Nestl in China Localization as a growth driver

24th October 2014

Nestl at a glance

CHF 92.2 billion in sales in 2013

339,000 employees in over 150 countries

468 factories in 86 countries

Over 2,000 brands

1 billion Nestl products sold every day

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The USD > 10bn Food & Beverage Companies in 2013 A graphical sales comparison between Nestl and its main global competitors

Nestl is the worlds largest food and beverages company but is still only 1.7% of the market

The 20 largest food companies account for less than 9% of the world market 3

Nestl sales office

opened in Shanghai

1874

Started trading activities in HK. First trademark (Eagle

sweetened condensed milk)

1908 1990

1996

Shuangcheng factory

(Heilongjiang Province)

Establishment of Nestl China HQ in Beijing

1999

80% partnership with Totole (Shanghai)

80% partnership with

Haoji (Sichuan Province)

2002

2010

70% partnership with

Dashan (Water)

Nestl China history: a long presence but lacking scale & depending mainly on western products

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WAHAHA (all beverages)

TINGYI (noodles, bever.)

MENGNIU (dairy, I-C)

COCA-COLA (CSD, juices, teas)

WANT WANT (snacks, bever.)

HAITIAN (soya sauces)

STRONG ( jellies, milk tea)

(CSD, juices, teas) UNI-PRESIDENT (noodles, bever.)

CHINA FOODS (oil, bever., wine)

HSU FU CHI (candies, cookies)

WANGLAOJI (herbal drinks)

YILI (dairy, I-C)

( peanut milk, congee)

(IMF, water)

BRIGHT (dairy)

CAGR 08-11

Note: Unilever F&B only (CHF1.4 billion with HPC). Coca Cola and Pepsi figures include bottlers. Nestl NNS for NiM Mainland China

Turnover (2011 Est, CHF bio)

10% 15% 20% 25%

The Chinese F&B market in 2011: highly fragmented & dominated by local players

Key F&B Players - Turnover & Growth 2008-2011

Source: Nestl GCR Analysis

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Crossroads ahead

THE KNOWN

Focus on global brands in niche categories

THE UNKNOWN

Grow by entering local & large categories

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Understand the target/partner (background,

culture, objectives)

Establish trust on both sides by understanding the underlying aspiration

Understand that some things will take longer than in Western culture

Take time to build relationships No clean deal high risk

Large foreign buyouts likely to face increasing regulatory hurdles and delays

Central government approval if notion of national economy and security

Increasing regulation

Lack of transparent accounting processes and

reliable market data

Often some challenges on management and large # of employees

Key considerations for M&A in China

IPO plans delayed, currently low valuation (but still high valuation expectation)

Market getting tougher (lower growth, increasing competition)

Some cash flow issues

Good window of opportunity

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YINLU is an ideal platform to become a major player in healthy dairy-based beverages & nutritious congees

Chinese relevant products

Leader in ready-to-eat congee and ready-to-drink peanut milk

High operational efficiency & Aseptic experience

4 large-scale standardized factories

~4 mio tons of capacity 61 production lines with

expertise in aseptic PET

Traditional trade & Deep penetration

8000 sales people

1.1 mio outlets covered

April 2011: 60/40 partnership with founding families

Headquartered in Xiamen

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HSU FU CHI is the leader in sweet confectionery in China with a very unique sales model

Leading position with ~900 products

Candies, chocolates, cakes, wafers, jellies cookies, snacks, sachima

3 production bases in Guangdong (South), Henan (Center), Chengdu (West)

529 kt of capacity 55 workshops 165 production lines 120 high speed

packing lines 80% imported equipment

Invented and developed the Pick&Mix format in China

3500 displays in Hyper and Supermarkets

July 2011: 60/40 partnership with founding families

Headquartered in Dongguan

Hsu Fu Chi

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Without 3 JVs (YL, HFC, WN)

Note: Unilever F&B only (CHF1.4 billion with HPC). Coca Cola and Pepsi figures include bottlers. Nestl NNS for NiM Mainland China

Turnover (2012 CHF bio)

Nestl reaching the Top 5 largest F&B players

Key F&B Players - Turnover & Growth 2009-2012

Source: Nestl GCR Analysis

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9.36

8.57

5.31

3.63

3.12 2.94

3.15

2.03

1.47

0.93

6.18

2.909

1.268

0.848 0.868

5.064

2.691764706

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0% 5% 10% 15% 20% 25% 30% 35%

YILI (dairy, I-C)

HSU FU CHI (candies, cookies)

( peanut milk, congee)

WAHAHA (all beverages)

TINGYI (noodles, bever.)

