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Building up Customer Management Skills to Improve Trade Spend Efficiency and Effectiveness

CONFIDENTIAL. Building up Customer Management Skills to Improve Trade Spend Efficiency and Effectiveness. DOCUMENT CONTENTS. Project objectives and scope Overall confirmed profit potential Transparency phase Recommendations and potential for each key lever

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Building up Customer Management Skills to Improve Trade Spend Efficiency and Effectiveness

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  1. CONFIDENTIAL Building up Customer Management Skills to Improve Trade Spend Efficiency and Effectiveness

  2. DOCUMENT CONTENTS • Project objectives and scope • Overall confirmed profit potential • Transparency phase • Recommendations and potential for each key lever • Implementation plan for each key lever • Specific action plans by account • Confirmed potential and required resources • Implementation organization

  3. PROJECT OBJECTIVES AND SCOPE Project objectives • Profitability: Improving overall profitability by 1 - 2 percentage points • Better pay for performance • Improved promotions • Improved product mix • Lower cost to serve • Not: Reduction of Trade Spend only • Skill building: Upgrading KAM skill profile from being purely sales oriented to becoming more cross-functional and customer contribution oriented Project scope Nestlé Spain “Dirección Refrigerados“ and shared service departments where necessary (e.g., Finanzas y Control, Servicios Corporativos, Producción, Comercial Corporativa) Source: Team

  4. OLD ALLOCATION 1994 1.4 1995 1.0 1996 0.3 1997 1.4 2.9 1998 3.0 1999 2000 (Estimated) 2.6 REFRIGERADOS DEVELOPMENT OF TOTAL TRADE SPEND VS. TOTAL PFME/MEDIAMillion pesetas, percent of net sales 30% of PFME is not controlled by marketing itself* 46.9 43.0 40.2 38.4 36.9 35.2 32.7 Total PFME/Media Total trade spend** Profitability*** * Including corporative costs (Disney license, “Alimentaria”,…), merchandising, and actions negotiated by KAMs and trade marketing ** Trade spend is equal to the sum of rebates, periodic allowances and temporary price promotions *** Before license fee Source: Nestlé Refrigerados P&L

  5. MA118054010119 Final Doc - Part1 DOCUMENT CONTENTS • Project objectives and scope • Overall confirmed profit potential • Transparency phase • Recommendations and potential for each key lever • Implementation plan for each key lever • Specific action plans by account • Confirmed potential and required resources • Implementation organization

  6. IMPROVEMENT POTENTIALOperating profit in million pesetas 200 to 260 555 to 730 • Improvement potential between 555 and 730 million pesetas could be achieved • This potential is equivalent to an increase in operating profit between 1.7 and 2.3% over net sales (basis 1999 year) 355 to 470 100 80 to 150 105 to 120 70 to 100 Optimize trade terms Increase promotion effecti-veness Improve cost to serve* Improve product-mix Potential without any change in the existing distribution system Improve existing distribution system* (“preventas” model) Total potential * Footnote Source: Sources * Footnote Source: Sources * Considering only the external distribution chain of “Refrigerados” Nestlé Spain (from Nestlé central warehouses to selling points) Source: Team

  7. MA118054010119 Final Doc - Part1 DOCUMENT CONTENTS • Project objectives and scope • Overall confirmed profit potential • Transparency phase • Recommendations and potential for each key lever • Implementation plan for each key lever • Specific action plans by account • Confirmed potential and required resources • Implementation organization

  8. Findings • There are structural differences in contribution by client cluster: • Top 20 accounts: contribution varies heavily by account (variation 22 percentage-points); no correlation between size and contribution. Contribution variations are explained mainly by trade terms (variation 19 percentage-points) and cost to serve (variation 20 percentage-points) • Other main accounts (21-40): contribution over net sales is almost 2.5 points above the Top 20 and 1 point above the total average due mainly to lower trade terms • Direct sales to distributors: contribution over net sales is more than 10 points above average due to significantly lower trade terms partially compensated by above average cost-to-serve • Small regional clients: contribution over net sales is about 1 point below average due to higher cost-to-serve and product mix, partially compensated by lower than average trade terms • ATC-”colectividades”: contribution over gross sales is aligned with the average, which is a more homogeneous comparison due to specific pricing policy applied to this group. Trade terms are above average and this gets compensated by lower product mix and cost-to-serve 0. Transparency 1. Trade terms 2. Cost to serve 3. Product mix 4. Account plans KEY TRANSPARENCY PHASE: ACCOUNT P&L 0.1 Account P&L 0.2 Brand P&L 0.3 Market Source: Team

  9. Product-mix Cost-to-serve • Non Quid-pro-Quo trade terms of Top 40 accounts • Pricing policy for non-reference products and small accounts • Cost-to-serve of direct sales to distributors and small regional clients 19.1% 23.8% 35.1% 43.0% • Product-mix of 21-40 accounts and small regional clients 0.1. PROFITABILITY DRIVERS BY CLIENT CLUSTERPercent of net sales - EF 1999 Contribution Trade-terms Top 20 accounts Other main accounts (21-40) Direct sales to distributors Direct sales to small regional clients ATC “Colectividades”* Average Areas of estimated potential * Profitability drivers of ATC are not directly comparable to other client groups due to the different pricing policy applied. Comparison becomes homogeneous in terms of gross sales, where the ATC contribution (16% over gross sales) gets aligned with the average (15.8 over gross sales) Source: Nestlé Spain Refrigerados; Team

