AT 5 ON a february morning it’s still pitch-dark inside Punjab’s hinterland, and temperatures are near zero. Thirty-two-year-old Manmohan Singh, who shares his name with the prime minister, is out on the dusty roads of Lanwal village, meandering through wheat fields and sleepy hamlets to take 800 litres of milk, 42 kilometres away to Moga, the dairy town of Nestlé India. Back in 2006, he inherited four acres, considered minuscule in Punjab, and was drawn towards additional income from milk. He was not a dairy expert; neither did he have money to buy cattle. Arvind Kumar Malik, one of the many local vets deployed by Nestlé to aid farmers, helped him get a loan of Rs 2.5 lakh to buy five cows and bone up on modern dairy techniques. Singh set aside an acre for his dairy foray and began supplying 70 litres of milk daily to Nestlé in 2006.
Today he owns 125 cows, is skilled at artificial insemination, which helps improve and maintain the breed of the cows, and has a Nestlé chilling plant at his farm. His profit from dairy alone is more than Rs 1.5 lakh a month. He farms multiple crops on the remaining three acres. Over the next year, Singh plans to extend his one-acre dairy shed to three. “When you come next, my farm will have expanded to the adjoining land which I bought recently,” he says. Singh has grown with Nestlé, but has a regret: “I can’t take leave or a vacation, or even attend marriages. The business is like my child. It needs constant attention.”
It’s a similar story for 37-year-old Mandeep Singh in Talwandi Khurd, around 45 kilometres from Moga, whose 56 cows yield 1,100 litres of milk for Nestlé each day. But he now wants to grow his herd to 500 and become “Punjab’s largest dairy farmer”.
Across Haryana, Rajasthan, and Punjab, there are more than 1 lakh farmers who supply over 1.3 million litres of milk every day to Nestlé India, a subsidiary of Nestlé SA, Switzerland’s foods and beverages giant. They form the backbone of its business here (dairy contributes to 43% of sales) and their ambitions reflect Nestlé’s own. Over the last five years, the company’s top line has grown at nearly 20% each year, up from an average of 9.5% between 2002 and 2006. What’s significant is that the growth has been nearly the same even without Maggi, Nestlé’s biggest and fastest growing brand out of India. The company’s stock also hit at an all-time high of Rs 4,695 on the Bombay Stock Exchange towards March end, moving up 30% in 12 months, contrary to the broader market.
“As recently as five years ago, Nestlé had a bias towards growing at GDP-plus rates,” says IDFC Securities managing director, Nikhil Vora, who has long tracked the company. “If India was growing at 4%, they were happy with 9% growth. This was a pedestrian approach with the kind of brands they have. But now, they want to grow at three times GDP.”
Normally extremely secretive—the company held its first press conference in 1998, though it’s been in India since 1912—Nestlé opened up to Fortune India to talk about its transformation. The inside story:
MEET ANTONIO HELIO WASZYK, Nestlé India’s 59-year-old chairman and MD, of Polish descent, but raised in Brazil. Much of Nestlé’s recent spurt has happened during his watch. Behind his desk in the glass-and-steel Nestlé House in Gurgaon hangs a white T-shirt in a glass frame with messages scribbled by his colleagues from Nestlé’s global headquarters in Vevey, Switzerland. It was a send-off present when he moved to India in October 2009. Of the many jottings, one is of particular significance. It says: ‘Make India Visible’. Its author: Nestlé chairman Peter Brabeck-Letmathe. This particular farewell message could well be Nestlé India’s overall strategy. As Waszyk says, “I have three priorities: growth, growth, and growth.” This, and “dream, dare, and deliver” are the two phrases that Waszyk repeats over and over again.
Waszyk’s appointment as India head shows how Vevey is thinking. In his 32-year career at Nestlé, Waszyk has never previously been responsible for any profit and loss numbers. Before India, he headed the global foods strategic business unit (mostly frozen foods and Maggi) at headquarters; in multinationals, such roles are strategic in nature and don’t come with any direct bottom line responsibilities. Prior to that, he headed Nestlé’s research and development centre. Despatching Waszyk suggests that operationally Nestlé India is very strong (it is, see charts), but it needs someone who can piece together a cohesive strategy for faster growth, a large part of which includes knowing what to launch.
