Nestlé S.A. – 2016 (www.nestlé.

com )

by Forest R. David and Meredith E. David

Headquartered in Vevey, Switzerland, Nestlé is one of the largest food producing companies in the
world providing quality, healthy, and tasty treats and meals for all ages. Nestlé’s diversified portfolio
includes notable product categories like baby foods, pet foods, dairy products, coffee, frozen goods,
bottled water, and weight management products. Across this range of products, the top Nestlé brands
include Milo, Häagen-Dazs, Carnation milk, Coffee Mate, Nescafe, Perrier, DiGiorno, Stouffers, Lean
Cuisine, Nesquik, Purina pet foods, Butterfinger, Baby Ruth, and Nestlé Toll House among others. Nestlé
also has many brands under a specific product category. For example, it has over 70 bottled water
brands in its portfolio, and over 100 chocolate & confectionary brands. Nestlé reported that in 2014 of
the group’s sales was 91.6 billion Swiss Francs (CHF) or approximately $98.8 billion USD based on 2014
average exchange rates. This indicated that the sales in 2014 were down a minimal 500 million CHF from
2013, approximately 0.6 percent. In the 2014 sales breakdown for the firm that competes globally, the
United States accounts for 28 percent; Latin America and Caribbean, 15 percent; Europe, 28 percent;
and Asia, Oceania, and Africa, 29 percent. During the first half of 2015, Nestlé faced a food
contamination scare in India and was forced to recall its range of instant noodles Maggi, from the
shelves in the Indian market costing the company 66 million Swiss francs ($67 million); Nestlé also had
to pay a $100 million USD fine. Overall, Nestlé’s sales declined slightly to 42.84 billion Swiss francs
($43.70 billion) from 42.98 billion francs a year earlier. The group’s net profit fell 2.5 percent to 4.52
billion francs. So, while Nestlé, like many other food companies, saw a particular slump in frozen food
sales, at constant rates, their sales had improved. The slump, especially in the United States of America,
was due to a shift in consumer perception toward food products that they feel are fresh or natural. Even
though frozen vegetables and freshly farmed products are often as wholesome as each other, people
still view frozen meals and snacks as having more preservatives, sugar, and sodium. Despite this chill
over the frozen food market, Nestlé’s research and development team has recently focused its effort on
revamping frozen-food brands Lean Cuisine and Stouffer’s, with an eye on product-packaging and health
attributes. Though the company is still struggling with the strong franc and its product recall in India that
resulted in its first ever quarterly loss in India, in 2015 the revenue in the Americas increased 5.2 percent
from the 3.7 percent growth in the first quarter. This growth was driven mainly by increased pricing.
Nestlé’s CEO, Paul Bulcke, recently diversified the company into skin health, spending almost $5 billion
in 2014 to acquire L’Oréal S.A.’s stake in a joint venture, and rights to sell certain medical products from
Valeant Pharmaceuticals International Inc. In the third quarter of 2015, Nestlé inaugurated its third
Nespresso plant, at Romont Switzerland. This move is a strategic, long-term plan for Nestlé with a focus
on producing its new large-cup Vertuo Line, a coffee machine that will compete with Keurig Green
Mountain’s K-cup. Nestlé’s North American Nespresso sales grew with its 2014 launch of the Vertuo
Line, and it now has 36 new boutiques in the United States. The coffee capsule market in the United
States is worth $5 billion and, thus, is a key growth market for Nespresso—flourishing in Europe, but
nascent in the United States. The company spent around 300 million Swiss francs ($308.29 million) to
construct the Romont plant. While the plant has a capacity to employ 300-400 workers, it has 125
employees.

