Knowledge Based Capital Innovation Sweet-spot in a Company Stefan Dobrev OECD 13 th February 2012
Food & Beverage Sales (Billions of USD) Globally, Nestlé is the world s largest food company The USD > 10bn Food & Beverage Companies in 2011 CHF 83.6 billion in sales in 2011 328,000 employees 461 factories 10,000 brands 1 billion Nestlé products sold every day 13th February 2013 1
Locally, we are facing intense competition Highest Nestlé Market Shares 2012 (% of Packaged Food Retail Value) Brazil Market Shares (% of Packaged Food Retail Value) Nestlé SA Brf Brasil Foods SA 13.6 11.7 11.6 10.8 10.6 10.6 9.1 8.4 7.4 7.4 7.6 7.8 8.0 8.4 8.8 9.1 4.9 5.0 5.0 4.8 0.0 0.1 Source: Euromonitor 13th February 2013 2 2007 2008 2009 2010 2011 2012
In key markets, we are competing against strong local players Market Leader 2nd 3rd 4th 5th 10th 12th 51st Malaysia abcdef Lam Soon Philippines abcdef San Miguel Brazil abcdef Brf Brasil Chile abcdef Fonterra Germany abcdef Unilever Indonesia Australia Nigeria India Poland Egypt Indofood Kirin Friesland Gujarat Co-op Unilever Savola Saudi Arabia Almarai Russia PepsiCo Mexico Grupo Bimbo Source: Euromonitor abcd ef abcd ef abcd ef abcd ef abcd ef abcd ef abcd ef abcd ef abcd ef
Competitor Knowledge is a key competitive advantage of a large global company Competitor Competitor 13th February 2013 4 Competitor
Nestlé can deploy knowledge across growing billionaire brands Size 13th February 2013 5
Expertise Cross-category technologies enable us to leverage our scope Businesses Food Safety Packaging Texture Taste Drying Systems Data 13th February 2013 6
Index, Nestlé = 100 Economies of scope drive efficiency in our R&D organisation 160 Nestlé R&D Efficiency Advantage vs. Competitors (R&D Intensity Adjusted For Product Mix) 140 120 100 80 60 40 100 117 126 142 146 20 0 13th February 2013 Nestlé Competitor 1 Competitor 2 Competitor 3 Competitor 4 7
Scale makes it worthwhile to own the innovation value chain In-house Fundamental Research Product & Technology Development Dedicated Engineering & Deployment Nestlé Research Centre Nestlé Institute of Health Science Clinical Development Unit 13th February 2013 31 Product Technology Centres and R&D Centres 8 Product Technology Centres and Application Groups to support 460 factories
Most of Nestlé s value is in knowledge based capital Nestlé Implicit Capital Composition (CHFbn, FY2011) 186 186 Market Value 171 Other Knowledge Based Capital 127 Maggi Nestle Pure Life Debt 14 Selected Brands* 35 Tangible Fixed 24 KitKat Purina Nescafé Nestlé Enterprise Value 13th February 2013 9 Assets *Source: BrandFinance
We go to great lengths to protect it Patent Co-operation Treaty Applications 2012 Nestlé Patents New Total 450 30,000 400 350 24,000 25,000 300 295 20,000 269 224 186 179 170 250 200 16,000 15,000 150 132 10,000 100 5,000 50 Source: WIPO 0 2006 2012 0 13th February 2013 10
Knowledge based capital is costly Nestlé Knowledge Based Investment as Percent of Sales (2011) 22% Marketing + R&D 6% CapEx 13th February 2013 11 R&D Spend as % GDP/Gross Margin Israel Finland Sweden Nestlé* Japan Korea, Rep. Switzerland Denmark United States Germany Austria Singapore Iceland OECD members Australia World France Belgium European Union Canada United Kingdom Netherlands Norway China Ireland Italy Brazil Russian Federation South Africa Turkey Poland 3.7 3.7 3.6 3.4 3.4 3.0 2.9 2.8 2.7 2.7 2.7 2.6 2.4 2.3 2.1 2.1 2.0 1.9 1.8 1.8 1.8 1.6 1.5 1.5 1.2 1.1 1.0 0.9 0.7 0.6 4.7 Source: UNESCO, except Nestlé data *Percent of Gross Margin
Knowledge investment is risky - only half of our developments make it to market 120% 100% Cumulative Survival Rate of R&D Projects All Projects & Years Started in 2011 Improvement Pilot 80% 60% 40% 20% 0% Start Go to Concept Go to Development Go to Industrialization Go to Launch Go to Post Launch 13th February 2013 12
Not everything gets patented 600 Nestlé Recorded Ideas And Patents Ideas Patents 500 400 300 200 100 0 2009 2010 2011 2012 13th February 2013 13
What happens to the rest? Knowledge Block Product/ Process Knowledge Block Product/Process Technical Assistance Knowledge Block Product/Process Knowledge Block Technical Assistance Knowledge Block Flow of Knowledge 13th February 2013 14
Impact Factor Nestlé scientists publish over 200 scientific articles every year 35 30 Impact Factor of Nestlé Scientific Articles (2012) 2012 Total: 240 Peer reviewed articles 25 20 15 10 5 0 Peer Reviewed Articles 13th February 2013 15
Positive externalities of knowledge based capital can misalign investment incentives Invest in Knowledge Based Capital Do Not Invest in Knowledge Based Capital? Social Surplus Accruing to Company Total Social Benefit Social Surplus Accruing to Company Total Social Benefit Investment (Opportunity Cost) Return (Benefit) Investment (Opportunity Cost) Return (Benefit) 13th February 2013 16
Summary The social benefit of corporate risk taking in knowledge exceeds the private benefit Therefore, it is worthwhile encouraging risk taking beyond what companies would rationally do if left to their own devices Possible means include Improve Efficiency: Universities, Clusters Sharing Hubs Education create knowledge infrastructure Improve Returns: facilitate spin-offs (monetise excess knowledge) Improve Cost: fund early stage research 13th February 2013 17