Nestlé's CEO to Wall Street: I did it my way

Nestle CEO Peter Brabeck-Letmathe

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After 11 years at the helm, Peter Brabeck-Letmathe will soon step down as chief executive of Nestlé, the world's largest food company, whose brands include Nescafé, Jenny Craig, Gerber and Poland Spring, San Pellegrino, Stouffer's and Maggi. It hasn't all been plain sailing, as the world economy has had to deal with the Asia crisis, the bursting of the tech bubble and 9/11.

But throughout Brabeck's tenure, Nestlé, which is based in Vevey, Switzerland, has managed to maintain steady growth even as many of its rivals including Britain's Unilever (UN), Kraft Foods (KFT) and France's Danone have stumbled or failed to match its pace. Sales, of about $90 billion, are 50% higher than when Brabeck took over and the company's profit margins have been rising too. In an interview with Fortune, Brabeck - who's staying on as chairman - talks about his record, how he has changed the company, what the new challenges facing his successor are likely to be, and how the conventional wisdom on Wall Street was wrong.

Fortune: The financial community likes to talk about the need for corporations to focus. You've pooh-poohed that as a fallacy. Why?

Brabeck: In the 90s there was a paradigm that only "focus" would lead to operating efficiency. It meant selling off lower-margin businesses and not investing in new markets, so that there would be an instant improvement in EBIT. Almost all of my competitors followed this. But we saw that with focus, there was a danger that you would not be able to get long-term growth. We looked for a different model. We wanted to combine a certain complexity with operating efficiency. That way we could have top-line growth improvement and long-term margin improvement. This is biology - the day you stop growing you start dying. If you focus and focus and focus you will end up in the hands of somebody else.

You reorganized the company to give greater autonomy to business divisions and put in place a big IT platform called Globe that's supposed to tie the whole company together. You've described it all as taking a supertanker and turning it into an "agile fleet of fast boats." Where did that idea come from?

Back in the 1970s (while based in Latin America), I was invited by the Chilean navy to spend two days with them on an exercise. I was very impressed. The frigates went off on their own, and the only centralized structures were one supply boat for fuel, one for food and one for munitions. I never forgot this.

What's the relevance to Nestlé?

There are physical laws. Boats can only get to a certain size. When we were a 50 billion company, we changed to get to a 100 billion company. To get to be a 200 billion company, we had to change structure again. The businesses are all different. I can't run ice cream the same way that I run Nescafé. At the beginning, I wanted to accelerate the performance of group and we achieved that through different initiatives we launched including factory closures and performance trimming. But looking forward, I had to think how to ensure we could get organic growth of 5-6%, which is very high for the industry. Now we have 27 brands with sales of more than CHF 1 billion each. Organic growth of 6% means you have to grow internally by CHF 6 billion every year. That's the size of many of my competitors. You cannot grow like that based on one product or one brand. You have to have a very broad and strong portfolio.

What would you like people to see as your legacy?

I think they will see a different company. We have moved it from being a process-technology led agro-industry company into one that is a research-led nutrition and wellness company. That's a strategic transformation. The evaluation criteria should be different now. I'm not Conagra. I'm not any more an agro-industry firm. The second thing is the importance of Globe, which I think is big. Without it, we wouldn't be able to become a 200 billion company. And then, there's the impeccable 11-year delivery of the Nestlé model. Every year we've had 5%-6% growth and improved EBIT margin. I never accepted that any external event could prevent us from delivering the model.

What about the things that didn't go right? Do you have any regrets about not buying Hershey (HSY, Fortune 500), for example?

We were not interested in Hershey. We are interested in recuperating the Kitkat and Rollo brands in the U.S. (which are held by Hershey there), and this is one of the things I regret I was not able to get. But there's only one way you could get it and that would be change of ownership. This would give us an opportunity to ask for it, but this doesn't depend on me. Overall, I think we made the right acquisitions and we also did not do acquisitions which had been pushed forward very strongly. For example it was said over and over again that we should acquire Numico, and I said no. I think the acquisitions we did make such as Novartis Medical Nutrition and Gerber added much more value. It was also rumored for years that I should have acquired Danone, and I said no. I feel comfortable that we made the right decision. There's one area where I am not happy. I would have preferred to be better in our dairy refrigerated business. It's the one area where I feel a little bit disappointed with myself. But look at what we established in new business: in pet care, we were number six and now we're number one. In water, we were substantially smaller than Danone and others, and today we are clearly the world wide leader. In ice cream, we started from nowhere and today we have world leadership. Nescafé is growing very well. Nespresso is a beautiful story.

Tell us about your successor as CEO, Paul Bulcke.

I've known him for many years. We had two very strong candidates, each with a strong profile. The board held hearings in august with the candidates, who presented their vision for 2017 and talked about how they would develop the company. There were also meetings with the candidates and their families. It was very thorough - one to one with every member of board. The outcome was unanimous. I think Bulcke is a very strong leader, there's no doubt about that. He has delivered results in all the jobs he has had. His performance impressed. He certainly is a man who lives the company culture. We feel that the culture is extremely important; it's the social glue that keeps everything together. The internal reaction confirmed the board's decision: there was a standing ovation when it was announced internally, which I had never seen before. I didn't get a standing ovation when I was announced.

Did the fact that the other contender, Paul Polman, was an outsider weigh against him?

No. He had three years at the company and his culture was not so far away (from Nestlé's), which is why I brought him in. He has very high values. If we had been perhaps in a crisis or you would have to do fundamental changes in a short period, perhaps his personality would have been the right one, but this company is not in crisis.

What will the big issues be for Bulcke?

The big challenge is now is flawless execution. There is still huge potential in our performance. I think our overheads are still not where they could be or where they should be. I also think we have a need to further improve our customer service. We are not the best in customer service. It's also very important to manage our R&D pipeline and create a pipeline that can be valued.

We're living in a period of rising food prices. How do you view that?

Food prices will stay high. The fundamentals are clearly there. There is increased demand on the one side, and we are starting to see the impact of water shortages in certain countries such as India and China. The third factor is biofuel. As you start to link oil prices with food prices through biofuels you will have much more ups and downs than you had before. The stability of food prices is gone.

What's the future of your two big shareholdings, in eyecare firm Alcon (ACL) and in L'Oréal (the French cosmetics giant of which Nestlé owns just under 30%)?

With Alcon, we created a huge amount of shareholder value. Our investment was $100 million and today it's worth $40 billion and 75% in our hands. Now is the point that Alcon doesn't need Nestlé any more, and Nestlé doesn't need Alcon any more. Now comes the moment where we think about what we do, but it has to be for the good of shareholders of Alcon and for the shareholders of Nestlé. This is one of the subjects I am working on and will continue to work on (as chairman). As for L'Oréal, we've had a very successful partnership for 30 years.

But in 2009 there'll be a contractual possibility to change the relationship.

I will spend the rest of my time thinking about what should be our relationship with L'Oréal after 2009. I'm looking forward to be able to lean back and to think about the future of this company. The decision on L'Oréal can only be done within a general consideration of quo vadis for Nestlé. You need a little bit of time and distance to do that. This will be a big strategic decision for the group. Now we have to know what we want and then see what the other party thinks.