History

The first thing most people instantly associate Nestlé with is chocolate products, but Nestlé’s roots are
embedded in milk products, in particular baby formula. Nestlé’s roots can be traced back to 1866 when
the Anglo-Swiss Condensed Milk Company first opened a milk factory in Cham, Switzerland. Nestlé was
actually founded one year later in 1867 when a German pharmacist, Henri Nestlé, saved a neighbor’s
child in Vevey, Switzerland, from starvation with a mixture comprising cow’s milk, wheat flour, and
sugar. Fittingly enough, Nestlé’s first logo was that of a mother bird feeding her new hatchlings. Nestlé
benefitted from World War I, which had created a shortage of food and governments were seeking
contracts to help feed its militaries. By the end of the War, the firm had grown from a few factories to
over 40 across various countries. Notable product launches after World War I included Nescafe in 1938
and Nestea a few years later. At the conclusion of World War II, Nestlé saw rapid growth, adding many
new product lines and even diversifying by purchasing a stake in Paris based cosmetics maker L’Oréal. In
the early 1990s, Nestlé benefited tremendously from the fall of communism in the former Soviet Union
and Eastern Europe. Nestlé diversified into the pet food business in 2001 with the acquisition of Ralston
Purina. Nestlé went on to purchase the American baby food giant Gerber in 2007 and Wyeth Nutrition
from Pfizer Nutrition a few years later, strengthening its baby nutrition business. In 2014, Nestlé
expanded its Nestlé Skin Health S.A. business to capitalize on the growing trends of global skin care. Part
of Nestlé’s motivation for these acquisitions was to shift their business more towards nutrition and
health from simply candy, food, canned goods, and other less nutritious products.

Internal Issues
Organizational Structure

Nestlé operates from a strategic business unit (SBU) type organizational structure as illustrated on the
company website’s About Us section; Exhibit 1 provides a list of Nestlé’s top executives along with their
title. It should be noted that there is one woman (Patrice Bula) among 16 top executives; providing
opportunities in upper management for women is an area Nestlé should work on improving in the
future.
Vision and Mission

Nestlé does not use the terms vision or mission, but on the company website’s About Us section, the
firm clearly states that it is “committed to enhancing people’s lives by offering tastier and healthier food
and beverage choices at all stages of life and at all times of the day.” Nestlé prides itself on being ethical
and non-negotiable on quality and safety.

Strategy

Being a global organization, Nestlé’s strategy has always displayed a competitive focus. Their corporate
roadmap is threefold. Nestlé has certain operational pillars that include innovation, consumer
engagement, and operational efficiency. Nestlé also has certain growth drivers. One such growth driver
for the group is in its image transformation from a packaged food company to one that focuses on
nutrition, health, and wellness. While it has no plans to stop selling chocolate, coffee, ice cream, and
other food products that it is world famous for, Nestlé is actively engaged in offering healthier food
options to its customers. The firm has the largest research and development budget of any food
company and it aims use this to produce healthier and tastier food options, from infant formula to
products designed for senior citizens. Nestlé has recently reduced the amount of salt, sugar, and
saturated fats in many of its products as a means of improving the nutrition quotient and enhancing
other flavors so as not to reduce the taste of these products. One key area that Nestlé will focus on
improving in December 2015 is its Policy on Marketing Communication to Children. The company will be
looking at phasing out their marketing communication in schools and increasing their focus on health
and wellness education through various mediums including the television. Nestlé currently has a series
running in both Mexico and the Philippines to better target children. The global ice cream market’s
growth expectation was to go from $67 billion in 2014 to $71 billion in 2015, with Unilever and Nestlé
having one third of that market share. However, consumers who are more aware of and concerned
about healthy diets prefer smaller treats and niche brands with healthier ingredients to large blocks of
ice cream. As part of their focus on premiumization, Nestlé is putting up some bulk ice cream businesses
for sale, while entering new markets, acquiring start-ups, and introducing new products. Independent
brands like the United Kingdom’s Jude’s, America’s Ciao Bella, China Mengniu Dairy, and R&R Ice Cream
in Europe are gaining market share. Nestlé sells the banana-like Peelin’ Pops, as well as Häagen-Dazs and
Movenpick, but some of its consumer ice cream operations have already been sold. More of its ice
cream business, which provides the company about $4 billion of its $95 billion in annual revenue, is
likely to be divested. In 2015, Nestlé sold its South African ice cream business to R&R Ice Cream. Nestlé
wants its operations to focus on nutrition and health. According to an analyst at the Swiss private bank
Vontobel, Nestlé may not want to increase its share in the unhealthy ice cream business. Nestlé also
looks at its competitive advantages—having unmatched product portfolio, research and development
capacities, and geographic presence—in its roadmap. Expanding on its health and wellness portfolio,
Nestlé sold its stake in L’Oréal in 2014 and used part of the proceeds to gain 100 percent control of
Galderma, the foundation of Nestlé’s subsidiary, Nestlé Skin Health. The vision behind this acquisition is
for it to become the most recognized company in the skin health category in the world through science-
based solutions.

