“Challenging” is how Nestlé Middle East CEO Yves Manghardt describes business during the past year for the Swiss multinational food and beverage company. And it is not hard to see why.
The $250bn company, which is celebrating its 150-year anniversary, reported an 8.9 percent decline in first-half net profit to $5.6bn, despite increasing its revenue by 3.5 percent. While Nestlé Middle East reported $2.4bn in sales last year, it faces one of the most testing periods in its 82-year history in the region.
Conflicts in Syria, Iraq and Yemen have almost wiped out sales in those countries, cutting a significant chunk from revenues, while the entire region is affected by underlying economic issues — dominated by the lower oil price.
“Over the past three years we have lost more than $220m of business because of the conflicts,” Manghardt reveals. “The low price of petrol [also] has implications in terms of the overall economy [and] low investment from the governments, as we know how much in countries like Saudi the public investments play a role in the economy.”
Global economic issues and job losses, particularly in the construction industries in Saudi Arabia and Qatar also have impacted Nestlé’s Middle East operations.
“2013 was the tipping point for us,” Manghardt says, referring to the conflicts. “In February [that year] we lost our factory in Syria, which was our third largest country [for business] in the region at that time. Today it’s the tenth largest. 2014 was [when the conflict started in] Yemen and mid-2014 was the start of ISIL in Iraq.”
The factory in Syria had manufactured multiple products for the country, including infant cereals, milk powder, coffee, Milo (chocolate drink), and Maggi products.
“[The Syrian] Ministry of Finance is controlling forex and that’s why they’ve put in place an import licence. They ask us to pay in advance, so there’s a number of measures that have been taken which make the importation very difficult,” Manghardt says.
“We used to have 600 people — 300 for the factory, 300 for overall business. Today we have just a few more than 70 people. We used to handle our business directly; we used to have close to 120 vans doing direct sales, but we don’t have one single van now and we rely on wholesalers to cover the country.”
Cailler is one of Switzerland’s oldest and best-known brands.
Despite the loss, Manghardt says “category wise we are doing quite well”.
“We maintained our increased market share, [across the region]. We have come up with some very good innovations in terms of nutrition, health and wellness. We have launched Nido Star, which is added-valued milk powder.”
The nutrition, health and wellness plays a core role for Nestlé’s business. Under the headline of ‘creating shared value’, Manghardt says Nestlé seeks to enhance people’s quality of life.
“In Iran we have done Project Horizon which helps farmers improve the quality of their milk [to Nestlé standards]. The [farmers] were not aware of issues with their milk,” he says.
“What we’re doing is helping the farmers, from feeding to milking the cow, to have a better quality. It now means that we can take 50 percent of our requirements locally. The aim is to become self-sufficiently locally.”
Education in nutrition, health and wellness, he says, starts with children. Nestlé assumes that children start making their own decisions around food between the ages of nine and 12, so the company has devised a programme specific for the region.
“We started in Lebanon in 2010 where we had a study made with the American University of Beirut to better understand the nutritional needs in the region. Together with them we have developed a programme called Nestlé Healthy Kids,” he explains.
“We have scientific evidence of the impact of the programme when we look at the schools in which the programme was run versus a set of schools where the programme was not run. We have evidence that the programme helps children to eat more vegetables, more fruit, and drink more water.”
The programme has also been rolled out in 29 schools in Dubai, as well as in Jordan, but an attempt to gain traction in Saudi Arabia hasn’t worked out due to the recent government changes, Manghardt says.
Nestlé reported $44.6bn in global sales in the first half of 2016.
Nestlé Healthy Kids goes some way towards addressing the growing issue of obesity and diabetes.
The rate of diabetes in parts of the Gulf is more than twice the global average, according to the International Diabetes Federation Atlas, while all GCC countries, which the exception of Oman, are in the top 15 in the world according to US statistics.
“The problem with the current state of obesity and diabetes is that a lot of people talk about it, but very few really know what to do,” Manghardt says.
“In the end, what we strongly believe is that it’s not one stakeholder on his or her own that can really make a significant difference, it’s when we work together. We have nutritional knowledge and governments have the channel which can be through schools, offices, or different channels, and we need partners in order to increase awareness.
