Nestlé in Greater China winning in the new reality

Nestlé in Greater China: Winning in the New Reality

Roland Decorvet Chairman

& CEO

Nestlé Greater China

Nestlé Investor Seminar, Shanghai

September 25th, 2012

1. China: Favourable yet challenging business environment

2. Nestlé‟s roots in China and recent performance: Accelerating

growth and 2 step-changing partnerships

3. Vision, Objective & Ambition

4. Winning in the new reality: China-relevant portfolio,

Region & channel focus, Success with partners

5. Creating shared value

Agenda

1 September 25th, 2012 Nestlé Investor Seminar, Shanghai

Source: The Economist Feb 24 ,2011


The size of a continent, with provincial GDPs at the level of developing or developed countries

China 2011

Japan

Philippines

Brazil

Mexico

USA

France

Germany Italy

Spain

UK

India Indonesia

Russia

Mid-East

South Africa

Portugal

China 2015

-

500

1'000

1'500

2'000

2'500

- 5'000 10'000 15'000 20'000 25'000 30'000 35'000 40'000

Annual F&B Consumption per Capita (2011, USD)

Annual Disposable Income per Capita (2011, USD)

Sources: Nestlé GCR Analysis, Euromonitor & McKinsey, 2011

240 USD +12%

+12%

Average growth for each

development phase

150

+1-2% +6-7% +9-10%

Global F&B

Consumption &

Disposable

Income Levels

China is still at an early stage in food consumption: Per capita by 2015 … only half of Mexico today


Zero tolerance Stricter legal framework

Higher awareness No preferential treatment

4

Nestlé continues to support government efforts to reinforce food safety

September 25th, 2012 Nestlé Investor Seminar, Shanghai

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2. Nestlé‟s roots in China and recent performance:

Accelerating growth and 2 step-changing partnerships





Agenda


Nestlé sales office

opened in Shanghai

Nestlé Products

Ltd. established in

HK

1874 Started trading activities in HK. First trademark (Eagle sweetened condensed milk)

1908

1920

1990 1996

Nestlé Shuangcheng factory

started production (Heilongjiang

Province)

Establishment of Nestlé China HQ in Beijing (relocated to

new premises in 2010)

Initial discussions

with PRC

authorities

concerning

possible

partnerships with

local companies

1979 1999 80% partnership with

Totole (Shanghai)

1992 Hong Kong factory (dairy +

ice cream) through acquisition of Dairy Farm


Nestlé history: long presence in China but rapid development since the 1990‟s

1993 – 2006

16 factories built in China to meet consumer demand

80% partnership with

Haoji (Sichuan Province)

2002 2009

2010

70% partnership

with Dashan

(Water)

2001

Nestlé R&D center

in Shanghai

2008

Nestlé R&D

center in Beijing

2011 Totole’s second factory in Shanghai

started production (the world’s largest

bouillon factory)

60% partnership with

Yinlu Foods Group

60% partnership

with Hsu Fu Chi

Accelerated investments in the 2000‟s showing long-term commitment to China


Nestlé vs. 2nd Best (2012)

Nestlé is perceived as the tastiest, healthiest and most trustworthy F&B brand in China


Source: Millward Brown, 2012, survey on the top 22 F&B companies in China

They are socially responsible

Ahead of other companies in developing nutritionally advanced products

A company I feel I can trust

Offer the tastiest and healthiest choice

Committed to continuous product improvement

Product range contributes to balanced diet

Invest heavily in scientific nutritional research and development

Provide great tasting products

Their on-pack information makes choosing healthier products easier

I would recommend their products

Made advancements in improving products healthiness

Deliver the best quality products

Encourage an active lifestyle

Their products are part of my everyday life

17%

16%

14%

12%

11%

11%

11%

11%

9%

6%

3%

3%

1%

1%

Factories ( under construction)

R&D Centers

Regional & local headquarters

35 million products

sold every day

~90% of Nestlé products

sold in China are locally

manufactured

31 factories and 2 R&D centers all across China


4

3

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Our partnerships have enhanced Nestlé‟s capabilities

