Nestl Water Management Strategy A New Competitive Advantage

authored by: Peer Ederer Ray A. Goldberg

15 August 2007

2007 Wageningen University --- EFAS All rights reserved. Cases are developed for discussion only, and are not intended to serve as source of data. No part of this publication may be reproduced, stored, transmitted or used without permission of Wageningen University.

accompanying material to this case study: Nestl Water Management Report, March 2007

acknowledgement The authors thank Hans Jhr, Benjamin Ware and Eduard Bruckner of Nestl for their constructive comments and openness in developing this case study.

editing International Meeting Point, Joy Christensen (jjss@c.dk) layout Grafisch Atelier Wageningen, Jeroen Brugman (www.gaw.nl) print Print Service Ede (www.printservice-ede.nl)

Nestl Water Management Strategy A New Competitive Advantage

"The prevailing approaches to Corporate Social Responsibility are so disconnected from business as to obscure many of the greatest opportunities for companies to benefit society. Typically, the more closely tied a social issue is to a company's business, the greater the opportunity to leverage the firm's resources and benefit society."
Michael Porter in Harvard Business Review, December 2006

Considering Water as a Competitive Advantage

Nearly every case study about Nestl refers to the picturesque setting of its headquarters in the city of Vevey on the tranquil banks of Lake Geneva, tucked away in the Swiss Alps. It is for good reason, as the setting characterizes the consumer goods giant: quite Swiss. Only in 2006 did the share of US ownership overtake the Swiss share in Nestl at the same time it is one of the most globalized companies anywhere. More than 98% of its sales amounting to CHF 98 billion (59 bn; $79 bn) are generated outside of Switzerland. The company operates 48 plants in 87 countries producing more than 0,000 different products, selling  billion products each day in a total of 30 countries, and employing a workforce of about 250,000 persons. In this, Nestl is not unlike Lake Geneva, which thoroughly Swiss on its northern banks, is also one of the most polyglottal places anywhere. The city of Geneva is the largest site of multilateral organizations in the world (the World Trade Organization, World Health Organization, International Labour Organization, World Broadcasting Unions, World Meteorological Organization, and more). The Swiss reputation for correctness, reliability, and pristine conditions are values that Nestl prefers as well, and which easily come to mind when observing the values-driven development of this company over 40 years of operation. On this particular Friday afternoon in early May 2007, there is nothing tranquil about Hans Jhr's office in Vevey (with the charming mountainside view rather than the lakeside view) where piles of paper will have to wait for another day to be processed. Vincent Petiard, director of the Nestl R&D Center at Tours in France, just stuck his head into the room for the third time. He is there concerning a policy decision on cassava, an important staple food in tropical areas, particularly in Africa. After a short exchange with him, Jhr, corporate head of agriculture for Nestl, says he would prefer finding a date when he can be in Tours and talk about this at length. As he says, "If we don't make the right decision here, we will regret it bitterly in ten years." While a colleague drops in to briefly introduce a researcher from an agricultural institute, whose work is supported by Nestl, his secretary is impatiently holding an ominously thick stack of papers, ready to hand them over to Jhr airplane tickets, meeting schedules, reminders, letters to be signed, the usual business agenda.

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Nestl Water Management Strategy A New Competitive Advantage

This same evening, Hans Jhr will fly to Australia to attend the inauguration ceremony for Australia's local chapter of a voluntary initiative of major food companies around the world in support of sustainable agriculture the Sustainable Agriculture Initiative platform, which he serves as president. He also hopes to gain a first-hand impression of the water shortage in Southeastern Australia and what the possible solutions might be. The Murray-Darling river basin in that part of Australia has been in the grip of a drought for seven years. Unless there is a dramatic change of weather for the better (meaning more rain) during the winter months from June to August 2007, this period of drought could mean the end of agriculture in that area (Exhibit 1 is an article excerpt from The Economist on the drought situation in Australia). About 40% of Australian agriculture is concentrated there and Nestl operations on that continent will be heavily impacted if the situation does not improve. According to estimates of the government of Australia, the drought has cost its economy a full percentage point of economic growth. A similar prospect is taking shape closer to home: the tomato growers in Northern Italy are on the verge of losing their 2007 crop after one of the driest springs on record in Italy. There is a real risk that the Nestl Buitone brand of pasta products could be left without tomatoes from trusted suppliers. Later in the course of May, both regions (Southeastern Australia and Northern Italy) receive some rainfall, alleviating the worst need. But by no means does that alter the basic question: How should the precious resource of water be shared? For Hans Jhr, who is in charge of sourcing agricultural raw materials for Nestl, the question is: How can water supply not only be secured, but turned into a competitive advantage for the company? Over the past couple of decades the company has become accustomed to the fact that yes, resources and raw materials should be protected and treated judiciously but they would never be short. At worst, it would be a matter of price to obtain them. Jhr is wondering whether that era has come to an end now. Already for several decades, the demand for some agricultural products has been rising twice as fast as productivity improvements per hectare, so ever more land and resources are being taken into production (Exhibit 2 for some crops). There is bound to be a natural limit to this practice. The demand for ever more sophisticated foods can be expected to increase even more rapidly due to urbanization, demographic changes, and unprecedented wealth creation around the world, while at the same time climate shifts and overpopulation place agricultural lands in jeopardy. To Hans Jhr, these tectonic shifts in the market point in the same direction. The availability and quality of water for food production could be in question before long, causing very high prices for pure water or worse, supply may even run dry in some regions, regardless of price. What would this mean for Nestl, given the company's history and future targets, its operating philosophy and value creation orientation? Is it enough to give water management a defensive risk management approach? Is it time to develop water into a tool of competitive advantage in the fight for superior products and superior value creation for the stakeholders? With his trip to Australia, Jhr was expecting to receive inspiration as to whether and how to make water a strategic asset for Nestl. But before leaving for Australia on this busy day, he wanted to be sure to make enough time for an interview to have this case study written he was hoping the topic would provoke much interest and good discussion in October during the EFAS conference in Rome.

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Nestl Water Management Strategy A New Competitive Advantage

