nestle 1996

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Page 1: Nestle 1996

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Page 2: Nestle 1996

THE McKINSEY QUARTERLY 1996 NUMBER 2 5

McKinsey: How did Nestlé begin?

Peter Brabeck-Letmathe: A hundred and thirty years ago, infant mortalitywas high in Switzerland – higher than in most emerging countries today. HenriNestlé was a pharmacist who was worried about children dying. He developedan infant cereal to help feed them. This was the first Nestlé product.

Henri Nestlé had two big visions. First, he immediately went international:the product was in five European countries four months aƒter launch.Second, he wanted his own brand. Store brands – private labels – alreadyexisted, but he was one of the first to create a manufacturer’s brand.

He also established a strong identity for his company through the nestimage that Nestlé still uses today. It happens that Nestlé in Germany means“little nest,” symbolizing all the good values of nurturing such as family,warmth, and caring. When distributors asked him why he did not put theSwiss flag on his product, he is said to have replied, “Anyone can use theSwiss flag, but only I can use my coat of arms. It will be my seal of quality.”

His house and first factories were in Vevey, Nestlé’s headquarters. We alsohave another head oƒfice in Cham, near Zurich, which is where the otherpart of the company, a sweetened condensed milk factory, began.

GLOBAL MARKETING

Andrew Parsons is a director in McKinsey’s New York oƒfice. Copyright © 1996 McKinsey &Company. All rights reserved.

Andrew J. Parsons

Nestlé: The visionsof local managersAn interview with Peter Brabeck-Letmathe, CEO elect, Nestlé

Editor’s note: Peter Brabeck-Letmathe will become CEO of Nestlé in June 1997. HelmutMaucher, who is currently both Chairman and CEO, will remain Chairman until 2000.

Page 3: Nestle 1996

Was it condensed milk that carriedyou around the world?

Milk at the beginning, then choco-late, then Nescafé. From the outset,we were an outward-looking com-pany. When you make less than 2 percent of your turnover at home,you don’t concentrate too much onyour domestic market. Our Swissoperating company is only 2 or 3kilometers from worldwide head-quarters, but we visit them as fre-quently as that of any other market.

Unlike US companies, which try totransform local hires into Americanbusinessmen, we are not trying toexport a lifestyle. We recognize weare foreigners; we don’t try to disguisethe fact that we are a multinationalcompany based in Switzerland.

Many countries are more comfortablewith the fact that we are Swiss thanif we were from the United States.Coming from Switzerland gives us a definite advantage as we are con-sidered politically more neutral. It would be foolish to pretend to be aChilean company, or a Chinese company, just because we have a very stronglocal presence in those markets.

Before the arrival of our current chairman, Helmut Maucher, however, ourcompanies looked very local. They were called Indulac or Chiprodal, forexample – names connected with the local environment. In many markets,Nestlé as a company name didn’t exist.

Then we said, this is absurd. If governments or activists want to attack oneof our companies, they only have to look at our annual report to know itstrue identity. What’s wrong with presenting ourselves as we are? We shouldbe proud we are Nestlé, not hide away making believe that we don’t want tobe a multinational. So we changed our policy and gave every company inthe group our own name.

Another distinctive aspect of your culture seems to be that you take a long view.You were one of the few that did not bail out of India, for instance.

NESTLÉ: THE VISIONS OF LOCAL MANAGERS

6 THE McKINSEY QUARTERLY 1996 NUMBER 2

Page 4: Nestle 1996

We didn’t bail out of India in the 1970s; we stayed in Chile under Allende.We don’t normally quit just because there is a change in the politicalsituation. When you are forever looking out for your short-term interests,you are not a reliable partner. Look at the way American money flowed inand out of Mexico if you want to see what devastating eƒfects short-termspeculative investment can have on a country. It is bad enough for theinvestor who loses a lot of money; for the local people, it is even worse.

But the company that stays, and carries on investing when things lookbleak, and builds up a business, and creates jobs – its relationship with the country is quite diƒferent from that of a company that is forever comingand going.

Do you also take a long view financially?

Clearly, we are not driven by quarterly profits. Indeed, our current chair-man, Mr Maucher, has given a clear message: we want to be sure ourpeople think long term in order to keep Nestlé the world’s leading foodcompany. Short-term performance is important, but we have to balance itagainst the long-term development of the company.

If we wanted to, we could improve our short-term performance overnight.We spend more on food technology and research than anyone else – aboutSFr700 million per year. We also put a lot of money into marketingactivities to build up our brands, and weinvest heavily in new products.

Our first priority is to ensure enough growthto double our turnover every ten years,currency shiƒts aside. Of course, we have towatch our financial performance too, and if we can improve it withoutjeopardizing growth, fine. But we won’t fix financial performance first andthen adjust everything else. We have made it clear that we don’t intend tobe driven by short-term financial pressure, but that we will equilibrate itwith our long-term goals.

We regard our shareholders as investors for the long term. We don’t want tobecome just an item in a financial investor’s speculative basket of holdings.Some people buy and sell our shares and that’s legitimate, but theirspeculative behavior is not necessarily in our interest. Shareholder value,economic value analysis, economic profit, and so on are of course all welland good, as long as these are combined with the long-term view.

Obviously there are many pieces to Nestlé. Do you see it as a portfolio and trimit every now and then if it isn’t performing in line with your plans?

NESTLÉ: THE VISIONS OF LOCAL MANAGERS

THE McKINSEY QUARTERLY 1996 NUMBER 2 7

We didn’t bail out of India in the 1970s; we stayed in

Chile under Allende

Page 5: Nestle 1996

We never talk about a portfolio. Portfolio management is alien to ourculture. Instead, we look at the businesses themselves, which is why we have set up our strategic business units – confectionery and ice-cream,coƒfee and beverages, pet food, milk and nutrition, and so on. Every one ofour products has a home in one of these units. We take each business andask how much growth potential is still there; we look at the shareholdervalue it creates. We think along the lines of, “If this business were anindependent company, what would we do with it?”

Recently, we decided that our investment in the wine business was not stra-tegic. Though our financial performance was good, we had no core compe-tence. For us, core competence means knowing more about some areas of abusiness than anyone else in the world. We make this judgment by com-paring ourselves with the market leader. To be a major player in pet food, forinstance – even to be number 2 aƒter Mars – we needed core competence.

