In Good Company with Nicolai Tangen - Mark Schneider CEO of Nestlé

Episode Date: October 19, 2022

In this episode, Nicolai Tangen talks to Mark Schneider CEO of Nestlé, the world's largest food & beverage company. They talk about the biggest food trends in coffee and pet food, how they are working on ESG issues in their supply chain and Mark even share what he eats.They also discussed leadership, recruitment, phycological safety and much more!The production team on this episode were PLAN-B’s Martin Oftedal and Olav Haraldsen Roen. Background research were done by Sigurd Brekke with additional input from our portfolio manager Yvonne Silden Langlo.The conversation was recorded 26th September.Links:Watch the episode on YouTube: Norges Bank Investment Management - YouTubeWant to learn more about the fund? The fund | Norges Bank Investment Management (nbim.no)Follow Nicolai Tangen on LinkedIn: Nicolai Tangen | LinkedInFollow NBIM on LinkedIn: Norges Bank Investment Management: Administrator for bedriftsside | LinkedInFollow NBIM on Instagram: Explore Norges Bank Investment Management on Instagram Hosted on Acast. See acast.com/privacy for more information.

Hi everyone, and welcome to our podcast, In Good Company. I'm Nikolaj Tangen, the CEO of the Norwegian Sovan Wealth Fund. In this podcast, I talk to interesting leaders of some of the largest companies we are invested in so that you can learn what we own and meet these impressive leaders. Today, I'm speaking to Mark Schneider, CEO of the world's largest food company, Nestle. They sell 1 billion products every day. They have 300,000 employees, operate in 190 countries, and own more than 2,000 brands. We own 2.5% of the company, translating into 90 billion kroner or 10 billion US dollars.

This was a really fascinating conversation, so stay tuned. Well, I'm here today with Mark Schneider. What an honor, Mark. You are the CEO of the world's largest food company. Thanks for having me. Looking forward to the conversation. Now, you guys sell 1 billion products a day. You have 2,000 brands and control a lot of different markets.

So my first question is, what do you actually eat? I consider myself a flexitarian, and that means I don't really believe in a whole lot of restrictions. But over the years, I noticed that I have dialed down meat consumption quite a bit. In fact, at home, I rarely cook meat at all because when you travel, there's so many occasions when you get served meat. I also believe in a large intake of fruit and vegetables. Usually, I try to shoot for 10 to 15 a day. And I'm a strong believer in vegetable juicing. So that's how I start the morning on a self-made vegetable juice.

And those are my secrets. What is your favorite brand of the ones you produce? My favorite brand among the Nestle brands, very clearly Nespresso. I think it's an amazing system that combines superb quality with super convenience

in preparing the coffee. Yeah, I know I'm drinking one of your coffees now. What would you say are the main trends now in food consumption worldwide? I think overall one of your coffees now. What would you say are the main trends now in food consumption worldwide? I think overall, you see that with Dr. Google being so accessible to everyone, people's knowledge about nutrition is really on the rise. I'm from a generation where even at school, you didn't learn much about it.

And so I'm pretty much a self-taught person when it comes to nutrition. I think these days, the schooling in this is so much better. And then people, for whatever question that may have, they can turn to Google anytime and find out the answer. As a result of that, awareness about the right intake of all sorts of macro and micronutrients, maintaining optimal weight, and also about the environmental consequences of what you eat is so much higher than before. And we as producers have to live up to that when it comes to transparency and good labeling and full information of what's in there. Seems to be a trend away from some of the global brands to more local brands.

How is that impacting you? I don't think there is a trend from global to local per se. There's a rising local awareness, but a global brand can serve that too by actually picking up some of the local attributes. So let me give you a good example. One of our core global brands is Nescafe. Nescafe has a strong iconic standing in Mexico and stands essentially for soluble coffee as it stands for that product around the world. When you pick up a jar in Mexico, it looks different from what it would like in Europe. It points out the fact that many of the coffee varieties are from Mexico locally.