“It’s really when we do things together that I believe one day we will be able to make a difference.”
As expected, Manghardt dismisses the effectiveness of a tax on sugar. Such a levy is due to come into effect in the UK in 2018. It is expected to raise $690m for the British government’s budget and will be used to combat childhood obesity, with part of the revenue raised going towards doubling funding for primary school sport.
“It’s interesting this tax on sugar that we hear people in different countries talking about. Will this deter people from drinking soft drinks? How many smokers are still smoking despite having these horrible pictures on the packs and in big letters ‘smoking kills’. Is it really changing people’s behaviour?” he questions.
Instead, Manghardt argues, education and leading by example are more effective methods to make a positive change. He says Nestlé is reducing salt and sugar in its products “on an ongoing basis” despite concerns that consumers are not switching to the healthier products.
“We are very much aware of the implication it has. For us it’s a commitment because it’s all about enhancing people’s quality of life,” Manghardt says.
Nestlé produces more than 2,000 brands in 189 countries across the world.
As well as re-engineering its food products, Nestlé is introducing resealable packets for some chocolate bars in an effort, it claims, to encourage consumers not to eat all the chocolate in one go. It is also promoting healthier cooking via a campaign that promotes using ‘one spoonful less’ of salt and oil.
“For us, it’s a continuous journey of improvement,” Manghardt says.
He insists financial benefits, in terms of increased sales or profits, are not the primary consideration in the common shared values programme.
“Of course, ultimately it helps our business to be sustainable. If our products are not perceived positive, by the end we will not have a sustainable business. We do it because it makes sense for everybody, not just the shareholders, but all the people involved.”
Nestlé has developed products specifically for the region, such as Nescafé Arabiana, the first ever instant Arabic coffee.
“It was developed for Saudi Arabia,” Manghardt says. “It look us three years and it involved the technology centre that we have in Switzerland and Japan. This was to answer a specific local taste and give an answer to a process that usually takes half-an-hour which is not very easy to master. Now we are exporting it to the United States, but it was really done for local taste.”
Despite general chocolate sales declining globally, high-end chocolate has bucked the trend. Last year, Nestlé introduced a ‘super-premium’ chocolate category with the 200-year-old Swiss chocolate brand Cailler (which it bought in 1929). The chocolate is sold primarily through Amazon to the US, Britain, Germany and China, but also in some international airports, including Dubai.
Nestlé has also up-scaled some of its existing brands to the premium market. Last year it sold a limited-edition KitKat covered in a real gold foil for $26.
“Over the coming years we will probably launch, I would say, ‘premium offerings’. New brands altogether? Could be, but it’s really a step-by-step approach and for us we are still very much building the base of our business in some countries [in the region],” he says.
Nestlé employs 335,000 staff — 11,000 of them in the Middle East.
“It’s a very varied region in the Middle East so just coming with new brands and products is not necessarily the answer.”
Manghardt says fortified products will also be an important part of the business for Nestlé.
“We have sold 8 billion fortified products [in a year], between milk powders and Maggi cubes, which is fortified with iron.”
Growth for the company is currently in the single digits, he says, and for the coming few years he expects “a more realistic approach for Nestlé” in the region, although he does expect an uptake in figures.
“Five, six years ago we thought that double-digit [growth] would go on for a much longer period,” he says.
Soon, however, a value-added tax (VAT) will be introduced in the Gulf region. Manghardt says the company is ready for its introduction and suggested there should be uniformity in the GCC when it comes into force.
“We are closely following the current VAT discussions. For the time being, there is no clear decisions on the percentage that will potentially apply to the different food and beverage categories. We will get ready for different scenarios and we will be compliant for any model proposed. Operating in several countries for our region, we would be in favour of a common model applied in the different countries in GCC.”
Improvement in Iran and Iraq could particularly help Nestlé return to its former growth curve, Manghardt says, and could each be worth “hundreds of millions”.
“The biggest potential for the future in terms of added potential, not just added growth, number one I put Iraq, number two I put Iran,” he says.
“We are very passionate and committed about this region. We really believe in the long-term. For us, whatever has been happening for the past few years is temporary and we really believe that there is a very positive prospect out of the Middle East in the long-term.”
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