Hsu Fu Chi

3 focused platforms with clear

strengths and expertise

Large portfolio:

6 China famous brands,

1 strong regional brand,

leadership in 11 categories

Nestlé Dry Grocery → Key accounts, few key distributors

Yinlu / Ready-to-drink coffee → Ready-to-drink beverage distributors,

high point of sales coverage, lower-tier cities

Hsu Fu Chi → Direct distribution, pick & mix, impulse model

Multinational company vs. Chinese entrepreneurs

Structured approach vs. speed / planning vs. hyperactivity

Team-minded vs. great leader

Different focus and KPIs – percentages vs. absolute amounts

Da Shan Water

Need to respect what makes

our partners unique

2 different “cultures”,

same values

Support & develop

Listen and change only if all partners:

1. understand why 2. agree 3. see clear benefits


The 2 latest partnerships have drastically changed the capabilities of Nestlé

47%

16%

5%

9%

23%

2012E Sales

CHF 5 bn

Actual 2011 Sales

CHF 2.5 bn

Note: Yinlu sales only 1 month in Actual 2011, Hsu Fu Chi sales in 2012E figures, not in Actual 2011; Nestlé F&B GCR includes Infant nutrition

28%

9%

21%

28%

14%

Nestlé F&B

GCR division


Food (Totole, Haoji, Maggi)

HFC + Nestlé Confect.

Yinlu + RTD Coffee

Globally/Regionally Managed Businesses

Partnerships

Nestlé F&B

Dairy, Ice-Cream, Coffee & beverages, Infant nutrition, Hong Kong, Taiwan

Nestlé Professional, Nestlé Waters, CPW, Nestlé Purina Petcare, Nespresso, Nestlé Health Science

Nestlé F&B

GCR division

2008 2009 2010 2011

12

Greater China Region is on track to become Nestlé‟s #2 largest market

2011R

ank

Market 2011 Sales

(CHF bn)

1 USA 21.5

2 France 5.6

3 Brazil 5.4

4 Germany 3.4

5 Mexico 3.0

6 UK 2.7

7 China 2.5


Nestlé Greater China

Region‟s sales (excluding Yinlu & Hsu Fu Chi)

Greater China 2012

Sales est.: CHF 5 bn

Rank: ?

13

2011 has seen significant investments to support our fast growth


2008 2009 2010 2011

Trading net working capital* as a percentage of sales

2008 2009 2010 2011

Capital expenditures* as a percentage of sales

Index (ref. 2008) 1

0.9

1.5

*Excluding Yinlu & Hsu Fu Chi

1 Index (ref. 2008)

Jan. 2011

14‟100 employees

Note: Yinlu & Hsu Fu Chi employees are accounted starting from Jan. 2012; Nestlé F&B GCR includes Infant nutrition

51%

26%

4%0%

18%

16%

7%

38%

32%

6%

Jan. 2012

47‟000 employees

Nestlé F&B

GCR division

Nestlé F&B

GCR division

The new Nestlé China: 47‟000+ employees


Food (Totole, Haoji, Maggi)

HFC + Nestlé Confect.

Yinlu + RTD Coffee

Globally/Regionally Managed Businesses

Partnerships

Nestlé F&B

Dairy, Ice-Cream, Coffee & beverages, Infant nutrition, Hong Kong, Taiwan

Nestlé Professional, Nestlé Waters, CPW, Nestlé Purina Petcare, Nespresso, Nestlé Health Science








Agenda


Be the recognized leading NHW

F&B Company by helping to build

healthier and happier generations

at every stage of life

Delivering innovative, safe, tasty, trusted and good

value-for-money products

Building partnerships with all stakeholders from

farm to chopsticks

Creating shared value and sustained development

Our Nestlé Greater China Vision


Our ambition is to grow double-digits while creating shared value









Agenda


19

The Nestlé Strategic Roadmap to win in the new reality


Comprehensive product offer matching all income levels Chinese Urban Household

Annual Income (’000 RMB)

Global Affluent

>250 (6% of population)

Mass

Affluent

125-250 (12% of pop.)

