Global Movers And Shakers

Kerry Group and Nestl expand existing markets while nurturing new opportunities

One is based in sleepy Tralee on Ireland's southwest coast. The other has its headquarters in Vevey, Switzerland, a smallish city nestled between a lake and the snow-sheathed Alps. But Kerry Group PLC and Nestl SA have two things in common: Both are in the food business, and both-just as L'Oreal SA, Avon Products Inc., and other IndustryWeek Best-Managed Companies do in their fields -- have become adept at pushing the boundaries of their existing markets while working to create new ones. Consider the numbers: Kerry grew from humble origins -- the forerunner of the company was founded in 1972 when 27 dairy farmers came up with 1.25 million Irish pounds (approximately US$1.55 million) to set up a dairy cooperative -- and has emerged as a truly international company specializing in food ingredients, with annual revenues of roughly $2.3 billion and manufacturing and technical facilities in 15 countries. In 1999 alone, sales increased by 11.7%, the operating margin jumped from 7.9% to 8.3%, and pretax profits rose by 25.2% to approximately $150 million. Though known to many consumers for a handful of high-profile retail brands such as Nescaf coffee and Crunch bars, Nestl is actually the largest manufacturer of food in the world. With nearly $50 billion in annual sales posted last year, Nestl once again showed robust growth, its 1999 revenues increasing by 4%. Net profits jumped by nearly 11% over that period, despite a downturn in some major markets. But the similarities between them go beyond their product ranges and their impressive performances. In the case of both Kerry and Nestl, driving that market growth has been a clearly thought-out and, equally important, clearly expressed strategy for achieving increased sales and greater market penetration. In that way Nestl and Kerry are not much different from Best-Managed Companies in other industrial sectors. Take L'Oreal, for example. The Paris-based world leader in beauty products achieved sales growth of nearly 20% by developing new products, expanding into key international markets, and investing in new facilities, all the while concentrating on increasing the reach of the group's top 10 brands. That sounds a lot like the Kerry Group. Or take Avon Products Inc., New York, which is investing heavily in research and development as well as making a major push to use the power of e-commerce to improve distribution. There are echoes of Nestl there. In fact, look across the gamut of companies in all industries that are seeing major growth in their markets-even in shrinking sectors-and you'll see that food is not all that much different from steel, semiconductors, or solar panels. Straightforward strategy Rather than selling milk, sausages, and food ingredients, Kerry Group makes its money by trading in knowledge, according to Denis Brosnan, who has been the company's managing director since its founding as a dairy cooperative in 1972. But Kerry, says Brosnan, had to learn that lesson the hard way. In its first six or seven years, the cooperative that would later give rise to Kerry Group coasted along on increased farm outputs made possible by Ireland's membership in what was then the European Economic Community. But 1979 and 1980 saw southwest Ireland lose a huge share of its farm production, and it became clear to Brosnan and his team that another approach would be needed if the company were to survive and prosper. The turning point, in Brosnan's view, came in 1984 when Kerry opened its first sales office in Chicago and set about learning the food ingredients business. "We were either innocent or brave at that stage," he chuckles. After gathering knowledge about the ingredients industry, Kerry's management began forging a philosophy that would make possible the company's meteoric rise. Brosnan describes it as "a very clearly thought-out strategy to supply rather than compete with consumer food companies." And implementing that strategy on a truly grand scale became possible in 1988, when Kerry bought out Beatreme Food Ingredients, a subsidiary of Beatrice Corp. "That was the key to our success," Brosnan says. Today, Kerry Group has three core business areas: agribusiness, which consists of the activities of the old cooperative; consumer foods, ranging from sausages and deli meats to ready-to-eat meals for the British, Irish, and European markets; and food ingredients, which is where the company has a thoroughly international presence. It's the ingredients business that has contributed the most to Kerry's market growth, but the company's move into that territory was fraught with danger. Kerry was worth about $135 million at the time, and it paid exactly that much to acquire Beatreme, which had only $37 million in assets. "The risk was huge," Brosnan says. "The step was a huge one-almost into the unknown. It's easy to look back and say 'Wasn't that brilliant?' but there were plenty of things that could have gone wrong." The approach Brosnan and his team used after 1988 was to take the technological know-how of Beatreme Food Ingredients and roll it out on a global scale. The big obstacle to creating growth, Brosnan says, was finding the right people. "We found it difficult to expand geographically while we had