The Multinational Monitor

November 1988 - VOLUME 9 - NUMBER 11

C O R P O R A T E    P R O F I L E S


By John Summa

THE SWISS-BASED food giant Nestle has in recent years acquired several U.S. companies and launched an aggressive promotional strategy in an effort to capture a bigger share of the swiftly- expanding gourmet food market in the United States. But a consumer boycott against Nestle declared on October 4 may sour the company's plans to ride out the fine food growth curve.

The Boycott's Back
The multinational food company is again under fire for "dumping" its breast-milk substitute in maternity wards, clinics and hospitals in the Third World, a marketing practice which prompted a 1977 boycott against the firm by the Boston-based INFACT. The seven-year boycott developed into one of the largest battles ever waged against corporate power by citizen groups, with over 100 organizations in some 65 countries joining in.

Despite Nestle's 1984 pledge to halt the exploitive marketing practices that prompted the boycott, critics charge the company is at it again, and a new boycott against the company has been launched, spearheaded this time by Action for Corporate Accountability (ACTION). "Nestle has failed to live up to the principles that its representatives pledged to support," says Douglas Johnson, national chair of ACTION. "Nestle acted without conscience when it knowingly sold sugar water mixed with chemicals as juice for babies [a reference to the actions of Nestle-owned Beech-Nut]. And, similarly without conscience, Nestle continues to dump supplies of infant formula onto hospitals for the purpose of inducing sales.

Nestle uses this effective marketing device even where use of the product is dangerous, and in spite of the world's health authorities calling for its ban," Johnson adds. The company has conducted itself in accordance with what it views as imperatives of the marketplace, rather than complying with the code of marketing practices established by an international community of health officials, critics charge.

Another group, the International Baby Food Action Network (IBFAN), which has been monitoring the industry since 1979, has found that in many Third World countries, the infant foods industry--which Nestle leads--"continues to deliver huge quantities of free supplies to hospitals." The companies, IBFAN notes, "claim it would be commercial suicide to stop donating supplies to hospitals: it is their most profitable means of product promotion and they compete viciously with each other for hospital business, at the sake of infant health."

The 1981 international marketing code of breastmilk substitutes (which was passed by a vote of 118 to 1 by the United Nations, with only the United States voting against it) prohibits free samples or supplies if used as a sales inducement, promotion in hospitals, various forms of unscientific promotion to health workers and direct consumer promotion. Nestle violates all of these clauses, IBFAN charges.

Nestle has also been criticized by the American Association of Pediatrics for undertaking direct consumer promotion of its new infant formulas released in the United States, called "Good Start H.A." and "Good Nature." The doctors have protested the moves because they say it discourages breast feeding. The new products are part of the company's first major foray into the profitable U.S. infant formula market, according to Nome Ghez, security analyst at Goldman Sachs in New York City. IBFAN charges that giving free supplies to hospitals discourages mothers from breast-feeding their newborn. "Donations of infant formula are extremely dangerous because samples of formula can 'hook' babies on the product," an IBFAN report explains. "Once bottle feeding starts, breastmilk begins to dry up. When the free sample is finished, the mother and her baby are dependent on the formula."

IBFAN is comprised of over 100 organizations in 70 countries around the world. The group works to enhance the health of infants by promoting breastfeeding and appropriate weaning methods. IBFAN has not called for the outright banning of infant formulas, only a halt to deceptive and dangerous marketing of them. Nestle announced in July that it would stop providing promotional free supplies in Thailand, according to Tim Smith of the Interfaith Center on Corporate Responsibility (ICCR). The company, however, continues to practice its marketing schemes, in violation of the World Health Organization code of conduct, in Pakistan, India, Kenya, the Dominican Republic, the Philippines and other countries. Companies like Nestle "have the responsibility to participate in the process, the code of conduct [these companies] sat down and agreed to," says Smith. Nestle is reinterpreting the WHO code and drawing its own conclusions, Smith says. He also points out that Nestle does not dispense free formulas in Brazil because it has a monopoly there. "This clearly shows that the so-called 'donations' in other countries really serve as a form of sales inducement," Smith charges. Since there is no threat from competitors in Brazil, he says, Nestle does not need to "dump" what it calls "free supplies" and "donations" there.