Nestl History of a Food Product Giant

The history of Nestl SA has several historic roots in the 9th century, one of them being its founder Henri Nestl, a trained pharmacist. He experimented with combinations of cow's milk, wheat flour and sugar in the mid-860s, to develop an alternative nutrition for the infants of mothers who were unable to breast feed. Henri Nestl founded his company in 867 and his product was highly successful in the rapidly industrializing regions of 9th century Europe within only a few years Farine Lacte Henri Nestl was marketed across the entire continent. By 873 his factories were producing 2000 tins of infant formula food daily, and from there on the company grew through successful product innovations and mergers all around the world to become the company it is today. It is worthwhile to have a close look at the early origins of the company, as they reveal much of its genetic code. Born in 84, Henri Nestl was raised in Frankfurt am Main as Heinrich Nestle in a family whose members had for centuries been glass makers and who could trace their origins to three brothers in the 5th century. Their family coat of arms was a nest with three young birds. Subject to political oppression in Germany, young Heinrich emigrated to Switzerland in 839. There he changed his name to the francophone spelling, Henri Nestl. In 843 Nestl bought his first company, a mill with an adjacent distillery, from which he diversified into vinegar, cooking oil, mustard and mineral water production. Between 849 and 858 he also experimented with the production of industrial gas and fertilizers from vegetable oils. Although he succeeded in selling to the city of Vevey, none of these ventures proved to be successful, nor did his early attempts at formulating infant foods. Only after the German chemist Justus Liebig managed to complete the analysis of human breast milk in 865, was Nestl able to create a synthetic formula in 867. But fast growth in the infant formula business outgrew Nestl's financial and managerial abilities. In 875, with a net profit of 400,000 Swiss francs, he sold out for  million francs to Jules Monnerat, a business friend and former Swiss parliament member, and two associates, Gustav Marquis and Pierre-Samuel Roussy. Monnerat had been eyeing the company for quite a while Henri was ready to retire after decades of the entrepreneurial roller coaster. This way, the company came under professional management very early on. Henri Nestl's legacy to the company are his name, the logo, understanding of science as the basis for new products, and entrepreneurial tenacity. Equally decisive for the company's long term development was the Anglo-Swiss Condensed Milk Company, which was founded in 866 by Charles Page. Page was the U.S. consul in Zurich, and he noticed that Switzerland had an abundant milk supply, with easy access to the whole European market. Ten years previously, the American entrepreneur Gail Borden had industrialized the process of canning milk for sale across the American continent, and Page had originally intended to sell Borden's Milk as a licensee in Europe. When that plan fell through, he went ahead and erected his own condensed milk factory, registered in the Swiss city of Cham. This company was called Anglo-Swiss, because it was the explicit intention to sell Swiss canned milk to the British. In 872 they also opened their first factory in England, and the company expanded in leaps and bounds. By 876 sales were fourfold the level of 872. However, Charles Page died in 873, leaving the company to his brother George and a group of investors.

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Nestl Water Management Strategy A New Competitive Advantage

In 877 the Anglo-Swiss company decided to enter the infant formula business, to which Nestl reciprocated by entering the condensed milk business. An attempt by George Page to buy the rival outright was firmly refused. So he turned his attention to the North American market. What followed were 30 years of intensive rivalry between Nestl and Anglo-Swiss for domination over the European and ultimately the global market for processed milk. In 905, the two companies merged, forming the Nestl and Anglo-Swiss Milk Company. Still today, the company is registered in both cities Cham and Vevey and the annual report is signed at both locations. The Page brothers, with their global vision for the Anglo-Swiss company from the very start, actually laid the foundations for Nestl to become the global leader in milk production. Today, Nestl SA purchases 2.3% of the global output of milk. By contrast, the 9th century Nestl did not set up operations outside of Switzerland until 898. Two further entrepreneurs deserve mentioning: Daniel Peter and Julius Maggi. In 875, Daniel Peter figured out how to combine milk and cocoa powder to create milk chocolate. Peter, a friend and neighbor of Henri Nestl in Vevey, started a company that very quickly became the world's leading maker of chocolate. In the early 900s Nestl and the Swiss General Chocolate Company entered into a symbiosis: Swiss General produced chocolates, Nestl sold them under various brand names around the world. In 928 the two companies merged. Today, Nestl still accounts for 3% of all global purchases of cocoa2. Julius Maggi, son of an Italian immigrant who was a successful entrepreneur in milling, took over a mill located in Swiss Winterthur in 869. As this industry was undergoing rapid technological changes at the time, Julius Maggi eventually diversified into processing and packaging healthy foods made from legumes and meats. The business had difficulty taking off, and it required several rounds of new capital infusions. But from the mid-880s Maggi products and seasonings began to establish themselves in households of the industrialized age. The resulting business had its own corporate history under the name of Alimentana SA until 947, when it merged with Nestl to form Nestl Alimentana. In this way the entrepreneur Julius Maggi was founding father to the wide range of non-milk-based products which Nestl sells around the world today. Until the merger with Alimentana, Nestl was a global milk and chocolate company with only one non-milk product, Nescaf. Nescaf was introduced in 938 after eight years of research requested by the Brazilian Coffee Institute, trying to develop dried coffee solutions that would satisfactorily preserve a coffee taste. World War II accelerated this product beyond imagination, especially among the American military such that after the war the company found itself more or less accidentally in the role of a global player in the coffee business. Today, Nestl accounts for 3% of the global purchase of coffee beans3.

,2,3 These numbers refer to estimates by Nestl (2003) on their total annual purchases of these commodities. 2,2,3 Published by Forest L. Reinhardt (2004), Nestl: Sustainable Agriculture Initiative, Harvard Business School, 3,2,3 Case 705 08

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Nestl Water Management Strategy A New Competitive Advantage

The core strategy which the company followed at its origins has not changed to this very day. Nestl is predominantly a food & nutrition products company Its product innovations derive from cutting-edge scientific research Its operations are global All the products are branded, with some 8,500 brands marketed around the world The company processes food preferably in its own factories, and almost never owns operations upstream in agricultural production Its products deliver superior performance to the consumer of which the brand is a sincere promise.

So CEO and Chairman Peter Brabeck-Letmathe could build on traditions and values deeply ingrained in the company from the start, when in front of a packed room of stakeholders on June 9, 2005, during its annual Nestl Investor Seminar, he declared: "Nestl is transforming from a respected, trustworthy Food Company to being a respected, trustworthy Food, Nutrition, Health and Wellness Company."

Nestl's Transformation from 997 to 2007 CEO Peter Brabeck's Strategy

Peter Brabeck-Letmathe took over the helm of the company in 997, after his predecessor Helmut Maucher had been running its operations for 6 years. Maucher was widely credited with having revitalized a stagnant company which the helter-skelter of post-war years had left exposed in several ways. In its drive to expand on all fronts through mergers and organic growth the company had burdened itself with unprecedented complexity in its operations. In its non-milk businesses, Nestl faced fierce competition from other consumer goods giants. The infant formula related boycott of Nestl products in the US exacted a heavy toll as of 977. Macroeconomic conditions had also been a roller coaster ride, with strong growth in many developing countries offset by economic and political collapse in others. The first world markets were likewise hit by currency revaluations, inflation and recession. Maucher reacted to all that past by streamlining the company, trimming it towards financial performance and solid respect for stakeholder communities in operational principles. He shed underperforming brands, made numerous acquisitions, and opened new product categories. The $3 billion acquisition of Carnation Milk in 985 was at the time a landmark for the food industry. Maucher also began to push authority into the operating units, reducing headquarter staff. The company returned to organic growth of 4% p.a. and respectable profitability. Still, despite the visible improvements overall, the world seemed to change even faster. The investor community felt that Nestl lagged behind its competitors such as Unilever, Philip Morris, and Danone. These seemed to respond with more agility to the major forces of the 980s and 990s, such as rapid consolidation, new technologies, increasing speeds in everything from manufacturing to transportation, changing dietary habits, and of course, the seismic shift in socio-economic paradigms towards open-market economies.

