(FORTUNE Magazine) – Every summer Peter Brabeck, chief executive of Nestle, likes to climb Les Rochers de Naye, an Alpine peak he can see from his office in the small Swiss town of Vevey. "If you're in good shape, it takes about 2 1/4 hours," muses Brabeck, sizing up the mountain through a window. Brabeck, an imposing 56-year-old Austrian, is used to scaling impressive heights. But since 1997, as head of the world's largest food company, he has been running a business that traditionally didn't perform at such high altitudes. Not anymore. In the first half of this year, Nestle's net profit rose 34.6%, to $1.6 billion.

In recent months Nestle has become a favored refuge for investors fleeing tech shares--a remarkable turn of fortune for a 137-year-old business whose most successful brand, Nescafe, was first launched in 1938. Nestle shares are up more than 20% since the start of the year, to around $2,000, and over the same period the company has outperformed the Dow Jones Stoxx food industry index by 11%. "Nestle is the top pick of the food-processing sector," says Salvatore Lanzilotti, an industry analyst at Bank Julius Baer in Zurich. Lanzilotti believes the stock could go as much as 17% higher.

What investors are betting on is Brabeck. They see in him a determined CEO who's willing to make the tough decisions that will keep Nestle's profits growing. Brabeck has reshuffled his executive team, adding a number of younger and more dynamic managers. To boost productivity, he has created a strong brand-management structure--six worldwide brands like Nescafe, Nestle, Perrier, and Buitoni pasta--with few overlapping products. He is also spending over $1 billion to wire this $48 billion company for the Internet Age.

But Brabeck still has a long way to go. While growing faster than other packaged-goods giants like P&G and Unilever, Nestle is still inefficient in terms of factories and head count. For instance, Nestle generally gets lower marks than archrival Unilever for its efforts to reduce overcapacity. Unilever currently has around 300 factories worldwide and aims to cut that number by 100. By contrast, Nestle has just under 500 factories and so far doesn't have much to report on the slimming front apart from the divestiture in the past year of 15 Findus frozen-food plants in Europe. "There is no doubt we have to go through a restructuring period," says Brabeck.

Given Nestle's sheer bulk, that will be a challenge. The company--ranked 41 in the FORTUNE Global 500--currently has 230,000 employees and operates in 70 countries. It has a mind-boggling array of over 8,000 products in its global larder, ranging from its famous Nestle chocolates to Friskies cat food and Stouffer's prepared meals, through Maggi cooking sauces to Dairy Farm ice cream and Poland Spring mineral water.

What's more, Nestle doesn't only sell things you (or your cat) can eat and drink. Nestle also owns Alcon, the U.S. eye-care firm, and 26.3% of L'Oreal, the French cosmetics group. Some of these businesses, like water and pharmaceuticals, are healthy performers, with annual growth rates over 7%. But other categories, like chocolate and dairy products, are laggards.

Brabeck's goal is to maintain a 4% "real internal growth" rate--a benchmark that strips out product price changes, acquisitions, and exchange-rate fluctuations. Nestle's third-quarter results (which didn't include profit figures) showed growth slowing, from 4.5% for the first half of the year to 4.2% for the full nine months. Yet analysts still expect Brabeck to hit his 4% target for the year.

That kind of growth may not be enough to send investors swooning--something Brabeck is well aware of. One option being bandied about by Nestle watchers is a headline-grabbing U.S. takeover bid. This summer Nestle stood back and watched Unilever buy Bestfoods for $20.3 billion, having concluded that any counterbid would be blocked by the U.S. Federal Trade Commission on antitrust grounds (Nestle and Bestfoods have overlapping strengths). Brabeck also stayed on the sidelines in June when Philip Morris bid $14.9 billion for Nabisco (an offer Nabisco shareholders look set to approve) on the grounds that cookies and crackers weren't a core Nestle business. The official line from Brabeck is that he doesn't need another U.S. acquisition, especially now that Nestle is poised to buy the rest of its fifty-fifty joint venture in America with Haagen-Dazs ice cream. On the other hand, when pressed on the subject Brabeck doesn't totally rule out a big U.S. takeover play: "I would say that in this period of consolidation, whenever a vital part of our industry is going to be touched, we will be present."