It features some of the farmers that we purchase from. And also it has a roast profile that actually appeals very much to the Mexican consumer. So in a sense, you localize a global brand. There's still the trust in the global brand and all it has to offer, but, you localize a global brand. There's still the trust in the global brand and all it has to offer, but then you localize it. And so you're right, local awareness is on the rise, but that does not automatically mean that local brands are the winners. And where are you in terms of plant-based food? I read about your vegan bacon and cheeseburger,

for instance. Is it any good? I think it is absolutely fantastic and i think it has to because i mean that segment when you mimic um your real life animal proteins um we call it the no compromise segment so this is not about vegans or vegetarians that want a plant-based diet they want people you know this is for people who want to actually swap every once in a while the original meat product against the plant-based product. And they don't want to make concessions when it comes to the taste. And so initially, we came in from behind. There were two American pioneers beyond

Meat Impossible Foods that were spearheading this space. We started to get seriously into this from 2018. And I think by now we have a very good lineup, not only hamburger patties and some of the toppings, but also plant-based chicken alternatives. We have seafood, we have pork. So eventually what we want to do is cover the whole spectrum of animal proteins and give consumers a choice. Very good. We talked a bit about coffee. I mean, you are kind of the king of coffee. Coffee is certainly one of our signature categories and one where I think some of the major innovations in coffee were really coming from Nestle.

So I mentioned soluble coffee, which was invented in the 1920s and 30s. Then this whole notion of capsule coffee, so portioned coffee, really dates back to the 1980s and 1990s, and Nespresso was the pioneer. These days, we have Nespresso and we have Nescafe Dolce Gusto. And obviously, you know, that was the starting shot to a whole lot of copycat products that also tried to offer up portioned or capsule coffee. So two major innovations in coffee really go back to Nestle and we're leading both of those spaces. Do you think you can make it even more premium

or have we reached the level there? I think in coffee, we're in the middle of what I would call a 30, 40-year premiumization drive across the globe. And a good example is in the United States, where I know in the 70s, people used to crack all sorts of jokes about the poor quality of coffee. Then Starbucks came along and then people really were willing to spend a whole lot more for the daily cup of coffee. And hand in hand with that, the quality has gone up. We see this around the world in every market.

It may play out around different brands and different varieties. But overall, the willingness to spend a bit more for this daily indulgence and then have a superb product and also one that is made sustainably, all of that's going up. From our research, there is no end in sight. There may be sort of a momentary kind of plateauing or slowdown in case we do enter a recession, but usually, you know, after that, it picks right up. And so coffee is one of those areas where you have endless permutations and varieties in how it can be served up. And there's lots of subsegments, and that avoids some of the head-to-head competition. And so from a pricing and premiumization perspective,

it's a wonderful space to be in. Who at Nestle came up with the idea of the capsules so that was an internal development and was it like one person who did it because if it was i hope they got a pay increase so um there was an internal um project initially who came up with the idea but then look this was a significant team effort over a period of 10 years because initially when you're trying to handle 19 bars of pressure to make that espresso clearly those machines were leaking left and right and they wouldn't have you know the stability that's needed for the consumer product that you push out there by the millions and then by about the late 90s you know we had ironed out all the quirks and

by that time you know it was really set for prime time. And then for the last 25 years, I think, we've been scaling this up. So it did take a lot of time. So there was one original inventor, but then there was a lot of teamwork to make that happen. You're also very big in pet food, and I guess pet owners are a bit crazy, no? Look, I'm a pet owner myself. I have two dogs and love them and so i would describe myself as a dog person but are there any limits to what people can spend on their pets

i think that the key growth drivers are seeing no limits there are two key to keep growth drivers one is in emerging markets as incomes rise rather than feeding their pet with household waste, basically people switch to dedicated pet food, which saves them time, is more hygienic, and is also better for the pet. And then in fully developed markets, you see, just like in coffee, this continued premiumization trend. And here again, just like in coffee, there seems to be no limit to it. in coffee, there seems to be no limit to it. From a health perspective, when it comes to giving the pet all the necessary nutrients, and also when it comes to freshness of the food, I think there's lots of things that can be done to premiumize over time. And we're riding that wave and leading it. And it's a terribly attractive segment to be in.