Upper

Middle Class

50-125 (39% of pop.)

Lower

Middle Class

30-50 (22% of pop.)

Poor

<30 (21% of pop.)

Dairy &

Nutrition Coffee Beverage Culinary Confection. Ice cream Hsu Fu Chi Yinlu


Source: Nestlé GCR analysis, selected units from Nestlé Greater China portfolio, sizes non representative

Waters Cereals

Pet food


Adapting product tastes & formats to local preferences

1998

2006

2005

2011

2009

Launch Nestlé Wafer in China

Explore Pick & Mix opportunity

Reach 10,000 tonnes

1st Above-the-line communication

Re-launch “Crispy Shark” brand

Continued innovation and growth

2008

Right recipe

Right brand & price positioning

Right communication campaign

Right in-store promotion

PPP: Crispy Shark chocolate wafer The right consumer insights


R&D: Senior Nutrition, Addressing the needs of the ageing population


Chinese aged 55+ will reach 335 million by 2015

They allocate half of their expenditure to food: RMB 5000 per year & per capita

Ageing society

HEART and BONE are top 2 health concerns for Chinese Senior Consumers

Price

High

Specific health

concerns

Heart Health Omega senior

Bone Health HiCal

Digestion- Essential

nutrition

Strong R&D to build up expertise in nutrition for seniors

Senior milk powder Product offering

Source: National Statistics Bureau 2010/Kantar consumer panel/McKinsey insight China

Portfolio optimization

More selective & better innovations

Out: 46 SKUs In: 14 SKUs

More competitive portfolio

Increase of Marginal Contribution

YTD growth 45% like for like

Improvement of Trading Operating Profit

I&R: Focus on winning regions with winning products The Ice Cream success story


Focus on regions with strong ability to win

Concentrate on North & South Regions

Close East Region

Dedicated organization with

strong channel & customer

intimacy

The widest F&B portfolio

in the out-of-home market

Nestlé Group expertise

& capabilities

Ability to customize products

& solutions

Inspiring Partners‟ Growth by Providing

Branded, Creative and Profitable

Food & Beverage Solutions

that are Making More Possible

for our Customers

Out-of-home: Nestlé Professional, helping operators win!


US: largest out-of-home market, followed by Japan and China

US/Japan: size driven by spending; high out-of-home spending/capita but low growth

China: size driven by population; low out-of-home spending/capita (RMB 1‟800) but high growth

United States

Brazil

China

France

Germany

Hong Kong

India

Indonesia

Japan

Portugal

Russia

Singapore

Taiwan

South Korea

-100

400

900

1,400

1,900

2,400

2,900

- 10,000 20,000 30,000 40,000 50,000

Ou

t-o

f-h

om

e S

pen

din

g / C

ap

ita

(CH

F)

GDP / Capita (USD)

We will keep on developing the professional channels as out-of-home consumption increases in China


Source: Euromonitor , Nestlé Professional Global Food service Industry Channel Quantification Report 2012

United States

Brazil

China

France

Germany

Hong Kong

India

Indonesia

Japan

Portugal

Russia

Singapore

Taiwan

South Korea

-100

400

900

1,400

1,900

2,400

2,900

- 10,000 20,000 30,000 40,000 50,000

Ou

t-o

f-h

om

e S

pen

din

g / C

ap

ita

(CH

F)

GDP / Capita (USD)

US: largest out-of-home market, followed by Japan and China

US/Japan: size driven by spending; high out-of-home spending/capita but low growth

China: size driven by population; low out-of-home spending/capita (RMB 1‟800) but high growth

We will keep on developing the professional channels as out-of-home consumption increases in China


Source: Euromonitor , Nestlé Professional Global Food service Industry Channel Quantification Report 2012

