Sweet Smell of Success at Nestle : Products: The Swiss food giant streamlines its Glendale-based U.S. operation. But the company still faces some hurdles.

By JAMES F. PELTZ

Sept. 8, 1992 12 AM PT

TIMES STAFF WRITER

Nestle SA, the Swiss food giant, overhauled its American operation twice last year to bolster its position in the U. S. food industry. The effect of those moves, good and bad, can be seen at any major grocery store.

Start with the freezer counter. There, Nestle’s Stouffer’s frozen foods are fighting for the top spot thanks to ferocious price-cutting by Stouffer’s--price-cutting Nestle says it can stomach because its corporate overhaul produced big savings in operating costs.

Nestle USA, based in Glendale, also says it is the market leader in chocolate chips, instant-breakfast items and canned pet food, where its brands include Friskies and Fancy Feast. In pet food overall, including dry food, Nestle claims second place behind dominant Ralston Purina Co.

But now walk over to the candy aisle, and Nestle USA’s products are more docile opponents. Despite making such venerable confections as Nestle Crunch, Butterfinger and Baby Ruth chocolate bars, Nestle USA concedes it has a mere 9% of the $11-billion U. S. candy market, leaving it a distant third behind archrivals Mars Inc. and Hershey Foods Corp.

Nestle trails in the candy market despite its restructuring efforts and despite having exceptional name recognition among consumers. “If you went out on the street and said, ‘What’s Nestle?’ everybody in America will say chocolate,” said Timm F. Crull, Nestle USA’s chairman.

As the candy market illustrates, name recognition doesn’t itself translate into leadership in every market, especially with Nestle fighting battles on so many fronts. Besides candy, some of Nestle’s other product lines, such as infant formula, ice cream and juice drinks, are also lagging in the United States.

Which underlines how Nestle USA, despite its streamlining effort and widespread successes, still faces hurdles in achieving the goals set out by its Swiss parent’s chairman, German-born Helmut O. Maucher, who wants all of Nestle’s product lines to be first or second in their markets.

Nestle USA was revamped after its parent, the world’s largest food company, spent the past two decades building its U. S. operations largely through a fistful ofacquisitions. Those included Nestle’s $3-billion purchase of Carnation Co., then headquartered on Wilshire Boulevard in Los Angeles, in 1985.

But after Carnation came aboard, Nestle realized that its American unit had become an inefficient hodgepodge of product lines. So it consolidated its U. S. operations twice, first in late 1990 with the creation of Nestle USA, and again in early 1991 when the company was split into six divisions.

The changes were as jarring for Crull as anyone. The Michigan native, after spending 34 years at Carnation, was Carnation’s president when the merger occurred, and was plucked to run Nestle USA.

Nestle USA’s 41,000 American employees also market Hills Bros. and MJB coffees, Nestle’s Quik chocolate-milk mix, Carnation breakfast and baking items, Contadina and Buitoni pastas, Libby’s canned foods, Kern’s juices and Beringer wines. They also run the Stouffer Hotel chain.

Nestle USA accounted for $7 billion of the Swiss company’s $36 billion in sales last year (based on foreign exchange rates at year’s end). Nestle USA does not disclose profits, but using its parent company’s profitability of 5% of sales for the past two years, Nestle USA would have earned about $350 million in 1991.

And overall, Nestle USA’s changes are paying off, food analysts said. “They’ve had their problems in the U. S. market, but clearly they’ve recently built a more formidable position,” said John M. McMillin of Prudential Securities Inc.

Nestle’s rivals, Crull said, “have more respect for us. We’re bigger, we’re stronger.”

Nomi Ghez of Goldman Sachs & Co. said Crull, 61, gets much of the credit. “He really turned this operation around,” she said. “He has long experience in the food industry and he’ll do whatever it takes to protect market share.”

It’s easy to see why. Consider: If Nestle managed to lift its share of the U. S. candy market by just one percentage point, it would equal about $100 million in additional sales. That would pay for nearly one-sixth of Nestle USA’s entire advertising budget, which totaled $636 million in 1990, according to the most recent figures from the trade publication Advertising Age.

Crull is determined to bolster Nestle USA’s candy business and its other laggard products, but it will require millions of dollars either for internal growth or acquisitions. So that’s why Nestle USA--which like its parent was once a lethargic, bureaucratic giant--was restructured.

Nestle USA needed to be more streamlined in order to generate the additional cash required for its brands to penetrate their markets further, whether by boosting advertising, making acquisitions, enduring price wars or by increasing research into new products that match consumers’ changing tastes.

Nestle’s worldwide business, in fact, has been undergoing an overhaul since Maucher took over as chairman of the parent company in 1982. Besides spearheading Nestle’s acquisitions, the brash Maucher transplanted several popular Nestle items--such as Stouffer’s Lean Cuisine frozen foods--from one continent to another and predicted that Nestle will double in size, to 100 billion Swiss francs by the year 2000.