Waszyk understands strategy well. During his tenure at foods (2004 to 2009), sales of Maggi rose by 30% to 40% across Asia and Africa. It’s a view shared inside. “Waszyk is a big-picture guy,” says someone who has worked with him and the two previous India heads. He’s also seen as someone who can get things done at Vevey.
The push comes at a time when Brabeck-Letmathe’s successor as CEO, Paul Bulcke, has been talking about building bigger businesses in the emerging economies. Unlike, say, at Unilever (coincidentally headed by Paul Polman, a one-time contender for Brabeck-Letmathe’s job), where over half of revenues come from emerging markets, for Nestlé it was 36% in FY2010. Bulcke wants to take that to 50% by 2020. Waszyk says that both Brabeck-Letmathe and Bulcke think similarly when it comes to emerging markets given that both were groomed in Latin America.
India needs to pull its weight to make Bulcke’s numbers come good. Indeed, shortly after Waszyk arrived, its status in the Nestlé universe was elevated to something called key markets. Others include Brazil and China. But though India has always fetched superlative financial numbers—an average return of 63.5% on invested capital over the last four years—at approximately $1.5 billion (Rs 7,109.2 crore), it’s still a very small business. Especially given that Nestlé’s been around a 100 years. It is smaller than other comparable operations such as Nestlé China ($5 billion) and Nestlé Brazil ($6 billion).
There have been previous attempts to put Nestlé India on steroids. Each of Waszyk’s three predecessors—Darius Eruch Ardeshir (MD between 1993 and 1998), Carlo M. Donati (1998-2005) and Martial C. Rolland (2005–2009) had their own ideas of what needed to be done. Ardeshir wanted to increase volumes, laid a five-year road map, and planned a rural foray when “personal reasons arising from irreconcilable differences with the top management of the majority shareholder Nestlé SA” cut short his innings in April 1998. His exit was accompanied by speculation of insider trading and doubts on Nestlé India’s financials. However, according to Nestlé, it was just a speculation which faded out.
Donati prepared Nestlé India to go mass, launching small packets and sachets (Munch at Rs 5, Chocostick at Rs 2, Maggi at Rs 5, Nescafé at Rs 3). Affordability and value for money became the new mantra. Rolland successfully launched Maggi rice and atta (wheat flour) noodles. But if Waszyk’s predecessors had their highs and lows (failure of Milo and bottled water PureLife), they nonetheless managed to carry the India story further. As Waszyk says, “They fixed the structure; we finalised the strategy and then we had to accelerate.”
Which, of course, happened the Nestlé way. While analysts love the stock, they privately say the company is a bit conservative about growth: It’s acutely conscious of its margins, products are mostly priced at a slight premium compared to competitors, it rarely discounts, doesn’t chase volumes, and so on. The brief for brand managers, for example, is to continually improve operating margins. A rival in Africa (a key Nestlé market) says even in that continent, where per capita income is among the lowest in the world, Nestlé refuses to abandon its premium positioning. Sunil Alagh, a consultant who once headed Britannia Industries, feels Nestlé never launched biscuits because margins are wafer-thin, high volumes notwithstanding. Similarly, it has decided against entering the popular savoury snacks business that would pitch it against companies such as PepsiCo’s Frito-Lay. “It does not fit our business model of nutrition, health, and wellness. Let them enjoy their growth,” says Waszyk.
Siddharth Singh, a professor at the Indian School of Business who consults with consumer goods firms, attributes this to the pride associated with the brand. “They will take years to develop and test because the stakes are much higher for them than a domestic company which might clock a higher rate of growth. Nestlé has the market information and will use it to their advantage but only when they think the time is right.”
Clearly, revolution isn’t Nestlé’s way; inspired evolution is. Nestlé’s values are very Swiss—efficient, no-nonsense, and consistent. As Nestlé SA’s recent results show, it’s no different at Vevey. It clocked revenue growth of 9.5%, with margins of around 15% for FY11 ending December. “Anyone can grow at the cost of margins,” says Waszyk. “Profitable growth is another matter altogether.” (China is perhaps the only notable exception—Nestlé’s margins there are half India’s: Of course, structurally it’s a different setting with a far higher penetration of packaged foods that runs on a more extensive modern retail backbone.)
