U.S. News

Nestle to Cut Plants, Products as Prices Soar


Nestle, the world's largest food company, will raise prices, cull unprofitable products and speed up production rationalization to prepare for a lasting rise in commodity and energy prices.

Jose Lopez, management board member at the Swiss-based firm, told Reuters the group's focus on name-brands, health food, and medical nutrition puts it at a competitive advantage as prices for energy, grain and milk rise on surging demand.

Rising input prices globally will stoke inflation, which will enable Nestle -- maker of KitKat chocolates and Nespresso coffee -- to pass those costs on to consumers, Lopez said in his first interview as head of operations for the global giant.

"It could provoke moderate inflation and moderate inflation is not a bad environment for business," Lopez said in his first interview as head of operations for the global giant. "If anything, I can buy better because I am bigger."

Lopez said the group would work to cut some product lines that appear less profitable in the light of higher commodity prices, but none of the 27 blockbuster brands that generate over 1 billion Swiss francs in sales. He declined to elaborate.

Nestle's efficiency drive under Chief Executive Peter Brabeck has seen the group grow organically by 5.8% a year and increase its gross margin by 300 basis points to 13.5% over the 10 years to 2006, helping it deliver industry beating improvements, according to a recent study by investment bank Dresdner Kleinwort.

The group posted organic growth - an industry measure that excludes price hikes and acquisitions - of 6.2% last year but warned profitability growth could slow as it tries to push through price increases.

Lopez said Brabeck's focus on health, wellness and nutrition plus the group's sensitivities to rising demand for environmentally friendly production positions it well to ride out the commodities storm and sail ahead of many rivals.

He declined to comment on French food group Danone's $17 billion agreed takeover of babyfood maker Numico. Nestle, which recently purchased the Gerber brand line of baby nutrition from Novartis, remains the world's largest maker of babyfood.

Plant Management

The group will speed up a production rationalization program that has seen it cut the number of food plants to 481 from over 500 worldwide in recent years while dramatically increasing output.

Nestle has been able to increase productivity at its global factory network by improving coordination between plants.

This has seen the group open new plants processing noodles in Malaysia and milk in China while other plants have been sold, such as chocolate operations in France and Italy.

"I am committed to accelerating the sectoral view of capacity," he said.

Input prices are likely to stay high or keep rising for some time, he said, as demand rises across the developing world for branded quality products, especially in the four fast-growing countries of Brazil, Russia, India and China.

"It is a new reality," Lopez said. "People don't understand well enough that these BRIC countries are creating an environment for consumption."

Lopez points to a "triple deal" for what he calls the three Fs - Food, Fuel and Feed - as driving up production costs.

"What has added an element of volatility is the policies on biofuels and some weather patterns," he said.

The group has already moved to fix many of its 2007 input prices through hedging and is now executing its 2008 hedging strategy, he said. "We are well through some commodities and are going through others (for 2008)," he said.

While milk is difficult to hedge, Nestle's extensive supplier network - Nestle is the world's biggest purchaser of raw milk - has helped it to control costs to some degree through purchasing agreements, he said.