Nestlé Turns 150. What Secrets of the Food Industry Hide Behind That Number?

It's hardly an exaggeration to say that the growth of this one company shows how an entire industry expanded.

Nescafé. Mineral water. Cetaphil facial cleanser. Totole chicken bouillon. Milo. Cheerios. Hsu Fu Chi pineapple cakes. Crispy Shark wafer biscuits. Pedigree. Capsule coffee machines. Maggi seasoning sauce. Haoji chicken bouillon. Carnation evaporated milk. Nestlé heart-health milk powder for older adults. Cream-filled ice cream cones. Ben NANA ice cream. Five Rams ice cream cones. Purina Pro Plan dog food. Perrier. Youmai oat cereal. Kit Kat. Maggi instant noodles from India. Cailler chocolate. Hot Pockets frozen pizza. Nestea iced tea.

Walk the aisles of a large or mid-sized Chinese supermarket shelf by shelf and you'll probably run into more than half of these. What you may not realize is that every one of them comes from Nestlé.

The products span more than a dozen categories. Trace their origins and you'll find they arrived through acquisitions the same company made in different eras and different markets over the past 150 years — Perrier came from France, Kit Kat is a brand of the British confectionery company Rowntree Mackintosh, Totole was originally a Chinese company…

A hundred and fifty years ago, Nestlé started out as a Swiss company selling milk cereal for infants, then merged with another company that sold condensed milk. Today, on Fortune's 2015 Global 500 list, Nestlé ranks 70th and is the food and consumer-goods company with the highest revenue — almost twice that of second-place PepsiCo.

Think of China's "century-old heritage brands": Tongrentang (founded 1669), Ruifuxiang (1862), Quanjude (1864). They are still around, and they all give off, to varying degrees, an air of tradition; their selling points are mostly "old" and "classic." Nestlé's products, by contrast, are still out there on the shelves of supermarkets big and small, in convenience stores and on e-commerce platforms — competing as ordinary contenders rather than as heritage names. And the company keeps launching new products.

With products under more than 2,000 brands, sold in 189 of the world's 195 countries, and China as its second-largest market, it's hard to avoid this giant food company. How did it get here? What does a scale this large actually mean? Nestlé gives us a way to take apart the secrets of the multinational food business.

1. How big a food company can get is a technology question

We have to start with the story of how a refrigerated railcar changed meat processing.

In the 19th century, processing meat was slow, laborious work. Cowboys drove cattle from the plains onto trains, which carried them to the Midwest or farther, to the East Coast, where they were finally slaughtered. Along the way cattle died or were injured, so the losses were already heavy by the time the train arrived.

But in an era when even the Ford Model T had yet to reach American households, public transport like the railroad was one of the few fast answers to long-distance shipping. Before refrigeration existed, high spoilage made it hard for any food company to expand beyond its home region. Gustavus Franklin Swift, who owned a Chicago slaughterhouse, found a way around it: reverse the order — slaughter and process first, then ship. He put refrigerant into sealed railcars to turn them into refrigerated cars. A car that once held a few live cattle could now carry meat hung vertically in strips, and shipping space no longer had to be wasted on discarded organs. Bulk processing of fresh meat became possible.

It was the arrival of the cold chain that cut spoilage sharply in food production and shipping, and so raised profit margins in supply and processing — and it let a company rooted in one region sell good, cheap products into other regions.

American transportation was developing fast at the same time, and together the two eventually produced the first outlines of a single nationwide food market in the US. Once a single market forms and competition appears, the ground is laid for mergers and acquisitions. Newly paved road mileage in the US grew from 620,000 kilometers in 1921 to nearly 1.62 million kilometers by 1935, letting food companies sell across ever-wider territory.

Then the cold chain moved into people's homes. Between 1930 and 1941, refrigerator sales in the US surged: 1.9 million units had been sold in total before that; another 20 million sold in those years. By the 1950s, mechanical refrigeration had thoroughly changed how ordinary Americans lived — they bought frozen food from supermarkets in quantity and stored it in a newly purchased refrigerator. And once refrigerators were in ordinary homes, everyone could buy and keep food they couldn't finish at once but still wanted — above all ice cream, which everyone loves.

For dairy companies, the credit for growing large belongs above all to a Swede named Ruben Rausing — the man who founded the company everyone knows as Tetra Pak. In 1951, Rausing set up Tetra Pak in Sweden to build a prototype filling machine, and soon delivered samples to a dairy in Lund. Nine years later, Tetra Pak opened its first packaging-material plant outside Sweden, in Mexico, with annual capacity of more than 1 billion packages — a sign of how badly the world's food industry needed this kind of technology to enlarge its map.

As households stored more food, food companies could sell at a larger scale more easily — frozen food most of all. It was in 1960 that Nestlé, spotting the jump in European demand for ice cream as households bought chest freezers, acquired Germany's Jopa and France's Heudebert-Gervais, and began its push to go global.

You can even look at it this way: a giant food company needs solid profit and the largest possible market in every region, and the making of that single market began the moment Miller wrote his commentary on the transformation of Chicago's meat industry.