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Nestl Water Management Strategy A New Competitive Advantage

As CEO in 997, Brabeck wasted no time putting his own stamp on the company. He installed a new senior team of his own choosing, and he set aggressive targets for top line growth of 6% and increasing operating EBIT margins. He defined his on-going strategy for the company in the Four Pillars of: . 2. 3. 4. High Performance Operations Innovation and Renovation Whenever, Wherever, However Consumer Communication

Through this period the company was subject to three major restructuring programs, called successively MH'97, Target 2004+, and GLOBE Operation Excellence. The last one in particular places its thrust on integrated technical and supply chains, optimized planning processes, complexity optimization, manufacturing and distribution network optimization, and high-performance logistics. Brabeck turned Nestl's manifold activities into an organization that he outlines as: "an agile fleet of businesses, each strong and flexible, with its own rules to be successful, and led by business specific management. A highly interdependent organization and efficient support structure able to leverage know-how internally and scale with suppliers, customers, media, governments,." Under Brabeck's aegis, the company achieved 5.8% organic sales growth by 2007, in addition to % net inorganic growth (Exhibit 3 for the growth performance from 997 to 2007). The EBIT margin has steadily improved from 0.3% to 3.5% over these ten years, while the cost of goods sold (in relation to sales) was cut from 5.8% to 4.3%. The valuation of the company went from 50 billion Swiss francs to 90 billion (Exhibit 4 for core P+L figures and sales by product and region, Exhibit 5 for a 2003 comparison with competitors, Exhibit 6 for the main brands). In 2007, Brabeck calls the financial model of 56% organic growth, annual improvement of EBIT margin, and improving trend in ROIC the Nestl Model and promises to continue delivering this model annually over the next 0 years. 2007 half year results showed organic growth of 7.4%. Brabeck announced that in September 2007 a new CEO would be selected from within the company. He concludes: "The course of the company has been set now our people must see it through."

So What about Water?

For his speech to the General Assembly of Shareholders on April 9, 2007, CEO Peter Brabeck-Letmathe chose to highlight water management:

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Nestl Water Management Strategy A New Competitive Advantage

"Ladies and Gentlemen, you will have noted that this year's Management Report includes a brochure about water. The availability and quality of water are here fundamentally important to us. How are we to produce or process quality foodstuffs without sufficient quantities of clean water? We felt it would be worthwhile outlining the action taken within the Group to preserve our water, and to describe current initiatives aimed at collaborating with other organisations and institutions to improve access to clean water on a much larger scale. As for the water used by the Group for production purposes, there was a drop of 35 percent between 2002 and 2006. We have also cut volumes of wastewater by 37 percent. And I cannot resist the temptation to confirm that the volume of water saved across Group production processes as a whole now exceeds the volume which we bottle and sell around the world." Why did water receive such prominent mention? Water management is essential to Nestl in three strategic ways: . Water as a product: One division of Nestl is Nestl Waters, the world market leader in water beverages and one of three product categories where Nestl holds the No.  position (the other two being ice cream and pet food). 2. Water in production: Water is essential for operations of food production, as ingredient in the food, as a cleaning agent for the production equipment, or as a process requirement during production processes and packaging. 3. Water in the supply chain: Water is a non-replaceable input factor to growing any kind of agricultural raw materials and clean water is a non-replaceable factor in growing safe foods. Water as a potentially strategic asset was not discovered exclusively by Nestl. The Coca-Cola Company ran full-page advertisements for a campaign it called and trademarked "This is our drop" (see Exhibit 7 for one of the Coca-Cola ads). Danone is no less active. Furthermore, Nestl was targeted by activists, who set its bottled water activities in the context of the availability of clean water to the world's poor. Nestl management felt it needed to stay in dialogue with global stakeholders on this issue. Says Michael Porter4: "Nestl has become a major target in the global debate about access to fresh water, despite the fact that Nestl's bottled water sales consume just 0.0008% of the world's fresh water supply. The inefficiency of agricultural irrigation, which uses 70% of the worlds supply annually, is a far more pressing issue, but it offers no equally convenient multinational corporation to target."

4 Harvard Business Review, December 2006

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Nestl Water Management Strategy A New Competitive Advantage

Water as a product: Nestl Waters one of three world leaders in the portfolio Nestl Waters is one of the outstanding stories of success in the Nestl portfolio. Between 993 and 2006 it grew from 5.8 billion liters to 2.7 billion liters sold, and the sales revenue increased from CHF 2.7 billion to CHF 9.6 billion. Sales per employee grew by nearly 50% from CHF 99,000 to CHF 30,000. It captured a global value market share of 9%, albeit at a below average EBITA margin of 8.7%. In line with Nestl's overall strategy as a Food, Nutrition, Health and Wellness company, Nestl Waters embarked on a strategy of aggressive expansion in what it sees as four categories: . 2. 3. 4. Water Water+ Nutrition Wellness Plain Flavored Functional Nutritional Still and Sparkling Indulgence, Pleasure and Healthy Alternative to Soft Drinks Health Benefits Mood, Traditional Medicine

With these categories Nestl Waters aims to expand beyond the traditional straight water business and establish itself as the worldwide leading non-carbonated soft drinks beverage company (Exhibit 8 forecasts the non-CSD beverage market).

Water in production: The Nestl Water Management Report Nestl has always prided itself for high environmental standards having installed water treatment facilities already as early as the 930s in its operations. In the Water Management Report of March 2007 the company lists its achievements in the usage of water between 2002 and 2006: 27% reduction in the liter volume of water used for producing  kg of product (from 9.4 to 6.85 liters) 37% reduction in the liter volume of wastewater generated to produce  kg of product (from 4.89 to 3.09 liters) 30% reduction in the amount of additional liters of water used to produce  liter of bottled water (from .22 to 0.86 liters). This amounted to a total of 90 billion liters of water conserved in the five year period. The report also points out the overall global withdrawal of freshwater in the amount of 4,250,000 billion liters per year. Distribution of usage is: 0% households, 20% industry, and 70% agriculture. Out of the 20% industrial use, Nestl accounted for 0.004% in all, of which Nestl Waters made up 0.0008%. The report goes on to talk about Managing water in operations, Managing water for the consumer, Managing water in agriculture and communities, and Future directions in water management. It highlights for instance that 90% of Nestl Waters volume is sold within the country of production. Professor Barry Popkin of the University of North Carolina in USA is

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Nestl Water Management Strategy A New Competitive Advantage

quoted saying that water reduces the energy density of the overall diet and essentially replaces excessive calories consumed from other beverages. It is reported further that Nestl Waters has responded with nearly 2 million liters of safe, fresh bottled water to those in direst need following such disasters as hurricane Katrina, the Indian Ocean tsunami disaster, and the Pakistan earthquake. Numerous local initiatives related to water management are supported by Nestl all around the world, two of which are quoted from the report here: Local Empowerment: In September 2006, the United Nations Development Program (UNDP) initiated a joint project with Nestl Pakistan and Engro Foods to empower 5,000 women in Pakistan's rural provinces with information on livestock development, plus training and financial credit. This complements on-going programs initiated by Nestl in rural communities in its milk districts to help establish tube wells and hand pumps which provide access to water. The new project includes a training curriculum for women that emphasizes improved water management practices on milk farms as well as issues related to water, health, and hygiene. Wastewater Treatment: The Nestl factory in Southeast Ghana is located in Tema, a city built in the 960s as a man-made harbor that has become Ghana's leading seaport and an industrial center. Nestl's factory there is part of an industrial zone with a wastewater treatment plant but on investigation they found that the local treatment plant was not sufficient in quality. So in October 2005 a monitoring program was installed, to calculate parameters for a custom-built wastewater treatment plant. Nestl engineers, who are now supporting the start-up of a recently built treatment plant at their site in Agbara, Nigeria, will be working on the Tema plant through 2007. This work in Nigeria has earned Nestl the Most Environmentally Proactive Industry Award from the local governor. The factory at El Jadida in Morocco is another example of Nestl leadership on wastewater treatment. The El Jadida factory is showcased by the local government as a leading example of wastewater treatment for other companies and operations.