And it's a terribly attractive segment to be in. Moving on to ESG, since you are in so many different food chains and supply chains, you obviously touch a lot of different issues worldwide. Perhaps we can kick off with coffee and the issues around deforestation and child labor and so on. And how do you work with this yeah so look we're committed of course to progress in both of these areas and to us it's not so much something that we look at by category only i think overall clearly child labor has no space in our supply chain and deforestation is an area that we believe is going to be key to protecting the climate. So early on, we made very strong commitments. In 2010, we had a goal that on the major commodities, we wanted to be out of any deforestation in our supply chain by 2020. We missed narrowly, we were in the high 90%. and we're now finishing the job within the next year or two.

Hand in hand with that, we committed to full transparency. So every year we were studiously reporting on how our progress in this area went. And that to me is key on these ambitious goals. It's one thing to have a commitment for five or ten years out. Unless you report year after year, and increasingly unless you have some third-party verification of what you're reporting, the credibility is not there. And if companies don't even report, then of course, as a consumer, you have good reason to assume the worst. And so it's important here that transparency and commitments go hand in hand. And how do you work with water management? As an investor, we have an expectation document on water management. And of course, not only because you have the Perrier brand,

but you're also one of the biggest users of water. How do you work with this? So clearly, water next to climate protection and plastic waste is one of our major ESG commitment areas. And you hit the two on the head. So one is in bottled water, you know, wherever we operate a source, we need to do this respectfully

in light of the local water tables. And we need to be good stewards of that local catchment area. Clearly, there's a balance here. You know, there's water coming in as a result of precipitation, for example. And then you have to be very thoughtful about how much water in a given period of time you can take out so that the local water balance, water table gets maintained.

And then you're right. We operate close to 400 food factories around the world. And most of these food factories need water as an input. Some of them operate in areas that have water scarcity. And here again, you need to kind of balance your water intake with the needs of the communities and the population around these plants. And you need to be sure that you're respectful. And I think this is an early on commitment we've had. We've also constantly put research into making the factories lower usage when it comes to water.

In fact, about a decade ago, we were the first one that started to operate a zero water nutrition factory. Initially, as you can imagine, when you innovate something like this, it's a project that has a lot of spend with little return. with little return, but the learnings from that were significant in the sense that for the next factory and the factory after, you have huge returns in the sense that you lower the input of water for the same output. If you're wondering how can a product like this be made without using any water, well, we're using the water that comes from the milk and we separate it early on and then we recycle that water time and time again. And this is how you get to zero water use in that product line. And the last topic I wanted to touch on within the ESG space is childhood obesity. We know that there are millions of children below the age of five, where this is becoming a real problem, and mainly because of too high calorie intake,

sugar, sodium, and so on. And so how do you work with this important topic? So this is also an area that we're very committed to and two major angles of attack. One is what you referenced, and that is consistently working, getting sodium and sugar out of the products and improving the nutritional profile. So that's work that's ongoing. And we've been at it for more than 15, 20 years already. You can only do this step-by-step because the science is only progressing at a certain rate. And then also people's palate is not something that moves in step functions. So if you took out everything at once, people would simply avoid your product and switch to something else so what you have to do is step by step take it out and keep the taste profile as close as possible to what it was before so that that's one avenue and then the other one is education and offering as much as possible

information these days on pack but also through digital means so that people make the right choices changing tech you've been very active on buying and selling companies since you took over. So how do you decide what to buy and what to sell? Well, let me say, yes, you're right. We did ramp up the amount of dealmaking, but I'll be the first one to say that when you're running a multinational company, you can't trade your way to riches. Okay, so buying and selling is part of a strategy arsenal, but it shouldn't be the only

one. On the contrary, by the way, you know, if you only pursue internal organic growth, that's not the right answer either. Because to me, it's the mix that makes things interesting, which allows you to scale up interesting area faster and to trade out of areas that over time offer diminished expectations only in a quicker way. And so to me, it has to be supporting the strategy. You have to decide first where you want to be, where you want to increase your presence over time. And then from there, work backwards and see then, okay, how do I get there by internal means? And if not, what do I buy in order to scale that up? So take our Starbucks deal in 2018. I think that was one of the deals that got a bit more attention.