We reckon we have to spend between SFr500 million and SFr1 billion onresearch and development to build up core competence in any majoractivity over time. If you want to enter a new business, you had better makeup your mind whether you want to spend this kind of money or not. If youdon’t, forget it.

Do you still have any businesses in which you have not yet achieved corecompetence?

In principle, I can say that we now have a well balanced and focused groupof businesses, which covers the main areas of the food and drink businessin which we are interested. There are a few minor sectors where we still canimprove and increase our core competences.

How do you make basic decisions? Are they part of corporate strategic planning?

We don’t do corporate-level strategic planning in a separate corporateplanning department. Instead, we use a combination of bottom-up and top-down approaches in markets, regions, and strategic product groups.

We meet once a year at corporate level to discuss the future strategic outlineof the group. Dealing with the figures doesn’t take more than five minutes; weknow they are wrong. Mainly, we talk about the way our diƒferent top man-agers see the future in their respective area. How do you view developmentsin Asia? What are the Europeans saying? What is your political environment?What product areas are on the priority list? It’s all very informal.

Then my colleagues and I stand up and say, “The strategy we agreed in thefood businesses is fine, so we can forget about them.” Three or four years

NESTLÉ: THE VISIONS OF LOCAL MANAGERS

8 THE McKINSEY QUARTERLY 1996 NUMBER 2

Page 6: Nestle 1996

ago, I explained that I felt fine with the main strategies in my area, but Iwanted to talk about ice-cream. What opportunities were there? Could weuse our core competences from milk and other areas?

A lot of questions arose. The Europeans pointed out that Unilever wasselling 880 million liters; ourselves, 80 million. The Latin Americansdeclared, “In our market, we are the leaders. Unilever isn’t here yet.” TheAsians said they had never thought about it. So we started a discussion.

Eventually, we agreed to explore the idea in more detail. We asked theresearch manager if we could make a KitKat ice-cream. A lot of technologywas involved. How much would it cost? As a team, we decided whatdirection to follow. Then it was up to the strategic business manager to go toeach zone and say, “Now we have decided in principle to go forward, let’s sit down to-gether and establish a plan for your area.”

That January, we told the markets to con-sider how we might get into the ice-creambusiness. They had to come back to us inthe summer and tell us what the options were locally. If they needed help,the SBU head would visit them. But we had to have some response, whetherit was yes, no, it’s a crazy idea, or it’s not a priority.

Once we got this bottom-up feedback, the SBU had to consolidate all thediscussions it had had with the zones and markets, and produce a plan forour November general meeting. Then we were able to say, “Last year wedecided to investigate the prospects for ice-cream. What we now have isthree or four markets here, two there, an option here,” and so on. And that’show we started to move.

We respond to what the local markets say, and they may take another lookand change their mind. But if they don’t want to do something, we don’tforce them. We might send a couple of people to oƒfer encouragement, butthat’s as far as it goes, except in some few cases where general managementfeels that these issues are not negotiable.

We had to persuade the United States to get more involved in ice-cream;they classed it as a dairy product, whereas we see it more as a frozenconfectionery. They produced machines and cones, and licensed the brands to dairies; we wanted to move over to self-manufacture and direct storedelivery. It was a long learning process on both sides, but finally weconvinced them. Today, we are a strong number 2 in the profitable impulseice segment, have a 17 percent stake in Dreyer, the company with the bestDSD system, and the machinery and cone business has been sold.

NESTLÉ: THE VISIONS OF LOCAL MANAGERS

THE McKINSEY QUARTERLY 1996 NUMBER 2 9

We reckon we have to spendSFr500 million to 1 billion on R&D to build up core

competence in any major activity

Page 7: Nestle 1996

Who absorbs the necessary marketing and R&D investments for a corporatestrategic priority like ice-cream?

The R&D investments are carried by the central organization, whereas themarketing, production, and distribution investment is the responsibility ofthe local operating company.

How long is your investment horizon?

Again we are looking for a good match between long-term growth oppor-tunity and short-term profit performance. With ice-cream, we are up to 580million liters aƒter one and a half years, mostly from acquisition, partly frominternal growth. We are now reaching critical mass, which has to come fairlyquickly if we are to build core competence. Once you have that, you canstart to look at your financial performance.

If a business performs poorly for a long period, it usually means that corecompetence is lacking and that the product might have downgraded to acommodity item where a strong number 1 has an overwhelming marketshare with basically no room for a second manufacturer brand. Take bakedbeans in the United Kingdom. Crosse & Blackwell is a beautiful brand –

huge, with a whole range of products. But wedid not get the performance in the cannedfood area. We tried repositioning, new tech-nology, research; no improvement.

When we analyzed the problem, we realizedthat the specific line of products didn’t oƒferthe consumer any understandable advan-

tage and that somebody else had a real market dominance. So we closed it.There was nothing else we could do; the value-adding core competencewasn’t there.

Consider another business, ravioli. You might think, baked beans, cannedravioli, what’s the diƒference? The diƒference is that we have core com-petence in the dough that goes into ravioli. This makes us by far the leadersin Europe, which gives us the volume and scale economies we need. And weget this critical mass through not just canned pasta, but refrigerated pastaand the dry pasta we acquired with Buitoni. Add to this the creative posi-tioning of the Buitoni brand “Share the Italian Love of Food” in innovativepromotions and add more specialized types of products and you canunderstand the economic success of Buitoni canned ravioli.

We have an entire research center devoted to pasta. When you have such a big presence, you learn about wheat, how it behaves under diƒferent

NESTLÉ: THE VISIONS OF LOCAL MANAGERS

10 THE McKINSEY QUARTERLY 1996 NUMBER 2

We have an entire researchcenter devoted to pasta. Whenyou have such a big presence,

you learn about wheat – and sowe get competitive advantage

Page 8: Nestle 1996

conditions, what you can do with it. And so we get our competitiveadvantage and consequently good financial results.

Is research and development a corporate function?

The R&D function is one of the few things we haven’t decentralized,although over 18 R&D centers are physically located all over the world. Allour research centers, wherever they are, are financed and controlled byheadquarters and receive the necessary input mainly from the strategicbusiness units, based upon requests from the markets.