Sterilization and the invention of the Tetra Pak carton extended shelf life; cold-chain logistics were built out; private cars, refrigerators and freezers spread across America. All of it also made the suburban supermarket possible, and in the end retail as a whole gained. Before that, the most common retail formats were the corner grocery and chains like A&P. The arrival of giant global-sourcing, global-selling companies like Walmart would also carry their customers — food companies among them — out into the world.

2. How big a food company can get is also a management question

From 1938 on, Nestlé began expanding into new categories. It was after the acquisitions of Jopa and Heudebert-Gervais mentioned above that Nestlé really began to go global.

Through the 1970s it kept buying companies in different industries, and in 1977 it finally renamed itself the Nestlé Group. But it now had to face far larger management problems. Look at the list of companies it bought in the 1970s and you'll see they were no longer simply European food businesses: Nestlé took over the American frozen-food company Stouffer's in 1973 and acquired the canned-food maker Libby, McNeill & Libby in 1976. (And don't forget that Nestlé also became a minority shareholder in L'Oréal in 1974 and bought the American eye-care company Alcon two years later — proof enough of how large this food company's management job had become.)

Every company that goes global runs into the same problem: how to get people in different markets working together. McDonald's employees, for instance, are spread all over the world; they have to follow instructions from headquarters while also fitting the way their local market operates.

Nestlé is the same. Its 335,000 employees work in 436 factories across 85 countries. Managing the businesses in every region, along with their factories, channels and upstream suppliers, comes down in the end to managing people.

To get the factory of the American canned-food company Libby, McNeill & Libby to understand a plan that headquarters in Vevey, Switzerland, has just adjusted, you need a fast and effective way to communicate.

Better management has in fact come along with better technology. For a company whose acquisition list keeps growing, nothing matters more during rapid expansion than keeping headquarters and the regions in step.

Without the telephone, the telegraph, the fax machine and the internet, everyone might still be a local business in the small Swiss town of Vevey, talking face to face. Technology is what made working together across the world possible.

You know the next part better: computers and the internet let a whole company's operations run in real time inside one system. Not just Nestlé — Coca-Cola, Yum! Brands, all these food companies that moved step by step into Europe, Latin America and Asia from the 1960s through the 1990s, in the decades of their fastest global expansion, also owe a debt to technology companies like Fuji Xerox, HP and IBM, and later Microsoft.

From faxed and photocopied documents to the simplest Excel spreadsheets, Word files and emails, these built the standard global language of business we still use — and behind it stands a single global standard for how to manage.

3. How big a food company can get is, in the end, also a money question

Better technology and standardized management produced one result: acquisitions that never stop.

Nestlé is hardly the only food company keen on M&A. Look at Kraft (split into Kraft and Mondelez International in 2012), General Mills (best known in China for Häagen-Dazs and Wanchai Ferry), Danone and the other food giants, and you'll find their histories are almost all accompanied by deals large and small. Anheuser-Busch InBev, the world's biggest brewer, became a beer giant only after absorbing three important brewers: America's Anheuser-Busch, Belgium's Interbrew and America's AmBev.

In fact any industry with fast-moving-consumer-goods traits, household products included (Procter & Gamble, Unilever), has also grown quickly by buying other companies. Facing a vast mass market, they need a run of strong brands and product lines, plus a constant feel for what consumers want, simply to survive the competition.

Another precondition not to be overlooked is a single global language for finance. The "three statements" built on double-entry bookkeeping — balance sheet, income statement, cash flow statement — put the operations and profitability of companies everywhere, not just food companies, into one shared frame of reference.

But food companies are more likely to become targets, and the big deals draw relatively more attention. Looking back, one likely reason is that they sit closer to daily life, and people know the brands.

Start from the most basic need and you find that demand for food is nearly the same across regions and populations. The yardstick for a Dutch dairy and a Xinjiang dairy is not, in essence, very different. That shared "language" makes a deal more likely too.

For a food company, retail channels are the heart of the operation. Buying another brand means selling more through the same channel.

Picture it: a large food company with 50 brands can load them all into one truck bound for convenience stores and supermarkets, which obviously costs less than shipping them separately. In the US, big food companies can even put their own staff inside supermarkets to stock shelves and make sure the products are displayed properly. Nestlé now owns 2,000 brands.

When entering a new market, buying an established company also fills out a distribution network fast. Before it acquired Hsu Fu Chi, for example, Nestlé's share of China's confectionery market trailed far behind Mars, Kraft and Unilever; buying Hsu Fu Chi lifted that share directly and also let it reach China's second- and third-tier markets through Hsu Fu Chi's sales network. Hershey, the chocolate and candy maker, bought China's Golden Monkey for the same reason: more channel resources in second- and third-tier Chinese cities.

Beyond channels, a company that owns several brands gains from working them together in procurement, production and marketing. A company with 10 potato-chip brands, for instance, will find it easier to get a lower price on potato flour. In the same way, it bargains harder when it stocks a big-box retailer like Walmart or buys marketing, and it can even share its IT and HR systems internally.