Water in the supply chain: Another perspective on Nespresso Nespresso is another success story in the Nestl portfolio. This one started in 986 as a separate company, free of the traditional business procedures Nestl has developed. With Nespresso the target was to offer highest quality homemade espresso. The concept was to provide special espresso machines into which portioned plastic cups of coffee could be inserted, yielding a perfect cup of espresso coffee. The project got off to a slow start, plagued by manufacturing difficulties and various failed attempts to hit the market the right way. Ten years down the road, the company still had not even reached the CHF 00 million threshold. But corporate stamina ultimately prevailed. In 2006, Nespresso cleared the CHF  billion hurdle and set a goal to reach CHF 2 billion by 200. The completely self-contained subsidiary, with separate offices and manufacturing facilities, and its own financing and marketing approach, has finally come of its own.

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Nestl Water Management Strategy A New Competitive Advantage

Nespresso has become successfully established as a lifestyle brand, with positioning in the neighborhood of Apple, Mercedes, Yves Saint Laurent, or Nike. It describes itself this way: Nespresso is an experience a category of one exclusive about reputation about target about reference Nespresso is not just a very good coffee # in the category excluding about awareness about mass market just a preference

Nespresso is aspirational and has become iconic worldwide Nespresso is the "Ultimate Coffee Experience". This "Ultimate Coffee Experience" is created by detailed attention to every step in the value chain. It starts with a selection of only the very best quality of grand cru coffee beans, which means only 0% of commercial grades are taken into consideration, out of which again only 020% are selected to fit the Nespresso aroma profiles. The next step is unmatched expertise in roasting and grinding. The coffee is then packaged in capsules offering a great variety, convenience, and guaranteed freshness. The espresso is finally brewed in patent protected, state-of-the-art machines which combine advanced technology with unique and innovative design. The point of sale for machines and customer relations is set in exclusive boutiques in premier locations. Customers become members in the Nespresso Club, where they have access to high class magazines and internet communities as well as a courteous 24/7 call center service for ordering new supplies or addressing concerns. All this adds up to the perfectly reproducible, best quality espresso coffee in the cup. There has been favorable press coverage, and numerous case studies have been written about the Nespresso success usually from the vantage point of marketing and product innovation. For Hans Jhr, Nespresso tells another story as well. He sees it as the perfect example to show why it is so vital to create functioning symbiotic relationships with the agricultural production chain supplying raw materials and by extension, how to think about water. At the start of the whole Nespresso value chain is Nestl's formidable access to the best coffee beans in the world access to a community which Nestl has fostered and nurtured for decades. Hans Jhr draws a pyramid of features for a consumer goods product. At the bottom are access and affordability. Then come layers of safety, convenience, conscience, and finally function. These layers represent the tangible qualities of the product. In the past, consumer goods companies could claim a premium for their branded products by consistently offering superior performance in these tangible qualities (Exhibit 9 for the pyramid). But the days of securing premium price advantages for those qualities are gone. Nestl chooses to be a Food, Nutrition, Health and Wellness company because of its scientific prowess at 8 R&D centers, with 4,500 R&D staff, a manufacturing network consisting of

0

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48 factory sites with 36,000 FTE5, and a deep supply chain knowledge where hundreds of agronomists and veterinarians supported by more than 5,000 additional extension services workers reach about 500,000 farmers who produce Nestl's agricultural raw materials around the world. These competences and skills generate competitive advantages which go far beyond the tangible qualities of the foods. Nestl also serves emotional qualities with its products, qualities such as the values of fair trade practices, labor issues, rural life and politics, values concerning the environment, technologies, animal health and welfare, the values of family, and fashion all of which can be worth the premium prices to the consumer. Hans Jhr observes: "Most of these perceived, emotional qualities get produced in the supply chain before the materials ever reach our gates. The communication to the market and the correct positioning of the product in the market is an important task for branding but they cannot communicate something into the product that has not been created beforehand in the supply chain. I wish even more people here in our company would appreciate the significance of this fact."

Reaching Upstream into the Supply Chain Nestl's Milk Districts as the Basic Model
From its earliest beginnings as the Anglo-Swiss Milk Company, Nestl has operated a unique milk district model on all continents (Exhibit 10 lists Nestl milk districts) to secure a continuous supply of high quality milk from farmers to the factories. In the simplest terms, setting up a milk district6 involves: negotiating agreements with farmers for twice-daily collection of their milk installing chilling centers in the larger communes and collection points in the villages or adapting existing collection infrastructure arranging transportation from collection centers to the district factory and implementing a program to improve milk quality. Nestl's activities in a milk district generate considerable income both for the farmer and the community. But Jhr is quick to point out that Nestl's approach7 is at heart about sustainable practice: "Once you start to operate a milk processing factory in a region, farmers see this is not a development project like those that a government might finance, where you come in for one, two or three years and then leave when the project is over. If we set up a factory, we are there to stay for tens of years you have to justify the investments to your shareholders. It is a very strong message we send to the local communities, and it says that we are really going to buy local raw materials.

5 FTE = full-time equivalent, a unit of employee involvement 6, 7 Ray A. Goldberg and Kerry Herman (2005), Nestls Milk District Model: Economic Development for a Value-Added Food Chain and Improved Nutrition, Harvard Business School, Case N9-906-406

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Nestl Water Management Strategy A New Competitive Advantage