The SBUs do two things. First, they look at an R&D proposal and makesure it fits within our long-term strategic framework, so that we do notspend corporate time on something we have not agreed. Second, theydecide, in conjunction with R&D management, which research center willwork on the project. A proposal from the American market might beresearched in Singapore; one from Japan, in the United States.

All the research centers have 15 percent of their time free to pursue any-thing they like, whether it is working with local markets or doing their own creative thinking. We don’t want them to do only what head oƒfice tellsthem, but also encourage their own initiatives.

At country level, we have smaller applications groups that adapt ourproducts. They might change the flavor of macaroni cheese to suit localtastes, or put in more or less sauce. All this is done locally.

What other functions are driven from the center?

Financial aspects, such as decisions about how a company is financed;branding; quality management; some human resource policies; and certaincore competences which are made available to our markets.

How big is your head oƒfice staƒf and what is the role of the SBUs?

We have 1,600 people here in Vevey. The SBUs, as part of them, serve twofunctions: helping to design the future of the business, and providingsupport to the operating companies. They propose the long-termstrategies for their corresponding businesses and advise local operatingcompanies on all issues like process performance, new products,distribution and logistics issues. To be an SBU manager, you shouldnormally have been a market head, or have run a major division in one ofour bigger markets.

How important is international experience?

NESTLÉ: THE VISIONS OF LOCAL MANAGERS

THE McKINSEY QUARTERLY 1996 NUMBER 2 11

Page 9: Nestle 1996

In general, it is diƒficult to find somebody in a top management position athead oƒfice or local level without substantial experience outside their homecountry. I started in Austria, went to Spain, Chile, Switzerland, back toChile, Switzerland again, then Ecuador, Venezuela, and now I am here. Irealize it is hard to uproot your family and move every three or four years,but we get at least three or four people a day asking if they can go and workfor us somewhere else.

You mentioned that branding is one of your centralized functions. How do youmanage so many brands?

The first principle is to consolidate all our resources behind the keycorporate strategic brands. Whatever the product brand or range brand,it has to be supported by one of our corporate brands. Let me give youan example. Rowntree had a “one product, one brand” policy: KitKat,Smarties, Rolo, Aƒter Eight. No mention of Rowntree. When weacquired the company, we applied our system, and KitKat becameNestlé KitKat.

We have ten worldwide corporate strategic brands, including Nestlé,Nescafé, Maggi, Friskies, Buitoni, and Carnation. Additionally, we have 45diƒferent strategic worldwide product brands, among them KitKat, Coƒfee-mate, and Crunch. Then there are 25 regional corporate strategic brands,

such as Perugina, Findus, and Stouƒfer’s,together with about a hundred regionalproduct brands – Eskimo, Taster’s Choice,Go-Cat, and so on.

The worldwide brands are under theresponsibility of SBUs and general man-agement, which establish a framework for

each one in the form of a planning policy document, a minimum labelingstandard, a brand positioning statement and communications platform,and a packaging handbook. The regional brands are the responsibility ofthe SBUs and regional management. They are international, but notworldwide.

We also have some 700 local strategic brands that are important toparticular countries, like Brigadeiro in Brazil. These are managed by thelocal markets and only monitored by the SBUs. We want to know theirpositioning and minimum labeling standard in order to protect them; thenwe can forget about them.

That leaves us with another appreciable amount of local brands in whichthe center does not intervene.

NESTLÉ: THE VISIONS OF LOCAL MANAGERS

12 THE McKINSEY QUARTERLY 1996 NUMBER 2

In general, it is diƒficult to findsomebody in a top management

position at HQ or local level,without substantial experience

outside their home country

Page 10: Nestle 1996

NESTLÉ: THE VISIONS OF LOCAL MANAGERS

THE McKINSEY QUARTERLY 1996 NUMBER 2 13

7,500 Local brands Responsibility of local markets

140 Regional strategic brands Responsibility of strategic business unit and regional management

45 Worldwide strategic brands Responsibility of general management at strategic business unit level

10 Worldwide corporate brands

Texicana

Examples

BrigadeiroRockySolis

MackintoshVittelContadinaStouffer’sHertaAlpoFindus

KitKatPoloCerelacBaciMighty DogSmartiesAfter EightCoffee-Mate

NestléCarnationBuitoniMaggiPerrier

Nestlé branding tree

Page 11: Nestle 1996

14 THE McKINSEY QUARTERLY 1996 NUMBER 2

McKinsey: You came to Nestlé through itsacquisition of Carnation. What differencesdid you see in the two companies?

Joe Weller: I was with Carnation when Nestlé acquired it in 1985. In a way, buyingCarnation was an opportunity to jump-startNestlé in the United States. Carnation, at over $3 billion, was almost as big as thewhole Nestlé US operation. Carnation washighly centralized, tactical, opportunistic, andvery short term. We were always trying to dobetter than the previous year. Carnation hadachieved 32 consecutive years of increasedearnings at the time of the acquisition in 1985.Nestlé, on the other hand, is decentralized,strategic, long term, and willing to invest.Right from the beginning, I thought that if we could marry the two, we would have awinner. My message to our people here is to take the best from a centralized and adecentralized approach to business.

As a result, we have what I would describe as an activity-based approach to an organizational structure. We examine every process that we perform, from the mailroom to the board room, and try to optimizeit. For employees, this means a mindset ofconstant change.

Let me give you an example. Three or fouryears ago, we needed a process to improvepurchasing, so we centralized it. We set up a program to help manage our suppliers.Thanks to this program, for example, we went from 43 suppliers of corrugated

cardboard to three. When you are a bigenough customer, you get beyond just price savings into technological and systemssavings. You become a real partner. This iswhere, we believe, you can get the realcompetitive advantage.

So we centralized first, but now we havedecentralized back down to the operatingcompanies. Because we now have a testedprocess in place for purchasing, we feel we no longer need to manage it in a centralizedfashion. Try to envisage a continuum between centralization and decentralization;then imagine there is a “dot” on thecontinuum that is constantly searching

AN INTERVIEW WITH JOE WELLER

How do your people in the markets decide which corporate brand to attach totheir local brand?

Each corporate brand has its own “territory” into which the local brand will fall.

How does your branding strategy relate to your corporate structure?

As I said earlier, each strategic brand is monitored by one of the SBUs. Polois under the chocolate and confectionery SBU, for instance. It’s all verysimple. We had to find a way of having fully decentralized management thatallowed us to manage corporate assets without intervening from day to day.