  10. MA118054010119 Final Doc - Part1 0.1 TO 20 ACCOUNTS SEPARATION OF PROFITABILITY DRIVERSPercent - EF 1999 Key account Variation* Trade terms Product-mix Cost-to-serve = + + 2279 0598 0565 0611 2277 0385 2404 1956 1958 0452 2231 2478 1959 0005 2476 2474 0213 2225 1419 2084 All other CUSTOMER CONTRIBUTION 17.7 % TOTAL TRADE TERMS 46.5 % COST OF GOODS SOLD 35.0 % DISTRIBUTION COSTS SELLING EXPENSES 22.0 % * Variation from weighted average of customer contribution as percent of net sales Source: Nestlé Spain Refrigerados; Team

  11. Findings • The most value-adding products per category are the most profitable • Contribution varies significantly by brand (variation 29 percentage-points), mainly in yogurts subcategories • Yogurts show the biggest contribution variations between brands; LC1 and enriched La Lechera are the most profitable brands within yogurts • Flor de Esgueva is the brand with the biggest contribution (16% of net sales and 22% of total category contribution) 0. Transparency 1. Trade terms 2. Cost to serve 3. Product mix 4. Account plans TRANSPARENCY PHASE: BRAND P&L 0.1 Account P&L 0.2 Brand P&L 0.3 Market Source: Team

  12. Findings • Overall market growth has been driven mainly by private labels • Danone has grown in line with the market • Refrigerados Nestlé has grown slower than the market in each category • Desserts and fresh cheese are categories with biggest growth gap (more than 10 percentage points) • In some subcategories Nestlé’s growth has been much higher than market growth but from a low base (e.g. liquid yogurts) • Nestlé is third player for yogurts and desserts after Danone and Private Labels. Only La Lechera and some other desserts hold better positions. • Nestlé is first in fresh pasta • Numerical and weighted distribution follow market share trends • With regard to prices some products have potential to capture part of the value between Nestlé’s and other competitors with lower market shares (e.g. “natillas”) • Nestlé stock-outs (numerical and weighted) are above competitors for the majority to products 0. Transparency 1. Trade terms 2. Product mix 3. Cost to serve 4. Account plans MA118054010119 Final Doc - Part1 TRANSPARENCY PHASE: MARKET 0.1. Account P&L 0.2. Brand P&L 0.3. Market Source: Team

  13. MA118054010119 Final Doc - Part1 DOCUMENT CONTENTS • Project objectives and scope • Overall confirmed profit potential • Transparency phase • Recommendations and potential for each key lever • Implementation plan for each key lever • Specific action plans by account • Confirmed potential and required resources • Implementation organization

  14. 0. Transparency 1. Trade terms 2. Cost to serve 3. Product mix 4. Account plans MA118054010119 Final Doc - Part1 PROJECT KEY LEVERS: TRADE TERMS Processes to implement Potential (million pesetas) Recommendations • 1.1 Price discounts • For small accounts reduce price discounts to defined range • Establish process to monitor small accounts price discounts, including follow-up of salesmen’s behavior • 1.2 “Quid pro Quo” trade terms • For some of Top 20 accounts reallocate money from non “Quid pro Quo” discriminatory trade terms to “Quid pro Quo” • Establish process to monitor non “Quid pro Quo” trade terms • 1.3 Promotional effectiveness • Shift promotions to products with higher contribution per promotion • Improve the type of promotions to be used with some clients • Establish processes to improve promotion management • Modify/launch promotion monitor process • Establish process to determine regular and promotional mix and prices ~40 ~30 to 60 ~40 15 to 30 ~ 50 Not estimated Total 175 to 220 Source: Team

  15. 0. Transparency 1. Trade terms 2. Cost to serve 3. Product mix 4. Account plans MA118054010119 Final Doc - Part1 PROJECT KEY LEVERS: TRADE TERMS - PRICE DISCOUNTS TO SMALL ACCOUNTS Processes to implement Potential (million pesetas) Findings Recommendations 1.1 Price discounts • Significant range of price discounts variation for small accounts (around 30% for reference products and 40% for non-reference products) • For small accounts, reduce price discounts to defined ranges • Establish process to monitor small accounts price discounts, including follow-up of salesmen’s behavior ~40 Source: Team

  16. MA118054010119 Final Doc - Part1 1.1 PRICE DISCOUNTS FOR SMALL ACCOUNTS AND REFERENCE PRODUCTS*Example: Enriched yogurt with sugar or taste** Acceptable range Percent of price discount on gross sales*** • Range of price discount variation for small accounts and reference products around 30% • Reducing discounts to acceptable range has improvement potential of  32 million pesetas Total gross sales by account (Million pesetas) * Regional clients with total growth sales of 100 million pesetas or below. Data from January/October 2000 ** Reference products analyzed; yogurt natural, yogurt with taste (pack and tarrinas), Flanby, enriched yogurt with sugar or taste and Dalky standard *** Price discounts not related with “Cadenas”. It includes discounts on regular and promotional prices and other trade allowances specific to the client Source: Team