Nestle insists that health care facilities should bear responsibility for determining how supplies are dispensed to mothers. The company also says it offers supplies only after proper "request forms" are filled out by health officials at recipient institutions. But IBFAN counters that Nestle "distributes reams of highly promotional, unprofessional and unscientific literature and advertisements aimed at health workers" in order to generate the "request forms." Nancy Gaschott of ACTION says, "Physicians are regularly subjected to direct selling techniques by sales representatives who offer cash grants, equipment or sponsorship to conventions in return for access to the wards or exclusive rights to distribute formula through the hospital or medical establishment." The "request forms" merely "deflect criticism from [Nestle's] supplies program," Gaschott adds. "It is nothing more than industry's attempt to place the burden of responsibility on the health care system for a promotional practice it initiated for its own profits decades ago." IBFAN claims that the forms really function as sales receipts, signed by hospital staff upon delivery of the formula.

In India, Nestle has aggressively promoted artificial feeding, according to Dr. R.K. Anand, a pediatrician from Bombay. "It is a habit difficult to break," he says, "even when we know it's wrong." Nestle and other companies' marketing practices have resulted in "more and more babies" being "displaced from their mother's breast by big business," Anand charges. In one Nestle ad, for instance, the layout depicts the image of a happy and healthy white baby reaching toward the sky. The sales pitch is that the "baby's health is within reach." The ad was used in the Philippines, where poverty and malnutrition are severe. The Philippines has adopted the WHO code, and it goes into effect in Brazil in December, 1988.

To underscore how Nestle has flouted its 1984 agreement to encourage the enactment of the code around the world, Douglas Johnson of ACTION says the company has lobbied against its passage in Brazil and Europe, as well as undermined its impact in the Philippines. "Nestle continues to be a corporation which will go to any length for the sake of profit," says Johnson. Nestle says it will abide by regulations passed by governments in the Third World.

But unilaterally ending promotional activities would be tantamount to "economic suicide," insists Thad Jackson, special issues director for Nestle. The issue is oversimplified by the promoters of breastfeeding, who, he says, are conducting the boycott. Jackson claims that Nestle is abiding by the WHO code it agreed to in 1984. "Within the framework of the code, we can give donations and low-price supplies," Jackson says. He points to article 6.6 of the code, which he says permits these activities. "That is simply not true," says Nancy Gaschott of ACTION. "The last sentence of the article says that donations or low-price sales should not be used as a sales inducement," and this, she says, is precisely Nestle's motive. She adds that donations can only be made in cases where infants need the formulas, such as in orphanages. "If Nestle were really interested in giving 'donations,'" she asks, "why aren't they supporting charities?" Gaschott notes that the World Health Assembly clarified article 6.6 in a 1986 resolution, which made clear that the small amounts needed by hospitals and maternity wards should be obtained through regular channels and not through "free supplies." Nestle's position on the resolution is that it does not apply to the company, despite demands for compliance from WHO's legal counsel, and UNICEF's insistence that the entire industry cease delivery of free supplies. Nestle has simply refused to abide, Gashcott says. "We tried to work with them, to have them develop a financial plan to phase out free supplies, but they would not yield. That is why we decided to put pressure on Nestle through a boycott."

Nestle's Jackson says the company's position is backed by the Nestle Infant Formula Audit Commission. The commission was created in 1982 and is known informally as the Muskie Commission-after former Sen. Edmund Muskie, who heads it. It was set up by Nestle's public relations division and has been funded exclusively by the company since then. Despite the identity of its sole benefactor, Jackson maintains that the committee is "totally independent." The commission is currently conducting two studies in the Third World, Jackson says. A study in Mexico focuses on "feeding practices," while one in Thailand is assigned with determining the impact of the company's cessation of free supply distribution there. While Jackson would not say more about the studies, critics feel that the Thailand report will look into the degree to which other companies will replace Nestle as supplier of infant formulas, and attempt to demonstrate that Nestle's unilateral withdrawal hurts the company but does nothing to benefit infants there.