With increasing

disposable income and

changing socio-economic

demographics,

out-of-home consumption

increases

Start manufacturing chicken bouillon 1988

1999

2009

Nestlé acquires 80% of Totole

Opening of Totole factory

Mr. Rong Yaozhong, founder of Totole,

is still General Manager of the company

after 13 years of successful partnership

1997

Opening of Totole„s second factory

2012

2001 Opening of Nestlé R&D center

Totole: A successful partnership in culinary products


Totole local insights + Nestlé technology = Winning recipes

Aroma

Taste Flavor

After

Taste

Overall

-5 -4 -3 -2 -1 0 1 2

Totole local insights Nestlé technology

Nestlé

Proprietary

technology

MHT STB

Winning recipes


… leading to a relevant portfolio for Chinese consumers

MSG range 3 „Xian‟ granulated chicken bouillon Dehydrated bouillon

Paste and recipe mixes Premium soya sauce & premium oil Gel & liquid concentrated bouillon


Totole: A proven track record of managing sino-foreign partnerships

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Nestlé R&D opened

JV established

2nd factory opened


Source: CNCS, 2011

Nestlé-Totole

way to success:

Common values,

Mutual learning,

Respect of

differences

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

Chinese relevant products

Leader in ready-to-eat

congee and ready-to-

drink peanut milk

High operational efficiency

& Aseptic experience

3 large-scale factories

Traditional trade

& Deep penetration

8‟000 sales people

>700‟000 outlets

covered


60/40 partnership with

founding families

Headquartered in Xiamen

…with a range of leading healthy & nutritious products


„Hao Zhou Dao‟ congee

Peanut milk range Milk peanut

‘Eight Treasure‟ congee

Red date peanut milk








Agenda


Making it the cornerstone of our operation, we never

compromise with food safety and compliance

Continuous consultation and cooperation with authorities,

academics and trade associations

Long-term partnerships with farmers and very stringent

selection and control of raw and packing materials

Strict implementation of the Nestlé Quality Systems with

comprehensive quality controls at each manufacturing

step and full compliance with regulation

Investment in state-of-the-art equipment and best-in-class

analytical capabilities

Quality, food safety and compliance are our non-negotiable priorities


Quality is our

biggest boss…

…a consistent

engagement

…across the whole

value chain

…in each of our

factories

…with the most

advanced

technology


0

100

200

300

400

500

600

700

800

1994 2011

Local fresh milk collected and processed

every day

• Daily fresh milk payments to farmers

• With multiplying direct/indirect effect on local

communities: ~ 200,000 people

In 2011, Nestlé agronomists trained ~17,000

farmers

World-Class Dairy Farming Institute

under construction in Shuangcheng, to

support the sustainable development and

the modernization of the dairy industry in

China

Volume - ’000 tonnes/year

Long-term cooperation benefiting thousands of farmers 1. Fresh milk collection

0

2000

4000

6000

8000

10000

12000

1998 Full Year 2012 YTD


Nestlé has helped pioneer coffee growing

in Yunnan province

• Nestlé Agriculture Technical Assistance: world

class support to coffee growers

• Experimental training and demonstration

coffee farm: model of best practices

• Trusted, reliable buyer of coffee beans at

stable and competitive price

June 2012, Rio, Brazil: Received the

World Business and Development

Award for "Innovative & productive

business practices that benefited Chinese

society"

Volume - tonnes/year

Long-term cooperation benefiting thousands of farmers 2. Coffee culture

Key Enablers


Attract, develop & retain

local talents

Human Resources

Expand distribution depth,

strengthen effectiveness &

expertise

Sales & Distribution

Transfer & build expertise and

know-how with strong Chinese

insights

Research & Development

Anticipate growth with best-in-

class production capacity &

organization

Technical

39

Greater China Region: a strong growth engine for Nestlé


Double-digit sales & profit

growth “the Nestlé way”

Winning in the New Reality

A quantum size leap:

2 new partners in 2011

Comprehensive portfolio

& deep Chinese insights

Proven track record of

winning with local partners

Positive 2012 outlook

Creating shared value

from farm to chopsticks

Thank You !

谢谢！

Nestlé in Greater China winning in the new reality

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