  17. 1. Set ranges of price discounts 2. Establish monitoring system 1.1 ACTIONS TO BE TAKEN TO REDUCE RANGE OF PRICE DISCOUNTS FOR SMALL ACCOUNTS • Define ranges of price discounts by category of product and account size • Periodically (i.e., twice or three times a year) monitor fulfillment of defined objectives at account level • Regionally, follow-up salesmen’s fulfillment of objectives, taking into account: • Average discount for assigned clients by product category and account size • Variability of price discounts within portfolio of assigned clients Key actions Source: Team

  18. Recommendations/ Issues moving forward Findings • Non “Quid pro Quo” concepts represent 68% of total trade terms for Top 20 accounts • From this 68%, which makes ~7,300 million pesetas, more than 65% (~4,900 million) are general pricing policies and follow a fixed and non-discriminatory discount scale • Finally, there are ~ 2.400 millions pesetas which are non “Quid pro Quo” and that do not follow any specific rule, except for the need of building-up an attractive net/net price for retailers • Establish process to monitor non “Quid pro Quo” Trade Terms • For some of Top 20 accounts reallocate money from non “Quid pro Quo” discriminatory trade terms to “Quid pro Quo” 0. Transparency 1. Trade terms 2. Cost to serve 3. Product mix 4. Account plans PROJECT KEY LEVERS: TRADE TERMS - “QUID PRO QUO” TRADE TERMS Processes to implement Potential (millon pesetas) ~30 to 60 1.2 “Quid pro Quo” trade terms Source: Team

  19. Percent of total trade terms for Top 20 accounts Non discriminatory “Quid pro Quo” Non “Quid pro Quo” Trade terms Discriminatory STUDY CLASSIFICATION 1.2 CLASSIFICATION OF TRADE TERMS COMPONENTS Considerations Examples • “Real trade terms” with substantial performance orientation • Promotional activities • Space • Volume target incentives 32% • Non directly related with a quantifiable target or objective • Hidden price reductions needed to match higher mark ups given by competitors • Includes EDLP* • Sales and trade relationship allowances (“Colaboración comercial” and “bonificaciones”) 22% • Historically driven, today little performance orientation • Follow a fixed discount model • General pricing policy (“condiciones de venta”) • Non-discriminatory price discount 46% * Everyday low prices to Nestlé customers, not always transferred to the final consumer Source: Team

  20. QPQ NQPQ (Discriminatory) NQPQ (Non-Discriminatory) 2,383 3,423 1.2 TRADE TERMS COMPONENTS - TOP 20 ACCOUNTSMillion pesetas, percent - EF 1999 10,703 127 65 136 754 155 734 31 2,779 703 1,589* 1,190** 324 270 462 169 3,034 293 1,863 4,897 General Price allowances Non discrimina-tory price discounts In store displays shelf-space, listing fees, ... Sales allowances (“Boni”) Trade relation allowances (“Colabo- ración comercial”) Discrimina-tory price discount (regular + promotio-nal) Promotion advertise-ment Trade promotions and others Volume targets (“Boni”) Cadena funds (“Prima colab. Cadena”) Sales targets, anniversary openings Interests and early payment discounts Total Top 20 Financial costs General pricing policy Space Specific target incentives Trade promotional activities Percent over net sales 8.1 13.2 2.0 1.2 1.4 12.1 3.2 0.6 3.3 0.6 0.3 0.5 46.5 * Price allowances to discount retailers with an everyday low price (Mercadona, Día, Continente, Eroski and Tengelmann) not always transferred to the final consumer ** It also includes some discriminatory price discounts on regular prices that should be reclassified as NQPQ- discriminatory Source: Nestlé Spain Refrigerados; Team

  21. QPQ NQPQ (Discriminatory) Financial costs Space Trade promotional activities MA118054010119 Final Doc - Part1 1.2 POTENTIAL FROM NON QUID-PRO-QUO DISCRIMINATORY TRADE TERMS - TOP 20 ACCOUNTS NQPQ (Non-Discriminatory) • A total of ~800 million pesetas are non “Quid pro Quo” discriminatory trade terms • Estimated reallocation potential of 20% to 40% with total contribution potential between 30 and 60 million pesetas 10,703 127 65 136 754 155 734 31 703 3,423 1,589 1,190 324 270 2,383 169 462 3,034 293 1,863 4,897 Total Top 20 General pricing policy Specific target incentives Source: Team