Social Responsibility

Nestlé is one of the most socially responsible companies in the world and has even created an award for
businesses that excel in rural development, nutrition, and clean water initiatives. In the 2014 social
responsibility statement to shareholders, CEO Bulcke stated that at the heart of Nestlé’s corporate
strategy is a desire to be the leading nutrition, health, and wellness-company in the world. Nestlé has
shared 38 commitments that they aim to meet before or by 2020, including producing healthier food
products, focusing on responsible marketing to children and women who opt to use baby formulas
instead of breast feeding, water and other environmental conservation, and focus on human rights and
workers’ rights for employees at Nestlé. Although Nestlé is doing an excellent job of reducing sodium
and sugars in foods, providing direction to farmers and rural communities on how to maintain healthy
water systems, and displaying ethical marketing of its products, the firm lacks in opportunities for
women in upper management. As of 2014, 25 percent of senior leaders and 34 percent of management
were women, but only 1 woman is listed out of the 16 people mentioned in the organizational chart of
top management (see Exhibit 1). Nestlé solicited the opinions and recommendations of the Bureau
Veritas in 2014 to audit its social responsibility initiatives and provide directions for improvements.
Bureau Veritas found Nestlé was in compliance with all social issues addressed, in particular Nestlé’s
work in rural development. Moving forward, a key area for improvement for Nestlé would be in
developing a clear methodology to quantify the benefits from the firm’s work in rural development.
Currently, Nestlé is focusing on case studies of just a few areas where it is working on rural development
activities. Bureau Veritas also suggested Nestlé provide increased disclosure to stakeholders on its R&D
programs that are transforming Nestlé from a food and beverage business to a health, nutrition and
wellness business.

Nestlé has received numerous accolades for its commitment to being socially responsible. In 2013,
Nestlé ranked 3rd among global food providers in the Access to Nutrition Index, which measures firms on
a variety of factors such as governance, ethical marketing, accessibility, product labeling, and other
parameters. In October 2014, Nestlé received a score of 96 out of 100 from the Climate Disclosure Index
and received a maximum score of 20 from the Carbon Disclosure Project Water. Also, in 2014, the Dow
Jones Sustainability Index assigned a score of 88 to Nestlé, placing the firm second in its industry.
Despite numerous accolades, in August 2015 Nestlé was sued in California for allegedly knowingly
allowing a Thai supplier that employed slave labor to provide fish for its Fancy Feast cat food products.
According to the class action lawsuit filed by the Hagens Berman law firm, Nestlé imports around 28
million pounds of seafood-based pet products to the United States through Thai Union Frozen Products
PCL. The ingredients in those products have been said to be the result of slave labor. The lawsuit alleges
that male individuals are often taken from certain areas in Thailand, Myanmar, and Cambodia, and sold
to companies like Thai Union. These individuals work for around 20 hours a day with little pay, and if
their work doesn’t meet standard requirements they are severely punished. Although protection of
human rights is one of Nestlé’s corporate principles, Steve Berman, managing partner of the Hagens
Berman law firm, had said that keeping these from the public has allowed Nestlé to mislead millions of
consumers, who support and encourage slave labor in the production of its pet food without even
knowing it.