It was very clear that we had a stronghold in soluble coffee and in portioned coffee, as I mentioned earlier. We were not particularly strong with a global premium brand that is based on roasting ground coffee. And Starbucks stands for that and has, of course, a tremendous global brand appeal. And so here was an opportunity to team up with them. Obviously, they continue to run the coffee shop business. We then took over the retail side of the business and um with that uh you know create a brand that has strong global appeal and covers the road roasting ground and whole bean area as well um one of the big things we're seeing now is food inflation and in the first half you increased your prices by six and a half percent and in some

regions even close to ten percent so how do you see this going forward? It's becoming a bit of a problem here now. Well, let's just step back 18 months and look at how the year 2021 and 2022 unfolded. No one would have expected at the beginning of 2021 that there's such a sudden and strong onset of inflation. that there's such a sudden and strong onset of inflation. And lots of people got surprised by it, including the people that we all pay to watch and prevent inflation, and that is the central bankers around the world. So looking back at the beginning of 21, first it was container shipping.

Think about the Suez Canal. Think about after a year of COVID, all the containers ending up in the wrong places. Container shipping for us, given how bulky and heavy some of our commodities are, is actually a major cost component. And things started to inflate here several fold. Clearly, that had some initial impact. Then energy went up. Then some initial commodities went up. Some of that simply due to poor luck. I mean, think about the Brazilian lost coffee harvest last year. And not surprisingly, with so much inflation coming from energy and commodities and transportation, at some point, starting from the second half of last year, it jumped into the labor market, first in the US and now pretty much globally. And now what you have is inflationary

pressures that really come from all corners. And now what you have is inflationary pressures that really come from all corners, and something where a company like us simply cannot walk away and compensate. To give you a sense, our gross margin, which I think is the best way to judge, you know, how you're impacted by inflation, shrank by about 3% over the last 18 months. So gross margin is the difference between your selling price and what it costs to make the product. The cost of goods sold, right. So 3% over nearly 90 billion Swiss francs of business, that's 2.7 billion of money that we have to make up.

And by the way, when sometimes people point their finger at the food companies, that shows you we're the victims of inflation. We're not the cause of inflation here. We're impacted by it. Through a lot of internal means, we were able to prevent the slide in our operating margin to the same extent. So our operating margin in that same time frame shrank by about half a percentage point. So the rest is internal efficiencies that we were seeking to basically make up for that tremendous decline in gross margin that we've seen.

Do you think that we've seen the peak in inflation? I don't think we've seen the peak in inflation because it's simply that the nature of inflation is shifting. As I mentioned, now it's more in labor cost demands. People see that there's less in their wallets and now they roll this forward in wage and salary expectations. And then also for whatever has happened on the commodity energy front, there is a full year effect that extends into 2023. So notice over the summer, when a few commodities eased a little bit, people asked us immediately, are you now able to lower prices? But we're not commodity traders we're people that have long positions we have hedging in place and we first of all still have

to cope with the full year effect of what went up pretty much in a straight line for 18 months and so looking at that it doesn't bode well for the rest of this year and next year we're trying to be as responsible as we can in our pricing. Responsible pricing is one of the mantras we believe in. When you talk about responsible pricing, what does that mean exactly? Well, think about emerging markets in particular and think about some of the products

where you have to watch affordability. This is an area where we clearly try to be more reluctant when it comes to pricing. We're not always able to avoid it, but especially in emerging markets, for quite a few products, you have so-called magic price points, and that is upper limits that are very much determined by the cash earnings of a person, for example, working in the field in that area.