  22. Potential (million pesetas) Recommendations Findings • Shift promotions to products with higher contribution per promotion • Check opportunities for promotion price increases • Renegotiate promotion costs • Shift promotions to more price sensitive products (e.g. Dalky) • Modify/launch promotion monitoring process • Use cabecera promotions and lotes only to generate volume, mainly in hypermarkets • Use present/lotteries only if requested by client • Implement “muebles” in 50 selected supermarkets • Negotiate all promotion parameters (time, place, recommended price, scope) with all clients • Establish processes to improve promotion management • Establish a process to determine recommended ranges of regular and promotional mix and prices based on price-elasticity • Adopt a “win-win” strategy to maximize profit pool with the retailer by repositioning prices • Promotion volume by product • Promotions area significant part of total sales (>50% for most products and clients) • Promotion contribution and volume uplift vary across products and accounts • Weakest volume uplifts for products with strong brands. E.g. LC1, La Lechera • Promotion mix • Cabecera promotions and “lotes” are less profitable than simple leaflet promotion but show stronger volume uplift • Present/lotteries do not show additional uplift • “Muebles” provide additional uplift and positive contribution especially when additional placement • Promotion management • Promotion agreements with customers often too unspecific • Poor data availability about promotion compliance and performance • Promotion price control not working well • Mismatch of realized vs. invoiced promotional sales • Regular and promotion mix and prices • High variability of regular and promotional sales mix and net/net prices across accounts • Final prices to consumer vary also significantly across clients 0. Transparency 1. Trade terms 2. Cost to serve 3. Product mix 4. Account plans MA118054010119 Final Doc - Part1 PROJECT KEY LEVERS: TRADE TERMS- PROMOTIONAL EFFECTIVENESS Processes to implement 1.3. Promo-tional effecti-veness • ~40 • 15 to 30 • ~50 • Not estimated

  23. 400 0 100 200 300 PRYCA • Net effect on number of promotions: +/- 0 • Additional contribution 1.8 million pesetas MA118054010119 Final Doc - Part1 1.3 VOLUME UPLIFT VERSUS PROMOTION CONTRIBUTION*Percent versus million pesetas Volume uplift (Percent of baseline volume) Assumptions Flan eggs 3 1 • Promotion costs spread over all products including baseline sales (method used today to calculate “aportación neta”) • One price (invoiced promotion price equals regular price) Yogurt natural Potential (Million pesetas) Recommendations Bio Calcio firme • Shift 4 promotions from LC1 firme to: • Dalky (+2) • LC1 liquid (+2) • Shift 2 promotions from Yogurt natural to Flan eggs or Bio Calcio Firme 1.0 0.6 0.2 Dalky Flanby 2 4 LC1 liquid Enriched La Lechera LC1 firme Promotion contribution per promotion* (Million pesetas) * Contribution to client’s net contribution; leaflet promotions only Source: Team

  24. 1.3 VOLUME UPLIFT VERSUS PROMOTION CONTRIBUTION BY TYPE OF PROMOTIONPercent versus million pesetas PRYCA CASE Leaflet + price reduction Cabecera + leaflet + price reduction Special promotion + cabecera + leaflet • Findings and potential actions • Cabeceras + price reductionHigh cost of 2.5 million pesetas per cabecera make these promotions unprofitable in spite of high volume uplifts • Negotiate additional cabeceras for cabecera payments (annual negotiations) • Consider shift to simple leaflet promotions • Special promotions (“lotes”) + price reduction Special promotions have the same contribution as leaflet promotions without consideration of cabecera costs. In spite of including cabecera costs they become very unprofitable • Negotiate additional benefits for special promotions (e.g. additional cabeceras) • Reduce costs for special promotions by avoiding special packaging • Consider shift to simple leaflet promotions Volume uplift (Percent of baseline volume) 2.000 Flan eggs LC1 firme 600 500 Flanby 1 400 3 300 Yogurt with taste 200 Enriched La Lechera 100 4 2 0 -3,5 -3 -2,5 -2 -1,5 -1 -0,5 0 0,5 Promotion contribution per promotion (Million pesetas) Source: Team

  25. Type Client Products • Entry Tickets (Lottery) • Tengelmann • Enriched La Lechera + Sveltesse Type Client Products • Trip to Paris (Lottery) • Tengelmann • All products TypeClient Products TypeClient Products • Bowl (present) • El Corte Inglés • Multipacks Yogurts • Car (Lottery) • GIGAE • Bio Calcios MA118054010119 Final Doc - Part1 1.3 VOLUME UPLIFT VS. PROMOTION CONTRIBUTION OF PRESENTS/LOTTERIESPercent versus million pesetas ESTIMATES Regular promotion Special promotion Volume uplift** (Percent of baseline volume) 500 Findings 3 1 • Uplifts are not higher than those for comparable promotion without present / lottery • Promotions have negative contributions X Recommendations 4 • Try “cheap” special promotions (i.e. lottery to win tickets) as a pilot with clients that show higher sensitivity to promotions in general 4 2 X Promotion contribution per promotion* (Million pesetas) Source: Team

  26. Implement “muebles” in 50 selected supermarkets* • Make sure 6 meters of shelf space per “mueble” are used for additional placement and not for replacement of shelf space (implementation: assume only 1/3 - 2/3 of “muebles” space is additional) • Outsource ownership, delivery, and maintenance of “mueble” at costs of about 6,000 pesetas/month MA118054010119 Final Doc - Part1 1.3 SECOND PLACEMENT OF PRODUCTS IN SUPERMARKETS (“MUEBLES”) Recommendation Identified potential (estimate) Current After implementation 554 Space (m) Sales (Million pesetas) 315-398 Contribution (Million pesetas) 51-69 Final contribution ~15-30 million pesetas • Additional product contribution of 18-35 million pesetas • Renting costs of “muebles” 3-4 million pesetas * Points of sale that have space for “muebles” and are visited at least once week by sales force Source: Team