Research & Development

Nestlé has the largest R&D network and budget of any food company in the world, with total R&D
expenses of 1.6 billion CHF in 2014 that amounted to 1.8 percent of total sales. Hershey and Mondelez
(producers of Cadbury, Nabisco, and other products) by comparison had no R&D expenses listed on
their respective income statement in 2014. Nestlé has 34 R&D facilities with over 5,000 employees
around the world working to provide healthier food options for consumers. Switzerland is the base for
almost two-thirds of Nestlé’s research and development. While these expenses are still relatively small
in relation to total revenues, Nestlé is aiming to transform itself from merely a food company to a health
and wellness company. With its strategy to produce healthier food and baby formulas, and to enter into
the skin care market, research and development is likely to become of increased strategic importance
for Nestlé moving forward. In fact, Nestlé plans to open R&D centers in the United States for frozen
foods, and in Shanghai for skin care products focused on an aging population.

Finance

Nestlé’s revenues dropped marginally in 2014 as revealed in Exhibit 2, but its net income increased 43
percent. Total assets, as shown in Exhibit 3, increased 10 percent in 2014 mostly due to a 10 percent
increase in the company’s goodwill and intangibles.

Segments

Nestlé is well diversified within the food industry with a range, for example, from pet food and skin care
products. Exhibit 4 below reveals Nestlé’s 2014 and 2013 revenues over its 7 segments. Note that sales
dropped in 5 product categories in 2014, only increasing in the Nutrition and Health Science segment
and the Water segment. The year 2014 as a whole was slow for many in the food industry, so Nestlé’s
sales are not out of line with industry norms. Nestlé’s increase in Nutrition and Health Science sales is in
line with the firm’s overall strategy of becoming increasingly a health and wellness firm, rather than
solely a packaged-food company.
Exhibit 5 represents Nestlé’s operating profits for each division during 2014. Note that Nestlé Water
profits only comprise 4 percent of the company total. Nevertheless, Nestlé’s sales and profits are quite
diversified, with no one product category generating more than 30 percent of total 2014 operating
profits. Much like Nestlé’s product categories, Nestlé’s geographical diversification is quite good, with
roughly a quarter of 2014 revenues divided between Europe, North America, Asia, and the rest of the
world as shown by Exhibit 6. It is quite remarkable that Nestlé is not overly dependent on any one
region. If needed, Nestlé should divert its resources to more profitable regions. For example, in 2014
Nestlé’s sales in Brazil, Philippines, and Russia increased 10.6, 9.4, and 13.4 percent respectively, based
on local currency (not taking into account exchanges rates with the Swiss Franc). These three nations are
fairly sizable in volume as well, with Brazil producing the 4th largest revenues of any country served by
Nestlé, and Philippines and Russia ranking 8th and 12th globally in Nestlé’s total sales. No other country in
the top 12 experienced growth in local currency over 3 percent, with several reporting lower sales in
2014 than 2013. Nestlé did suffer from the depreciation of the Russian ruble, Mexican peso, and
Australian dollar in 2014. The first half of 2015, however, continued to indicate a slowdown in emerging
markets, especially China, while established markets remained stable. Competitors Nestlé competes
primarily in the food and beverage business with 70 percent of operating profits derived from these
products and the remaining profits derived relatively evenly between skin care and pet food products.
Within the food and beverage business, Nestlé finds itself competing with global chocolate giants,
Hershey, Mars and others, along with firms such as French-based Danone, European focused Nomad
Foods, U.S.-based Kraft, and many more. In the skin care business, Nestlé competes with a slew of
consumer products firms such as giant Unilever. On pet foods, Nestlé competes with familiar
competitors such as the world leader in pet food, which may be surprising to some, Mars. Del Monte,
along with Procter & Gamble (P&G) are also in the pet food business.
Hershey