The most powerful tool we have to convince new farmers to improve their output, or give the dairy farm a real try, is building a factory. When they see the factory going up, they know this is for the long term, and they believe in us. In this way, sourcing locally creates ongoing cash flow to rural areas. Once we are installed, people see that Nestl pays on time one of our major strengths. We have the financial capacity and reliability to be on time and consistent with our payments. Then we have a clearly linked transparent pricing system which stimulates quality improvement and points to safety aspects on fresh milk intake. With these things in place, a lot of other things follow. With cash at the front end, you buy feed, pay for veterinary services. And then when you get cash on the back end, you provide the necessities for your family, your children education, television, a new roof, and products that you can afford now and couldn't before. In some districts, I have seen housing conditions improve tremendously over just ten years. Besides that, the discipline it takes to run a dairy farm successfully following a strict milking schedule day in and day out pervades the farming family's daily life, and then the community. Once you have to collect milk, you have to make sure the road system functions without disruption. And suddenly you begin to link rural areas to urban centers. And by that, you have encouraged other types of trade. Once you have the milk tanker going back and forth regularly, there will be a truck loaded with rice, vegetables, or fruit and traveling the same route. Utilities spread as well. Suddenly, because the cooling center needs electricity, there is enough demand that it can be supplied to the local villagers and they get electricity too. The same for communications. At our early collection centers in Brazil for example, the locals came every day to use the telephone it was the only one in the area." The company's tradition and know-how in managing milk districts has also been applied in other selected commodities such as coffee, cocoa, and several more. For instance, the longer discussion which Jhr wanted with the research director in Tours about cassava revolves around the question whether and how to provide genetically modified seeds to the farming communities producing this staple food in West Africa. The basic principle in this approach to supply chain management is always the same: make knowledge and technology resources available to the farming communities, so they can produce better qualities and quantities of the raw materials for Nestl factories to buy. This creates stable income flows to the farmer, which in turn allows farmers to solidify their businesses and make investments. That stability also improves the social fabric of family and community life, which in turn improves the business climate and ultimately returns to enhance the quality and stability of raw material supplies to Nestl. Working closely with farming communities creates win-win relationships for all parties, and this embodies Nestl's mission of shared and sustainable value creation. In the year 2000, Nestl aggregated this approach to managing supply chains for agricultural raw materials under what it called the Sustainable Agricultural Initiative Nestl (SAIN), in this way making it explicit and more tangible. Two years later the company could convince its major European competitors, Unilever and Danone, to become threepartite founders of the Sustainable Agriculture Initiative (SAI) platform, spreading this philosophy into an

2

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industry-wide approach. SAI has since grown to encompass most major food companies of the world, including The Coca-Cola Company, McDonald's, Tchibo, and others (Exhibit 13 shows the roster of members). The SAI platform has activity centers in cereals, coffee, dairy products, fruits and potatoes/vegetables.

Back to Water: Can Water be a Competitive Advantage?

The water management issue runs somewhat perpendicular to all the strategic initiatives which Nestl undertakes in its supply chain. The water management strategy does not (yet) take center stage in the Nestl concert of operations but to stay with the analogy, water is like the chairs on which the musicians sit when playing in concert. It is easily taken for granted and painfully missed if not available, as in the Australian drought. The current water management strategy is embedded in a number of the agricultural and operational sustainability programs which Nestl actively promotes, like SAI or the 4C initiative in coffee (Common Code for the Coffee Community), and various other water initiatives (Exhibit 11 for a project example in Cambodia). As such, water management is a tightly integrated element of Nestl's stance on corporate social responsibility (Exhibit 12 for their CSR policy). It is important enough to feature its own 40-page management report. In the report, and in other places, Nestl pledges: W A T E R Work for ever lower volumes of water per kilogram in food and beverage production Assure that our activities respect local water resources Take care that water discharged into the environment is clean Engage with agricultural suppliers to promote water conservation among farmers Reach out to others to collaborate on water conservation and access, with a particular focus on women and children.

For several decades protection of the water resource at Nestl was part of the "free froms" strategy. The implication is that water needs to be treated carefully to be "free from risks" that it can pose to the food which the consumer buys. That makes water management a defensive risk management strategy. But consumers do not pay premium prices anymore for the "free froms". Any kind of packaged food, also in developing countries, is expected to be risk free Nestl would not be able to claim superior value performance out of being "even more free of risk". Nor would Nestl be able to claim a leadership position in the industry on that basis. The strengthened emphasis on the water resource as embodied in the Water Management Report, the special mention by Peter Brabeck-Letmathe during the General Assembly, and the Water Commitment Pledge (above) indicate that for Nestl management, concern for the water resource has acquired a new dimension. The company searches for ways to turn water management into a critical success factor in the minds of employees, to generate genuine value for all the stakeholders and communities that Nestl interacts with.

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Nestl Water Management Strategy A New Competitive Advantage

In the context of being a Food, Nutrition, Health and Wellness company then, how could water management add more to the equation? Principally, it could do that in two ways: as a value driver of emotional qualities to the end consumer, and/or as a strategically available asset for the production chain. Would Jhr's trip to Australia give him the inspiration for value mechanisms with which to turn Nestl's water management strategy from a defensive risk approach towards an important competitive advantage of value creation? Would Nestl's historical roots protecting and nurturing agricultural producers, embodied for instance in its continued commitment to the unique milk district model show the company the approach for water? What would be the right metrics to measure success? What are the criteria by which to evaluate water initiatives? What tangible deliveries can a competitive advantage based on water be expected to provide to the company, especially when considering the complexity and size of Nestl's supply chain? Throughout its history, Nestl has succeeded in being a preferred partner to the agricultural community and its stakeholders. This ranges all the way from those 500,000 farmers to whom the company reaches out directly, and as far as the communities, governments and not-for-profit organizations that are concerned about sustainability in the usage of natural and human resources. It is after all the world's farmers who are custodians of the land and resources that are required in order to produce foods. Both the devotion of research and shared value creation models with these farmers in the past have provided Nestl the vantage point of a recognized leader in the global food industry, far beyond merely being a very large company. The task that faces Hans Jhr is to find how to maintain that leadership in an increasingly resource constrained world that must respond to society's health, nutritional, food safety and environmental needs. The water problem in Australia is likely to be just one of many such emergencies that he, Nestl, and the whole industry will have to face with increasing frequency.

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Exhibit 1

Drought in Australia

The big dry

The Economist, 26 April 2007 (abridged) THE mouth of the Murray-Darling river sets an idyllic scene. Anglers in wide-brimmed sunhats wade waist-deep into the azure water. Pleasure boats cruise languidly around the sandbanks that dot the narrow channel leading to the Southern Ocean. Pensioners stroll along the beach. But over the cries of the seagulls and the rush of the waves, there is another sound: the mechanical drone from a dredging vessel. It never stops and must run around the clock to prevent the river mouth from silting up. Although the Murray-Darling is Australias longest river system, draining a basin the size of France and Spain combined, it no longer carries enough water to carve its own path to the sea. After seven years of drought, and many more years of over-exploitation and pollution, the prime minister Mr Howard argues that the only hope of restoring the river to health lies in a complete overhaul of how it is managed. As the states weigh the merits of Mr Howards scheme, the river is degenerating further. Every month hydrologists announce that its flow has fallen to a new record low (see chart). In April Mr Howard warned that farmers would not be allowed to irrigate their crops at all next year without unexpectedly heavy rain in the next few months. A region that accounts for 40% of Australias agriculture, and 85% of its irrigation, is on the verge of ruin. The drought knocked one percentage point off Australias growth rate last year, by the governments reckoning. It is paying out A$2m ($.7m) a day in drought-relief to farmers. If mature vines and fruit trees die in the coming months through the lack of water, the economic fallout will be more serious and lasting. Most alarming of all, the Murray-Darlings troubles are likely to worsen. As Australias population continues to grow so does demand for water in the cities and for the crops that grow in the river basin. Meanwhile, global warming appears to be heating the basin up and drying it out. Although few scientists are confident that they can ascribe any individual event including todays droughtto global warming, most agree that droughts like the present one will become more common. Dry as a bone
River Murray, monthly inflows Gigalitres, 000 2.0
Long-term average 2006 2007

