Nestle's Quick

By Peter Gumbel/Vevey

The Matterhorn, Switzerland's best-known mountain, is also one of its hardest to climb, requiring peak fitness and experience using crampons and ropes at high altitudes. That didn't deter Peter Brabeck-Letmathe, 58, the chief executive of Nestle, who has been mountaineering in the Alps since he was a child. He fulfilled a lifelong ambition last summer by reaching the 14,692-ft. summit. "It was just perfect," he says, his eyes sparkling at the memory.

The pleasure may have been greater because it was Brabeck's second try. Two years ago, he was within half an hour of the top when it began to snow heavily. To the surprise of his guide, Brabeck insisted on turning back. Even though he says his life wasn't in danger, "the risk was too high for the responsibility I have."

Ambitious, persistent--but cautious: those characteristics are also Brabeck hallmarks as he attempts to lead Nestle up its own steep mountain. He took over as chief executive in 1997 in the midst of a growth spurt that saw Nestle double its sales, to $60 billion, in a decade and cement its position as the world's largest food company. With brands that include Stouffer's frozen dinners, Perrier and Pellegrino water, Nescafe coffee, Friskies cat food, Carnation milk, Buitoni pasta and After Eight chocolate mints, it's the leader in hundreds of product categories worldwide. But Brabeck isn't satisfied. "The most important role I have in this organization is fighting against complacency," he says. His overriding goal: to double Nestle's sales once again, this time more cost efficiently.

Brabeck won't put a date on his goal, but he's moving quickly. He has ratcheted up internal growth targets and spent about $15 billion on acquisitions in the past two years, mainly in the U.S., which now accounts for about 25% of Nestle's sales. He has gobbled up companies including Dreyer's ice cream, Chef America and, biggest of all, the pet-food company Ralston Purina. Some analysts have questioned whether Brabeck is paying too much for his conquests and taking on too much debt amid a global slump that is lingering longer than expected. But at the same time, Brabeck has moved to boost profitability by closing dozens of creaky factories, ditching low-margin operations such as cocoa-and tomato-processing plants and improving productivity. Under his leadership, the company has cut manufacturing costs by $2.8 billion, and more savings are promised.

Behind the scenes, Brabeck is working to reshape Nestle's traditional decentralized management. He wants to replace the jumble of conflicting practices within the company's far-flung divisions--in areas from accounting to purchasing--with a unified system aimed at better leveraging Nestle's worldwide scale.

It's typical of Brabeck that these moves, while significant, aren't billed as any kind of revolution. Brabeck has spent his entire professional life at Nestle, working his way up from lowly ice-cream salesman, and he's respectful of the 136-year-old company's traditions. Just as in the mountains, he moves with care. "Peter Brabeck lives life to the full, but he's circumspect," says Vreni Spoerry, 64, a nonexecutive Nestle director for the past decade. "He's good at anticipating what might happen and seeing where the risks lurk."

In Nestle's case, the risks lurk literally everywhere. The company dates back to 1867--when Henri Nestle started selling a cereal he had invented for infants--and is still based in his hometown, Vevey, Switzerland, on Lake Geneva. But it has long outgrown its Swiss roots and is today perhaps the most multinational of multinationals. Its products are available in almost every nation in the world, and its executive board is made up of two Americans, two Austrians, a Briton, a Dutchman, a German, a Mexican, two Spaniards and a Swede. Yet its corporate culture remains firmly grounded in the Swiss tradition, favoring modesty and consensual change over American-style brashness. Joe Weller, 57, the head of Nestle USA, calls it a "global company with a Germanic personality." And Brabeck nurtures "the Nestle spirit," even co-writing a nine-page brochure that tries to explain it. "Nestle people do not show off" is one definition. Another: "Nestle is skeptical of short-term fads and self-appointed gurus."