Headquartered in Hershey, Pennsylvania, The Hershey Company is the largest chocolate producer in
North America and a confectionary leader worldwide, with over 80 brands, annual revenues of over $7
billion, with about 20,000 employees, and operations in about 80 countries. Hershey offers chocolates
as well as other candies, mints, and chewing gum. Notable products include Hershey Kisses, Mr.
Goodbar, Twizzlers, Jolly Ranchers, Ice Breakers, and, what may arguably be the best-selling candy bar
on the planet —Reese’s, a Hershey brand that became an official sponsor of ESPN college football game
day, in 2015. Hershey is currently expanding globally with strategic emphasis on markets in China and
Mexico, but the company still derives about 85 percent of its revenue from the USA. In 2015, Hershey
introduced products like KitKat White Minis, Hershey’s caramels, Reese’s Spreads Snacksters, and
Graham Dippers. In early 2015, Hershey acquired KRAVE Pure Foods, Inc. for about $300 million. KRAVE,
founded in 2009, is a maker of beef jerky and other high-protein snacks. Hershey is focusing on getting a
share of the ever-increasing meat snacks market and building its capacity to make foods that consumers
want to snack on. It expects the U.S. meat snacks category, valued at about $2.5 billion, to grow at a
double-digit pace. Hershey plans to operate KRAVE, which saw $35 million in sales in 2014, as a single
business unit in the North America division; KRAVE’s founder, Mr. Sebastiani, continues to head the
business as the company’s president. Mars, Inc. Mars is the second largest candy manufacturer in the
United States and the third largest privately-held company in the United States according to Forbes.
Headquartered in McLean, Virginia, and having annual sales of over $30 billion, Mars, like Nestlé, is well
diversified with six business units consisting of chocolate, drinks, food, symbio-science, pet care, and
Wrigley chewing gum. Mars blockbuster chocolate brands include: Snickers, Milky Way, M&Ms, Dove,
Bounty, 3 Musketeers, Starburst, Skittles, among others. Mars’ annual revenue in 2014 was about $35
billion, more than 50 percent higher than in 2007, largely due to the firm’s 2008 acquisition of Wrigley.
Since patenting recipes is difficult and producing chocolate is secretive, Mars does not allow visitors to
its kitchens in its factories and facilities. Mars’ first blockbuster product back in 1923 was the Milky Way
candy bar. Market researcher Euromonitor International recently reported that Mars’ market share in
the USA rose to 28 percent from 24 percent. To further battle Hershey, Mars in 2014 opened a new
500,000 square foot chocolate factory in Topeka, Kansas at a cost of $270 million. Almost every day, the
factory cranks out around 39 million peanut M&M’s and 8 million miniature Snickers candy bars. Like
Nestlé, Mars advocates globally sustainability of the cocoa resource but has received criticism in recent
years over purchasing cocoa from West African farms that use child labor. Mars is also one of the
world’s biggest producers of dog food and pet-care products. Mars’ Wrigley division produces chewing
gums, confectionery products, and a variety of other products ranging from Uncle Ben’s rice to Flavia
coffee. Pedigree, Greenies, and Whiskas are some of the pet-food brands under Mars. Interestingly,
chocolate is Mars’ second-largest business globally, behind pet care.

Danone

Danone is a global company based in Paris, France with 21 billion euros in revenue in 2014. The firm has
four key operating segments—dairy products, water, baby nutrition, and medical nutrition, representing
52, 21, 20, and 7 percent of revenues respectively. Danone is also fairly diverse geographically with sales
of approximately 40, 24 and 36 percent in Europe, North America, and Other respectively. With the
close overlap on products and markets served, Danone is a significant competitor to Nestlé on many key
areas. In early 2015, Danone warned sales for 2015 were expected to decline and the company planned
on cutting costs and reorganizing production. However, the first half of 2015 was profitable for Danone
as the Euro has depreciated much more than the Swiss Franc, making conversions back to Euros more
beneficial for the firm. Chinese demand for baby formula was also strong in the first half of 2015 leading
to an increase in worldwide Early Nutrition sales of 11 percent from the first half of 2015 compared to
first half of 2014. Over the same time period, Dairy, Waters, and Medical Nutrition decreased/increased
(0.4), 9.5 and 8.1 respectively at Danone. Nomad Foods Nomad Foods is a large food company based in
the British Virgin Islands. Nomad derives nearly 90 percent of its revenues from the United Kingdom,
Germany, Italy, and Austria. Nomad reported over 1.5 billion euros in revenues in 2014 but should see
this number increase substantially with its 2015 purchase of Iglo, which included Birds Eye and Findus
Group’s European operations for $2.8 billion USD expanding the firms reach across a much broader
European footprint. Nomad is focused primarily on the frozen food market and is now targeting possible
U.S. acquisitions.