At a November 1988 news conference, the commission absolved Nestle of any wrongdoing, and tried to disparage the work of ACTION. The commission released a "Report on the Infant Formula Controversy," which it claims is based on "regional fact-finding missions in Asia, Africa and Central America," as well as "investigations of individual countries in these regions."

But ACTION charges that the commission has "conducted no formal on- sight monitoring of Nestle's marketing practices since early 1984." The report parrots the company position, ACTION claims, concluding that "excessive quantities" of formula are not distributed to hospitals, that "request forms" are properly used, and that article 6.6 of the WHO code permits distribution of free supplies.

Staking Out America's Sweet Tooth
The person at Nestle who will be feeling the heat from the boycott is Helmut Maucher, Nestle's managing director. Described by Fortune magazine as "a guilt-free man who loses no sleep over smoking and health," Maucher hopes to stake out a sizeable chunk of the growing chocolate market, particularly premium chocolate.

The boycott, however, will make this difficult, and negative publicity may provide a boost to Nestle competitors. (The 1977-84 boycott cost the company as much as $5.8 million in lost revenue, according to boycott organizers.) As part of its bid for the U.S. gourmet chocolate market, Nestle has introduced a foil-wrapped chocolate candy with royal settings on the label to evoke the firm's European origins. The "Chocolate Collection of Henri Nestle" is even being marketed directly to the public in the company's own, newly-created retail outlets, an idea based on its retail prototype at Disneyland. To reach wider audiences with their products, the company has plunged into the burgeoning home video market. Nestle's Alpine White chocolate candy bar will be seen on every copy of the "Dirty Dancing" video, which industry experts estimate will be seen in roughly 52 million U.S. households. Connecticut-based Vestron, which distributes the "Dirty Dancing" video, acknowledged that similar deals are in the works with Nestle.

Coffee, Tea and a Monopoly: Nestle Shops Around
Nestle Food Corp. purchased Carnation in 1984, at that time the largest non-oil merger in U.S. corporate history. Sales reportedly jumped some 35 percent in 1985 with the purchase of the U.S. food conglomerate. The Office of Fair Trading, a body of the British government, recommended that the U.S. government intervene to prevent near monopolies in certain products as a result of the merger. The Carnation deal, which cost Nestle $3 billion, gives the company a foothold in the $1.5 billion U.S. baby-formula market. It also increased the number of manufacturing plants for existing product lines, such as dairy products. Nestle has also taken over Britain's Rowntree and Italy's Buitoni both involved in food processing and marketing.

Worldwide sales of infant formula now top $4 billion annually, with Nestle making about half of these. American Home Products, also a target of the ACTION boycott, and Nestle are the two biggest sellers of infant formulas in the Third World. Nestle's total worldwide sales for fiscal 1988 reached $25.8 billion, with profits of $1.2 billion. According to industry analysts, Nestle's net margin grew at a spectacular 4.4 percent between 1981 and 1986. Total assets amounted to $16 billion in 1986, and net income jumped 13.2 percent during the 1981-1986 period. Sales rose more than 11 percent in 1984 and 35 percent in 1985.

Managing director Maucher began a "no-holds barred battle" for the decaffeinated coffee market in 1985. Its desire for an increased share of the market led to ads in which Nestle claimed to use an exclusive decaffeination process, patented in Switzerland, to produce Nescafe brand coffee. Complaints to the national advertising division of the Better Business Bureau resulted in the ads being dropped. Ads promoting Nestle's Taster's Choice, a product on the ACTION boycott list, claimed, inaccurately, that it was the only decaffeinated coffee naturally processed.

At the end of 1986, Nescafe had a 2.1 percent share of the decaffeinated coffee market in the United States, while Taster's Choice had a 6.2 percent share. In the coffee market as a whole, however, Nestle had a 26.8 percent share in 1986, putting them in second place behind General Foods (42.6 percent) and ahead of Proctor & Gamble (19.5 percent).