all English-speaking people in senior management," he explains. Kerry's solution was to map out a geographical strategy of where the company wanted to be operating four or five years down the road, and then to recruit heavily in the universities in those regions. The result is that Kerry managers around the globe are a diverse bunch who understand the countries in which they're operating. A diverse management staff is necessary, Brosnan explains, to keep up with its fast-changing industry in which "food companies [are] putting more and more work back on the specialist supplier." These days, Brosnan says, Kerry supplies three main things: a marketing department that stays ahead of industry trends; a technology department that develops new materials; and a culinary section that helps develop new recipes for Kerry's customers in the consumer food industry. Those components help drive Kerry's organic growth, but they also are applied to the acquisitions the company has made over the years. Following the 1988 Beatreme purchase Kerry made major moves in 1994 and 1998, acquiring U.S.-based DCA Food Industries and the UK's Dalgety Food Ingredients business of Dalgety PLC, respectively, with both acquisitions helping Kerry to increase its reach. Kerry solidified its position in snack seasoning by buying a German firm, Tukania Proca GmbH. The 1998 purchase of the Burns Philp & Co. Ltd. ingredients business in Australia and New Zealand gave Kerry an important foothold in Asian markets, which Brosnan sees as being of great importance down the road. Brosnan refuses to say what companies Kerry might be eyeing over the rest of this year, but the company is sitting on enough ready cash that the rumor mill about possible Kerry targets is never quiet for long. Brosnan said at the company's annual general meeting earlier this year that the company might make a few small acquisitions this year, but nothing on the scale of the Dalgety purchase. Instead, Kerry is seeking to firm up its presence in emerging markets through both small purchases and capital investments. Recent years have seen the company make investments in Brazil, Poland, and Malaysia, with the aim in each case to establish a presence from which to serve markets that will be growing dramatically in the near future. Brosnan sees Eastern Europe, South America, and Asia as the most fertile areas for growth in the ingredients business. In all of those regions, he says, there are few opportunities to acquire large companies, so the Kerry strategy is to buy smaller ones and expand them. The whole point, he says, is to respond to the needs of its customers as they expand globally. "In South America, for example, a lot of U.S. corporations are buying and investing in the food industry. Kerry's already being there makes life easier for them. Instead of having to find new suppliers, they can just pick up the phone and call Kerry [Ingredients] in Beloit [Wisconsin]," Brosnan explains. Maintaining leadership The Nestl experience has been of a markedly different variety. A long-established giant of the corporate world, the Switzerland-based company saw its revenues stagnate in the early 1990s. There even were two straight years of decline, but the company turned that dip around in 1996 and hasn't looked back. Every year since then has seen revenues rise, and usually quite robustly. Last year's 5.8% jump came despite bad news from key markets and the disposal of noncore divisions. While much of that growth has been the result of acquisitions, CEO Peter Brabeck-Letmathe says Nestl also is flying higher because it has forged a clear set of goals and stuck to them. "Nestl's strategy is quite straightforward," he explains. "We are the leading food and beverage company and we intend to keep that leadership position. We are committed to long-term, profitable growth and one pointer to our determination is the publicly stated target of 4% real internal growth." The three-tier strategy aims at creating low-cost, highly efficient operations by coming up with process innovations. The Swiss food giant strives to strengthen its position through aggressive R&D efforts aimed at creating product innovations, says Brabeck-Letmathe. He says Nestl is ideally positioned thanks to those R&D efforts, as well as its already broad product range and its position in emerging markets. The Nestl CEO says the company's emphasis is on organic growth, but he does not rule out acquisitions that might add heft to Nestl's portfolio. "If such an opportunity arises, we can and will act," he says. Noting that within a few years roughly 500 more million people will be wealthy enough to buy industrially prepared foods, Brabeck-Letmathe says the future looks particularly bright for Nestl. "We are indeed well positioned to benefit from that development which is going to be particularly visible in Eastern Europe, in Asia, in Latin America, and in some parts of the Middle East/Africa region." Kerry Group may be trying to expand its markets by greenfield investments, but Brabeck-Letmathe says Nestl's investments will be more focused on information technology. "Over the next three years," he says, "we will invest increasingly in IT, so that Nestl really can take advantage of the productivity gains of the Internet age."

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