External Issues
Flavor Enhancers

There is a growing awareness of sugar’s harmful effects on people in particular high-fructose corn syrup
and salt. Hershey is a high-profile example of the move away from high-fructose corn syrup that has may
fuel weight gain and diabetes, using sugar in some of its products as a replacement for high-fructose
corn syrup. However, the American Medical Association stated that restricting the use of syrup is not
supported with enough evidence. The Corn Refiners Association, through research by firms like Mintel
and Nielsen, analyzed perceptions of sweeteners and observed that 67 percent of consumers felt
specific sweetener types were less important than moderation. In the food and beverage industry, soda
constitutes a large portion of the high-fructose corn syrup market. Hunt’s ketchup is one product to
have reverted to using corn syrup after having tried more sugar because there was no change in the
sales. The U.S. Food and Drug Administration (FDA) had denied requests made by some companies to
have their sweetening agent renamed “corn sugar” on nutrition labels. In addition to this, in July 2015
the FDA proposed forcing food producing companies to add the percent daily value of added sugar on all
nutrition labels like the percent daily allowance of salt, fat, and other ingredients, which are listed on
the product labels. Any added sugar, just as in the case of corn syrup, can have dramatic effects on the
body. Added sugars are linked to diabetes, tooth decay, heart problems, weight gain, and many other
health problems. In response to sugar being harmful, there is a growing global demand for artificial
sweeteners as a means to reduce calories, stabilize blood sugar levels, and just an overall healthier
choice rather than raw sugar. However, to date, research in this area is not conclusive as some studies
reveal artificial sweeteners are similar to raw sugar once ingested. Europe has banned several artificial
sweetener products such as Stevia and aspartame from lack on conclusive research, but other nations
such as Japan and the United States have been using the same sweeteners for decades. Never the less,
there is a growing public awareness toward both raw and artificial sugars. Another common flavor
enhancer found in food is salt. Table salt has been linked to water retention, high blood pressure,
stomach cancer, osteoporosis, and killing of beneficial bacterial in the body. Many medical researches
recommend limiting salt consumption to 6 grams a day, however the World Health Organization
suggests the average person consumes between 9 and 12 grams of salt daily. Many food companies are
attempting to reduce the amount of sodium in their products as global awareness increases on the
harmful effects of a high salt diet. Nestlé, for example is experimenting with reducing both salt and
sugar from its foods and replacing them with natural flavorings.

Cocoa Prices

Over 100 years ago, chocolate was generally considered a luxury for the rich and out of the grasp of
lower income customers. However, today consumers in emerging markets worldwide are able to afford
increasingly higher quality chocolates that require better and higher percentages of cocoa. Unlike other
crops such as corn or soybeans, cocoa is more difficult to produce, and cocoa prices are expected to rise
substantially moving forward, according to the International Cocoa Organization (ICO). Typically, cocoa
trees take upwards of 10 years to mature and many trees now are old, not yielding the same number or
quality of beans. Farmers are also switching to more profitable crops, even as the price per ton of cocoa
approaches $3,000. Analysts estimate the cocoa price would need to be $3,500 per ton to maintain
current production rates from farmers. In fact, the ICO expects the demand to production ratio to be the
highest ever by 2018, since it started keeping records in 1960. In 2013 alone, worldwide consumption of
cocoa beans was up 32 percent from 2012 and Chinese demand is projected to rise 5 percent annually
through 2018. To help combat the new demand, Mars and Nestlé have spent millions to educate
farmers in West Africa on proper techniques and in developing new types of cocoa trees. The Ebola virus
outbreak in West Africa threatened hundreds of cocoa farms. North American based Blommer
Chocolate Company is a top cocoa processor and one of the main suppliers to rival Hershey and other
chocolate producing companies. Blommer is expanding its processing capacity to meet strong chocolate
demand in the United States. Nevertheless, chocolate companies are facing tough choices that include
raising prices, reducing portion sizes, or even using less cocoa in its products. As early as 2006, Hershey
started using substitutes for cocoa butter in the production of Krackel and Mr. Goodbar which resulted
in the firm having to change the label “milk chocolate” to “made with chocolate” or “chocolate candy”
to comply with the FDA protocols for labeling of chocolate food items. Hershey however is now
switching both Krackel and Mr. Goodbar back to solid milk chocolate, meaning the bars will contain at
least 10 percent cocoa per FDA regulations to be called milk chocolate.

