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How Nestle fought back

How Nestle fought back

KUALA LUMPUR - In 2013, just as Alois Hofbauer took the helm of Nestle (M) Bhd as managing director, he went to a hypermarket in Penang, where he noticed a shopper’s trolley filled with items the company sold. What he saw, however, was that the man had pi

Hofbauer spoke with the man on the choices he had made and took a photo of him with the goods. That photo, and the realisation that local competitors were making inroads into the consumer market Nestle competes in, made its way to the headquarters of Nestle Malaysia with a chilling message: unless the company changed, it was in for trouble on the horizon.
 
That, together with a slowdown in China and Malaysia’s rising household debt, were doubts that would affect the company’s prospects.
 
 “It was the start of the perfect storm,” he says. Hofbauer jumped into action and engaged with Nestle’s 6,000 employees within two months. Employee-engagement led Hofbauer to the factory floor to gauge what the line workers thought.
 
“They told me that finally, the senior management was waking up to the reality.” They knew the trends in the volume of goods Nestle sold and had their own thoughts about how to tweak things in the factories. Hofbauer and his team got 50,000 proposals on how the company could improve.
 
“We said the money saved would be reinvested in the company.”
 
The factory workers and supervisors, who were all Malaysians and in some instances second-generation workers, told him what Nestle needed to hear. The people on the shop floor knew whether household products such as Maggi and Milo were selling well, judging by production patterns of those goods.
 
The suggestions led to tangible savings. A factory floor manager proposed an idea on optimising shift rotation for his team, which contributed to over 2.4 million ringgit (US$594,380) in savings annually.
 
A production floor executive gave suggestions on ways to reduce machine breakdowns, which improved machine efficiency, contributing to over 1 million ringgit in savings annually.
 
A shop floor employee in charge of boilers, meanwhile, came up with a simple idea on changing the optimum temperature of the company’s chillers without affecting production. This helped bring about 500,000 ringgit in savings per annum.
 
“We began to save when everyone in the company started to think about how to avoid wastage and work smarter,” he says.
 
Hofbauer thought Nestle Malaysia could have saved 100 million ringgit in its first year of implementing the changes proposed. It saved 129 million ringgit in 2013 instead. The next year, Nestle thought it could save 120 million ringgit but saved 134 million ringgit, and last year, even when the goods and services tax was introduced, its cost-saving initiatives led to 188 million ringgit in additional income.
 
The money saved through the years was reinvested into technology and better products.
 
During the past five years, Nestle has invested 1 billion ringgit in its business, with 600 million ringgit in just the past two years alone.
 
“By reinvesting these savings, we are able to make it work for us and provide more value to our consumers, which is a key priority for Nestle. This has also helped us to keep our prices stable,” he says.
 
The improvements and cost savings beefed up Nestle Malaysia’s earnings, where at the end of 2012, it posted a revenue and net profit of 4.25 billion ringgit and 427.1 million ringgit respectively. At the end of last year, revenue and net profit were at 4.84 billion ringgit and 590.7 million ringgit respectively.
 
Dividends too were raised during that period from 180 sen a share to 260 sen a share.
 
The savings also allowed Nestle to more or less keep its prices stable even with the drop in the ringgit against the dollar. Raw materials and packaging materials come from overseas and are priced in US dollars.
 
“Even this year, we have managed to hold prices on average,” he points out.
 
The insights he got from employees transformed Nestle into the company it is today, where its stock is at an all-time high of 80 ringgit a share, having risen from 52 ringgit in 2013 for a return of 54 per cent.
 
Its market capitalisation has increased by 17 per cent to 18.6 billion ringgit.
 
Making the changes
 
Cost savings do have their limits, where the amount that can be saved cannot be large forever. As Hofbauer puts it, “there is only so much you can squeeze out of a lemon.”
 
What it needs to also do is to continue innovating and improve its products to suit current trends. It encouraged its employees to come up with an idea that could become a bestseller.
 
“Everyone can contribute and this is part of our drive to encourage the whole company to be more innovation-focused and create new sources of growth.
 
“New innovations from employees which are workable or will drive growth in the business will be rewarded. Winners stand to get 10,000 ringgit in prize money and two business-class flight tickets to Switzerland.”
 
In 2013, innovation contributed 120 million ringgit to Nestle Malaysia, which Hofbauer says is not bad. However, for a company the size of Nestle, it should be better. Last year, innovation contributed 380 million ringgit.
 
Innovation means that Nestle has been able to introduce to the market products that not only fit into its idea of nutrition, health and wellness, but also provide convenience to its customers.
 
But innovation is not just driven by labs. Employee feedback has led to the creation of localised flavours of Maggi noodles such as Johor seafood laksa and Sarawak sambal laksa.
 
“Overall, around 10 per cent of the group’s sales growth in financial year 2015 was from our product innovation.
 
“Our Nestle Malaysia and Singapore market contributes a third of key innovations and product upgrades in our regional zone of Asia, Africa and Oceania.”
 
It is the combination of investments, innovation and cost savings which has managed to contain price pressures and seen Nestle’s domestic market share rise from 13 per cent in 2013 to 16 per cent last year.
 
“We have added 300 basis points (to market share) in a very challenging environment. We have avoided people shifting to cheaper brands by investing in our brands.”
 
The improvement in Nestle’s business has meant that Malaysia, once ranked with an outside chance, has been selected to host one of the Nestle group’s three global procurement hubs. It will open in November after beating other countries in the region. That centre, while creating high-paying jobs, will benefit Nestle Malaysia’s business.
 
Exports on the rise
 
Nestle Malaysia is the halal hub for Nestle worldwide and in terms of exports, it ships out the second-largest number of Nestle products worldwide after the United States. Exports make up 20 per cent of the sales of Nestle Malaysia.
 
“We have not only been helping other Nestle companies obtain halal certification, but are also exporting to more than 50 markets around the world,” he says.
 
Exports, which had been affected by factories in countries starting operations and also weak economies, were up 12 per cent in the first quarter of its current financial year.
 
“After three years of bottoming out, exports are bouncing back.”
 
The other aspect where Nestle is putting more money into is e-commerce.
 
In China, 10 per cent of Nestle China’s revenue is from e-commerce and it recently signed a partnership with online retail giant, Alibaba.
 
For Malaysia, Hofbauer says Nestle has invested significantly to leverage on the opportunities in the digital landscape and it has also brought in expertise from Nestle globally to build its local e-commerce team.
 
It has established a digital department at its headquarters for not only communication but also its e-commerce business.
 
In March, Nestle’s turnover from e-commerce, namely direct sales to consumers, was 300,000 ringgit. Last month, it was 1 million ringgit.
 
“We recently partnered with online retail partners like Lazada and 11Street. We will also be launching our first flagship store in Lazada for all our products this month,” he says.
 
Hofbauer understands that Nestle needs to embrace how the younger generation consumes products and its recent hire of 30 management trainees was to allow the company to come to grips with the change that is taking place among the younger consumers.
 
Nestle used to invest 8 per cent of its advertisement spending on digital. Today, it is close to 40 per cent.
 
“To reach out to the new generation, we have to communicate with them.
 
“We are investing ahead of time in all our capabilities. We will not be a follower but a leader in our industry,” he says.
 
(US$1 = 4.04 ringgit as of 8/6/2016 via oanda.com)
 
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