1.6 1.2 0.8 0.4 0

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Murray-Darling Basin Commission

Many of the worlds rivers, including the Colorado in America, Chinas Yellow river and the Tagus, which flows through Spain and Portugal, are suffering a similar plight. As the world warms up, hundreds of millions of people will face the same ecological crisis as the residents of the MurrayDarling basin. As water levels dwindle, rows about how supplies should be used are turning farmers against city-dwellers and pitching environmentalists against politicians. Australia has a strong economy, a well-funded bureaucracy and robust political institutions. If it is struggling to respond to this crisis, imagine how drought will tear apart other, less prepared parts of the world. Droughts have long plagued the Murray-Darling. The region is afflicted by a periodic weather pattern known as El Nio. At irregular intervals of two to seven years, the waters of the central Pacific warm up, heralding inclement weather throughout the southern hemisphere. Torrential rains flood the coast of Peru, while south-eastern Australia wilts in drought. The duration of these episodes is as unpredictable as their arrival. They can range

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Nestl Water Management Strategy A New Competitive Advantage

from a few months to several years. As a result, the flow of the Darling, the longest tributary of the Murray, varies wildly, from as little as 0.04% of the long-term average to as much as 9%. Although the most recent El Nio ended earlier this year, it has left the soils in the basin so dry and the groundwater so depleted that the Murray-Darlings flow continues to fall, despite normal levels of rainfall over the past few months. By the 990s the drawbacks were evident. For one thing, states were allowing irrigators to use too much water. By 994 human activity was consuming 77% of the rivers average annual flow, even though the actual flow falls far below the average in dry years. The mouth of the river was beginning to silt upa powerful symbol of over-exploitation. Thanks to a combination of reduced flow and increased run-off from saline soils churned up by agriculture, the water was becoming unhealthily salty, especially in its lower reaches. The tap water in Adelaide, which draws 40% of its municipal supplies from the river and up to 90% when other reserves dry up, was beginning to taste saline. The number of indigenous fish was falling, since the floods that induce them to spawn were becoming rarer. Toxic algae flourished in the warmer, more sluggish waters. In 99 a hideous bloom choked a ,000km (625 mile) stretch of the Darling. Such horrors stirred indignation among urban Australians. The bad publicity put tourists off river cruises, fishing trips and visits to the basins various lakes and wetlands. Many small businesses got hurt in the process. The citizens of Adelaide, which contains several marginal parliamentary seats, began to worry that the taps would run dry. Farmers were also starting to fear for the security and quality of their water supplies. So Australia embarked on a series of reforms that in many ways serve as a model for the management of big, heavily exploited rivers. New South Wales, Victoria and South Australia agreed to cap the amount of water they took from the river and to keep clear, public records of water-use rights. They also made plans to reduce salinity and increase environmental flows. The commonwealth agreed to encourage this by allocating buckets of cash to compliant states. All these initiatives were to be managed by a body, called the Murray-Darling Basin Commission, in which the commonwealth and the various riparian states, including

Queensland and the tiny Australian Capital Territory (ACT), had equal representation and where decisions were taken by consensus. Moreover, Australias politicians also agreed to a set of principles by which water should be managed throughout the country. There should be no more subsidies for irrigation. Farmers should pay for the maintenance of channels and dams. For each river and tributary, scientists would calculate the maximum sustainable allocations of water and states would make sure that extractions did not exceed that figure. To ensure that such a scarce resource was used as efficiently as possible, water should be tradable, both within and between states. And the minimum environmental flows necessary to keep the river in good health should be accorded just as high a status as water put to commercial uses. Guided by these principles, the states and the commonwealth have made much progress. By 999 the average salinity of the river in South Australia had fallen by over 20%. In the late 990s salinity levels were falling within the prescribed limit over 90% of the time, compared with roughly 60% in the 970s and 980s. The construction of fish ladders around dams and weirs, and the release of extra water into important breeding grounds, has spawned a recovery in native species. The commission is spending A$650m to boost environmental flows, mainly by stemming losses from irrigation, and hence leaving more water in the river. The trade in water has taken off. There are two basic sorts of transaction: sales of part of a farmers water allocation for the year or a permanent transfer. Temporary exchanges between farmers in the same state topped ,000 gigalitres (220 billion gallons) in 2003, or around a tenth of all water used for agriculture. That roughly matches the cumulative amount of water that has changed hands permanently within the same state. Meanwhile, the commission has codified rules for trading water between users in different states. The volumes are much smaller, but the system is working as economists had hoped. In general, water is flowing from regions with salty soil to more fertile ones; from farms that are profligate with water to ones that are more efficient; and from low-value crops to more profitable ones. In particular, struggling dairy and rice farmers in New

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South Wales and Victoria have sold water to the booming orchards and vineyards of South Australia. A government assessment of a pilot scheme for interstate trade determined that such shifts prompted A$767m of extra investment in irrigation and food-processing between 997 and 200. Another study found that water trading helped to reduce the damage wrought by droughts. But there are lots of problems. For one thing, the reforms concern only water that has already reached the river. Farmers in certain states can still drill wells to suck up groundwater, and tree plantations absorb a lot of rainwater that would otherwise find its way into the river. Little dams on farms, which block small streams or trap run-off from rain or flooding, are an even bigger worry. Little is known about how many there are or how fast their numbers are growing. In theory, most states are trying to regulate them, but the rules are full of loopholes and enforcement is difficult. Hydrologists fear that the severity of the drought has encouraged farmers to build more dams. Some states are keener on the reforms than others. In 995, when New South Wales, South Australia

and Victoria agreed to cap the amount of water they took from the river, Queensland refused to join them on the grounds that it uses only a tiny share of the basins water. The state government felt it had a right to promote irrigation along its stretch of the Darling to bring Queensland to the same level of agricultural development as the other states. It has since agreed to negotiate a cap. But earlier this year, despite the ongoing drought, it awarded new water-use rights to farmers on the Warrego, one of the tributaries of the Darling. New South Wales, meanwhile, frequently exceeds its cap. Its farmers plant mainly annual crops, such as rice and wheat, instead of perennials like fruit trees or grape vines. If there is not enough water to go round, its farmers may suffer for a season, but their earnings are not permanently diminished. So the state tends to be less cautious in its allocation of water than Victoria or South Australia. However, the commission has no power to ensure that states stick to their caps. It can only denounce offenders publicly, in the forlorn hope that the shame will induce them to behave better.