  27. ESTIMATE ALCAMPO Total payments for unrealized promotions equal~15 million pesetas MA118054010119 Final Doc - Part1 1.3 PROMOTION MANAGEMENT: INVOICED VERSUS REALIZEDPROMOTIONAL SALESPercent of volume - 1999 Payments without performance Products sold at promotional price to end-consumer Natillas vanilla (74;97) Multipack Natural yogurt (90;81) Explanations LC1 liquid (40;68) La Lechera trufa (63;70) • Hidden discount: • Application of promotion prices 5 to 7 days before start of promotion • Non-compliance: • All products from one product group ("gama") are invoiced at promotional price, but promotion is only applied to selected products (La Lechera, LC1, Bio Calcio) • Promotion price simply not applied (Petit Nesquik) Bio Calcio Natural (64;61) La Lechera Natural (74;56) Bio Calcio Frutas (86;48) Trufas (44;33) Mousse chocolate (23;34) LC1 yogurt (64;38) Flanby vanilla (75;35) Petit Nesquik (47;16) Products invoiced at promotional price to customer Source: Team

  28. CHANNEL: SUPERMARKETS MA118054010119 Final Doc - Part1 1.3 MIX OF PROMOTIONAL AND REGULAR SALES AND NET/NET PRICESEnriched yogurt with sugar or taste (example of reference product)Percent of total sales volume*, pesetas per unit Regular sales Promotional sales Regular net/net price Promotional net/net price • High variability of regular and promotional sales mix and prices across accounts • Develop a system to periodically define and monitor regular and promotional mix and prices Alimerka Dialsur Uvesco Capra-bo Sabeco GIC El Corte Inglés Unigro Hnos. Martín Ahorra-más Gadisa Enaco Ahold Biscay * Estimated from January/October 2000 data Source: Nestlé Refrigerados Spain; Team

  29. CHANNEL SUPERMARKETS Variation of consumer prices across clients of about 12% with a range of 56 pesetas MA118054010119 Final Doc - Part1 1.3 VARIABILITY OF CONSUMER PRICES ACROSS CLIENTSEnriched yogurt with sugar or taste - May/October 2000 Nestlé Danone Source: Nestlé Spain Refrigerados

  30. Frecuency: once a year MA118054010119 Final Doc - Part1 1.3 PROCESS TO DETERMINE REGULAR/PROMOTIONAL MIX-DETAIL Get Nielsen report on regular/promotional price elasticities Define volume functions Define contribution functions Determine price range that maximizes contribution Consider competitors prices Summarizs regular/promotional price ranges Activities • Discuss analysis with Nielsen representative and monitor progress • Using price elasticities, get total volume by product as a function of price • Based on variable cost per product derive contribution as a function of price • Find price range that has maximum contribution • Adjust optimal price range considering competitors’ prices and potential reactions • Summary analysis for all products Prom. Price Reg. Price End products Producto X V (P) para producto X  (P) = (P-C).V(P) Product X Product X Prod. Volume multipliers Optimal range Volume Contribution Contribution Precio A B C 99-115 80-90 Nestlé Compet. A Compet. B Discount 10% . . . 5% Price Price Precio

  31. Forecast regular sales Forecast promotional sales per promotion Determine required promotional sales Prepare summary report with regular/promotional mixes Frequency: once a year 1.3 PROCESS TO DETERMINE REGULAR/PROMOTIONAL MIX-DETAIL Activities • Using volume functions and recommended price range calculate expected regular sales by product • Repeat analysis for promotional sales • Determine percent of time on promotion and type of promotions to reach volume targets by product • Consider marketing objectives • Summarize analysis for all products End product Product X Product X Product X Product % Reg. sales % Prom. sales Promotional volume A B C . . . 80% . . . 20% . . . Regular volume Total Volume Volume target Regular price Promotional price % Prom. sales 0% 10% ... Source: Team

  32. 0. Transparency 1. Trade terms 2. Cost to serve 3. Product mix 4. Account plans MA118054010119 Final Doc - Part1 PROJECT KEY LEVERS: COST TO SERVE Potential (million pesetas) Recommendations • 2.1 Nearby hypermarkets • Improve efficiency of direct distribution to nearby hypermarkets • 2.2 Central warehouses operators • Improve delivery efficiency through modifying contracts with central warehouses operators • 2.3 “Preventas” model • Modify external distributors’ current distribution model 50 to 80 30 to 70 200 to 260 Total 280 to 410 Source: Team

  33. Potential (million pesetas) Findings Recomendations • Returns at hypermarkets directly served by Nestlé are much bigger than when served through distributors • Improve the quality of orders by developing skills of “reponedores” • Improve delivery efficiency 50 to 80 0. Transparency 1. Trade terms 2. Cost to serve 3. Product mix 4. Account plans MA118054010119 Final Doc - Part1 PROJECT KEY LEVERS: COST TO SERVE - NEARBY HYPERMARKETS 2.1 Nearby hyper-markets Source: Team

