Nestlé's Brabeck: We have a "huge advantage" over big pharma in creating medical foods

FORTUNE -- Nestlé is the biggest food company in the world, with a market cap of roughly 191 billion Swiss francs -- which is more than 200 billion U.S. dollars. To reach its size, the company has spread well past the iconic chocolate bar that comes to the mind of the American consumer and even past the powdered milk and coffee products that made it famous elsewhere in the world. In fact, Nestlé has over 29 brands that earn upwards of a billion Swiss francs for the company every year.

Former CEO and current Chairman of Nestlé Peter Brabeck tells Fortune about managing a global food giant. Brabeck explains why no one at headquarters taste-tests your pizza, where there's a place for Nestlé in the pharmaceutical field, and how biofuels are making the commodities crunch worse.

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Peter Brabeck

Nestlé is the biggest food company in the world. How do you make sure a company that size still makes products relevant to consumers?

At the end of the day, every man and woman on this planet needs about 2,400 calories. But one of the big challenges that food and beverage companies face is that there is no global consumer. Every single consumer in this world has his or her own idea about what she or he wants and needs. So you have to be decentralized.

At Nestlé, headquarters has nothing to do with the taste of the pizza you're buying in the U.S. That's the responsibility of local management.

You've got a strong worldwide coffee business. Where do you see potential for growth in the U.S. coffee market?

In the U.S., the big growth is in portion coffee. We are actually launching a new offering for portion coffee, which is Nescafé Dolce Gusto.

How much promise does that product have?

I would make a bet that Nescafé Dulche Gusto will be a billion dollar brand in the next two or three years. This is a business that we launched only three years ago. It's already earning more than half a billion today, and it's growing like crazy.

You have a notably huge R&D budget -- about $2 billion. Where is that money going?

We have to continue to be the leader in food technology -- this is a fundamental thing. We constantly have to invest in new technologies for chilling, dehydration, and freeze-drying.

But we also have a medical foods division. These products are different, they have to be approved by the FDA, and you have to have clinical trials. This is very serious. You start to enter completely different terrain.

What are some of your medical foods products?

We have developed a full line of products that help counterbalance the negative impact of chemotherapy.

We also have a company that makes a chewing gum for people who have chronic kidney inflammation. So instead of getting injections, you can take chewing gum and it will have the same effect.

There are a lot of chronic diseases in which nutrition can either be additional help or can be preventive.

What kind of competition do you have in medical foods space?

Our biggest competitor is Abbott Laboratories (ABT, Fortune 500). But we feel like we have a big advantage in the medical food area.

Why?

First of all, we bring the understanding of the patient that pharma companies normally don't have -- they think about molecules and things like that. Secondly, we have a huge advantage because we know how to texturize the product. For example, if you cannot swallow, we can give a product a texture that allows you to swallow. We can give also products a taste so that you would eat even though you feel lousy.

Are you worried that consumers who think of Nestlé as a chocolate company will be confused?

No. I mean, Jenny Craig is an example. Who knows that Jenny Craig is Nestlé? It's a huge weight-management business, and it's doing very well. Now, one day we might put the Nestlé brand more in front of Jenny Craig because it would help give our company something different.

The perception of Nestlé is quite different from country to country. In the U.S., there is no doubt that for a generation or more, everybody remembers, "Nestlé makes the very best chocolate." I think that it was a campaign from the 1930s.

But if you go to Latin America, for example, people think of Nestlé as more of a nutrition company. Why? Because the first products Nestlé launched in Latin America were infant nutritional supplements and milk powders.

How would you respond to critics who say that there's a conflict between Nestlé's health initiatives and, say, your recent purchase of Kraft's frozen pizza business?

First of all, I would say that we have a $100 billion food product that we will continue to develop. We will not stop developing it just because we want to create a new industry.

Secondly, if you would ask anybody what is considered the best nutrition diet, they will say the Mediterranean diet because it is composed of 1/3 protein, 1/3 carbohydrates and 1/3 fat.

Now, pizzas are part of the Mediterranean diet. There's nothing bad about pizza. It's a very healthy food.

I know you're sick of this question, but how do you view the commodities crunch?

There are some fundamental issues of supply and demand that explain why it's happening. Every second we have 2.5 more people to feed and every second we are losing 0.35 hectares of arable land due to erosion and urbanization. We're running out of water, which is a basic ingredient for agriculture.

The world made some politically wrong decisions like subsidizing and fostering biofuels, which increase the demand for an already limited supply of food in an unsustainable manner.

There has to be a ban on using food for fuel. A move in that direction would have an immediate effect on bringing down the stress on the food supply.

But that probably won't happen. So what is Nestlé doing to make food products sustainably?

We are working with more than 600,000 small farmers in our most important areas: milk, coffee and cocoa. We help them with their efficiency and show them how to use less water. Working with the farmers also transforms them into consumers for our products.