And there's one reason Brabeck just might be forced to move. Sylvain Massot, a food industry analyst at Morgan Stanley Dean Witter in London, points out that Nestle is on course for zero net debt by the end of 2001 and should end up with $10 billion in cash by 2005, if the company makes no further acquisitions. Massot estimates this would be enough to finance a $20 billion takeover. Brabeck faces a dilemma. Simply returning excess cash would suggest a lack of long-term strategic vision. Yet there are no obvious U.S. takeover targets for Nestle. Privately, for instance, Nestle executives are scathing about poorly managed middleweight food groups like Campbell, and following the sale of Bestfoods to Unilever, there isn't any other heavyweight American player likely to attract a bid from Vevey.

To understand the new, improved Nestle, you have to start with Brabeck himself--an old-economy CEO who talks and acts as if he were already striding at Internet speed into the new economy. His early resume is more Indiana Jones than Organization Man. Immediately before joining Nestle in 1968, Brabeck was part of an Austrian expedition that climbed a 9,000-foot mountain in the Himalayas "Alpine-style"--that's to say, without benefit of oxygen, pack mules, or support teams.

He came down to earth as a salesman for Findus frozen food (then a Nestle unit) in provincial Austria, where he struck a deal with his boss. If he was merely rated "good" at his job, Brabeck would have to stay in his native Austria--a country he now remembers dismissively as "very socialistic." But if Brabeck was deemed "outstanding," he would have the chance to go abroad with Nestle. For two years no Austrian mom-and-pop store was safe from Brabeck's attentions, and in 1970 he got his reward when he was appointed national sales manager for Chile. "That was my political-education curve," says Brabeck, whose various postings in Latin America over the next 17 years saw him witness the fall of President Allende, General Pinochet's reign of terror, political turmoil in Ecuador, and the nationalization of Nestle's factories in Venezuela. "Very turbulent times from all angles," Brabeck recalls in his slightly Germanic English. "But through turbulences, you get the room to move and take initiatives."

In 1987 the ambitious Brabeck was recalled to Vevey as global head of culinary products, and by the mid-1990s he was heir apparent to Nestle's long-standing CEO, Helmut Maucher. Today Brabeck attributes part of Nestle's current success to the foresight of his German predecessor. "[Maucher] made the necessary acquisitions and investments....Now I have the opportunity to consolidate," he says. What Maucher spotted in particular was the potential of bottled water. In the early 1990s he began acquiring a collection of famous mineral source brands such as Perrier and Vittel, and packaged H20, including Nestle's Pure Life spring water (aimed at developing markets), is now one of Nestle's most important growth engines. Last year the water division registered an operating profit of $275 million on sales of around $3 billion. That represented just 7.1% of total group revenues for 1999. But Nestle is already the acknowledged world leader in bottled water, and over the next decade Brabeck aims to double sales to around $6 billion.

To get those kinds of results, not only for water but for the rest of the company, Brabeck is counting on what he calls his four pillars of growth: (1) operational efficiency, (2) innovation and renovation, (3) sale of products "whenever, wherever, and however," and (4) better communication with customers. As far as efficiency is concerned, he started by getting rid of underperformers in his senior executive team who hadn't grasped that the days were over when consumer packaged-goods companies could simply dump products on retailers and wait for fat returns. Many of those retailers, like Wal-Mart, were competing on cost with their own brands, while the consumers themselves were no longer exhibiting the same loyalty to tried-and-trusted products. "The external environment had started to change very fast," recalls Brabeck of the mid-1990s. "If we wanted to be a leader--and we call ourselves the leading food and beverage company in the world--then we had to introduce a rate of internal change that was faster than the rate of external change."

That spelled curtains for some of Nestle's slow-moving old guard. "I changed the crew," Brabeck explains with pride. "Not one member of the general management [board] had the same job as he had before; three of them left, and new ones came in."

At the same time, to rally the troops Brabeck laid down the aforementioned 4% real internal growth target. Nestle had lumbered along for much of the 1990s below this benchmark, so essentially he was promising pain. Says Brabeck: "I told them that, my dear friends, perhaps we are still walking with slippers, but what I want is that we train together, so that we put on, as the first step, tennis shoes. Then we will train ourselves even more so that one day we will be able to put on racing shoes."

Initially, Brabeck focused his staff's energies on reducing Nestle's operational costs, because as he puts it, "these were things which you can feel and you can touch." Things, in fact, like surplus people. But some analysts think Brabeck has been too timid in taking on trade unions in Western Europe, where 34% of all his employees are based (see box). Since 1997, Nestle's work force hasn't shrunk at all; it's been stable at 230,000. Brabeck doesn't share that view, but he does concede that for political and social reasons "restructuring in Europe is much more difficult than in any other part of the world." Well, yes: In the same three-year period, Nestle's work force in Western Europe actually went up, from 59,572 to 79,337 at the end of last year.

