CEO shares how Nestle copes with raw material price hikes

By Jess Halliday

- Last updated on GMT

Related tags Raw material Nestlé Material Price

Nestle will use price increases as a last resort in the face of rising raw material costs, says its CEO, and only after implementing its 4-point strategy based on trend predictions, engaging suppliers, replacing ingredients, and cutting down waste.

The consumer goods giant today reported full year sales of CHF109.7bn, representing 6.2 per cent organic growth and 4.6 per cent real internal growth. Growth was seen across all product categories, and across all geographies.

Nestle is predicting organic growth of between 5 and 6 per cent throughout 2011, and claims to be “well placed to face uncertainties ahead, including volatile raw material prices”.

In a press conference this morning CEO Paul Bulcke likened the current climate to a Rubik’s cube – “fascinating, interesting, inviting, and a hell of a challenge”.

He outlined the company’s 4-point strategy for managing ingredient price hikes without raising the prices of its products unless absolutely necessary: tracking underlying price trends; engaging with up-chain suppliers; innovating to switch out pricey ingredients; and reducing waste.

Only when all these cards have been played should price increases be introduced, Bulcke said. “More of the above and less of pricing, that’s what we do”.

Underlying trends

“Our first answer is to really read through the volatility the underlying trend. It is clear you cannot price your products with the same nervousness, you cannot answer as an organisation with the nervousness that is happening with the price of raw materials.

We, as a company, have to see the underlying trend and drive in systems to bring in stability into our organisation to cope with the challenges,”​ he said.

Although clearly the trend in food prices today is upwards, this follows many years of a downward trend in prices. “Somewhere there is something to say… it will stabilise, and that can incentivise agriculture to an actor with its place in the world. It has to be seen in a more holistic way”.

Engaging up the chain

The second level to Nestle’s approach is to have a short term and a long term procurement strategy.

In the short term, this means how you handle the volatility and use all the instruments at your disposal to build a competitive advantage into that – and Bulcke boasted of Nestle’s procurement management capabilities.

In the long term, however, it is important for companies to connect with supplier and farmers up the chain. In the last year Nestle has announced two new programmes to work with suppliers in the cocoa and coffee areas, so it can play an active role in ensuring the quality and quantity of raw materials.

“We are investing heavily there because we see the benefits of engaging positively and using our knowledge, our science and R&D to help create better yields and better quality – because we have a vested interest in having good raw materials.”

Innovation and reducing waste

The third point is combining ingredients and replacing certain expensive ingredient in products in a creative way, without altering the pleasurable aspects of a product.

“It is driving renovation of our product categories but also brining new products that give very creative solutions, so that we add more value on top of the tangible raw materials.”

Bulcke gave the example of switching some meat proteins in products to less expensive vegetable proteins.

Waste and efficiencies

Finally, Bulcke drew attention to the need to drive down waste and improve efficiencies, driving Nestle’s continuous excellence initiative to its lowest limits “with a nervousness and alertness that is incentivised by pressure on the cost level”.

This, he said, “should absorb a big proportion of the need for price increases.”

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