Nestle SA (OTC:NSRGY) is the world's largest food and beverage company.

[1]
Nestle owns several major
consumer brands such as Stouffers, Nescafe, Kit-Kat,Carnation, Nestle Water, and many others.
[2]
All in all, 30 of
Nestle's products earned 1 billion CHF or more during 2010, making Nestle a major force in the global food and
beverage industry.
[3]
Nestle competes with companies such asUnilever NV (UN), Hershey Foods (HSY), Kraft
Foods (KFT), Cadbury Schweppes (CSG), and GROUPE DANONE (DA) in the packaged food market. With only
42% of its food and beverage sales coming from North America, Nestle is one of the most geographically diverse
of the major food and beverage companies.
[4]
In FY 2010, Nestle generated revenues of CHF 104.6B ($121.1B
USD) and net earnings of CHF 9.05B ($10.5B USD).
[5]

Although it already occupies the top spot in terms of sales, Nestle is attempting to continue sales and margin
growth by increasing the nutritional value of its products and expanding into new areas of therapeutic foods for
people with various illnesses.
[6]
The company's stated goal is to transform itself from a food manufacturer to the
world's leading nutrition, health, and wellness company.
[3]
In 2010, Nestle created a subsidiary that will create
food-based products meant to help prevent and treat various medical conditions such as heart disease and
diabetes.
As retailers push private label products, the ability to earn and maintain shelf space at groceries, convenience
stores, and other retail outlets plays a large role in the profitability of packaged food companies. Nestle's large
portfolio of prominent consumer brands helps it maintain and increase its shelf space presence despite the
growing private label trends, giving it an advantage over competing firms that lack such a strong brand
portfolio.
[7]
These advantages don't, however, insulate Nestle from the impact of rising raw food prices;
as grains and dairy prices rise, so do Nestle's costs of production, which can pressure profits.
[8]
.

Business Segments
Nestle is divided into eight units, of which at least four contributed more than 10% to annual sales. This speaks to
not only the company's diverse interests, but also its strength in each of the respective markets. In FY 2010,
Nestle generated revenues of CHF 104.6B ($121.1B USD) and net earnings of CHF 9.05B ($10.5B USD).
[9]

Beverages (CHF 19.27B, 18% of sales in FY 2010)
Beverages is the second-largest segment after Milk Products, Nutritional and Ice Cream. Nestle owns several
international beverage brands including Nescafe, Nesquick, Neste, each of which generated more than 1 billion
CHF in 2007.
[10]

[11]
With more than 400 factories around the world, Nestle is able to formulate each product to
local tastes; "Nescafe" in Switzerland has a different recipe to the same product sold in the USA.
[3]

The combination of the recession and upper class consumers' increased environmental consciousness
[13]
has
lead many customers to cut back on bottled water in favor of tap water and reusable containers. Industry experts
don't expect bottled water to bounce back anytime soon, and the trend may expand beyond the US.
Milk Products, Nutritional, and Ice Cream (CHF 19.56B, 18.7% of sales in FY
2010)
Milk Products, Nutritional, and Ice Cream was Nestle's largest segment. It includes the Carnation, Coffee
Mate,Dreyer's, and Edy's brands among many others. Nestle's milk and ice cream brands compete with products
such as Breyer Ice cream and store brands. Their nutritional products include Gerber Brand baby food and
Nestle brand yogurts. Nestle's nutritional products compete against brands such as Dannon Yogurt and store
brands. The company's Nutrition segment became part of Nestle HealthCare Nutrition in early 2011 and will
report under this wholly owned subsidiary in the future.

Prepared Dishes and Cooking Aides (CHF 17.2B, 16% of sales in FY 2010)
Maggi
Confectionery (CHF 11.8B, 11% of sales in FY 2010)
Nestle's Confectionery segment includes confectionery brands include Kit-Kat and Nestle Chocolate. The Nestle
Chocolate brand produces famous products such as Baby Ruth and Nestle Crunch.
[18]
Nestle's confectionery
products compete with chocolates and candies from Hershey Foods (HSY) and Cadbury Schweppes
(CSG) (recently purchased by Kraft Foods (KFT) and snacks from manufacturers such as Kraft Foods (KFT), as
well as various store brands. With Kraft Foods (KFT)' purchase of Cadbury in January 2010, Nestle dropped to
the third largest chocolatier.
=Pet Care (CHF 9.97B, 9.3% of sales in FY 2010)
[20]
Purina
Pharmaceutical Products (CHF 781M, 0.7% of sales in FY 2010)
L'oreal (LRLCY)






