The conservatism comes across even while discussing how Nestlé could potentially leverage its powerful brands. Waszyk is a purist when it comes to brand extensions. He thinks Fevicol is a great brand because it hasn’t diluted its positioning. So while Maggi soup and noodles are fine—both need to be cooked and reflect a mother’s effort—Maggi biscuits would be a complete no-no.
WITHIN SIX MONTHS OF taking charge, Waszyk distilled all his insights on a single sheet and flew over to win Vevey’s approval. “It was about a big vision and a simple strategy,” he says. The vision is to aspire to make Nestlé India a Rs 25,000 crore outfit. And that sheet of paper carried 10 ideas needed to get there.
One of the big things that Waszyk pushed for was creating capacity ahead of demand. In Rolland’s time, there was already evidence that inadequate capacity was choking growth. That, combined with the fact that India had begun delivering on numbers, convinced the bosses. Waszyk came back with a go-ahead to spend $500 million on capacity expansion, and a promise of more to follow. This is more than Nestlé has invested in the last decade. Of this, Rs 910 crore was deployed last year as part of investment in fixed assets, while the remainder will be used to complete the capacity expansions by the middle of this year. When this exercise is complete, Nestlé will have doubled capacity for all its brands except Nescafé. In fact, huge investment in countries such as India is one of the reasons why globally emerging markets accounted for a greater share (52%) of capacity creation in 2011.
Simultaneously, Nestlé expanded distribution. Its labels are now available in 3.8 million outlets, of which 1.2 million were added in the past three years. More than 500,000 outlets were added last year alone. In October 2010, when Waszyk set this target, he was seen as a person obsessed with triggering growth. But he persevered. Today, Rs 3 Maggi Masala-ae-Magic, a universal tastemaker, and Rs 2 Maggi Noodles packets are available even in remote villages. Another way of looking at these numbers is that everything else being the same, this rise in outlets translates into 13% annualised growth.
Meanwhile, Waszyk began forging deeper relationships with farmers—another of the single sheet jottings. Every month, he makes at least two trips into India’s interiors to meet farmers. Using translators, he engages in meaningful chats. This comes easy to him—growing up in Brazil, he spent a lot of time at his grandfather’s farm. His mother’s family owns vineyards in Tuscany. “I understand agriculture very well,” he says.
While such bucolic bonhomie is all very well, it serves a deeper purpose—securing raw material supplies. Companies such as Nestlé are almost entirely dependent on farmers for all their raw materials from milk to wheat. Consider that in FY11, Nestlé consumed 386,000 tonnes of milk worth nearly Rs 890 crore and nearly 182,000 tonnes of wheat flour worth Rs 300 crore. Deeper relationships led by the boss result in better, long-term contracts, hedge against price volatility, keep competitors at bay, and so on. Food inflation and the rise in raw material costs are already vexing—the cost of raw material consumed as a percentage of gross sales has risen from 33% in 2005 to over 38% in 2011.
Besides Waszyk playing ambassador-at-large, one of Nestlé’s copybook methods to get farmers on its side is to help them improve their crop. For example in Coorg, it’s working with nearly 7,000 farmers to improve the quality of coffee beans and productivity. This includes advising them on the saplings to plant, sharing expertise on improving yields, and sending beans to labs in Europe for quality checks. Says Sanjay Khajuria, senior vice president, corporate affairs, Nestlé India: “This is no philanthropy. Such activities are integral to our business approach.” Nestlé is also working with farmers to improve the quality of high protein wheat [used mostly in Maggi].
WHAT WASZYK and his predecessors have done so far hasn’t diluted the perception of Nestlé being a premium product company. Its labels still carry a price premium, sometimes as high as 20%, and maintain No. 1 or No. 2 position in the category. “Subconsciously, Nestlé has become a natural choice. The surety of the brand and the value proposition, and also the perception of getting quality if you pay higher, is letting Nestlé get away with a higher price point,” says a global competitor. Nestlé has also succeeded in catching the consumer psyche of not buying cheap. “No one wants to be seen as poor. They would pay more to keep their nose up. Nestlé has handled this urban stress brilliantly,” says Anand Dixit, executive director, PricewaterhouseCoopers.
