Monday, 01 March 1993

UK: Nestle Rowntree - A bittersweet tale.

UK: Nestle Rowntree - A bittersweet tale. - Five years on from Nestle's controversial takeover of Rowntree, Peter Wilsher considers to what extent the critics' fears were justified.

Five years on from Nestle's controversial takeover of Rowntree, Peter Wilsher considers to what extent the critics' fears were justified.

The sign next to the main gate of the world's biggest sweet factory changed last autumn from "Rowntree Mackintosh" to "Nestle - Nestle Rowntree Division". It took more than four years after 1988's bitterly contested takeover before the new management got around to making the switch. The local joke was that the maintainance department, in a spirit of historic loyalty, had somehow managed to mislay the order. But more probably the delay mirrored the Swiss multinational's general sensitivity as it set about absorbing and refashioning what had, for over a century, been the dominant corporate enterprise in the ancient city of York.

Its clinching £2.55-billion cash bid, which followed on from, and ultimately eclipsed, a rival offer from fellow Swiss confectionery maker Joseph Suchard, generated an almost unprecedented volume of criticism. The workforce, the Rowntree board, the City authorities, the Labour party, a phalanx of Tory backbenchers, backed by a vociferous assortment of chauvinists and patriots and the trustees of the many Rowntree charities, all vied with each other to warn of the dire consequences if the deal was allowed to go through.

The main considerations urged on the Government as reasons for it to block the sale, or at least refer it to the Monopolies and Mergers Commission, were basically sixfold: (1) employment would be slashed. One MP angrily cited a Swiss newspaper report that Nestle planned a one-third cut in Rowntree's 5,000-strong UK staff. (2) Investment would be starved as the new owners systematically shifted production abroad, closer to export markets. (3) Research and new-brand development would wither away now that foreigners had acquired control of Rowntree's long-established labels, such as world-beating (and quintessentially British) fruit gums, KitKat bars, Polo mints, Black Magic and Quality Street assortments. (4) "The end" would be written to Rowntree's long, proud history as a benevolent employer. (5) Decision-making, and senior management functions, would shift to Switzerland. That would be of permanent detriment to York. (6) Justice would be flouted if control passed, by way of an incontrovertibly hostile takeover, to a company whose own shares, by both Swiss law and the structure of its articles, were effectively bid proof.

To back up these arguments, the protesters took to the streets, political platforms and the corridors of power - but it was all in vain. Lord Young, then secretary for trade and industry, decided against a monopolies referral, thus bringing an avalanche of denunciation down on his head. Nestle quietly cultivated the City institutions who were now the major shareholders (since the once-dominant stake held by the Rowntree charities had been allowed, through profit-taking and non-takeup of rights issues, to atrophy). It then clinched the battle with a 20% improvement on its initial offer. Suchard decided to throw in the towel and hand over the huge lump of equity it had acquired in the wake of the April dawn raid which first put Rowntree into play. On 28 June Nestle announced that it had more than 50% of the votes, at which point the Rowntree chairman, Kenneth Dixon, conceded defeat and agreed to recommend the bid "subject to certain conditions".

Between then and the eve of Suchard's first strike the stock-market valuation of the business had risen by 130% or just under £1.4 billion. By the end of July, when the last recalcitrants (including some of the charities) accepted the inevitability of compulsory purchase, it was all over. That was almost five years ago, and it is now possible to see, with clarity, what Nestle has made of its highlycontroversial acquisition and how justified, or otherwise, were the fears.

In fact, the dissipation of the most immediate and worrying of these fears began almost immediately. Capital spending in York, which had stood at £9 million in 1987, doubled to £19 million in 1989, and will have reached a cumulative £100 million by the end of 1994. In the process the Haxby Road site, which remains by far the biggest of all Nestle's 440 worldwide units, has acquired a string of major new plants designed to reinforce its existing brand leaderships far into the 21st century.

Some £14 million went into general-purpose cocoa-processing. Another £15 million replaced the 90-year-old building where Polo mints have been made since their 1948 launch, and expanded capacity to a nice round one million an hour. This year will see a new Aero line (£7 million) and an £18-million milk chocolate factory. And early in 1994 the programme is due to be rounded out by KitKat 5, a £20-million miracle of automated wafer-baking, which, it is hoped, will add another 25% or more to the "have-a-break" biscuit's already staggering £200 million a year sales.

Looking further to the future, the York research centre has been doubled in size, given a £6-million facelift, and presented with 40 new top quality scientists gathered from all the main countries where the Swiss firm operates. Much of its work is concentrated on finding profitable ways to combine Nestle's white-chocolate expertise (Milky Bar) with Rowntree's long-recognised mastery of the brown variety. The first fruits (apart from the symbolic white Smartie which joined the familiar colours soon after the takeover) are Bianco, another milk-based bar, and Vice Versa, which craftily incorporates the attractions of both colours, but has yet to carve itself a really substantial sales niche.

That is hardly surprising. Building up sweet shop loyalty demands decades of patience and effort. Even Yorkie, the most recent of Rowntree's significant introductions, goes back to 1976, while KitKat, Aero, Black Magic and Smarties all date from before World War II. So Nestle was not buying just an income stream, it was acquiring a series of quasi-monopoly positions - KitKat, for example, outsells its nearest rival, the Mars bar, by more than 50% in the UK (with everyone else virtually out of sight) - as well as a clutch of established products ripe for exploitation in less mature markets elsewhere.

