Before Shopping, Nestle Is Checking Its Pantry First

By MELINDA FULMER

Oct. 29, 2000 12 AM PT

TIMES STAFF WRITER

Every company has its perks, and for employees of Glendale-based Nestle USA, they include a discount company store loaded with everything from its namesake Nestle Crunch bar to Lean Cuisine, Friskies pet food, Ortega salsa and Perrier mineral water.

Carrying more than 168 brands and a majority of the company’s 2,000 products, the store exemplifies how huge Nestle has become. But even with enough brands to stock its own store, some critics say Nestle--and its Swiss parent, Nestle SA--isn’t moving quickly enough to expand its empire.

Most of the world’s major food companies, including Kellogg Co., Unilever Inc., General Mills Inc. and Philip Morris Cos.’ Kraft Foods, have begun swallowing up their rivals to spur growth and gain more space on supermarket shelves. Meanwhile, Nestle has sat on the sidelines.

“They’ve been the big question mark,” said John McMillin, a food industry analyst with Prudential Securities.

Some industry analysts characterize the food giant as sleepy and slow to embrace innovation. And just a few years ago that was probably true, admitted Nestle USA Chief Executive Joe Weller. Not anymore, he said.

While others are looking for corporate marriages to boost growth, Nestle has been reorganizing, shedding its lower-margin commodity businesses such as roasted coffee and potato processing, and adding new products to its top-selling brands. In the process, it has posted sales growth of more than 4%, higher than the industry average of 2.5%.

“We are not in the panic mode that some of these other companies are [in],” Weller said. “We can wait for the game to come to us.”

Analysts expect Nestle to make a few major moves in the next year. Pet food giant Ralston Purina Co. is mentioned as a potential target, as well as Quaker Oats Co. and Dreyers Grand Ice Cream Inc.

The company is reportedly in discussions to acquire Haagen-Dazs ice cream from Pillsbury Co., which is being acquired by General Mills Inc.

Weller declined to comment, but said that ice cream is important to Nestle and that it will “continue to be in that business.”

He also acknowledged that expanding the company’s nutrition line, which includes Power Bar and a dietary supplement called LC1, is a priority.

Still, he says, there’s no rush. Things are moving fast enough inside the company.

Food industry and supermarket consolidation--coupled with the advent of Internet marketing in the food business--is reshaping just about every part of Nestle’s business from management structure to how it advertises its products.

The changes have started literally at the top, with executive desks and Oriental rugs being removed from the 21st-floor management offices to make way for employee meeting rooms and temporary offices for telecommuters. Top brass is moving down several floors, alongside division personnel, and the organizational chart has been flattened, doubling the number of vice presidents reporting directly to Weller.

Sitting closest to Weller in this new scheme is Nick Riso, Nestle’s new head of e-business initiatives--a telling sign that Weller believes the Internet will be one of the biggest catalysts at Nestle and in the food business.

Although food companies have been slow to embrace the Internet, Weller and Riso are trying to fuse the Web with almost every function of the company from human resources to procurement to marketing. A map of the company’s organizational structure depicts these departments practically hovering around key online executives. One of the company’s vision statements is “Make e-business the way we do business.”

“People in e-business come to work every day thinking about how they’re going to change things,” Weller says. “If we can permeate this organization with that kind of thinking, we’re going to be a lot better off.”

For Weller, 55, the entrance of the Internet into the old-line packaged-food business is one of the most exciting events in decades. Get him talking about the Web, and Weller’s Tennessee-accented voice gains pitch and his eyes gleam.

Pulling his chair over to a laptop, he shows off the company’s first attempt at an Internet make-over: a new Web program that allows employees access to a range of online services, from selecting benefits programs to picking a mortgage, arranging adult day care and meals for an ailing parent, or choosing a summer camp.

The company also has invested millions in Transora, the online exchange that will allow Nestle and 50 other companies to purchase everything from packaging to warehousing to ingredients, and eventually enable retailers to stock their shelves and track orders from a single Web site.

Eventually, he says, “it will take a lot of waste out of the system,” eliminating paperwork, reducing labor costs and making it easier for firms to contract out for services.