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THE McKINSEY QUARTERLY 1996 NUMBER 2 15

for the point of optimization. Theenvironment around us is changing so fast that we must constantly adjust if we are going to be efficient.

What advantages does the optimizationapproach give you?

Nestlé is one of the most diversified foodcompanies in the United States, but we arecompeting with a lot of focused players outthere. We have set up four autonomousoperating companies to manage differentsegments of the business: dry groceries;beverages; frozen, refrigerated, and ice-cream; and food service, which focuses onfood sales to professionals in restaurants and hotels and on sales through vendingmachines, for example. Each has its ownpresident and its own emphasis. We wantthem all to be focused, but we also wantthem to be efficient, so we have started totackle the issue of how we share resources.We don’t want to necessarily centralize these resources, although we do want theirutilization optimized.

Take our engineering group. We house it inour dry groceries business, because we canmanage it best there. The other operatingcompanies access it through our corporatetechnical management. So we don’t have tocentralize it or set up a big staff; we leave itwhere it is, as an area of core competence.

There are other areas where we do centralize.Legal would be an example where we have a

centralized general counsel. Mergers andacquisitions is also centralized.

As the third largest food company in theUnited States, you already have a lot ofpower. So what do you get out of beingpart of the wider Nestlé group?

It’s a reciprocal relationship. Vevey brings a strong strategic direction, and we, as thebiggest market for many products, do a lot of work on corporate priorities like buildingbrand positions, even though it will be Vevey that takes these positions worldwide.Negotiation takes place between the SBUs at head office, our business units here, andzone management, which sits like a traffic cop in the middle.

The wonderful thing about our advisors inVevey is that they realize the local marketsknow more than they do about the localbusiness environment. Even if they have somegreat idea they want to push, at the end ofthe day, the market head calls the shots. If you disagree with a Vevey initiative, you hadbetter have good reasons, but when you have, and you take a stand, you get Veveymanagement’s full backing.

How do you feel about R&D as acorporate function?

I think we have a huge coordinationopportunity and challenge that could speed up our response rate to local marketopportunities. This is how R&D works now:we have a need, our local SBU head contacts

CHAIRMAN AND CEO, NESTLÉ USA

That’s the challenge – plus the complexity of Nestlé, which is unique amongfood companies.

Are you gradually consolidating your brands, moving them toward regional andultimately worldwide strategic brands?

Yes, but some are going the opposite way. Findus was a worldwide strategicbrand for frozen food for thirty years. It has just been redefined as aregional strategic brand. The market had moved so far that in the emergingmarkets, and where Findus had no presence, we could launch our frozenfood products under the prevailing culinary brand!

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16 THE McKINSEY QUARTERLY 1996 NUMBER 2

the SBU head in Vevey, who then scans our 17 R&D centers around the world to locatethe technology that might be able to help.Mostly this arrangement works; sometimesdistance gets in the way, but the process can be slower than it needs to be.

In the US, anything we do in pet foods we are usually successful at. A big reason for thisis our worldwide pet food R&D center is basedin St Joseph, Missouri. The head of our petfood business is in St Joseph every monthtalking to the researchers, prioritizing theprojects. It is a fantastic fit for us. Now I am sure my colleagues outside the US do notfeel the same way about the US R&D center inpet foods as I do. The distance from the localmarket makes it more difficult. Given wecannot have R&D centers in every market, itfalls to all of us to work on communicationbetween operating companies and R&D tomake our product research as effective as the pet care example.

At corporate level, Nestlé now hasrelationships with a small number ofcommunications partners, rather thanusing lots of advertising agencies. Howdoes this work in the States?

We helped pioneer this approach. When thecommunication function was first suggested,we went outside and hired an ad executivewho understood the advertising industry. Hehad ten years in packaged foods experienceon the manufacturer side of the business and ten years on the agency side. It’s no

good picking one of your internal marketingpeople and putting him or her in charge ofcommunications.

All communications report directly to oursenior vice president of communications, andhe reports directly to me. That’s important;everyone has to know the market head isbehind him 150 percent. He sees all theadvertising from our operating companies and shows everything to me for sign-offbefore it goes on air. He works with all ouragencies and with each of our operatingcompanies; we have gone from 15 companiesto five in the two years he has been here.Now we have a stronger presence with fewer agencies, we’re getting much bettercreative work from them.

To begin with, there was a lot of naturalresistance from the operating companies. You can’t tell marketing managers that you’regoing to make their advertising decisions, oryou won’t have good marketing managers forvery long. So the head of communications hasto sell himself to them as a true resource. Thisis a resource that has to add real value for theoperating companies and the overall companyor it becomes just another cost center thatcannot survive long term.

How do you execute the brandingstrategy that came out of Vevey?

Again, we had a lot to do with developing itin the first place. It works something like this:Vevey sets a strategic brand framework, andout of that comes a brand’s position. This is

AN INTERVIEW WITH JOE WELLER

If one day we take frozen food into Eastern Europe, I’m sure we will useMaggi, not Findus. In Germany, Maggi is a powerhouse. When we launchedunder Maggi, we got a unanimous reaction from the trade that finally weunderstood branding.

Chambourcy is another example. It covers all of our white refrigeratedproducts in Europe – more than a billion dollars. From an image point ofview, it is perhaps the most advanced, nutritional, and “cool” of all ourbrands. But it did nothing to build the overall Nestlé identity.

So we are dropping the Chambourcy corporate strategic brand altogetherand using Nestlé instead.

Page 14: Nestle 1996

THE McKINSEY QUARTERLY 1996 NUMBER 2 17

something the world has to live with; onceagreed upon, none of us can do a thing tochange how the brand looks. But the beauty of it is that you do get consistency, which creates value and gives you a lot of clout in the long term.

Vevey doesn’t do all the work on positioningon its own; everyone is involved – themarkets, the SBU, the zone. Ultimately, thebrand strategy represents an agreementbetween the markets and the SBU, thoughthe final responsibility is Vevey’s. Within thisframework, the markets then develop thepersonality of the brand. We can’t alter itsposition, but we work out what the brandmeans to us and how it is going to be relevantto our market. That’s how we combineinternationally strategic with locally relevant.

Do you see opportunities in alternativechannels?