The better news for Nestle shareholders is that Brabeck and his highly regarded chief financial officer, Mario Corti, reckon to have achieved operational savings from improved efficiency of around $1.7 billion, or about 1.1% of sales. That's just the beginning. Now Brabeck is sprinkling a little e-magic in every nook of Nestle's business. In June, Nestle paid an undisclosed amount for the license to use German software group SAP's entire mySAP.com suite of products, which will be made available to all 230,000 Nestle employees. The goal: to automate and integrate all of Nestle's operations, from procurement through production to distribution. Nestle has also teamed up with SAP and Danone to launch CPGMarket.com, an electronic supply and distribution system for the U.S. food industry, which will compete with a rival platform being launched by the Grocery Manufacturers of America.

The next pillar, innovation, involved revamping Nestle's R&D unit so that there would be better coordination among the group's different businesses. You can see some of the results at Nestle's state-of-the-art research center a few miles from Vevey, where the company's white-coated eggheads investigate such specialized topics as the color of Buitoni pesto sauce. Under the new regime, researchers are encouraged to cross-fertilize their inventions across different product lines. One example: LC1, a bacterium that aids digestion and protects against infection. At present LC1 is added to a yogurt brand of the same name, but on the day FORTUNE visited the Nestle labs, researchers were trying to hit upon other possible applications (they wouldn't say for what products).

Brabeck's third pillar, "Whenever, wherever, and however," sounds like new-economy jargon but is simply about maximizing Nestle's sales. To explain what he means, Brabeck takes the example of Nescafe, the company's all-time most successful brand. Nescafe took off during World War II when the U.S. military requisitioned Nescafe's entire American output for a year, and today Nestle claims that 3,000 cups of the brand are consumed worldwide every second. But to hold this position, Nestle needs to create new sales channels. "Soluble coffee is a typical grocery product," says Brabeck, as if he were talking about some prehistoric retail world. What excites him are Nescafe dispensers, Nescafe-branded cafes, and, hmm, Nescafe as part of your premium in-flight service. "If you're flying Air France today, you will see on the first-class menu that the coffee you get is Nescafe," he enthuses.

Ultimately, what Brabeck wants to do is build highly targeted "communities" of consumers--his fourth strategic pillar. So welcome to Nespresso, the club for more than 250,000 members who (as the corporate marketing material says) "treasure quality coffee as part of the simple moments of pleasure in everyday life." No, Nespresso isn't your average cup of freeze-dried, but the real goal with this premium filter blend is to create customer loyalty. Nescafe licenses manufacturers that sell club members cafetiere machines that--coincidentally--can only make Nespresso premium filter coffee.

Welcome as well to Club Buitoni, named after the Italian pasta brand that Nestle bought in 1988 and aimed at lovers of Italian culture. Okay, all 400,000 members so far are Italian, but Brabeck--who speaks the language fluently--says the pasta's Website (www.buitoni.com) is building an interactive community in Britain, the U.S., and Japan. Visitors can click on favorite Italian recipes--all made, naturally, with Buitoni pasta --or even win a trip to the testing kitchens at Casa Buitoni in Tuscany, near where "Mama Giulia Buitoni first made pasta commercially in 1827." Says Brabeck: "We have been able to launch [Buitoni] products basically without television advertising, but based upon a fine targeting of people who really have an interest in the Italian lifestyle."

So will Brabeck's four pillars hold up Nestle's heft? Here's the catch. Nestle isn't doing anything that competitors like Unilever aren't attempting as well. The only difference is that Nestle started its corporate makeover a little earlier and, with the glaring exception of labor and factory overcapacity, has moved a little faster than most packaged-goods players to revamp its business.

What Brabeck will have to do to keep his stock rising is formidable. First, he'll need to tackle the overcapacity problem in Europe--a tough task given the Continent's resistance to layoffs and change. Then he'll have to keep finding new ways to breathe life into his products. It's not easy to get old-economy products like Nestle's Quik, Mighty Dog, or Stouffer's generating the kind of new-economy buzz that turns on today's investors. Finally, he'll also have to make sure his expensive foray into the Internet world pays off--something that could take years and disrupt day-to-day operations along the way. Just ask any CEO who has tried to create an e-company while at the same time running a tough business.

The path up the mountain for this Swiss packaged-goods titan can only get tougher and tougher. Call Nestle fortunate to have a CEO who relishes vertical challenges.

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