  34. MA118054010119 Final Doc - Part1 2.1 NEARBY HYPERMARKETS DIRECTLY SERVED BY NESTLÉ Current situation Complication Recommendation • More than 60 hypermarkets which are close to central warehouses are served directly by Nestlé through external operators • Orders are realized by carried out and temporary people hired through agencies • Reduce level of returns through: • Incorporate these hypermarkets in external distributors tours, or • Improve current efficiency through increasing quality and skills of merchandisers and delivery efficiency Percent of returns over gross sales* Average of current situation ~7% Average when distributed through distributors ~3% * Total year 1999 Source: Team

  35. Potential (million pesetas) Findings Recomendations • Stocks-outs at distributors warehouses are higher than at central warehouses • Select delivery efficency KPI’s and measure them on an on-going basis • Include KPI’s in contracts with current central warehouses and transport operators • If delivery efficiency does not improve change operators 30 to 70 0. Transparency 1. Trade terms 2. Cost to serve 3. Product mix 4. Account plans MA118054010119 Final Doc - Part1 PROJECT KEY LEVERS: COST TO SERVE - CENTRAL WAREHOUSES OPERATORS 2.2 Central warehouses operators Source: Team

  36. Potential (million pesetas) Findings Recomendations • Three months ago a new distribution and merchandising model, which is fairly similar to the one of Danone, was launched by two Nestlé’s distributors • Results from new model are very positive: • Increments sales • Improves product mix • Launch the new model for two or three distributors as pilots • Track results and launch new model for the rest of distributors as soon as possible 200 to 260 0. Transparency 1. Trade terms 2. Cost to serve 3. Product mix 4. Account plans MA118054010119 Final Doc - Part1 PROJECT KEY LEVERS: COST TO SERVE 2.3 “Preventas” model Source: Team

  37. 12 “autoventas” CONCEPTUAL MA118054010119 Final Doc - Part1 2.3 “PREVENTAS” MODEL OF ESPLUGUES’ DISTRIBUTOR Traditional model “Preventas” model People involved Main activities People involved Main activities • Contact client • Realize order 3 “preventas” • Realize order • Get products from distributor’s warehouse • Make the products’ “picking” at client site and distribute them • Do merchandising* • Get products from distributor’s warehouse • Make product picking during distribution • Distribute products • Do merchandising* 9 “repartidores” • Other considerations • In comparison with Cordoba model, this model does not imply an extra cost, even though there is a cost reduction caused by using renting cars instead of trucks • Key question is if product picking should be made or not by the “repartidor” * Except in hypermarkets, where there are dedicated external people Source: Interviews

  38. MA118054010119 Final Doc - Part1 2.3 PROS AND CONS OF “PREVENTAS” MODEL Pros Cons • Qualitative/process: • Improve quality of the order • Improve contact (time and quality) with the client • Increase control of selling-point • Better define roles to be played by each agent • Quantitative/results: • Increase sales • Improve product-mix • Reduce stock-outs and returns • Reduce distributors’ cost* • Could imply a reduction of numerical distribution if it is applied to distributors/tours where breakeven cannot be achieved for small doors • Implies a possible investment in systems (mainly mobile terminals for getting orders) • Advantages of the new model justify the need to apply the model as soon as possible • Extension of the “preventas” model should be limited to those distributors/tours which have similar characteristics as current Cordoba / Esplugues model * Model of Esplugues distributor Source: Interviews; Team

  39. 0. Transparency 1. Trade terms 2. Cost to serve 3. Product mix 4. Account plans MA118054010119 Final Doc - Part1 KEY LEVERS OF THE PROJECT: PRODUCT MIX Processes to implement Potential (million pesetas) Recommendations/ Issues moving forward Findings 3.1. Improve current product -mix • The gap between actual and optimal product mix for total “Refrigerados” Nestlé is very large • Improve product-mix for 13 accounts of Top 20 group by: • Listing some SKU’s • Changing volume weight between products/ SKU’s • Setting target volume growth by products/SKU’s • Implement account process to define and monitor optimal product-mix by channel/account ~100 Total ~100 Source: Team

  40. HYPOTHESIS: CONSTANT VOLUME ESTIMATION • -4% Yogurt Natural, with taste or sugar • 3 SKUs Fruits + Yoco • +10% Low fat yogurts • +82% Liquids • +5% Whipped cream • +27% Mousse • +20% Petit + Yoco • +5% Fresh cheese Mousse MA118054010119 Final Doc - Part1 3.1 CHANGE OF PRODUCT MIX: WIN-WIN SITUATION Example: Grupo Carrefour Million of pesetas and percent Impact on contribution Proposed changes (percent growth) Nestlé Retailer ~20 million pesetas ~35 million pesetas Total Source: Team

