February 27/Western Europe Food and Drinks Insights -- Switzerland-based Nestlé has reported sales of CHF107.6 billion ($98.9 bllion) for 2007, representing a healthy 9.2% increase on the previous year. Even more impressively the firm has reported a 12.9% increase in earnings (before interest and tax), to reach CHF15.0 billion ($13.8 billion). This very strong growth suggests that the firm's focus on innovation, particularly in the healthy-eating and functional food categories, has allowed it to shoulder commodity price increases that have dented profits at less innovative food firms. With one of the largest R&D budgets of any food company, this constant innovation should allow Nestlé to continue growing both profits and revenue even if external factors continue to push up raw material costs, the company believes.

Over the past two years, Nestlé has bolstered sales at its health and nutrition arm (Nestlé Nutrition) with three sizeable acquisitions -- Gerber, which offers baby food and juices, Novartis Medical Nutrition, which offers nutritional drinks and weight-loss firm Jenny Craig. These acquisitions confirm that Nestlé sees foods that offer health and wellness benefits (or "neutraceuticals") as a key future growth area and also a division that is well shielded from rising commodity prices. Together with organic growth of 9.7%, these acquisitions meant that sales at the firm's nutrition arm grew by 41% in 2007, reaching CHF8.4 billion ($7.7 billion). Although still a relatively small part of the total company, representing less than 10% of total sales, the very fast growth and high margins available from this division make it strategically important.

Nestlé is also making increasing use of the innovations provided by its nutrition arm in its more mainstream products. This strategy, which Nestlé refers to as Branded Active Benefits, allows the firm to offer conventional products with additional health benefits that consumers are willing to pay a premium for. For example the firm now offers its Nesquick milkshake brand with added calcium and its Nesvita milk range now includes a version that claims to help lower cholesterol. In 2007, Nestlé's total R&D budget reached CHF1.87 billion ($1.7 billion) -- a figure that has grown by over 50% in the last five years. This huge budget allows the firm to conduct strict clinical-style tests allowing the firm to make bold, scientifically backed claims about the nutritional benefits of its products. This is a particular area where the firm's size gives it an enormous advantage over smaller firms. The research required for innovation and clinical-style trials is usually very expensive as often only a small fraction of research leads to a new product innovation. The economics of this kind of innovation can be seen in the pharmaceutical industry, where generally only very large firms are able to compete effectively. As food innovation becomes more and more high-tech these economies of scale are likely to become similarly apparent for some sections of the food industry -- meaning that smaller companies may find it increasingly difficult to compete with the multinational giants.

From the March 3, 2008, Prepared Foods e-Flash