No question about it. Take pet food as anexample. We’re continuing to be the mainstay in the supermarket sector but we have to bein other channels like pet shops as well –perhaps with different brands. In beverageswe’re developing ideas like ready-to-drinkcoffee. We need to develop new channels for such products.

How has the global expansion of some of your trade customers affected you?

I can give you an anecdote that sums up thewhole thing. I was in Washington, DC and I got a phone call the CEO of a major US trade

customer. He said, “I’ve got a hell of aproblem, Joe. I just heard from our peoplethat your local market head in a large SouthAmerican country made a negative statementabout our company at a local pressconference.”

I was not aware of the incident, but I said Iwould find out. I got straight on the phone,but believe it or not, I couldn’t get through toour South American market head because hewas still at the same press conference wherethe comment was allegedly made.

This is the world we live in today. We can’t say something on the other side of the globeand think nobody is going to hear it. The time zones might be different from Glendaleor Vevey, but that doesn’t stop informationflowing instantaneously worldwide. You havegot to be buttoned up all around the world,everywhere you operate – especially whenyour customers are going global too.

The other point to this story is that few of the local issues that occur between Nestlé and our trade customers can be resolved inSwitzerland; as in the above case, most of ithas to be worked out locally. The marketshave to handle these matters for themselves.The laws are different in every market; theimplications are tremendous. Start centralizingsomething like that, and you’re in big trouble.Decisions have to be made at the local level.

That brings us back to the old Nestlé adage:Think global, act local. If you keep that asyour mindset, you can’t go too far wrong.

CHAIRMAN AND CEO, NESTLÉ USA

Does this mean you want the company name to play a bigger role in finalconsumer choices in the future?

Nestlé is a brand in its own right. For consumers, relevance of Nestlé as acompany comes first of all through contact with products that are brandedNestlé. If we want to be perceived as the world’s leading food company, wehave to oƒfer consumers an increasing amount of products that they canidentify as Nestlé’s.

The choice of products that we will club under the Nestlé brand depends onthe way these products enhance the Nestlé image – not on what Nestlébrings to their products. Therefore each of these products has to have deep

Page 15: Nestle 1996

roots. Take infant cereals, for example. This is the only product that has anautomatic right to the Nestlé brand because it is with infant cereals thatNestlé began. Next come baby food and infant formula, powdered, con-densed, and refrigerated milk products, chocolate, confectionery, breakfastcereals, and ice-cream. All are basic Nestlé territory, positioned undernourishment and enjoyment. They have earned the Nestlé brand too.

Today, about 40 percent of total turnover is from products covered by the Nestlé corporate brand, which makes our company very relevant toconsumers. Every day, they are in contact with a Nestlé-branded product.

How do you deal with products that do not carry the Nestlé brand?

For products that don’t carry the Nestlé brand, we have been creating aNestlé Seal of Guarantee to put on the back, and linked to Nestlé by a short

note like: “All Maggi products benefit fromNestlé’s experience in producing qualityfoods all over the world.” But we have tostrike a balance between making purchasersaware of Nestlé and preserving the distinctpersonalities of our other strategic corporatebrands. Where we have a relevant core com-

petence combined with a specific brand territory, as we do with Maggi andBuitoni for example, it is better to keep a separate brand identity.

We do not combine Nestlé/Buitoni, because Buitoni is more than a prod-uct: it represents the authentic Italian lifestyle. Nor do we have Nestlé/Maggi. Maggi oƒfers local recipes to suit local tastes, even though it belongsto a multinational. A Maggi bouillon in China tastes diƒferent from one in Chile.

There are a few exceptions to our brand strategy, like pet food. For manyreasons, including cultural aspects, we are not using our Nestlé Seal ofGuarantee on products destined for animal consumption.

Aƒter a long discussion, we also decided to drop the symbol from mineralwater. We felt that people buying water are looking for the purity of thesource, whereas our seal is that of a manufacturer. So we set up a specialinstitute, Perrier-Vittel, which puts its own guarantee on mineral water.

What are the implications for corporate responsibility? What if the purityproblem with Perrier had occurred under your ownership?

Either you are responsible, or you are not responsible. You belong to a family,or you don’t. If your son is successful, and you go around proudly saying,

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18 THE McKINSEY QUARTERLY 1996 NUMBER 2

Where we have a relevant corecompetence, as we do with

Maggi and Buitoni, it is better tokeep a separate brand identity

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“This is my son,” you can’t turn round and say, “Who is this? I have neverseen him before,” when he does something bad. That’s no way to behave.

The responsibility behind what we do is huge, and we accept it.

You have established consistent frameworks for your major brands, but how doyou get things executed in so vast an organization?

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Let me give you an example. When I took this job, we all agreed that weshould further intensify the visibility of the Nestlé brand.

We could have run a campaign on CNN, but we didn’t think that was theanswer. We formulated a comprehensive brand positioning and communi-cation architecture under the guidance of Mr Maucher.

Next came the worldwide market heads meeting, which happens everysecond year. It brings together all the top managers from over 70 marketsand head oƒfice. We gave a presentation, and aƒterward the managers hadan hour to work through the ideas before they asked questions. When themeeting finished, they took a set of documents with them.

Eventually, the new branding approach became part of our trainingsystem. Whenever I travel, I get all the local marketing people together andgo through the charts. In key markets, there is also a communicationsdirector who acts as my local counterpart, making sure that change isimplemented. In the United States, for example, the communications

director looked at our plans, asked howthey applied to his market, put in a brandequity system, and trained 470 people in sixweeks. And so it goes on.

In addition, we issue positioning statementsto the whole group. They describe our long-

term vision of a brand’s personality: how Smarties should work, why we have Nestlé on top, what the product’s core values are, what Smartiesmeans to the consumer. We also include an ethical guide to make suremarkets don’t take creative excellence into areas which don’t fit the Nestlécorporate image.

We have produced positioning documents for our worldwide brands and thekey regional ones – about a hundred in all. They are compiled by the SBUsin conjunction with marketing and communications staƒf from the markets,and approved by general management. That’s how we manage our brandsacross the world.

What happens if you find local teams doing things that are inconsistent with thepositioning documents?

We have to correct them. In this sense, the SBUs have a direct responsibilityover the operational company.

We also have labeling standards to protect our brands. There is no discus-sion; the local markets must apply the minimum standard, and that’s that.