And so those we observe, and we're really trying to keep products within reach. There's no point in offering the perfect product if it can't be afforded by people. On the contrary, where we do make it up somewhat is on the super premium side of things. As you know, in premium, there's the well-known Veblen effect. You're Norwegian and Torsten Veblen, I think,

is one of your rockstar economists. And it is true that in premium and super premium areas, sometimes raising the price can even increase the attractiveness of a product. And hence, there's much less sensitivity here to price increases. But if I put on my socialist hat, do you think you got the balance between your profit and the affordability in poorer countries, right? I think you're seeing from our operating margin that we are sharing.

And as you saw from the gross margin, in fact, you know, we are giving up a lot. I think we have a responsibility to keep our company vibrant. No one is served if we weaken the company so much that there is not enough left over to pay for innovation, to pay for some of the sustainability drives that we discussed earlier. So, you know, we have a responsibility not only to our shareholders, but also to the business and its long-term prospects that it can stay relevant not only for this year, but also for the next five to 10 years. And that takes effort. That takes oxygen. As you see, the biggest part of the cushioning here

came from our own internal savings, but some price increases were unavoidable. I've heard you say that your favorite thing to do is to spend time in the R&D department to look at new products and innovation. So you have 4,000 people working here in a lot of different locations so what do they do do you just sit there and eat different stuff and kind of come up with new kind of funky

tastes so so look i mean obviously there's lots of different facets to it but uh one of the real cool setups here uh is just upstairs from where i'm sitting now uh there is a test kitchen and so once or twice a month um i sit there with our head of R&D and some of the experimental cooks we have. And we've been trying new products. So this is primarily in the food space. But I also have my own deals here with the category leaders for confectionery and coffee. And every time they come up with something exciting, you know, someone knocks at the door and basically brings a sample and we'll just have a good time testing those so to me look at the end of the day if you don't love food and beverage if you're not a foodie this is not your place okay

and if you were a car company everyone would understand that there is steering wheels everywhere and you know cars that you test if you're a company, you have to be willing to sink your teeth into products and then come up with an opinion. What I tell people is, look, you can't eat PowerPoint slides, but you can eat our products. You can eat our products. And hence, this is what you have to focus on. How do you create a creative environment? I think you need to foster creativity two ways. One is that fascination with wacky

ideas and the sense of humor that it sometimes takes around that. And the other one is to also make it safe to have an idea that fails because you will never get creativity in a setting where people are afraid to come up with the wrong answer or the wrong proposal. And so you need to foster, you know, that freewheeling attitude. Also be very open about things that don't work out right. And even things that I do all day long, you know, I don't get it right every day. And so speaking openly about that setting example that it is not about each individual idea that may be right or wrong, but rather your batting average over time. I think that's the key part.

And how important is the psychological safety? I mean, this is an expression kind of invented in a way by your personal friend, I believe, Amy Edmondson. I think you sat next to each other at the Harvard Business School. Yeah, so Harvard Business School in its first year has a fixed seating chart. And so I spent the first year sitting next to her and she's still a good friend. And obviously, I deeply, deeply admire the research that she's done. And that area of psychological safety is exactly what I was pointing to. If you want to have learning, if you want to have creativity, you need to create an environment where people feel safe to speak out about things that went wrong, even terribly wrong, and where people feel safe to come up with ideas that may be from left field and unusual.