But nowhere did Nestle have to change more than in the United States, where its competitors also are large, aggressive companies with economies of scale that enable them to have enormous marketing clout and to keep prices down. They include Procter & Gamble Co. (Folger’s coffee), Philip Morris Cos. (Kraft General Foods frozen dishes), Mars and Hershey (candy) and Ralston Purina (pet food).

Like Nestle, those companies understand that to grow in the packaged-foods industry today, a vendor must have familiar, popular brands backed by huge advertising and marketing budgets. Otherwise, it’s hard to obtain additional shelf space in the nation’s big supermarket chains.

Even when Nestle USA was formed nearly two years ago to consolidate the company’s far-flung American lines, it remained a patchwork of 15 companies. Supermarkets would be visited by three salespeople peddling various Nestle beverages that would all end up on the same aisle in the store. The coffee division and the wine group would place separate orders from a glass-container company, losing valuable high-volume price discounts in the process.

“We said, ‘This is crazy,’ ” recalled Crull.

So Nestle USA streamlined itself again four months later, merging the companies into six divisions: beverages, foods, frozen foods, food services, wines and the Stouffer hotels. Nestle also named Crull executive vice president of Nestle SA--the first American to reach so high a post at the Swiss parent. As a result, he spends about half the year in Switzerland.

“We’re creating one company, like Procter & Gamble,” Crull said of his American operation. “The pieces put together make us a much more viable, stronger company to compete against.”

How? The changes “reduce our overhead so we can take more money to advertising, promotion and to our customers” in terms of lower prices, said Robert Shult, head of Nestle USA’s food group. The savings also mean “we might not have to make price increases, we might not have the pressure on our profit margins as much as our competitors would,” he said.

That’s evident in the frozen-food wars.

Stouffer’s led that market for many years, but was toppled by the arrival of ConAgra Inc.’s Healthy Choice entrees in 1989. In recent months, however, Stouffer’s has been fighting back with its price-cutting and revamped product line.

“Nestle responded to the competition,” although “Nestle and all of its competitors are at break-even or taking a loss” in frozen foods because of the price war, said David Goldman, food analyst at Oppenheimer & Co. “And that’s going to remain the situation until Nestle finally relents on price.”

That could take some time. “Contrary to what you read, we are making a very good profit” in frozen foods, Crull said, adding that Stouffer’s now leads the market with a 23% share, versus 21.5% for ConAgra. Goldman Sachs analyst Ghez agreed. “Stouffer is making good money,” she said.

Other observers, such as Goldman, contend that ConAgra still holds a slight lead over Stouffer’s. But they all agree that Nestle’s biggest assets in the U. S. market are its size and patience.

“This is a company with an extraordinary long-term perspective,” said Prudential’s McMillin. “Nobody likes to compete against Nestle because they have such deep pockets and take such a long-term perspective.”

Except, perhaps, Nestle’s candy rivals. So far Crull hasn’t moved Nestle up from its distant third place in that market. “They haven’t paid as much attention to candy as they could have,” Lisbeth Echeandia, publisher of Confectioner Magazine, said of Nestle. “It was not a priority.”

It is now. Nestle wants its candy group to grow twice as fast as the industry, or 10% a year, to grab more market share, Shult said. “We don’t want to be average in the future.”

Candy is a business where name recognition can be exploited to pump up a company’s market share for the least possible cost. It’s accomplished by unveiling new variations on existing popular brands. Example: Mars’ new Milky Way II, a lower-fat derivative of its Milky Way bar, and Mars is now in the ice-cream business too, with its recent introduction of Milky Way and Snickers ice-cream bars.

Nestle, meanwhile, is test-marketing bite-size versions of its Butterfinger bar. The company likewise has extended Nestle Crunch and other candy brands into ice-cream products.

But it remains to be seen whether Nestle USA tries to quickly lift its share of the candy market by buying another producer, just as its parent did in the bottled-water business recently by acquiring Source Perrier SA of France for $2.6 billion. Nestle, without identifying specific industries, will say only that it plans more takeovers generally.

“We’re very active in looking for acquisitions,” Crull said. “We’re pretty good size. But we’re not big enough.”

Nestle’s Product Line

Nestle USA, the Glendale-based U.S. arm of the Swiss food giant, operates six divisions: beverages, candy, food products, food service, pet food and lodging. Here are some of its most popular brands:

BEVERAGES

Hills Bros. coffee

MJB coffee

Taster’s Choice coffee

Nescafe coffee

Nestea

Nestle Quik

Carnation Coffee-mate

Carnation evaporated milk

Carnation infant formula

Libby’s juices

Kern’s juices