Wonky at the chocolate factory

The chief executive blames Chris White, but Nestlé’s problems with its UK confectionery arm lie in an over-reliance on sub-brands, a failure to ‘globalise’ and an underestimation of rival Cadbury in its home market. If things don’t improve, could Nestlé sell up? By David Benady

The blame game over who is responsible for the shortcomings of Nestlé’s UK confectionery business exploded into the open again last week. In a dramatic outburst, the company’s chairman and chief executive Peter Brabeck-Letmathe singled out former Nestlé Rowntree chief Chris White as the executive responsible for the company’s recent malaise.

White, who was ousted in November, had himself described Nestlé Rowntree as a “business in crisis” when he first took charge in January 2004. He appeared to blame the strategy of outgoing marketing director Andrew Harrison for the confectionery business’ problems. But last week, it was White’s turn to soak up the criticism.

Brabeck-Letmathe and the Nestlé board were in London to announce financial results for 2005, and these showed the company’s organic sales up 6.2% to CHF91.1bn (£39bn), though sales of confectionery, chocolate and biscuits only managed to grow 2.6%. The chief executive declared that in the UK, White’s strategy of launching new products had raised costs without a corresponding boost in sales.

“White was very successful in running an ice cream business in Australia,” Brabeck-Letmathe told journalists. “But he made one mistake – he applied the ice cream model to the confectionery business. In ice cream, you have to have new products and they live for a season. But the situation in confectionery is not the same. It is a much more stable business. What he did was to constantly launch new products; you could call it hyperventilation this has brought us an enormous amount of costs.”

The remarks illustrate Brabeck-Letmathe’s view that there is no single business model that can be applied across Nestlé’s divisions. But one observer claimed it was odd for Brabeck-Letmathe to lay the blame for Nestlé Rowntree’s problems at White’s door because the chief executive had hired him in the first place. It is certainly unusual for a boss to so publicly criticise one of his executives.

The depth of the crisis at Nestlé Rowntree was further underlined when the company announced 275 job losses – subject to consultation – from its head office and factories at York and Fawdon, near Newcastle upon Tyne. This represents some 8% of its workforce.

The redundancies come after Nestlé Rowntree experienced a dire year, with sales of its best-selling four-finger KitKat slumping 25% in 2005 according to Nielsen, while Smarties and Polo sales fell over 5% (see table). It should be pointed out that KitKat’s multipack sales are not included in the Nielsen figures, since they are counted as biscuits.

One bright spot for Nestlé was Aero, which became the fastest-growing chocolate brand in the UK, growing nearly 30% after the launch of its Aero Bubbles sub-brand.

Slower launch rate

Though welcome news for the company, this has not lessened the crisis. Brabeck-Letmathe said that in future, new launches would be carried out at a slower rate. The job of turning around the division falls to Paul Grimwood, appointed managing director after White’s departure last November.

Yet some believe the predicament at Nestlé; Rowntree far predates White. The product proliferation was already well under way when he joined. KitKat Kubes, a bite-size sharing sub-brand, was launched in 2003 – though axed last year – while the expensive failure Double Cream was launched in 2002. White accelerated the launches, spinning off nine KitKat variants, and was accused of damaging the brand’s equity while also cutting ad spend.

Some observers believe Nestlé Rowntree’s problems are historical. Nestlé’s £2.5bn takeover of Rowntree in 1988 was flawed from the start, they argue, since Cadbury would fight tooth and nail against Nestlé making inroads into the UK. The idea behind the acquisition was to push Rowntree UK through Nestlé’s global distribution system. Opinion is divided on the success of this strategy.

One analyst believes confectionery brands do not lend themselves to globalisation. “Extension of the chocolate franchise has not been a recipe for success for Cadbury or Hershey,” he says.

On the other hand, a former executive says Nestlé Rowntree was successful in building market share, and made KitKat the UK’s top selling countline in the early 1990s. “It used Nestlé’s distribution to push Rowntree brands into continental Europe, while the role of the UK was to act as a cash generator. Much to people’s surprise, Nestlé didn’t starve the business of marketing investment, and the company was allowed to run itself,” he says.

Under one banner

But while Nestlé has spewed forth a stream of sub-brands, Cadbury has pulled its brands together under the Cadbury Dairy Milk banner and forged ahead. Nestlé seems to be attempting to mimic the Cadbury masterbrand strategy with the KitKat name. It is about to introduce a peanut butter variant of KitKat Chunky to take on Masterfoods’ Snickers.

However, David Lang, an analyst at Investec, warns/ “The view at Cadbury is that KitKat is an inflexible product, it doesn’t lend itself to that level of extension. Nestlé annoyed the trade by confusing the consumer.” He believes Nestlé Rowntree has to go “back to basics.” However, others think Aero may be better suited to the masterbrand strategy and is benefiting from this.

Trends in confectionery do not seem to be going Nestlé Rowntree’s way. There is a move to more premium chocolate as people tend to eat less, but more indulgently. Cadbury’s purchase of Green & Black’s has given it access to this appetite, but Nestlé’s introduction of Baci from Europe has yet to make much of an impression in the UK. There is also a move towards tablet chocolate and away from countlines – also good news for Cadbury.

Another analyst believes Nestlé could put Rowntree up for sale if it fails to fix the problems. “If you look at the categories it is in, confectionery is under-performing. In the long term Nestlé would sell it off, but will give it one more shot,” he says. At the same time, confectionery runs against Nestlé’s overall attempt to position itself as a “health, nutrition and wellness” company.

Others believe the idea of Nestlé selling off Rowntree is fanciful, given that the area is still highly profitable – Nestlé’s confectionery, chocolate and biscuit margins stand at some 11.3%, against 12.9% for its sales as a whole. There is also plenty of room for expansion in developing markets.

But fixing the UK – one of the world’s foremost confectionery markets – is crucial. The company is gradually reintroducing the “Have a break, have a KitKat” slogan axed by White, and promises fewer confusing launches. The UK division needs to sharpen up its strategy, or it could find itself having a permanent break from Nestlé ownership.