The result is that for all his ambition to usher in a new era of growth, Brabeck is not about to follow the radical--and financially successful--example of one of Nestle's main rivals, the Anglo-Dutch Unilever group. Unilever has taken a machete to its operations over the past three years, cutting the number of its brands by half to focus on 400 key products and shutting 83 of its 250 manufacturing facilities. Those efforts have widened its operating margins by 45%, and its earnings per share were up 27% last year, despite the sluggish economy. During Brabeck's tenure, Nestle has closed 156 factories, but it has acquired or opened 183 new ones, increasing the total to 516. And it continues to nurture some 8,000 product brands. That's about the same number as when Brabeck became CEO, although he has been putting more emphasis on the company's six global brands, including Nescafe and Nestle itself, which account for about 70% of sales.

Brabeck pooh-poohs the notion that a company should focus tightly on its core competency. Nestle's big challenge, he says, "is that we have to be able to learn how to get operational efficiency with a relatively complex business structure. This is what I think real management is all about. The other thing is much too easy." Rather than narrow its focus, he believes that a well-managed and flexibly organized consumer-goods company can sell dog food and ice cream--as well as coffee, water and candy--and gain advantages in marketing, purchasing and distribution over more specialized firms.

Nestle's complexity, though, comes at a price. While the company's long-term growth has outstripped that of many rivals, its margins are lower; "subpar profitability" is how Morgan Stanley analyst Sylvain Massot describes it. Its stock trades at about 15 times estimated 2002 earnings, less than that of Kraft Foods, Kellogg or Hershey Foods, which all trade at price-earnings multiples of about 20. And Nestle ranks far behind Unilever, which trades at 35. Brabeck isn't fazed. "If I had run the company based on the opinion of financial analysts, it would already have been bankrupt," he says, half jokingly. He points out that some of the company's current best growth markets, including Russia and China, required a decade of investment before they bore fruit.

Nonetheless, Nestle thinks it is undervalued--and is trying to broadcast that message. Soon after he was appointed chief financial officer last year, Wolfgang Reichenberger solicited analysts and investors for suggestions on what Nestle could do better, and the company has started publishing more detailed financial information, including sales-growth figures for some individual product categories.

The company invited 150 analysts to a seminar in Miami last October that was the highlight of its investor-relations campaign. But on the evening before the seminar started, Brabeck let slip over drinks that Nestle had an option to acquire the French cosmetics company L'Oreal in 2004. When the markets opened the next morning, Nestle stock tumbled on fears about what such an acquisition would do to its already growing debt. Brabeck kicked off the seminar with an angry lecture, complaining that his remarks had been misinterpreted and reading aloud extracts from the option agreement with L'Oreal--in French. "He was very emotional," says Andrew Wood, an analyst for Sanford C. Bernstein who was present.

Indeed, Nestle's stock has been particularly volatile because of concerns among investors that Brabeck's debt-financed acquisition strategy risks overextending the company. Nestle's net debt has quadrupled since Brabeck took over in 1997, to $13.8 billion in 2001, the latest year for which figures are available. The company has nonetheless managed to hang on to its top-shelf, triple-A rating, and Brabeck still gets some respect from Wall Street. "He's done well so far in keeping the top line bubbling and extracting better margins," Wood says. Wood and other analysts--including those at Goldman Sachs, which recently added Nestle to its list of recommended stocks--believe that Nestle could outperform its rivals in the next few years precisely because the company has so much room to improve its bottom line.

Brabeck didn't set out to be the CEO of Nestle when he began selling ice cream in his native Austria 35 years ago. He says he didn't even know that the company he worked for, Findus, was owned by Nestle at the time. "His ambition was to experience Latin America, to have an adventure there," says Gottfried Truppe, his college roommate. Why the fascination with Latin America? "The wide-open spaces and high mountains," Brabeck says. It was also far from home--and far from the mountaineering tragedy he had just lived through.

Brabeck was born in Villach, Austria, six months before the end of World War II. His mother Edeltraud Brabeck recalls rushing with her infant son to an air-raid shelter to avoid Allied bombs. In the tough economic times after the war's end, the surrounding Alps became Brabeck's playground. By age 10, he was climbing with ropes. As a teenager, he took off for hiking trips with his friend Hans Thomassen, with little more than a tarp and his mother's sandwiches. She recalls that "he was always an adventurer, just like his father"--a salesman for an oil company. Indeed, along with mountaineering, Brabeck today enjoys glacier hopping in a Piper plane with high wings and retractable skis.