  41. Total ~100 million pesetas MA118054010119 Final Doc - Part1 3.1 KEY ACTIONS TO BE TAKEN TO IMPROVE PRODUCT MIX - 2000*Million pesetas and percent Growth New SKU’s Svel-tesse natural + taste Net incremental contribution** (million pesetas) Svel-tesse fruits Bio Calcio natural Bio calcio low fat Petit Especia-lity Yoco liquid Lc1 Liquid Mou-sses Petit Yoco Fruits + Yoco Others Account Carrefour (hipers) Carrefour (supers) GIGAE Alcampo Dia Ahold/ Supercliplo GIC SABECO Unigro Ahorramás DASA 18% Reintro-duction 22% 44% 68% Reintro-duction 3% 36% 1 SKU 100% 8% 300% 53% 20% Reintro-duction 70% 1 SKU 20% 14% 3% 1 SKU 9% 55% 1 SKU 40% 15% 20% 35% 7% 10%1 SKU 15% 1 SKU 1 SKU 25% 35% 11%1 SKU 15% 20% 25% 6% 14% 10% 20% 15% 5% 35% 15% 15% 10% 10% 5% 15% 19% 15% 15% 10% 10% 15% 17% 10% 5% 10% 18% 10% 100% 10% 15% 15% 15% 15% 20% 10% 25% 15% 6% 9% 15% 10% 35% 27% 15% 25% 5% 25% Reintro-duction1 SKU 75% 100% 15% 150% 97% Reintro-duction 60% 20% 100% (Petit Classic) 21%(Petit Classic) 3% (Desserts Lechera) 15% (Bio Calcio Liquid) 2 SKU’s (Yogurt + Desserts Lechera) 10% (MousseSvelttesse) 15% (Sveltesse liquid) - 5% (Yogurt Lechera) - 20%(Desserts Lechera) 17.5 3.9 26.4 10,1 12.1 5.5 9.2 5.0 8.9 3.8 2.0 * Improvement potential based on analysis of 2000 data ** Deducing contribution of products that reduce volume. Hypothesis: constant volume, except for Día (7% volume growth) Source: Team

  42. Frequency: twice a year Define model’s parameters and weights Calculate theoretical product mix by channel Introduce clients’ current situation to calculate theoretical product mix by client Adjust theoretical product mix by client to get feasible target Theoretical product mix for Nestlé Spain Refrigerados Targets by account: • New listings • Growth targets by product • Volume share by product Sub-category Contri-bution % Vol. Natural with taste . . . 100% Total MA118054010119 Final Doc - Part1 3.1 PRODUCT MIX OPTIMIZATION MONITORING PROCESS What do we get out of it? Theoretical Product Mix by Channel Theoretical Product Mix by Client Discounts Dia Supermarkets Carrefour Hypermarkets Contri- bution Sub-category % Vol. % Vol. Growth Sub-category Contri-bution Fa- cings % Vol. . . . . . . 0% 100% 100% 206 Source: Team

  43. MA118054010119 Final Doc - Part1 DOCUMENT CONTENTS • Project objectives and scope • Overall confirmed profit potential • Transparency phase • Recommendations and potential for each key lever • Implementation plan for each key lever • Specific action plans by account • Confirmed potential and required resources • Implementation organization

  44. Activities Responsible • Reduce price discounts for small accounts to defined range • Group products into homogeneous clusters according to variable discount level (approx. 10/15 clusters) • Classify product clusters as reference or non-reference • Set variability allowed above average for reference and non-reference products and by client size segment • Define target average discount and maximum discount allowed by product cluster and client size segment • Revise assigned budget to sales regions according to new discount ranges • Communicate to sales region new ranges of discounts and adjusted budget • Implement/negotiate new discounts • Monitor periodically fulfillment of discount objectives (twice a year) as defined process • Extend reduction of price discounts for small accounts to fresh pasta and cheese Trade Marketing Trade Marketing Trade Marketing Trade Marketing J. Urcola J. Tronchoni Regional Sales Force Trade Marketing Trade Marketing MA118054010119 Final Doc - Part1 1.1 IMPLEMENTATION PLAN: PRICE DISCOUNTS Source: Team

  45. Activities Responsible • Reallocate non “Quid pro Quo” discriminatory trade terms to “Quid pro Quo” • Confirm and negotiate concepts defined with the retailer • Implement “Category Management” in selected retailers • Monitor fulfillment of objectives defined and value results • Launch trade terms monitoring process to measure periodically (once a year) the evolution of “Quid pro Quo” - non “Quid pro Quo” trade terms for top 20 accounts • KAM’s • Corporate Trade Marketing • Trade Marketing • KAM’s / Sale force • Trade Marketing • KAM’s • Controller MA118054010119 Final Doc - Part1 1.2 IMPLEMENTATION PLAN: “QUID PRO QUO” TRADE TERMS Source: Team

  46. Financial benefits (Million pesetas) KPI’s • Average price discount by product and client segments • Percent of clients with discount out of range • Percent of space by account • Percent share of space by level and account • Number of new SKU’s • Percent of realized/planned promotions by type • Average contribution of promotions by account • Number of “muebles” by account • Sales for each store with “muebles” • Qualitative KPI’s for reports: • Availability • Quality • Completeness BASIS FOR ACTION CONTROLLING MA118054010119 Final Doc - Part1 1. IMPLEMENTATION STATUS: TRADE TERMS Implementation status Recommendations Total Realized 1Q01 2Q01 3Q01 4Q01 Beyond • Reduce price discounts for small accounts to defined range • Reallocate money from non “Quid pro Quo” discriminatory trade terms to “Quid pro Quo” • Shift promotions to products with higher contribution/ promotion • Improve type of promotions (“muebles”) • Establish processes for improving promotion management • In execution by Trade Marketing • Not initiated • Not initiated • Not initiated • Not initiated 40 30-60 40 15-30 50 10 7.5-15 5 10 7.5-15 7.5 1.5-3 6 10 7.5-15 7.5 1.5-3 6 10 7.5-15 20 12-24 38 Source: Team