Exhibit 2

Global output for selected agricultural crops (compound annual growth rates 9802000)

% 3

-1

Cocoa

Sugarcane Soybeans

Corn

Rice kg/hectare

Coffee

Wheat

millions of hectares

Source: FAO data analyzed by Jason Clay, World Agriculture and the Environment, World Wildlife Fund, 2004

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Exhibit 3

Nestl shows organic growth at 5.8% (9972006)

Growth 15% FX 10% FX FX

10-year average

FX

2.5% Acquisitions 2.2% 3.6% OG 5.8%

5%

0% FX

FX FX FX FX FX

-1.4% Divestitures -1.5% Forex

-5%

OG: Organic Growth

-10%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Pricing & Other Acquisitions Divestitures Foreign Exchange (FX)

Real Internal Growth

Source: Nestl Investor Seminar, Vevey, 7-8 June 2007

Exhibit 4

Nestl consolidated financial figures (20042006)

in CHF millions Sales EBIT Group (a) as % of sales EBIT (Food and Beverages) (a) as % of sales Net profit (b) as % of sales as % of average equity attributable to shareholders of the parent Capital expenditure as % of sales Equity attributable to shareholders of the parent Market capitalization, end December Operating cash flow Free cash flow (c) Net debt Ratio of debt to equity (gearing) 2006 98,458 3,302 3.5 ,66 2.2 9,97 9.3 8.7 4,200 4.3 50,99 66,52 ,676 7,08 0,97 2.5% 2005 9,075 ,876 3.0 0,043 .0 8,08 8.9 8.6 3,375 3.7 47,498 52,576 0,205 6,557 9,600 20.5% 2004 84,690 0,760 2.7 6,62 7.8 7.4 3,260 3.8 39,236 5,237 0,42 6,640 0,200 40% to 27%*

(a) Earnings Before Interest, Taxes, Restructuring and Impairments (b) Profit for the period attributable to shareholders of the parent; net profit 2004 is not comparable to 2005 due to the treatment of goodwill as per  January 2005 (c) Operating cash flow less capital expenditure, disposal of tangible assets, purchase and disposal of intangible assets, movement with associates as well as minority interests * data 30 June 2004 to 30 June 2005

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Exhibit 4

Consolidated financial figures (20042006) - continued

Nestl share values

per share data (CHF) Total earning per share Underlying (a) Equity attributable to shareholders of the parent Dividend Stock exchange prices (high/low) 2006 23.90 24.2 32.5 0.40 448.30/355.00 2005 20.78 2.49 22.6 9.00 404.30/298.30 2004 6.97 8.82 0.0 8.00 346.00/276.00

(a) Profit for the period attributable to shareholders of the parent from continuing operations before impairments, restructuring costs, results on disposals and significant one-off items (also adjusted for tax impact from the adjusted items).

Analyses of Nestl sales and EBIT

in CHF millions 2006 By geographic area and management responsibility Zone Europe Zone Americas Zone Asia, Oceania and Africa Nestl Waters Nestl Nutrition Other Food & Beverages (a) Unallocated items (b) Total Food and Beverages Pharmaceutical products Other activities (c) Total Group By product group Beverages Milk products, Nutrition, Ice cream Prepared dishes and cooking aids Chocolate, confectionery and biscuits Pet care Pharmaceutical products Total segment Unallocated items (a) Total Sales 26,698 3,286 5,439 9,66 5,955 2,777 9,77 6,687 98,458 EBIT 3,0 4,946 2,583 834 ,005 362 (,674) ,66 2,36 3,302 Sales 27,620 30,757 5,704 8,787 82,868 8,207 9,075 2005 EBITA margins .8% 5.3% 6.7% 8.% 30.7% .6% 2.9% 2004 Sales EBITA margins 26,484 2.8% 27,776 4.9% 4,673 7.3% 8,039 8.3% 76,972 27.4% 7,78 2.6% 84,690 2.7%

25,882 25,435 7,635 ,399 ,420 6,687 98,458

4,475 3,003 2,323 ,309 ,730 2,36 4,976 (,674) 3,302

23,842 23,235 6,673 0,794 0,569 5,962 9,075

7.2% .2% 2.8% .3% 4.3% 30.7% 2.9%

2,793 2,503 5,878 0,258 9,934 5,324 84,690

7.7% 2.% 2.% .2% 4.5% 27.4% 2.7%

(a) Mainly Nespresso and Food & Beverages joint ventures managed on a worldwide basis (b) Mainly corporate expenses as well as research and development costs (c) Mainly pharmaceutical products, Nespresso and joint ventures managed on a worldwide basis and Eismann (until August 2004) Source: Company documents

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Exhibit 5

Global sales exposure by country for top four food companies (2003)
Danone 0.0 2.0 0.0 5.0 4.0 3.0 3.0 0.5 2.0 5.0 31.5 6.0 26.0 0.0 3.0 7.0 57.0 .0 Unilever .2 4.0 2.5 6.0 .0 .5 5.0 .0 6.5 3.0 34.0 8.0 5.2 2.5 7.5 3.6 40.0 26.0 Cadbury .0 2.0 0.0 6.0 4.0 .0 0.0 5.0 3.0 3.0 17.0 2.0 .0 3.0 .0 .0 44.0 39.0 Nestl .7 0.7 3.2 2.5 3. 0.5 3.2 0.3 3.0 3.0 30.0 5.0 9.7 3.0 9.5 5. 43.2 29.

(All in %) China India Japan Asia Mexico Argentina Brazil Latin America Africa / Middle East Central + Eastern Europe Total Emerging Markets United Kingdom + Eire France Spain Germany Italy Western Europe North America

Source: Citigroup Smith Barney Research (2005), Ackerman, Smith and Peterson, p. 02

Exhibit 6

Nestl brand names (2007)

Nestl is present in its different markets with the following main brands
Nescaf, Nespresso,Tasters Choice, Ricor, Ricoffy, Bonka, Zogas, Loumidis Poland Spring, Nestl Pure Life, Arrowhead, Vittel, Deer Park, Levissima, Perrier, S.Pellegrino, Ozarka, Contrex, Ice Mountain, Zephyrhills, Nestl Aquarel, Hpar, Acqua Panna Other beverages Nestea, Nesquik, Nescau, Milo, Carnation, Libbys, Caro, Nestomalt, Nestl Shelf stable foods Nestl, Nido, Nespray, Ninho, Carnation, Milkmaid, La Lechera, Moa, Klim, Gloria, Svelty, Molico, Nestl Omega Plus, Bear Brand, Coffee-Mate Chilled Nestl, Sveltesse, La Laitire, La Lechera, Ski, Yoco, Svelty, Molico, LC, Chiquitin Ice cream Nestl, Antica Gelateria del Corso, Dreyer's/Edy's, Drumstick/Extrme, Maxibon/ Tandem, Mega, Mvenpick, Sin Parar/Sem Parar/Non Stop, Delta Infant nutrition Nestl, Nan, Lactogen, Beba, Nestogen, Cerelac, Nestum, Neslac, Guigoz, Good Start Performance nutrition PowerBar, Pria, Musashi HealthCare nutrition Nutren, Clinutren, Peptamen, Modulen Bouillons, soups, seasonings, pasta, sauces Maggi, Buitoni, Thomy, Winiary,Torchin, Osem, Totole, Haoji Frozen foods (prepared dishes, pizzas, Stouffers, Lean Cuisine, Hot Pockets, Buitoni, Maggi, Wagner, La Cocinera small meals) Refrigerated products (cold meat products, Nestl, Buitoni, Herta, Toll House, Sabra dough, pasta, pizzas, sauces, snacks) Chocolate, confectionery and biscuits Nestl, Crunch, Cailler, Galak/Milkybar, Kit Kat, Smarties, Butterfinger, Aero, Polo FoodServices and professional products Chef, Davigel, Minors Petcare Purina, Friskies, Fancy Feast, Alpo, Gourmet, Mon Petit, Felix, Dog Chow, Cat Chow, Pro Plan, Purina ONE, Beneful, Tidy Cats Source: Company documents Coffee Water

