Nestle SA Chief Executive Peter Brabeck expects sales growth in China to rebound this year as new products and promotions win back customers following the company's withdrawal of two milk-powder products from Chinese grocery store shelves.

Switzerland-based Nestle recalled two Neslac products in June after authorities found they contained too much iodine. Customers in China, the company's second fastest growing major market, bought fewer Nestle products as a result. Nestle, which makes KitKat chocolate bars and bottles Perrier water, is spending more on marketing, and will introduce products such as herbal mineral water to tap local demand for food and drinks with added nutrients.

"All that I have heard and seen has made me quite confident that we should be able to have more fantastic growth than we've enjoyed over the last five years," Brabeck said in an interview in Beijing on August 31, after visits to supermarkets and meetings with government officials.

Sales growth on the Chinese mainland, Hong Kong and Taiwan slowed to 7.5 per cent in the first half from 13 per cent last year, held back by the withdrawal of Neslac. Brabeck is looking to the mainland, the world's fastest growing major economy, to stoke demand as European consumer spending stagnates.

The milk-powder cans now carry a sticker with a "Thumbs-up" logo to show it's produced in line with iodine standards. Nestle is giving out samples and stationing doctors in Beijing supermarket chains to answer customer concerns.

Shares of Nestle fell 4 Swiss francs, or 1.1 per cent, to 350 franc (US$267) in Zurich. The shares have gained 18 per cent this year, boosting Nestle's market share to 141 billion franc (US$109 billion). The Dutch shares of London and Rotterdam-based Unilever, the makers of Lipton tea and Magnum ice cream bars, have increased 14 per cent, while those of Paris-based rival Groupe Danone have climbed 29 per cent.

Nestle's sales in China grew 20 per cent on average, excluding currency and acquisition effects over the past five years, compared with food industry growth of 10 per cent, according to Brabeck.

China's gross domestic product (GDP) rose 9.5 per cent in the second quarter, faster than economists expected, the National Bureau of Statistics said in July, helped by a surge in exports and further investments in power plants and factories.

Sustainable growth

"Over the next three to five years, organic growth of 20 per cent is sustainable," says Edouard Dubuis, a fund manager at Zurich-based Clariden Bank, which manages US$31 billion including Nestle shares.

"The question mark is profitability and what happens with its pricing power. China is a huge market, but it's also a tricky one."

Nestle said on August 17 that net income in that period increased 32 per cent to 3.68 billion Swiss francs (US$2.97 billion), as it cut costs and sold more ice cream and Purina pet food in the United States and Latin America.

Nestle's China business has posted an operating profits since 1999. Sales throughout China, rose 13 per cent last year, excluding currency and acquisition effects, to 10.7 billion yuan (US$1.3 billion).

"It was perhaps exactly this market which provoked my first thoughts about transforming us from a food company into a nutrition company, because food in China has always had a functional role to play," Brabeck says.

Nestle operates a research centre in Shanghai where it is developing new products, such as flavoured waters made with chrysanthemum and hawthorn, based on traditional Chinese infusions.

Nestle's origins date back to 1867, when pharmacist Henri Nestle developed a formula for babies who were unable to breastfeed, according to Hoover's Inc. Its roots in China date from 1878, when Nestle first began selling Eagle milk products there. After withdrawing from China in 1949, Nestle returned in 1979 and now employs about 12,000 staff at 21 factories.

The recall of Neslac, ordered by the Beijing Administration of Industry and Commerce, came after Nestle had to pull another brand, Neslac Gold 3, after authorities found levels of iodine that exceeded Chinese standards. Too little or too much iodine can lead to health problems, including goiter, a swelling of the neck due to an enlarged thyroid gland.

Nestle, known in China as Que Chao, or "the Bird's Nest company" because of its logo of a mother bird feeding two chicks, says half of its revenues in the country comes from infant formula and other nutritional products. The rest is from Nescafe instant coffee, cold beverages, ice cream, KitKat bars and other wafer confectioneries, and Maggi soups and sauces.

Brabeck says China might end up ranking as one of Nestle's top five or 10 markets by sales. It's now 13th.

French competition

Brabeck says Nestle must overhaul its product range in France, the company's second biggest market, to adjust to discount retailers. Hard discount chains such as Aldi Group and Lidl have made progressed well there, he says.

Sales in France fell 0.2 per cent in the first half, while those in Germany, its third biggest market, gained 0.7 per cent.

Nestle has already begun producing specially adapted 2-litre bottles of water for sale exclusively in Lidl stores, which has helped make it one of Nestle's top 10 customers worldwide, Brabeck says.

In Germany, there are signs of "a light at the end of the tunnel," Brabeck says, referring to what he called a "willingness to invest again" in Europe's largest economy.

"I am confident the time of negative growth is over."

Bloomberg News

(China Daily 10/17/2005 page6)