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20 THE McKINSEY QUARTERLY 1996 NUMBER 2

We used to use over a hundreddiƒferent agencies; then we

decided we needed partners who truly understood us

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But brands do vary in the amount of freedom they have. Maggi has a lot.How can the center say how Maggi’s “borscht soup” should be presented inRussia? We only need to know that in all communications related to Maggi,we have a red bubble on a yellow background, and “You and Maggi… makethe best meals,” or whatever. I prefer all Maggi communications begin “Youand Maggi…” as it positions the brand as a friend of the person cooking,but the rest is up to the market.

KitKat is another matter. It is basically the same product in the same pack-aging all over the world, so we can’t give local markets so much freedom.

Does this apply to advertising too? Are you trying to encourage more multi-country campaigns for products like KitKat?

Not at all. Most of our products are food products, and food is extremelylocal. If you try to be too global, you lose eƒficiency in communication.

Some time ago, Chile produced an outstanding Nescafé commercial. In alittle house by a lake, a man gets up early and tries to wake his son (whoprefers to stay in bed) to go fishing. We see the disappointed father sittingin the morning mist at the lake. Then the son reconsiders his decision, getsup and makes a cup of coƒfee and brings it to his father for a moment ofspontaneous renewal. Their whole relationship is built up through coƒfee.

Now, the same commercial, projected in a diƒferent market can bringcompletely diƒferent connotations. In Paris, you might even provokeecological feelings that look almost like an environmental statement. Thesame images are perceived totally diƒferently.

Taking a spot that is successful in one place and playing it in another justdoesn’t work. I am struggling to prevent us oversimplifying our world incommunications.

How do you manage your advertising?

We used to use over a hundred diƒferent agencies; then we decided that ifwe wanted to address branding and communications globally, we neededpartners who truly understood us. There’s a strong link between yourculture and the way you communicate, and you have to know someone verywell to have them communicate on your behalf. So we eventually chose fiveadvertising agencies – McCann Erickson, Lintas, Ogilvy & Mather, JWT,and Publicis/FCB – and came to a worldwide alignment to which werecently added the Japanese agency Dentsu for our Asian markets.

I look for communications partners, not advertising agencies.

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22 THE McKINSEY QUARTERLY 1996 NUMBER 2

McKinsey: Core competence is obviously a key issue for Nestlé as a whole. Whatdoes it mean for you in Brazil?

Roland Meyes: In general, it means that wedon’t go into nonstrategic areas that won’t be of interest to the group in the long term.But in certain businesses, Brazil and SouthAmerica have core competences that don’texist elsewhere in Nestlé. Take biscuits.Nobody believed in them in the past; then, in the late 1960s, Brazil went into biscuits,and Colombia, and Chile followed suit, andnow we have a huge share of the SouthAmerican market, with excellent profits.Today, it’s accepted in Nestlé that biscuits are a regional strategic business – at least inSouth America, where we are big enough tohave reached critical mass.

On the technical side, we are working todevelop the next generation of specialists, and as the largest market for biscuits withinNestlé, we are able to influence research anddevelopment. We have a leading position,with something like 20 to 25 percent of the Brazilian market – close to 200,000 tons. Most of our competition in this area is still local, though there are a couple ofmultinationals out there too.

Do your consumers view you as a localcompany or a multinational?

We are the largest food company in Brazilwith revenues of over $3 billion. Yet fewconsumers in Brazil know we are Swiss. They think we are Brazilian or American. As we now incessantly stress the Nestlé brand and its related core attributes,

people will gradually realize we are Swiss,which will be to our benefit because Swissproducts have an enviable image for highquality here as elsewhere. Our 17,000employees of course know.

Nestlé has a policy of using fivecommunications partners internationally.How has that affected your relationshipswith local advertising agencies?

In accordance with the guidelines, we are aligned with two of the five globalcommunications partners, and we use themfor most of our strategic brands and newproducts. We also have long-standingrelationships with two local agencies.

AN INTERVIEW WITH ROLAND MEYES

Do you mind if an agency has a competitive relationship?

No; we are pretty relaxed about it. Anyway, agencies change personnel allthe time. An individual is here one week, somewhere else the next. Whatcan you do about confidentiality then? But if an agency feels like a realpartner, it will protect us internally as much as possible. It’s not somethingI worry about too much, but I still remind them constantly of theirconfidentiality agreement.

To us, the important thing is to have dedicated teams. McCann, forinstance, has 10 people working only with Nestlé. I see them as an extended

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THE McKINSEY QUARTERLY 1996 NUMBER 2 23

With some exceptions, they work mainly onour local brands and specialties.

In the long run, the international agencies willundoubtedly take value away from the locals.So what we try to do is suggest to the localagencies that it might be in their interest and benefit to seek agreements with ouraligned partners. When we have worked with a company for 35 years, I think we havea responsibility to help them get orientatedand find satisfactory solutions for both parties involved. Up to now, it is not asthough we have any problems with the quality of their work.

Worldwide communications alignments do bring substantial benefits. Through thispartnership, the agencies can graduallyspecialize in assigned product categories, and we are starting to see very positive results for example with Nescafé, ice-cream,and chocolate. In addition, expertise cansometimes be transferred from market tomarket. We might, for example, be able tocopy a good advertisement from one countryand use it in another.

But there are limits to this kind of cross-fertilization. We tried to mutually create andshare an advertisement between Brazil andChile, but it was a flop; there were culturaldifferences, union problems with the artistes,and difficulties with the music. And strategies for some products will often vary by market.Developed countries have a high penetrationof instant coffee, for instance, but in coffee-producing countries consumption is very low, so you can’t pursue a single strategy

for Nescafé worldwide. Even, say, Brazil and Colombia don’t have all that much incommon: in Brazil we mainly take black coffee with sugar, while the Colombiansgenerally drink theirs with a dash of milk.

Your business environment here in Brazilhas changed dramatically in the past five years. What differences have younoticed?

Today, you have more control over yourbusiness because there is more transparencyin the economic environment, especially as faras inflation is concerned, which has droppeddrastically. You can also get rid of a lot offormer administrative problems and can nowfocus on real business-related issues, wheremarketing, innovation, and speed – amongothers – become key factors. On the otherhand, competition is getting tougher, andprices are being squeezed.