Key Trends and Forces
Changes in Raw Food Prices put Nestle's Margins at Risk
The price of raw foods such as corn, wheat, and dairy can change due to factors such as weather and demand
from other industries. Nestle's ability to pass cost increases on to consumers will play a big role in their ability to
maintain their current profit margins.
[27]
Commodity prices have not yet stabilized and continue to rise. The
company has been gradually increasing prices since 2005, foreseeing the major rise in commodity prices,
however it has been combating higher input costs by reducing the cost of packaging, increasing efficiency, and
introducing high-end products with higher price points.
[28]

Consumers Demanding Healthier Foods
Nearly all of Nestle's revenues come from sales of food and beverage items. Thus, changing consumer demand
for different types of food and beverage items can have an impact on Nestle's sales. These changes can be
seasonal; for example, consumers tend to demand more hot beverages such as coffee during the colder winter
months.
[29]
Long term trends also affect consumer demand. For example, the National Restaurant Association
says that consumers have been demanding healthier food options when dining out, which reflects the larger trend
of growing public concern for health and wellness in general.
[30]
Nestle is attempting to take advantage of trends
such as these by putting the "Nutritional Compass", which prominently displays nutritional information, on over 90%
of its products' packaging, and repositioning itself as a nutrition and health company.
[31]

Nestle's creation of the Nestle Health Science company illustrates their commitment to nutrition, health, and
pharmaceutical foods.
[32]
This wholly-owned subsidiary will create food-based products meant to help prevent
and treat various medical conditions. The company will also oversee the Nestle Institute of Health Sciences
which will undertake research aimed at bridging the gap between pharmaceuticals and food and unraveling the
web of connections between food, drugs, and disease. Nestle's existing Healthcare Nutrition segment will now
become part of the new subsidiary.
[33]

Strong Swiss Franc Hurts Nestle's Sales
Nearly all of Nestle's sales happen outside of Switzerland, but the company reports its income in Swiss
francs.
[34]
As such, changes in the exchange rates between the Swiss franc and other world currencies can
greatly impact Nestle's revenue. When foreign currencies depreciate relative to the Swiss franc, any transactions
denominated in those currencies will convert to a smaller number of francs, meaning less revenue for Nestle. The
opposite is true as well, with a weak franc boosting Nestle's international sales. In order to help minimize the
effect of fluctuating exchange rates, Nestle purchases currency futures, swaps, forwards, and options.
[35]

Nestle Must Capture Growth In Emerging Markets
Recognizing the important of emerging markets, Nestle is investing heavily in production capacity in new markets,
such as South Africa, Brazil, Russia, and India. Nestle's expects emerging markets to account for 60% of future
growth.
[36]
Additionally, company has introduced its "Popularly Positioned Products." These products are lower
cost and are priced at a level where poor consumers in the developing world can purchase them every day. With
the explicit goal of having emerging market sales account for 45% of revenues by 2020, Nestle is heavily
investing in Brazil, Russia, and India from 2010-2012, and encouraging local acquisitions by their geographic
subsidiaries.
[37]
The company has also expanded its manufacturing facilities in Africa with new/expanded
factories in Kenya, Zimbabwe, Angola, Mozambique, and other countries. The company plans to increase sales
of locally made products in Africa to 52% in 2012 and 76% by 2016.
[38]



Key Competitors
Nestle competes with other packaged foods companies as well as store brands from retailers such as Safeway
(SWY), Wal-Mart Stores (WMT), Walgreen Company (WAG). Nestle's major competitors are:
Unilever NV (UN) - A Dutch company that produces packaged foods and products for the home and
personal care markets. Unilever is one of Nestle's largest international competitors.
[39]

Kraft Foods (KFT) - A U.S. company that produces packaged foods products. Kraft is one of Nestle's largest
U.S. based competitors.
[40]
In early 2010, Kraft bought Cadbury Schweppes (CSG), creating the largest
candy company in the world and strengthening Kraft's international presence.
[41]
Cadbury Schweppes
(CSG) is a U.K. company that produces products for the confectionery and non-alcoholic beverages markets;
they compete with Nestle's beverage and confectionery products internationally and in the U.S.
GROUPE DANONE (DA) - A French company that produces packaged foods and beverages. Groupe
Danone competes with Nestle internationally and in the U.S.
[42]

Hershey Foods (HSY) - A U.S. company that produces chocolate and sugar confectionery products. Hershey
Foods competes with Nestle's confectionery brands mostly in North America.