  47. MA118054010119 Final Doc - Part1 1. SUMMARY OF KPI’S - TRADE TERMS Measured in relation to Actions to monitor KPI Unit Frequency Calendar • 1.1 Reduce price discounts for small accounts to defined range • 1.2 Reallocate money from non “Quid pro pro “ discriminatory trade terms to “Quid pro pro” • 1.3 Shift promotions to products with higher contribution/ promotion • 1.4 Improve type of promotions (“muebles”) • 1.5 Establish processes for improving promotion management • Average price discount by product cluster and segment of client size • Percent of clients with price discount above maximum by product cluster • Number of facings by account • Share of space in each level by account • Number of new SKU’s by account • Percent of realized promotions versus planned by type/ product/ account • Average contribution of realized promotions by account • Percent of “muebles” installed versus planned by account • Volume increase for each store with “muebles” • Qualitative KPI’s for reports: • Availability • Quality • Completeness • Percent • Percent • Units • Percent • Units • Percent • Percent • Percent • Percent • Number of reports • Scale 1 to 5 • Scale 1 to 5 • Defined target average price discount by product cluster on client size • Target number of facings by account • Target share of space in each level by account • Defined objective of new SKU’s by account • Number of planned promotions by type/ product/ account • Planned average contribution of planned promotions by account • Number for “muebles” planned by account • Previous year • Previous period • Previous period • Previous period • 2/ year • 2/ year • 4/ year • 4/ year • monthly • 3/ year • 3/ year • Monthly • Monthly • 3/ year Jan., Jul. Jan., Jul. Jan., Apr., Jul., Oct. Jan., Apr., Jul., Oct. Jan., May, Sep. Jan., May, Sep. Jan., May, Sep. Source: Team

  48. Financial benefits (Million pesetas) KPI’s • Percent of returns over sales • Product availability at nearby hypermarkets • Percent of stock-outs at distributors warehouses • Percent of sales growth by product and distributor • Number of new SKU’s by distributor and client BASIS FOR ACTION CONTROLLING MA118054010119 Final Doc - Part1 2. IMPLEMENTATION STATUS: COST TO SERVE Implementation status Recommendations Total Realized 1Q01 2Q01 3Q01 4Q01 Beyond • Improve direct distribution to nearby hypermarkets • Improve delivery efficiency of operators • Modify external distributors’ model • Not initiated • Not initiated • In progress 50-80 30-70 200-260 3-5 1-2 18,5-27,5 7,5- 17,5 13-18 18,5-27,5 7,5- 17,5 25-34 10-20 15-35 161-206 Source: Team

  49. MA118054010119 Final Doc - Part1 DOCUMENT CONTENTS • Project objectives and scope • Overall confirmed profit potential • Transparency phase • Recommendations and potential for each key lever • Implementation plan for each key lever • Specific action plans by account • Confirmed potential and required resources • Implementation organization

  50. 29.4 - 37.4 35.4 -44.4 MA118054010119 Final Doc - Part1 SPECIFIC ACTION PLANS BY ACCOUNT (1/5) Non “Quid pro Quo” Promotional effectiveness Product mix improvement Total potential (million pesetas) Potential (million pesetas) Potential (million pesetas) Potential (million pesetas) New SKU’s Volume growth Account Actions Products Actions 2279 0598-0565 Improve assortment in supermarkets Improve quantity of space Improve quality of space Increase participation in client's promotional activity 9-18 8-16 Decrease 4 promotions of LC1 firme Increase 2 promotions of Dalky Increase 2 promotions of LC1 Liquid Decrease 2 promotions of natural yogurt Increase 2 promotions of Egg Flan or Biocalcio Firme 3.9 Fruits + Yoco Sveltesse Natural + Taste Sveltesse Fruits Sveltesse Liquid LC1 Liquid Biocalcio Firm Biocalcio low fat Biocalcio Liquid Liquid Nestlé Desserts La Lechera Mousse Petit specialities Petit Classic Petit Yoco Mousse Sveltesse Fruits + Yoco Sveltesse Natural + Taste Sveltesse Fruits Sveltesse Liquid LC1 Liquid Biocalcio Firm Biocalcio low fat Biocalcio Liquid Liquid Nestlé Mousse Petit specialities Petit Classic Petit Yoco Mousse Sveltesse 1 1 100% 3% 15% 40% 10% 5% 5% 5% 22% 3% 15% 15% 200% 75% 4% 36% 14% 7% 35% 6% 10% 17% 10% 18% 15% 6% 111% 25% 10% 26.4 17.5 Source:Team

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