convenience in the grab-and-go category in the U.S. We are also looking at new innovation models, developing what we call internal incubators. There are two very visible outcomes of that in the U.S. One is the launch of the Outsiders Pizza Company, and the second one is the launch of Wildscape. I will show you in a minute what this represents, what this means in terms of ways of working and in terms of outcomes. What we try to do there is to reproduce what startups company would do, but benefiting from the scale and the strengths of Nestlé. We are also increasingly developing an open innovation model with 9 Square Ventures in Purina or Henri@Nestlé in the Silicon Valley, promoting, again, an open innovation framework, enabling an open innovation framework. But let me show you what in practice this Outsiders Pizza Company and this Wildscape mean. Founder Foods is in fact all Nestlé people. One of the things that we're trying to replicate here is how to work with the speed and agility of a startup, with the scale and expertise of the world's largest food company. We actually have a separate space for this team to operate. We give them free rein to find other ways of working, so they're free to circumvent our existing processes. Typically, we've given them nine months from idea to launch, and they have to have a product on the market in those nine months. The first product we were able to launch was Outsiders Pizza, which we did in a test market and have been expanding gradually ever since. My very first day on the project, my boss handed me the pirate flag and really wanted us to use it as a reminder to not take no for an answer, to really push the system, and to act as scrappy entrepreneurs would versus accepting the way that we've always done things. From start to actual launch, we took about 10 months. The thing that's important to recognize is with brands like this, these are born from the ground up. The startup community in the U.S. is doing a really good job of understanding where the consumer is going, reading the market, and getting there quickly. More recently, we've launched Wildscape in the spring of 2017, and we're in the process of expanding that distribution as well. We like to call Wildscape frozen food that looks and feels as good as it tastes. We saw growth in the frozen category happening from super premium brands. But we felt like they weren't delivering truly a different experience for consumers. We wanted to create something super premium and something that appeals to millennials, and millennials that cared about their health. And we had just about nine months to make that happen. But we also fully empower the individuals and the team to lead the work the way they need to lead it to get the job done. What is interesting there beyond the launch of Outsiders Pizza Company and Wildscape is the capacity to reinvent the ways of working and to reinvent the organization so as to be more innovative, more agile, and hopefully have an impact in the marketplace. More to come, of course, in that area. We want to invest also in high-growth channels and win with the winners, win with the ones growing. Big focus on e-commerce, and not only in the U.S., of course. We have been growing 38% in Q1, so above industry benchmarks. We have put in place also, in September last year, a global Amazon acceleration team in Seattle, which is driving joint initiative, the joint business plan between Nestlé and Amazon. But it is just one example. We are really working with everyone and every key player. Of course, walmart.com and chewy.com or Rappi or Mercado Libre in Latin America are top of the agenda. We are also investing in the proximity channel. This is a growing also form of convenience, and this is growing fast. Out of home is an important driver, and club as well is part of the agenda. We want to strengthen the consumer engagement model. Digital has opened an entirely new space, and we want to achieve personalized consumer experiences for the consumers. Of course, it is very visible and particularly relevant in the pet care arena, but also in the infant nutrition arena. Certainly there, Gerber is a benchmark. We want to accompany the parents in their parenting through a personalized nutrition journey. We are deploying new growth-enabling capabilities across the organization. We got digital centers of excellence in all the key markets in the U.S. In the U.S. Food and Bev and U.S. Pet Care. We got one in Mexico and one in Brazil. But we are putting in place e-business units in each and every of our operating organization across the Americas. We are investing in sales analytics. We are investing in data to make better business decisions and to be more agile and more relevant. We are investing also in flexible manufacturing so as to enable fastest possible process between idea to launch. We are enhancing our shared services and beyond Brazil, Ribeirão Preto and Panama. We are opening up, as we speak, a new center in Paraguay. Of course, we are leveraging digital across our organization and across our value chain. We are also, of course, leveraging science and technology. I already mentioned a few initiatives. I think we made the headlines, and rightly so, with the launch of our new structured sugar and one of its first application with the Milkybar buttons in the U.K., where we basically achieve a reduction of 30% sugar content without compromising the taste. We got a second solution, which is micro-aeration, which we have just launched in Mexico, which is giving a better taste profile and a smoother chocolate while reducing significantly also the sugar content per portion. We are moving aggressively in the direction of recycled PET. We are using, as we speak, 50% of the usage in bottle is recycled PET, and we are moving aggressively towards more and towards 100%. We are leveraging and rolling out the HMOs across our infant formula, and we have great success also with this medium-chain triglycerides, which we have introduced in our pet care, which is giving the food for the pet brain and improving impressively mental, the cognitive capabilities of aging dogs. That is one of our big successes. Of course, we are pushing it across the board. We are also investing