Acquisitions brought new markets, in categories and in geography; add greater scale and a stronger ability to absorb risk, and the result was a global market and a global consumer. What makes food companies distinctive is that the way they make money is clear, and repeatable. The way they are managed is clear, and repeatable. Building channels is repeatable. And demand is the same everywhere.

It's a good target.

4. All told, is this a story of globalization, or of the middle class rising?

After the 1960s, Nestlé's pace of acquisitions and mergers picked up noticeably. Behind that lay the expansion of the American middle class — then the world's largest consumer market — and households with more to spend.

In the 20 years after the Second World War ended in 1945, the US economy grew at tremendous speed and became the richest in the world. Over the decade from 1950 to 1960, American gross national product rose 40%. That is also when the American middle class rose, and by the 1960s it was more pronounced still: two-thirds of American households had reached middle income, and household disposable income was climbing steadily.

The sociologist Michael Harrington described how startling the number and speed of the 1950s middle class were — people didn't even know what to do with their growing wealth, other than buy more products, better products, newer models.

Nestlé settled on global expansion as a long-term goal after the war. Because the middle class did not rise in every market at once, Nestlé could copy its American experience into markets that developed later, which is why it bought the frozen-food company Stouffer's, the canned-food maker Libby, McNeill & Libby, and the American Carnation Company.

In fact, rather than say that big food companies tried to meet the needs of this new middle class, it is closer to the truth to say those needs were "taught." Before the product existed, the need may not have existed either — but "living like rich people in developed countries" was appealing in itself.

The example you know best: Nestlé came to China in the 1980s and started selling instant coffee. In a country used to drinking tea, persuading consumers who knew nothing about coffee to accept this dark, bitter powder was not easy.

Television, spreading around the world after the war, gave this consumer culture a channel. In the late 1980s Nestlé ran TV commercials in China that all but taught Chinese viewers to drink coffee step by step — "Take a teaspoon of Nescafé, add hot water, add sugar, add creamer or milk, and you instantly have a fragrant, fresh cup of coffee." It looks a little funny now, but the tagline — "It tastes great" — did a great deal to shape what Chinese consumers thought coffee was.

The classic Nescafé ad — "It tastes great"

This was a business expansion and a cultural one at once. You could say Nescafé single-handedly built the Chinese habit of drinking coffee, right up until Starbucks arrived.

Only a large company has the cultural reach to turn a product into something the whole world converges on consuming. Fast-moving consumer sectors like food and household products have always been the biggest spenders in marketing; Procter & Gamble, another giant, still spent $8.2 billion in 2015 after cutting its marketing budget.

Which shows, from another angle, how much a successful brand matters to a food company.

Food companies generally run a multi-brand strategy, and brands are their most important asset. On Forbes' 2015 list of the world's most valuable brands, "Nescafé" and "Nestlé" ranked 32nd and 49th (which in its own way shows how strong the Nescafé brand is).

"Brands matter enormously in the food industry. Unlike the technology industry, which has to keep remaking its hardware, once a food brand's value is there it may not change for more than 100 years," said Zhao Yiwei, who once covered food stocks at Fidelity, the world's second-largest asset manager. "For food companies like Nestlé and Coca-Cola, sitting on a fairly large platform with very good resources, if they go buy a small company, the price is well worth it to them. And a small brand may be worth more, and cost less, in a big company's hands than if it kept growing on its own."

Buying someone else's established brand is worth more, too.

In 2010, Kraft spent $19.6 billion on Cadbury. It then merged the two companies' products and marketing. Cadbury was a widely known brand in Asia, so Kraft used that recognition to push Oreo.

It is a shortcut to market share. And buying a company that already exists is often better "value" than building the business yourself, hand over hand.

Acquisitions made these products bigger and stronger. And, of course, more industrial. Nestlé represents the food industry: what happened to it has happened to other food companies too.

Industrialization has been criticized plenty already, and that isn't what this article set out to examine. The packaged-food business Nestlé now leans on most is growing sluggishly, and that is the newest bottleneck facing a 150-year-old company. Since 2012, Nestlé's annual sales have slipped from 92.2 billion Swiss francs to 88.8 billion in 2015.

The new opening Nestlé has found is medical nutrition. After a run of acquisitions in that business in recent years, the latest news, at the end of June, is that Nestlé has brought in its first outside CEO in 94 years: Ulf Mark Schneider comes from healthcare, where he spent more than a decade as CEO of the medical company Fresenius.

Analysts generally read Schneider's arrival as a sign that "Europe's most valuable company is about to overhaul its strategy." A turn from food to healthcare at the level of the whole company would, in theory, be the first in 150 years.

Back to the supermarket. When Nestlé returned to China in the 1980s, it started with instant coffee. Its method of attack in China was the same as everywhere else: buy quickly, build the brand, then keep bringing out new products. The Chinese companies it has taken in include Totole, Haoji, Yunnan Dashan, Yinlu, Hsu Fu Chi, Wyeth… But these businesses face the risk of aging products and aging brands. The Chinese market is also more complicated: the same Nestlé is understood differently in different places.

Either way, all kinds of small brands flowing into one company that has lasted 150 years is the best gloss there is on commercial vitality — most companies don't live this long, and people even less so.

Cover image: Visual China Group

Image sources in the article:

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