Since the introduction of the new economicplan in mid-1994, and a gradual increase ofincome power, our volume growth has beentremendous; last year we registered realinternal growth of 23 percent. While this isobviously not sustainable, we still expect 12 percent for this year.

Because of Brazil’s formerly high inflation and its price controls, improving productivityin most companies was neglected in the past.We are now having to work hard at raising itwithin the confines of increased competitionand trade pressure. That involves taking stepsthat are not too welcome, like rationalizingand restructuring. Within Nestlé, we can learnfrom other countries that have faced similar

PRESIDENT AND CEO, NESTLÉ BRAZIL

arm of my communications team. They visit every six weeks to tell uswhat they are doing around the world. And they brief their peopleinternally just as we brief ours so that we get the same understanding onboth sides.

Our five communications partners are aligned with our categories andstrategic brands: for instance, Publicis is aligned with Perrier, JWT andLintas with chocolates, and O&M with Milo. In some categories, we keepthings away from an agency because it is engaged with a competitor. Thenthere are open categories where local markets can decide who they want towork with. Charts show the alignment policy for each agency so that

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24 THE McKINSEY QUARTERLY 1996 NUMBER 2

drastic but very encouraging economicchanges – such as Chile and Argentina –where they had to adapt themselves quickly and efficiently.

Brazil’s retail trade is evolving rapidly.How are you responding, and whatbenefits do you derive from Nestlé’sexperience in other countries?

In the past, I think we did a better job ofmanaging the trade than the Europeans. They gave in to trade demands too easily, and now they have real problems. In LatinAmerica, we were much tougher, which put us in a better position.

What is really new is that transnationalretailers that we deal with here are starting to exert pressure outside Brazil when theydon’t get something within. In other words,they start to think local, and try to act global or international. Carrefour asked us for additional extra discounts, partly as a corporate fee, and when I said “No,” itdelisted most of our products for about fourmonths. From carrying some 250 Nestlé items, it went down to about 25, most ofthem converted into loss leaders that itcouldn’t do without. We said, well, the lawwon’t let us refuse to sell to you, but you have to pay the full list price; no discountswhatsoever. Luckily, Carrefour still representsonly about 5 percent of our sales.

What was different about this affair was that Carrefour delisted Nestlé temporarily, not just in Brazil, but also in France and other European countries, trying to applypressure within a global context. We just

have to defend the position and convince our international retail partners that eachmarket has its own specific characteristics.Pricing policies and discounts are notsomething which simply can – nor should – be negotiated on a global basis. Existingproblems have to be sorted out locally.

Then there was the problem with a major US discounter. In Brazil, it recently entered the market with a very low pricing policy;sometimes it undercut net list prices by 20 or 30 percent, practising a clear loss leaderpolicy with our main brands. I was askedabout this at a press conference, and I said it could be interpreted as an unfairpractice which might even be violating legalregulations in certain countries. My commentsblew up into a kind of scandal, withsurprisingly instant repercussions far outsideBrazil. Right after the conference, I had mycolleague, Joe Weller from the States, on the phone transmitting the complaints fromthe discounter’s headquarters. In the end, we had to issue a statement saying we weremisunderstood by the press and had to clarifywhat it was I really said.

Peter Brabeck said that one of the bestdefenses Nestlé has against the might ofthe retailer is innovation in your productoffering. How do you think Nestlé isdoing at innovation?

I completely agree with Peter’s statement but I personally feel there’s still a problem. We have a huge network of R&D centers, but what comes out isn’t quite equal to the investment we put in.

AN INTERVIEW WITH ROLAND MEYES

country managers can see immediately how much scope they have inchoosing their communications partners.

Normally, we try to have at least two partners aligned for each category. Incoƒfee, for instance, McCann and Publicis sat down with the SBU andselected markets to establish the positioning and labeling documents for thebrands. This made them part of the process and helped them understandwhat every word in the documents means.

Your communications partners are competitors in their own right. Doesn’t thatcause problems with alignment?

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The technological gap between ordinaryeveryday products is gradually getting muchnarrower. As a consequence we need morevalue-added products, with high quality andreal detectable consumer benefits that clearlyset them apart from the competition. I feelthat real breakthrough innovations are stillrather scarce, or sometimes too sophisticatedand, as a result, often too costly for placingthe products successfully in the market. This is especially the case in emergingcountries like Brazil where the meaning of the saying “value for money” is different than in Europe or the States.

In our specific case, I would like to see stillmore emphasis on the practical side, forexample, local applications of existingtechnologies from elsewhere, or being moreinnovative in relation to today’s local practicesand standards. In emerging countries, there is still a lot which can be done in this way in order to get a competitive advantage,instead of just waiting for pure advanced R&Dresults which might require high additionalinvestments, and increased production costand final consumer prices.

What do you see as the biggestchallenges facing Nestlé over the next ten to 15 years?

One will be our handling of our corporate and strategic brands. They are an enormousasset, and we can’t afford to lose thefranchise we have established over severaldecades. Direct ordering via computers and the Internet will be other importantdevelopments. It will give us better and a

more direct access to consumers and morepower to influence their buying decisions,which could help us reassess and furtherfoster our brands if they start to flag.

In human resources, we have to make a big effort to keep hiring top-quality peopleand train them adequately. We must continue the cross-fertilization with ourpotential collaborators as well as the cross-fertilization of ideas and methods within the Nestlé universe.

Our success today is largely due to the factthat we went outside Switzerland and Europeearly in our history. There are still countriesemerging today that we are just entering orhave yet to enter, so that’s another priority –getting into new markets before the rest ofthe competition and securing an adequatestronghold.

This means that understanding the world as a whole will be much more important. I’m not convinced that everyone, even nowadays, is thinking globally yet, as opposed to justcountrywise. And we may have to definestrategic areas for the long term so that wecan detect new trends quickly and perhapsspin off those areas where we are not socompetitive. To do this, we’ll have to be highly flexible and adaptable to change.

PRESIDENT AND CEO, NESTLÉ BRAZIL

Not really. As long as their billings go up every year, they are happy. They dogood business, with potential for growth. We pay them well, but we ask a lotof them. I want Nestlé to be their most favored customer so that they put alltheir best people to our work.