Potential Taxes and Health-Minded Public

There is a growing awareness worldwide to unhealthy eating, especially when it comes to sugars,
processed foods, and animal fats. Many different governments (local, regional and national) have (or
plan to) increased taxes or flat out banned unhealthy items. Taxes are viewed by governments much like
tobacco taxes as a way not only to curb citizens’ consumption but also as an additional means of
revenues. For example, Connecticut recently proposed a 2 percent additional tax on all soda, suggesting
it would provide $144 million in annual revenues and reduce soda consumption in the state. New York
City has banned most sugary drinks 16oz and larger from being served. The Navajos Nation, the largest
American Indian Reservation in the United States with 300,000 members, is proposing a tax of up to 7
percent on fatty snacks and soda, up from the current level of 5 percent, while healthy food items are
excluded from taxation. Former NBA star Yao Ming is campaigning in his home country of China to
promote healthier eating and exercise habits. Mexico recently passed legislation to significantly tax both
sugary drinks and high calorie items such as candy. Peru, Uruguay, and Costa Rica banned all junk food
from public schools, including candy bars, back in 2012. Many other nations in Latin America require red
or yellow circles around sugar content on items depending on their sugar content. All of these actions
and trends are a threat to Nestlé. Increasing obesity is a major problem among the world’s population.
Processed sugar negatively impacts the body by increasing your chances of tooth decay, obesity, and
diabetes, and additionally can significantly increase one’s chances of getting heart disease and even
cancer. Scientific tests reveal that sugar is basically a food for cancer cells and people that drink 2 soft
drinks a week are 87 percent more likely to develop pancreatic cancer. For comparison, a Nestlé
Butterfinger and Baby Ruth contain 29 and 33 grams of sugar respectively, and a can of cola contains
around 39g of sugar. Sugar is also believed to be damaging to your skin, looks and overall mood. Moving
forward, Nestlé could consider increased marketing of dark chocolate, which contain good antioxidants,
but is much higher in saturated fat than milk chocolate and contains high levels of sugar. Sugar free
candy has also been linked to cancer and weight gain, partly because artificial sweeteners are not
healthy. By 2017, almost 150 artificial ingredients, like artificial sweeteners, preservatives and artificial
flavor enhancers, will be discarded from Panera Bread Company’s kitchens. Food companies are
increasingly eliminating unnatural and unhealthy ingredients. For example, natural colorings made from
turmeric and paprika will replace Kraft Heinz Company’s artificial colorings in its macaroni and cheese
product, and PepsiCo’s Diet Pepsi will see a switch from artificial sweetener aspartame to sucralose.
After an environmental advocacy group said it found nanoparticles, through laboratory tests, in the
Dunkin Donut’s white powdered sugar, the company will do away with titanium dioxide (a whitening
agent used in sunscreen) from its recipes. Nanoparticles, like titanium dioxide, may cause damage to
cells and tissues.

Hair Care, Skin Care, Cosmetics

The hair care, skin care and cosmetic industry in the USA accounts for over $55 billion in annual sales
and enjoyed a growth rate of nearly 6 percent from 2010 through 2014. Much like many food products,
consumers still purchased beauty products at relatively high rates even during the recession. Growth is
projected to continue through 2020 at rate of nearly 4 percent. Hair care and skin care products are the
two largest revenue producing contributions to the industry as a whole with revenues each of
approximately $13 billion totaling just short of 50 percent of total revenues combined. Higher marketing
and R&D expenses, along with a growing concern for reduced packaging, animal safety, and product
safety all negatively hurt profits. Consumers also are quick to switch from brand to brand and are
showing less brand loyalty presenting both threats and opportunities for producers. There is also a
growing influx of imported products from around the world on all price points. Generally perceived
higher quality products are imported from Europe, where perceived lower quality and lower priced
products are imported from Mexico and China. Skin care products continue to grow as a percent of total
industry market share as more and more people are using these products, including men. In 2014, skin
care products barely trailed hair care products in industry wide sales but are expected to be the largest
revenue producing product category moving forward. Firms promote anti-aging treatments and wrinkle
reducing creams. Even creams promoted to remove back circles from under the eyes are available.
Sunscreen is also in this category. Estée Lauder’s CEO recently suggested that men’s skin care products
may outpace company-wide growth at his firm moving forward.