in our industrial footprint. Logically, we do that in the categories where we have the best footprint and where we want to expand. So Purina Pet Care is one of them, both in North America, dry and wet, but also in Latin America, Chile, and Mexico. We are also investing in the U.S. and in Latin America, in the coffee space. We want to do that in a way that creates sustainable, shared value for society, for Nestlé, for consumers, for employees, and for society at large. There are three focus areas where we put the emphasis. One is nutrition, health, and wellness, and we are putting a big focus on the Nestlé for Healthier Kids program, focusing on children nutrition and making sure that they can have a healthy lifestyle, and you learn healthy habits from a young age. We are putting a lot of emphasis as well on the youth employment and youth employability and promoting decisively the vocational training schemes, the ones that combine the theory with the practice based on the Swiss or German model. We will have our third Pacific Alliance Youth Summit in Colombia in the next weeks, and we will have one Mercosur Youth Summit in Montevideo at the end of the year. We have built up alliances with more than 100 companies across the continent to have a bigger impact on that issue of youth employment. Last but not least, of course, the environment. Water stewardship is important. We got it up and running across our factories in the Americas, and we are driving as well, zero waste to landfill in our factories, but also in our distribution centers. We are promoting the usage of renewable energy, moving towards 100% to reduce our carbon footprint. I would like to highlight that as an experiment, but an experiment successful, which we would like to develop, we got our first triple zero factory up and running in Brazil. It's a zero water factory, zero water impact, zero waste to landfill, and zero carbon footprint using 100% of renewable energy. As we are focusing on reigniting growth, we are seeing an acceleration, especially at trade level. Pricing is a little bit more under pressure, especially because of Brazil. Volume mix is picking up while delivering significant improvement in underlying trading operating profit, 60 basis points last year. We continue on that path towards the objective that has been set of 150 to 250 basis points improvement by 2020. As a conclusion, it's clear that the change is there and is not abating in terms of the speed and the dynamic. We are driving a mindset of continuous transformation, not only to enhance margin, but primarily to drive growth and drive a strategic virtuous circle of sustainable and profitable growth. We are fundamentally pursuing a holistic growth model, including internal and external innovation, but including as well, M&A. With that, I'm happy that we have a bit of time for Q&A, 16 minutes or so, and I'm happy to open up to any question. Yep. Hi. Two questions for me. The first one is really on innovation. You presented today on some really interesting innovations in different product categories. To be fair, when we look at growth over the past couple of years in the U.S. and in the Americas, it feels like actually you've missed quite a few things in pet food, in ice cream. What you're presenting today seems to be like solutions. From what you presented today, it also feels like it's been kind of a wake-up call at Nestlé that actually you need to be more aggressive in terms of innovation. Is that the right way to think about it, that actually you're really pushing more aggressively, in the context of probably recognition there's more disruption in the market? Yeah, I think the trends you are referring to, like the move towards organic, natural, more local, more authentic, is not completely new. Maybe it's been new to the U.S., but we have seen it developing across the world, probably starting in Europe and now crystallizing in the U.S., at a pace that has impacted significantly the industry. I think we are on top of it now since a number of years. It's not just a wake-up call of the last months. We have been really on top of it. We understand that in a context which is changing very fast, expectations are different. Consumers see the industry and our categories differently. We have been capable in a few cases to reshape also the way consumers look at the categories, like in the coffee area, for instance. That drive and that focus is there since a while. Now, between the moment you start to put the focus increasingly on that one and the moment you see the impact, there is a lag in time. But many things that we have been doing and which we have been developing, and those have been developing the last couple of years, you start to see coming on stream and impacting the marketplace. Now, it's clear that Wildscape, Outsiders Pizza Company, are a relatively small business today. No business is starting huge. Nespresso are starting very, very small for many years before picking up. It's the same for those. We have to be patient. We have to continue supporting them. We have to plant the seeds. We have to invest as well in our blockbusters, and make sure that they stay relevant at all times. We have to strengthen our consumer engagement model. We have to invest increasingly across our operations. This is the agenda that we're embracing, and this is what I wanted to share today. So it's not just a wake-up call of today. This agenda has been embraced now since a while, and you start to see some of the fruits coming on stream. Sorry. The second question. There's a lot going on in the world of coffee. Yeah You presented some of your own initiatives. I suppose the question is really around actually getting your different businesses to work together. You talked about actually single packaging, the water business on one hand, coffee on the other hand. One could think that actually, there may be more to do in terms of having your route to market playing a bigger role as it belongs to the water business, actually helping out your coffee operations as well. Is there any sense of that you may be looking at different type of business models, route to market, in the context of actually coffee playing a bigger role also in the cold