The company has spent more than $300 million annually in recent years promoting, among other products, Carnation Coffee-Mate non-dairy creamer, Nestle's Crunch, Nestle Toll House Cookies, Nescafe, Stouffer's frozen dinners, Alpine White Chocolates and Beech-Nut Baby Foods.

The company has been streamlined by Maucher, who took the helm in 1981. In addition to making sales promotion his primary thrust, Maucher has sought to eliminate inefficient and counter- productive management practices, a move which has pleased Nestle stockholders. But when Maucher began to change the company's capital structure to help finance the purchase of Carnation, some Swiss stockholders objected. Plans to buy back Unilac, Inc., based in Panama, provoked a veritable stockholder revolt. Some even claimed that the company was violating the terms of the offering documents for a deal critics said would be a windfall for the purchasers of the certificates at the expense of Swiss equity holders. Nestle recently granted foreigners shareholder privileges that had been previously reserved for Swiss stock owners, including voting rights.

In spite of the Swiss financial community's reputation for eschewing deep foreign entanglements, there is a begrudging acceptance of the need for Nestle to become less reclusive.

Nestle has been a pioneer of multinational business practices, and continues to be. Infant formula was the company's first product, invented by founder Henri Nestle in the latter part of the 19th century. In order to grow, Nestle had to convince the public that breastfeeding was inferior to the breast milk substitute; then, as now, the company strong-armed the public through heavy use of commercial ads and marketing gimmicks. Strong sales of Nestle products were also helped by wars and expanding global operations. But Henri Nestle would later sell his company to a group of Swiss capitalists. After a fierce struggle against the U.S.-controlled, but Swiss-based Anglo- Swiss Condensed Milk Company, controlled by American Charles Page, the two companies merged in 1878. World War I doubled Nestle's capacity and following the war Nestle began to penetrate the Third World. The company's success in Brazil convinced the owners that operations in the less developed world could be profitable. The second World War also proved a boon to company growth. "World War II put instant coffee on the map," writes Milton Moskowitz in The Global Marketplace, "and by the end of the conflict, Nestle had on its hands a worldwide coffee business." Nescafe is a ubiquitous symbol of Nestle's global enterprises.

Nestle today is ranked among the 25 largest multinational corporations, producing and selling more food than any other enterprise. Ninety-seven percent of its sales are outside its Swiss borders. Nestle has been at the forefront of the intra-European transnationalization of companies, a process also being propelled by the pending Common Market economic unification. Mergers within Europe (and between Europe and the United States) have increased and are expected to continue. In the wave of mergers and buyouts, some Swiss shareholders have expressed fear that Nestle is becoming an "American-style acquisition company." While such a development is an unsettling prospect for the Swiss, deeper Nestle involvement with U.S. companies and the North American market, as well as a potential increase in U .S. holders of Nestle stock, may provide the baby formula campaign with new sources of leverage against the company.

One such source might be labor unions representing Nestle workers. The International Union of Food and Allied Workers Associations (IUF), which represents many Nestle workers, did not endorse the last boycott and has yet to take any position on the new one. But Joy Ann Grune, North American regional secretary for the IUF, says the union "will consult with the boycott people in order to determine what position to take." Grune says the IUF's international Nestle Labor Council has taken solidarity actions in the past, such as the boycott against Coke for its involvement in union repression in Guatemala. (See MM, May 1988.)

Nestle boycott activists are also expected to seek help from the anti-apartheid movement. The company maintains 10 plants in South Africa. According to Nestle's Thad Jackson, the company feels it can make a bigger contribution to the black majority by staying in the country. Nestle has always been effective at public relations, despite its two run-ins with the boycott activists. Its creation of the Muskie Commission was innovative and effective in bringing an end to the first boycott. It brought quick results, and was a public relations success. Less savory tactics were also used, including red-baiting. (An article disparaging the boycott activists was published in Fortune magazine.) Nestle also knows who its friends are in political circles: 95 percent of its PAC contributions went to Republicans in the 1986 election cycle. Judging by its recent moves, it appears Nestle is again prepared to employ whatever tactics it deems necessary to convince the public that its infant formula promotions are the result of its concern for infant health and not merely the actions of a corporate giant greedy for higher profits.