Activist Shareholders

Food and beverage companies have been popular targets for activist shareholders because of their
bloated lackluster growth. In August 2015, Bill Ackman disclosed a stake in Mondelēz International,
spurring speculation that he would seek cost cuts and potentially a sale. Similarly, ConAgra Foods and
Boulder Brands have recently faced calls for shakeups. So far however, activist investors have mainly
targeted U.S. food companies, but Nestlé’s underperformance is attracting prying eyes. Nestlé is
grappling with falling demand for its biscuits and peanut-milk beverages in China and the recall in India
of its popular Maggi instant noodles. Its frozen-food business is not performing well. Given the activist
shareholder environment, Nestlé may want to consider divesting its frozen-food division, along with the
company’s 23.2 percent stake in cosmetics maker L’Oréal S.A. Nestlé could add 21 billion euros ($23
billion) of cash flow through 2018 by gradually reducing its stake in L’Oréal, said Jeff Stent, an analyst at
Exane BNP Paribas. Nestlé could use that money to boost its share buyback or to make acquisitions.
Additionally, an activist shareholder could require Nestlé to sell is its skin-health business. Nestlé
acquired full control of the Galderma wrinkle treatment and acne medication business from joint-
venture partner L’Oréal in 2014, but skincare does not fit well with food and beverages. To significantly
impact Nestlé, an activist investor would need at least a 1 percent stake, said Urs Beck, a fund manager
at EFG Asset Management. That would cost more than $2 billion. Jenny Craig and PowerBar are two
examples of businesses that Nestlé acquired, held onto for too long and got depressed prices for in later
divestitures. The political environment in Switzerland also gives activist investors another reason to “go
for” Nestlé. Switzerland has instituted a “fat-cat” referendum that gives shareholders more say over
salaries and the ability to eject an entire board. Even Nestlé’s Chairman Peter Brabeck-Letmathe has
said new Swiss laws threaten the company’s long-term strategy. A new proposal that would allow
investors to sue management and directors, even amid opposition by most shareholders, is also flawed,
he has said. “Activist shareholders and plaintiffs’ lawyers would be granted free reign,” Brabeck-
Lemathe says.

Future

Nestlé has many internal and external issues to consider as the company struggles to help feed the
world and reward shareholders, employees, and customers. The company is determined to become a
renowned nutrition and corporate wellness company, but many of its products still are unhealthy for
consumption.
Analysis
This is a case developed in 2016, therefore much has changed in the external environment and most
probably in the internal factors for Nestlé. However, for this case analysis, you do not need to make any
further research about the current situation. Focus on the case as it is given and use the information to
do a SWOT analysis. Any research findings you use for your analysis, please do not forget to cite your
sources (both in text and at the end in a REFERENCES section). Plagiarism will not be tolerated.

Step 1. Using the Nestlé case, identify what you consider to be Nestlé’s three major strengths, three
major weaknesses, three major opportunities, and three major threats. Try and include a percentage
(%), number (#), dollar ($), or ratio (employees per share) to reveal some quantified fact or trend for
each factor listed (you can estimate the numbers as needed).

Step 2. Record the opportunities, threats, strengths, and weaknesses you identified in Step 1 in a SWOT
Matrix (see the example given in your book).

Step 3 Match key external and internal factors to generate feasible alternative strategies for Nestlé.
Record SO, WO, ST, and WT strategies in appropriate cells of the SWOT Matrix. Use the proper notation
to indicate the rationale for the strategies. Include four strategies in each of the four strategy cells.
Refrain from using generic strategies, like ‘forward integration’, etc. Provide specific strategic
alternatives for each matching.