In 1967, during a summer vacation from business school in Vienna, Brabeck traveled to Pakistan with a group of friends to climb Tirich Mir, the highest peak in the Hindu Kush. They drove through Turkey and Afghanistan in a secondhand van and slept in tents their mothers had sewn. The expedition turned into a disaster. In bad weather two of the team, including Thomassen, fell off an ice wall to their deaths. Brabeck survived because he had returned to base camp the day before the tragedy: there had been only enough food for two, and he lost the poker game that had decided which of the three would turn back. The experience changed his life and continues to influence his management. "When you lose your best friends in such an expedition," he says, "it makes you more aware of the relativity of the risks but also of the relativity of the individual."

Back in Austria, he abandoned plans to earn a doctorate, joined Findus and was soon posted to Chile. President Salvador Allende was then in power trying to implement his "Chilean road to socialism," and Brabeck recalls spending much of his time trying to dissuade government officials from nationalizing milk production. He also had to deal with militant labor officials on the factory floor who could bring operations to a standstill.

One of the highlights of his posting was the day Fidel Castro introduced him to cigars. It was in September 1972, he recalls, at a trade fair in Santiago. The Cuban exhibitors needed refrigerators for their shrimp. Brabeck lent them some. When the fair opened, Castro came over with a box of smokes to say thank you. But the Cuban leader's biggest gift, Brabeck says, was to warn Allende of the problems Cuba had encountered when it nationalized milk. That gave Nestle valuable breathing space.

Brabeck was called back to Switzerland in 1975, and after the turbulence he had just lived through, "Vevey seemed as boring as hell," he recalls. Within three months, barely enough time to hang the curtains and find a school for the eldest of his three children, he was on a plane back to Chile along with his family, this time as Nestle's local marketing director. Three other executives had turned down the job, nervous about the political turmoil. Brabeck jumped at it.

Something similar happened five years later. Brabeck returned to Switzerland as deputy head of the Latin American division, expecting to settle down in Vevey for three to five years. But within weeks, there was a management crisis in Ecuador, and he was parachuted in to become the new general manager. This time his Chilean-born wife refused to go with him. She stayed in Switzerland with the children, and she and Brabeck divorced. But there too Brabeck showed his famous persistence. Ten years later, on his 50th birthday, the couple remarried.

By then he was back in Switzerland, in charge of marketing. When CEO Helmut Maucher began redefining Nestle's product and branding strategy, he leaned increasingly on Brabeck. He even took to calling Brabeck Suslov, a joking reference to Mikhail Suslov, notorious chief ideologist of the Soviet Communist Party. The new product strategy involved grouping all Nestle products under six global brands, including Nescafe, Nestea and Nestle itself. Once it was launched, Brabeck grew restless and asked to be sent back into the field. Maucher was then in his mid-60s and close to retirement. Brabeck technically reported to the chief operating officer, who was widely expected to become the new CEO. Maucher asked Brabeck bluntly, "What is it you truly want?" Brabeck's reply: "The chair you're sitting in." Several months later, Maucher announced that Brabeck would succeed him.

To understand Brabeck's strategy of cost-efficient global growth, unwrap a Kit Kat. Nestle acquired the chocolate-covered wafer bar in 1988 when it bought Britain's Rowntree. Today it's a $1 billion business, says Patrice Bula, head of the chocolate division at Nestle headquarters, and the company is pushing Kit Kat as its answer to the Mars bar, the world's most popular candy. Last year Nestle started producing Kit Kats in Russia and Bulgaria for Eastern Europe. A Latin American launch is slated this year. Kit Kat is already selling briskly in Japan, Australia and India, and a relaunch is under way in Thailand.