And that's something that I think leadership needs to support and foster. too much downside in having unwanted ideas or coming up with errors that may have happened then clearly people clam up and but then you know they sweep things under the carpet and you don't have an improvement and you don't have the creativity you want yeah we recently recorded a an episode with her really really fascinating when you look at people what are the personal qualities that you admire generally well one of the one you just touched upon and that's creativity i think the ability to link a set of facts in new varieties and ways um i think that is key um i think then there's lots of basics uh like you know being able to trust someone uh you know that people always speak the truth. And then also just very simple things as

being on time and being just a reliable team player. And, you know, in a large company like this, it's never about just one person, it's about a team that drives something forward. And if the team senses that for one specific person, it's all about you, it's not about, you know, the team outcome, then clearly, that's not helpful. So team spirit and living team spirit is important. Management, that's one of my favorite definitions. Management is working with and through other people. And so people skills and just feeling good in your skin around other people and working with them collectively, that to me is key. And specifically, how do you do it? I mean, you run a company with 300,000 people, right?

It's like a big, big town. How do you communicate with the organization? Well, I think you have to communicate at different levels here. You need to spend with your direct reports and colleagues a lot of time one on one and need to be convincing and comfortable in a one-on-one setting. But then I think in the day and age of digital, you also have to master all the digital tools that allow you in real time to connect to a large number of people. So without significant use of internal social media and email, you don't have the speed, you don't have the reach to actually

get the organization going in the same direction. You can't just do it, you know, level by level, word of mouth. You need to have your internal megaphone, if you will, to get the message across. So when it comes to communication in a large firm, internal communication, to me, it's three levels. One is one-on-one. The next one is small to mid-sized groups in person. And the third one is this digital, internal, company-wide communication. You have to be devoted to all three and you have

to be good at all three if you want to meet people's hearts and minds. You came from Fresenius, which is a really fine German healthcare company, into a food company. Do you think you could manage anything? No, I think there's obviously limits and there is also very, very steep learning curves involved when it comes to tackling a new situation. So I approached the Nestle opportunity with a lot of humility. And so I approached the Nestle opportunity with a lot of humility. And there was some overlap in the sense that both Fresenius and Nestle were engaged in what's called medical nutrition. And as it happened, you know, I was a lifelong foodie and someone that over the years in health care had started to take a deep interest in nutrition as probably the single biggest driver of good health going forward. So what I described to you earlier, my vegetable juicing habit

and the strong personal interest in nutrition, that's something that predates my time here with Nestle. And so that's why I was so fascinated with this opportunity. But could I manage anything? No. And so even for this area that had such a deep interest to me, it was a huge learning experience to switch company and switch industry. And at the time when I started this in 2016, I also deliberately laid down anything else I was doing at the time. So I gave up a board position and a few not-for-profit engagements to solely focus on this and this alone.

What do you read? At the moment, I'm reading about um the importance of sleep uh so a book called why we sleep that came out a few years ago and to me when it comes to health it's about the trinity of nutrition exercise and sleep have you got any bad habits um well when it comes to sleep, I think jet lag is my middle name. And so like all cloak-trolling executives, I think this is something that you preciously have to watch because if you don't watch it, then time zones or the world around you will simply bite into the sleep budget and you pay the price over time. Now, we have a lot of young people and young professionals listening to this podcast. What is your advice to young people?

Key advice is carefully listen into yourself. Like, what is it that you want to do? And don't be guided about what, you know, people around you or the public things is a desirable career. It has to be a good fit with you and who you are and what you want. And I noticed in particular with large public companies that there seems to be this automatic motivation with business students

that they wanted to end up in these positions. But these days, you know, as a business student in particular, there's so many ways to do something similar in a different setting. So you can be a startup entrepreneur.

You can be, you know, a key player in a mid setting. So you can be a startup entrepreneur, you can be a key player in a mid-sized family company, you can be a fantastic business scholar. So I mean, let's go back to Amy Edmondson and that year in business school. So she had a wonderful career in academia and that is equally important and her insights are equally important than maybe making it to the head of a large public company. And so there's lots of different ways and carefully understanding who you are and leading your own life and not living up to someone else's expectations, to me is key. Mark, it's been a real pleasure to have you on here. Amazing company and a very impressive CEO.

So thank you so much. Thanks a lot. Thanks for having me. Enjoy the conversation. Thank you.