MENGNIU (dairy, I-C)

CHINA FOODS (oil, bever., wine)

WANT WANT (snacks, bever.)

UNI-PRESIDENT (noodles, bever.)

BRIGHT (dairy)

JIADUOBAO (herbal drinks)

CAGR 09-12

(IMF, water)

With 3 JVs (YL, HFC, WN1)

COCA-COLA (CSD, juices, teas)

Nestles drivers for JVs with Yinlu & HFC

Why did we enter the JVs with Yinlu & HFC? Transform Nestle in China - Achieve scale & relevance

New categories

Different business model

Chinese insights

Growth opportunities

What is their strength? Entrepreneurship

Speed & flexibility

Category knowledge

Proven success in China

Realization about the limits of their own model & succession

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Deciding factors for Yinlu & HFC to choose Nestle as a partner?

Why did THEY choose Nestle as a partner? Nestl's respectful approach

Non imperialistic way to manage separate markets & businesses

Totole JV track record

Nestl's promise to keep their identity

Ensure long term success for their brands

What does Nestle bring to them? Know How, R&D and Quality

People

Planning

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The JVs have transformed Nestl in China resulting in a unique business model

Portfolio diversity - Adapting to local preferences

JVs & Wyeth Nutrition account for >70% of NNS

Beijing Head office and 4 Head offices as well as Different business models

Seasonality & complexity driven by the Chinese calendar and events

RTM # of POS

Yinlu >1,400,000

Nestle F&B 314,000

TTL 200,000

HFC 120,000

Wyeth 31,000

Example: HFC

Small to mid-sized business in existing or adjacent categories

Strong synergies in terms of manufacturing and/or S&D

Full integration Standalone business

Current management continues to drive the business

Owner retaining equity to be incentivized to continue to create value

Nestle providing full support in terms of R&D, finance & marketing

When does it apply?

Mid to large-size businesses in new categories where there is limited/no synergies with our existing businesses

Mindful to maintain low-cost structure

Two post-acquisition models

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One Country two systems

Organization Alignment

Compliance

Governance

Build on the JV business models and respect differences

Define service provided by Corporate Functions to entire NIM

Identity Culture Values

Find the right balance

Defining a hybrid model for Nestle GCR

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Managing the JVs: its less about the WHAT, much more about the HOW to do

Western Professional Manager

Chinese Entrepreneurial Manager

Implications

Education University High-School / College Be modest & humble

Languages Multiple + some Chinese Chinese + local dialect Learn basic Chinese

Communication Emails / PPT 1-to-1 / Phone Get personal

Decision Collegial Top Down Give guidance

Risk Manager Taker Be pragmatic

MOR Monthly

Complete Review Irregular

Focus on key issues / actions Prioritize key issues & action

plans

Planning Must / Fixed Waste / Flexible Be flexible & adaptable

KPI OG / OP1 / WD Growth / MS / Cash-Flow / ND Grab Market Potential

Employee Management

Inclusive Professional distance

Hierarchical Blurry private/profess. line

Get personal

Role of Government Last priority Central Get political

Drinking Culture Whisky, Cognac & Cigar Repetitive shots Try if you can

Holidays 5 weeks 5 days Be productive on-duty

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Glocal A Glocal Company

Global Local

Global Best Practice Corporate Management Specialist

Local Insights Entrepreneurship Generalist

A hybrid business model enables us to get the best out of both global and local expertise

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THANK YOU