drink world? It's a very good question, and I'm happy if this question is triggered by our moves. It's clear that in the last years, we have built up a slightly different vision on how we play and how we're going to play in the coffee arena. We moved from a position where we wanted to be a leading player in the soluble coffee space, and the portion coffee systems into a more holistic vision, where we want to be a global leader, but as well, locally, a leader. We got many components in the strategy, many brands, many systems, many technologies that we can leverage, many routes to market. You are right, and we're adding now a new tool in the toolbox. But if you look at it, this is pretty focused. I've been talking about three major brands, a few major technologies. I'm absolutely confident that we'll be capable to orchestrate all this and make a big impact in the marketplace, the same way we have been capable to orchestrate Nespresso and the development of Nescafé Dolce Gusto into a billionaire brand, in Europe and globally. I'm confident that we'll be able to orchestrate Nescafé, Nespresso, and Starbucks. In the last couple of years, we have put in place a global coffee council, where all the key stakeholders in the coffee space at Nestlé are meeting regularly, to discuss on the strategies going forward and initiatives, just to make sure that we are on top of it and that we are at cutting edge when it comes to our strategies, and that we don't leave any stone unturned, and that we really capture the full value and the full potential of the category globally. You mentioned agility at the very beginning of the presentation, and you removed a layer from the organization. Can you just expand on that a bit? Tell us what that layer was, whether there's more you can do, and what else you've done to increase the accountability and the entrepreneurship of your organization. There is one thing which we have seen is that we are mobilizing and increasingly mobilizing teams on specific topics or specific projects, and sometimes we can put them outside of the organization and outside of the boundaries, outside of the framework. Like in the case of Outsiders Pizza Company or Wildscape, or we did that also in the past with Nespresso. This is the way Nespresso has been developing. We are just replicating a model which has been successful for us in the past, and which is very successful also with Partner. That's one way to look at it. Now, it's clear that increasingly, we're in a world where we have to work beyond traditional hierarchical boundaries. We want the organization to be fluid. We want people to be able to organize according to projects, according to ambitions. We want people increasingly to work end to end. The fact that we flatten the organization and increase the span of control is certainly allowing that, is a big enabler that facilitates also the speed of the communication and creates greater agility, greater speed, greater accountability across the organization. This is fundamentally what we are pursuing with that. There may be some benefits also in terms of structural costs, but the main thing there is to increase agility and speed across the organization. Laurent, just in terms of North America specifically, some of the remuneration packages have been altered to put a greater emphasis on price than perhaps was the case in the past. Could you talk about how you envisage that working or changing the environment for your operations in North America, where pricing is difficult for the industry? Yeah. Pricing is difficult, and it's a little bit like in Europe since a while. Pricing is difficult because it's fundamentally a low growth or no growth environment, so everyone is fighting for a share of the consumer wallet. Plus, there is huge competition across channels because the channels and the customers are also fighting for the same. Plus, internet and the web players are creating price transparency, and they're also quite aggressive and quite quick to align on the lowest player. What we are doing fundamentally is try to capture the value of our brands in the eyes of the consumers. We put a greater emphasis on strategic revenue management, and we work the mix as well, and through innovation renovation, try to create additional value and additional pricing through that. We try to leverage as well our cost efficiency initiatives to mitigate the cost pressure impact. But if we have to increase prices, we do. You see some pricing coming in North America in this respect. It's been visible already in Q1, and it's there. Hi. About coffee, could you, again, related to pricing as well, could you give us an idea of what the Starbucks deal is going to mean for pricing through, I guess, selling the Starbucks brand through the Keurig channel, how it's going to impact on the Nespresso channel, what we can expect to see in terms of pricing between those two different channels? Yeah. It's probably a bit early to enter into the details. The deal is not closed yet, and we are still in the phase to share information, and we have not even really entered into developing the plans. But I see fundamentally a great deal of complementarity. From a channel perspective, Nespresso has got, and this is the purity and the beauty of the model, that they control the value chain end-to-end, and they control the price 100%. So they got that lever totally under control, and they got their own cloud marketplace. Starbucks, of course, is leveraging other channels. When you think of where is the battlefield today, which is the U.S., complementarity is absolutely perfect. The $2 billion or so business of Starbucks CPG is through indeed the Keurig system, but also through the mass channels and through e-commerce, and this is in perfect complementarity. I don't see any issue with the brands competing with each other. The beauty of having Nespresso in the portfolio and Starbucks, but even Nescafé, is that those brands are premium or super premium brands, and they command a high value in the eyes of the consumer. They are generally not brands that are heavily promoted or downtraded. In this respect, the Starbucks deal is a big plus for us. Gives us complementarity and space in terms of value creation.