But, Weller added, that system is several years away from having a significant impact on Nestle’s bottom line. Nestle initially will use the site for more mundane things such as ordering cardboard boxes.

More immediately promising, analysts say, is the launch of its own proprietary site, NestleEZorder.com, which allows Nestle to accept orders from customers it once couldn’t afford to bother with, such as small sporting-goods stores, lunch counters, kiosks and mom-and-pop convenience stores. Weller expects the site, developed in just 12 weeks, to have 2,500 customers by next fall.

But just as important as these internal systems will be Nestle’s use of the Net to forge relationships with consumers. With the number of new-product introductions increasing each year, the pressure is on for companies such as Nestle to find new ways to cultivate loyalty for their brands and get them in front of more consumers at different times of the day.

After abandoning a host of brand-oriented Web sites that few ever visited, Nestle is now launching content sites, such as https://www.VeryBestBaby.com and https://www.VeryBestBaking.com, to serve up recipes, recommendations and guides as well as a soft sell of products such as chocolate morsels, infant formula and Nesquik.

In addition to developing a more loyal following for its products, the hope is that these sites could help Nestle develop more relevant products and get them to market more quickly, giving them a competitive edge.

“It’s not the big beating the small” anymore, Weller told a group of advertising executives last week. “It’s the fast beating the slow.”

Smaller manufacturers would argue that that’s not the case. Scale gives manufacturers such as Nestle the clout to gain space on supermarket shelves and the money to pay slotting fees and advertising allowances that supermarket chains now demand.

With more products hitting the market, and more chains introducing their own store-brand products, even huge companies such as Nestle must focus on expanding their more popular brands, which do a large volume of business for retailers, rather than launching new ones.

“If you are not in a leadership position or at least a strong No. 2, it’s going to be very difficult down the road,” Weller said.

Indeed, if the pace of consolidation continues in the food and supermarket business, analyst McMillin speculates that there may be just eight major companies selling food in five big supermarket chains.

Although Nestle products can be found in just about every aisle of most supermarkets, its goal is to muscle in to more space on these shelves.

To do that, it has added new products to such top brands as Nescafe and moved some brands into several areas of the store, such as the frozen dinners recently introduced to the Ortega Mexican food line.

It’s also borrowing innovations from other parts of its parent company, such as frozen sauce beads, used in a French stir-fry product, that it incorporated into its new Stouffer’s Skillet Sensations line of frozen meals.

By rolling out new products, Nestle is now the market leader in the freezer case and the two-year-old Skillet Sensations line now adds $100 million in sales to the company’s top line.

Nestle calls this strategy of pumping new life into top-selling brands “renovation innovation,” and Weller believes it is critical to staying in the minds of consumers bombarded by thousands of messages every day.

Analysts say there’s some truth to that.

“Extending their brands’ impact into many new markets by creating these new products is a much better approach than acquiring something they don’t know how to market,” said Arlene Spiegel, director of the food and beverage practice at PricewaterhouseCoopers.

She points to the failure of Snapple, which has had several owners in the last couple of years, each struggling to manage the brand effectively.

Weller and others contend that much of the consolidation of the last few years has come at a high price.

“The jury is out on whether these big mergers and acquisitions really pay off for shareholders in the long term,” said Patrick Schumann of Edward D. Jones in St. Louis. “Nestle is in a good position already. They can afford to sit back and be more selective.”

Although Nestle may have a portfolio of popular brands, analysts say it has been slow to innovate and is beginning to feel some pressure from competitors who have introduced more convenient or useful products.

It took Nestle 35 years to make a significant change to the packaging of its Coffee Mate creamer, which is hitting stores this month.

“It’s kind of like they’re having to say: We’re not your father’s Oldsmobile,” Spiegel said. “Somebody is shaking them up, and I think they’re seeing the light.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Nestle Products at a Glance

A few of the company’s 168 brands:

Nesquik chocolate milk

Nestle’s chocolate and candy

Stouffer’s and Lean Cuisine frozen dinners

Power Bar energy bars

Alpo dog food

Friskies cat food

Nestle Toll House morsels and cookies

Libby’s Juicy Juice

Ortega Mexican food