Unlike Coca-Cola's, Kit Kat's formula is different almost everywhere. A Russian Kit Kat is a fraction of an ounce smaller than a Bulgarian one, and the chocolate is coarser and not as sweet as that in a German Kit Kat. In Japan, strawberry-flavored Kit Kat is all the rage. Each of these product variations is the result of thorough market research on local tastes. "There is no global consumer for the food-and-beverage business. This is a deep belief we have," Brabeck says.

But there is a gaping hole in this global strategy: Nestle doesn't control Kit Kat in the biggest chocolate market of them all, the U.S. Back in 1970, Rowntree licensed the brand in perpetuity to Hershey. The only way for Nestle to get it back would be a change of heart--or a change of control--at Hershey. So when the Hershey Trust put the company up for sale last year, Nestle saw a ripe opportunity. Brabeck made an agreement with Britain's Cadbury Schweppes under which it would return Kit Kat and another brand, Rolo, to Nestle if Cadbury made the winning bid for Hershey. In the end, the Hershey Trust dropped its sale plans, but Nestle has not given up hope. Brabeck says he's "willing to go a long way" to get the brands back "because they belong to our family."

In some weeks, Ian Jobson makes 20 types of Kit Kat at the big plant he oversees in the northern English city of York, the largest Kit Kat manufacturing operation in the world. Nestle installed $11 million worth of robots on the production line last year, and a new $1.6 million automated packaging machine is due to be installed this year. The number of people needed to staff the round-the-clock operation has been cut to 28 from 60. Jobson patrols the factory floor in his white coat and hairnet, soliciting ways to improve production. Nestle sent a manufacturing SWAT team to help last year. That resulted in a raft of small production-line improvements, including redesigning the levers that dab glue on the wrappers and reprocessing wasted sugar rather than feeding it to York's pigs--tiny changes but ones that add up and are far cheaper than a new robot. "We are obsessed with getting costs down," says Jobson. Back in his office, he pulls up a graph showing York's productivity. In 1998 it took 38 man-hours to produce a ton of chocolate. This year's time is forecast to drop to 23 hours--a 40% improvement.

Jobson recently met over lunch with Brabeck, who is on the road more often than he is in Vevey. Brabeck estimates he meets from 2,000 to 3,000 Nestle staff members every year, about 10% of the work force. He pays particular attention to about 150 up-and-coming managers, trying to get to know them and their spouses.

One issue Brabeck is explaining a lot these days is the big data project he has put in place. Dubbed GLOBE, an acronym for global business excellence, it involves as many as 2,000 people worldwide working to define and standardize everything the company does. Switzerland, Singapore and Peru were the first to switch to the new data system last November, and they found they were able to eliminate a mass of duplications and redundancies in their systems--for example, tens of thousands of customers who were listed several times in databases, alongside vendors who had gone out of business. Among other things, the exercise has shown that Nestle doesn't leverage its size well and often neglects to get volume discounts when different divisions buy paper clips or shipping pallets from the same suppliers. A lot is riding on the GLOBE project: Nestle is promising a further $4 billion in cost cuts by 2006, and more than half of that depends on opportunities identified by GLOBE.

Brabeck wants Nestle's management structure to pay less attention to national boundaries, and he has begun to get his way. Nestle's water business is now run as a global operation out of Paris, and its eye-care business was spun off as a separate company, Alcon, with its own stock-market listing. Nestle's most futuristic business, an attempt to develop nutritional supplements that enhance beauty, is being pursued as a joint venture with L'Oreal. But Nestle's national organizations still manufacture much of what they sell locally, controlling the chocolate, milk and most other products they sell in their countries.

How will such change go down in an organization that values tradition? "We don't have a choice," says Weller, Nestle's U.S. head. Consumer taste is so fickle, and the businesses Nestle is in are consolidating so fast that "we can't get to the next level without changing." Still, to get everyone to buy into the idea, Brabeck characteristically has set up a working group of national managers, including Weller, to figure out how to make the changes work in practice. That's another lesson the mountains taught him. "You learn very early on that you're better off working in a team," Brabeck says. "It's how you'll survive. There's nothing worse than having a weak team on the mountain." That, and unforeseen bad weather.