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Exhibit 7

Coca-Cola's consideration of the value of water

Source: The Coca-Cola Company

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Exhibit 8

Nestl Waters sales volume and growth projection (20052009)

% 10

(billion liters) 60

9
50

8 7
37

8 7 6 5

40

6
30 23 20 12 10 6 8 2 0 Flavored water 3 Juice & Drinks Ready-todrink Tea 18 15 20

32

5
24

4 3 2 1 0

Neutraceuticals Sport & Energy drinks & Drinks

Fruit juices

Volume sales in 2005 Source: Company documents

Forecasted Volume Sales in 2009

CAGR 05-09

Exhibit 9

Nestl pyramid of consumer expectations and concerns

???

Social Responsibility & Personal Values

environment, technologies (GMOs), animal health & welfare...

Function Conscience Convenient Safety Access/Affordability

Source: Company documents, June 2004 tangible quality

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perceived quality

ethics, fair trade, labor issues, rural life, politics...

Nestl Water Management Strategy A New Competitive Advantage

Exhibit 10

Select chronology of Nestl milk districts

Location Switzerland: Cham, Vevey Switzerland: Fribourg, St. Gallen Chippenham, England Middletown, New York Dixon, Illinois Hamar, Norway Fulton, New York Hegge, Germany Staverton, United Kingdom Neuenegg, Switzerland La Penilla, Spain Queensland, Australia Dennington, Victoria, Australia Rotterdam, The Netherlands Ashbourne, United Kingdom Araras, Brazil Lisieux, France South Africa Boue, France Jamaica Date 930s 934 934 935 940-45 940-45 944 946 96 970 978 982 986 988 990 99 993 995 200 2004 Location Panama Graneros, Chile Magdalena, Argentina Octolan, Mexico Venezuela Cajamarca, Peru Columbia Bugalagrande, Columbia Moga, India Chiapas, Mexico Caqueta, Columbia Sri Lanka East Java, Indonesia Punjab, Pakistan Heilongjiang, China Thailand El Jadida, Morocco Quingdao, China Namangan, Uzbekistan Heilar, Inner Mongolia, China

Date 860 872 872 882 882 895 900 90 903-04 903-04 905 906 90 92 93 920 925 925-930 927 930s

Source: Company documents

Exhibit 11

Nestl donates Cambodian factory to Hagar International

Nestl's partnership with Hagar International began in 2006, when Nestl technical advisers started helping Hagar Soya improve its food manufacturing practices. Nestl's partnership with Hagar covers activities in Cambodia, but may expand as the foundation develops similar programmes in other countries. Hagar International was founded by Swiss national Pierre Tami in 994. Over 00,000 homeless, trafficked and abused women and children have since been helped by Hagar. Hagar International has developed a number of successful programmes and three separately run businesses (design, catering and soya milk manufacturing) aimed at generating sustainable employment for underprivileged women and affordable nutrition for the population at large. Since the inception of Hagar's water programme in 200, over 350,000 people have gained access to clean water in Cambodia. In addition to these social activities, Hagars businesses also serve about 00,000 customers on a commercial basis.

Phnom Penh, Cambodia, June , 2007 Nestl today hands over vacated factory buildings in Phnom Penh to Hagar International, a Swiss foundation helping destitute women and children in Cambodia. The facility will be used to expand production of enriched soya milk by Hagar Soya, a commercial venture owned by the foundation. The donation comes in the wake of an expanded partnership between Nestl and Hagar International announced last February to fight malnutrition and poverty in Cambodia. This covers cooperation with the Nestl Research Centre (NRC) near Lausanne and Nestl Product Technology Centres to help optimise the nutritional composition of existing and new food products for low-income people, including the fortification of soya milk and an oral rehydration solution against diarrhoea for young children. Nestl will also provide Hagar International with additional know-how on clean water supply, as well as further technical training for Hagar staff.

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Exhibit 12

Nestl's concept of Creating Shared Value as a CSR policy

Peter Brabeck-Letmathe, Chairman and CEO, Nestl:

"We have invested heavily to strengthen our supply chain, and found many ways to tie local needs and opportunities to our business objectives."
Mark Kramer, Center for Business and Government, John F. Kennedy School of Government at Harvard University and Managing Director of Foundation Strategy Group (FSG):

"Creating Shared Value is a very different approach to CSR, because it is not focused on meeting a set of standard external criteria, or on philanthropy. The idea of winners and losers doesn't fit this model of CSR."

A Framework for Creating Shared Value

Agriculture and sourcing Purchasing practices
Value chain impacts

Manufacturing and distribution Environmental, labor and safety practices Food safety through improved standards of operations Labor practices for mutual benefit Improved environmental standards Better food safety standards and workforce development Risk management for food safety Creation of employment opportunities in the community Premium food manufacturer

Products and consumers New/renovated products for nutrition, health and wellness Research for consumer benefit Consumer nutrition, health and wellness

Sourcing for quality and sustainability Research and development for better yields

Building a context for growth

Agricultural and supplier development Knowledge transfer and farm assistance Partnerships for sustainable agriculture

Increase knowledge and awareness for healthy nutrition and lifestyles Knowledge and education for healthy nutrition and lifestyles

Access to raw materials at specified quality and foreseeable price Higher food output using fewer resources

Value for Nestl

Profitable growth from superior product benefits

Source: The Nestl concept of corporate social responsibility as implemented in Latin America, Nestl S.A., 2006

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Value for society

Higher food production standards

Wider access to food, and improved nutrition and health

Nestl Water Management Strategy A New Competitive Advantage

Exhibit 13

Members of the Sustainable Agriculture Initiative platform (2007)

Founding members

Groupe Danone

Nestl

Unilever

Other members

Campina

Consorzio Interregionale Ortofrutticoli

The Coca-Cola Company

Danisco

Dole

Ecom

Efico

Elders

Fonterra

Friesland Foods

Kemin

Kraft

Lamb Weston / Meijer

McCain Europe

McDonald's

Neumann Kaffee Gruppe

Sara Lee

Tchibo

Volcafe

In cooperation with

Confederation of the Food and Drink Industries of the EU (CIAA)

Source: www.saiplatform.org

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Nestl Water Management Strategy A New Competitive Advantage

Exhibit 14

Nestl offers its experience to the broader water management debate

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