One area that is becoming important is combining brands. We did a Nestlébreakfast promotion with Libby juice, Nescafé coƒfee, breakfast cereals,Herta ham, Gloria condensed milk, and so on. One agency is starting tospecialize in these joint promotions and build up core competence.Similarly, we have a strategic alliance with Disney that gives us exclusivityfor all foods in Europe and the Middle East, and for some categories in the

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United States. When Pocahontas was launched, we supported it with a rangeof products and promotional activities for the benefit of both parties.

Before, with our business split into brands on the one hand and operationaldivisions on the other, we could never summon the full power of Nestléagainst the might of the retailer. What we are doing now by bundlingproducts and brands, especially in promotions, under one thematic roof issomething very few, if anybody else, can match.

In many ways, the biggest challenge for marketing today is presented by thedeveloped markets. How are you addressing this challenge?

I think the diƒference between emerging and developed market is, amongothers, a psychological one. In the emerging markets, the consumer wantssomething; in the developed markets, it is as if he or she doesn’t wantanything. It has almost become fashionable to have less and care more, say,about ecology. In this environment, our old axiom of being a customer-driven company is not suƒficient.

What kinds of enticements are needed to stimulate consumer demand?

Convenience, taste, and health are driving forces; so is value. I think peopleare willing to spend more if you can show them perceptible diƒferences. Inthe past, innovations in the food industry weren’t always understandable to the consumer, and sometimes a premium price was much too high for the actual diƒference involved. Another problem was that the industry

concentrated on final products, so innova-tions were relatively easy to imitate; anyonecan make frozen ready-to-eat dishes.

What we have to do is refocus on R&D toproduce real technological innovation. Wemust develop products with characteristics Ican patent and protect, and benefits that will

genuinely interest the consumer. One example is LC1, a special dairy foodcontaining a bacillus that reinforces the immune system. Another productunique to Nestlé is hyperallergenic infant formula. The almost SFr700million we now spend on R&D is aimed at developing more patentable andhighly diƒferentiable base technologies that are hard to imitate.

How do you view products like Olestra?

They worry me. If manufacturers are starting to make food artificial so thatconsumers can digest it without getting anything out of it, we are back inRoman times, when people got rid of what they had just eaten.

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26 THE McKINSEY QUARTERLY 1996 NUMBER 2

Food is more than the sum of its chemical parts. You

can substitute the chemicals, but you can’t replace the

life that’s in the food

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It’s not what food should beabout. I believe that foodintake is the substance of life– not just physically, butemotionally. There is no im-portant event in our lives thatis not connected with food.Whether it is Christmas, or abirthday, or Ramadan, foodis at the center of socialinteractions.

Olestra is a fat substitutethat transforms food into aphysiologically unnecessarything. It allows you to con-sume something that youknow you shouldn’t. Insteadof deciding, “I’m going tohave a more balanced diet with less fat,” you start tosay, “I’m going to eat moreand more of this, and it’s notgoing to harm me.”

Would you use Olestra as aningredient in your products?

I don’t know yet. It’s under discussion but I have some problems with it. Ifwe put it in chocolate, for instance, we would have to decide how to fortifythe product to compensate for the minerals that Olestra supposedly takesout of the body.

There are two diƒferent ways of looking at this. One is, “What’s the problem?Too much fat? Fine, we’ll develop a fat-free fat.” The other is to ask, “Whatcan nutrition do for you?”

I think it can do a lot. Nutrition is not just a load of chemicals. If I takewheatcorn and analyze it, and then put it through a mill and analyze theflour again, the results are the same in chemical terms. But if I put a littleof each in the soil, what do I get? From the wheatcorn, a plant. From theflour, nothing.

Food is more than the sum of its chemical parts. You can substitute thechemicals, but you can’t replace the life that’s in the food.

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THE McKINSEY QUARTERLY 1996 NUMBER 2 27

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How far do you see Nestlé being able to use nontraditional channels to mitigatepressure from the trade?

Most people agree that the mass consumer is slowly dying out. Tradeconcentration and the mass media are both about the mass consumer. Butthe more the consumer is segmented, the more you have segmenteddistribution channels.

Your approach to these segmented distribution channels depends on your product portfolio. The strongest retailers are only a small part of our total business in some areas. With ice-cream, most of our profits come

from street sales, swimming pools, andsuchlike, where we control and stock ourown freezers. It’s much the same withconfectionery.

Traditionally, our products were groceryitems that needed preparation at home:milk powder, condensed milk, Nescafé,

frozen food. But more and more consumption is taking place outside thehome. So our challenge now is to convert the home preparation items intoproducts that are available on the move. Ready-to-drink beverages are anexample; we are working with Coca-Cola to distribute our canned Nescaféand Nestea.

Recently, we introduced global availability as a measure into our strategicthinking. We want to make Nestlé products available to people wheneverand wherever they want them. There’s a saying in the chocolate SBU:“Nobody goes more than a hundred steps for a chocolate bar or an ice-cream.” You are there, or your competitor is there, or nobody buys anything.

What role does the retailer play?

The retailers, in the widest sense, are our most important partners to bring the products to the consumers and this function is and will be ofutmost importance.

However, today we have retail channels developing for core grocery prod-ucts that are not dependent exclusively on traditional supermarket chan-nels. Take home delivery, for example. In Switzerland, many frozen foodsand beverages are home delivered. Germany too has a fantastic system – 38percent of all ice-cream there is home delivered.

Nowadays, you need an investment of up to $50 to $60 million to build anew supermarket in the UK. If you are a retailer, you have got to wonder

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28 THE McKINSEY QUARTERLY 1996 NUMBER 2

“Nobody goes more than ahundred steps for a chocolate baror an ice-cream.” You are there,or your competitor is there, or

nobody buys anything

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how you can recoup your costs from this supermarket when the trend is toward alternate channels like home delivery, gas stations, and evenvirtual shopping.

Instead of focusing their eƒforts in developing some of these channels andincreased services for consumers, some retailers still focus only on price.Now, there are retailers and there are retailers. Some create value, but thereare also those that destroy it. They take the best brands – brands thatrepresent many years of investment – and use them as loss-making items intheir own repertoire. For a brand, nothing is worse than being a loss leader.As a manufacturer, we spend hundreds of millions on brand equity andadvertising; if someone comes along and tells consumers they can have ourproduct at 60 percent oƒf, all that investment goes down the drain.

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