But is this a long-term, competitive advantage, especially given that players of all hues, from MNCs such as Danone, Unilever, and ITC, to retailers such as Kishore Biyani, are limbering up for a bigger foods business. The big trend that Nestlé has ridden is the rising popularity of convenience foods and others want to cash in.
There are plenty who see chinks in Nestlé’s armour. Citing the example of Maggi, a Nestlé watcher says that a targeted attack on the company in a particular geography can send it into a huddle. “The competition failed because they tried taking on Maggi on a pan-India basis. Things might be different if they go all out in just Tamil Nadu, Kerala, and Karnataka.” Maggi continues to enjoy 78% market share in the instant noodles segment, according to Euromonitor.
IDFC’s Vora points to how Nestlé missed a trick or two in coffee, even though globally beverages are its biggest business. Over the last decade, beverages’ contribution to Nestlé India’s sales has declined from 24% to 14%. The coffee-drinking population has begun moving out of home towards cafés even as Nescafé parlours aren’t seen as being trendy enough for the youth. Also, according to industry estimates, Unilever’s Bru took the lead by positioning itself as a regular coffee (it’s blended with chicory) against Nescafé Classic, a 100% pure soluble coffee. Nescafé is trying to improve awareness and positioning itself as a youth brand (recall the Deepika Padukone as neighbour ad). Similarly, in the past, milk in Tetra Pak and Nestlé Dahi (curd) nearly failed, and had to be re-launched.
In Waszyk’s view, Nestlé’s true rivals are those firms that can pour big money into research. “I do not have too many competitors. There are many players but very few with the depth of R&D, management bandwidth, and brand to counter us,” he says, adding that fighting for market share in India is expensive and not a long-term proposition for most. “I am here to bake a bigger cake and not to fight for a slice of the existing one.” Nestlé’s investing Rs 230 crore to set up its first R&D unit in India, and its 29th globally.
Here’s how Nestlé does it. When he was head of the foods unit, Waszyk kicked off two massive projects, Epicure and Gastronomy, first in China and then in India, to understand the eating habits of consumers. Epicure, conducted in India during 2006-2007, surveyed “in-home cooking” for 42,000 meals and over 100,000 dishes. The project’s findings were sent to a lab and led to the launch of Maggi Masala-ae-Magic and Bhuna Masala, two sub-brands that have witnessed tearaway growth. Several products are in the pipeline based on the findings of the Gastronomy project, which ended in December.
For Sunita Sachdev, director, UBS Investment Research, this is a classic MNC at work. “Nestlé comes with the competitive insight and backs it with R&D to localise taste,” she says. Adds Shivani Hegde, general manager (food), Nestlé: “Maggi is like a mother who understands the changing needs of everyone in the family. The consumer now has a rational and emotional relationship with this brand.” While she emphasises Nestlé’s consumer insights and understanding the need to innovate products, she adds that they need to be delivered in an affordable way and should be accessible to everyone.
Ultimately, as Alagh puts it, it’s this tenacity and knowing what works for it that makes Nestlé such a formidable competitor. Some years ago, Nestlé evaluated buying MTR to enter the ready-to-cook business. The deal fell through and it waited years before entering this market through microwavable meals, Maggi Juicy.
WASZYK’S NEXT big India idea has to do with the findings of the Gastronomy project. That’ll constitute phase two of his India tenure. (He promises there won’t be a phase three.) Nestlé is being extremely tight-lipped about what it may launch, but the bets are on premium confectionery and beverages.
Looking back, Waszyk says India has been an extremely rewarding experience. He had the option to head Italy. It was tempting. (His favourite food is Italian and he believes the best Italian cuisine in Delhi can be found at his house, when he cooks.) But ultimately he opted for India.
Gurbaksh Singh would approve. At Jalalabad, 14 kilometres from Moga, the 68-year-old Nestlé agent routinely opens his collection centre at 6 a.m. for milk suppliers. He has been doing this since Nov. 15, 1961. Over the last half a century, the number of suppliers who are routed through his agency has grown from four to 145. “Nestlé has been single-handedly responsible for helping the local economy, even during the Indo-Pak conflicts or the years of militancy. Now, even my grandchildren are associated with the company.” What more could Waszyk ask for?