Indications so far are that they have not wasted these opportunities. Even KitKat, which is already Britain's best-selling confectionery item, achieved such a sales surge last summer that it had to be put on ration to the country's insatiable newsagents and supermarkets. The Quality Street packers, who normally go on short-time during the slack period after Christmas, were this year asked to work a record three week's worth of full shifts. In exports, there was a 30% increase in direct overseas deliveries from Nestle Rowntree's UK offshoots in 1991, followed by a further 20% in recession-stricken 1992.

As a result, the division's overall employment levels have remained almost unaffected by the current Europe-wide economic downturn. Elsewhere Nestle has reshuffled production within its European operations to the detriment of some of its older facilities. In February it announced that it was to switch chocolate bar production from Glasgow to more advanced factories in Newcastle and Dijon. As a result 550 jobs are to go at Glasgow over the next two years. Instead of the large-scale lay offs that York feared due to the Swiss's comprehensive cost-cutting campaign, the city has actually benefited from an almost unique degree of job stability. But although the chocolate-maker has indeed taken a sharp axe to its labour costs, and achieved spectacular productivity gains (1,000 KitKat people are now producing twice the tonnage that 800 managed five years ago), any potentially damaging effect on jobs has been more than offset by the need to maintain ever-higher output.

This is not just a management verdict. It is widely endorsed by the officials of the General, Municipal and Boilermakers' Union (GMB) which represents the bulk of the business's 3,000 York-based production workers. George Tuthill was elected chief convener for the Haxby Road site just two days before Suchard launched its dawn raid. He cut his negotiating teeth in the course of the bid struggle and the subsequent shake-down period.

Allowing for all the usual boardroom-shopfloor tensions he can see little but benefit for his members as a result of the Nestle incursion. "They have put in as much investment in five years as Rowntree could have afforded in 20," he says. "And it is only as part of a major multinational that we have been able to achieve the 60% export growth that is keeping us on the expansion path."

There have been major shifts in working practice, he says, most notably a continuing drive to contract out non-core activities and eliminate anything not directly concerned with chocolate production. The biggest change here was closing down the former Boxmills packaging unit, with 160 jobs attached, and transferring its orders to a new plant custom-built by the Canadian Lawson Marden group. But even that scale of cutback has been more than offset by new hirings, and more are in the pipeline. Wages, though no longer as good as they were in Rowntree's heyday, remain above average, and Nestle has not attempted to halt the steady reduction in working hours - now down to a standard 37 for everyone.

Tuthill's opposite number Neil Moore, who speaks for the office and administrative staff who belong to GMB's APEX wing, is less sanguine, and considerably more apprehensive about the takeover. While the production side has flourished, this group has suffered significant attrition. Numbers have been trimmed from 1,400 to just under 1,000 since the 1988 watershed. Some of the fall has been the result of natural wastage, early retirement, voluntary redundancy and a degree of resulting non-replacement. But more worrying was last year's decision to switch the 50 finance department jobs concerned with individual product accounts to the Nestle UK headquarters in Croydon. There was considerable trepidation when that was followed up in December by an announcement, as yet unamplified, that there would be a full-scale new administrative staff review "to be completed this year and implemented by spring 1994". Only when the thrust of that becomes clear, Moore feels, will it be possible to judge the import of Nestle's longer-run intentions.

In the meantime, though, he is happy to endorse Tuthill's verdict that, in the area of labour relations, staff benefits and community involvement, the Swiss and their British management team (which is Rowntree Mackintosh dominated) have behaved impeccably. The famous profit-sharing arrangement, which Joseph Rowntree introduced back in the 1920s, has not only been maintained but extended to embrace the whole of Nestle UK. Similarly the already generous company pension arrangements have been further improved under the new regime. It is also possible, under its recently revised terms, to take early retirement as early as 50, which has done much to cushion any redundancies affecting older workers. Even on the community involvement side, where Nestle was widely expected to take a hard-headed, value-for-money line, it is hard to find many complaints.

The Swiss company certainly got off to a bad start when its chairman, Helmut Maucher, allowed himself to be needled by persistent questioning on community issues into exploding: "I am not against culture and ethics but we cannot live on that." But this is as far as it went. Peter Anderson, the Rowntree Mackintosh community relations officer, retains his job, his office and his £670,000-a-year budget to support local charities and enterprises. Indeed, he is currently preparing a brief on how such activity might be extended to all the other 25 towns and cities where there are offshoots of Nestle UK.

It is, however, precisely on the nature and status of this relatively new Nestle UK (it came into existence in October 1991) that the residual Rowntree sceptics have now focused their unease. The most prominent of these doubters is Sir Donald Barron, a former chairman of the old Rowntree Mackintosh and now head of the Joseph Rowntree Foundation, the biggest of the three charities which still preserve the family's philanthropic name.

His objections fall into two parts. The first is a general feeling that York, as the birthplace and traditional home of the business, has been badly short-changed since the buyout. As he said in his latest Foundation report: "The dismantling of one of the few large company headquarters based outside London, and the transfer of decision-making to more distant locations could, on the evidence of other provincial cities, have a damaging effect on the character and well-being of the community." His second objection, though, is much more specific. It relates to the "special conditions" which were agreed with the old Rowntree Mackintosh board as the price of abandoning opposition to the bid. These, he claims, have been systematically ignored leaving York dangerously unprotected if there were to be any future policy shift.

In his final letter to shareholders, the RM chairman, Kenneth Dixon, listed a number of commitments to which his Nestle opposite number had readily agreed. A new grouping was to be set up in York, under Dixon's own direction, which would assume responsibility for all Nestle's international chocolate and confectionery strategy. York would remain as the HQ for Rowntree's UK activities. These would remain under their existing management, which would report directly to Nestle in Switzerland. As a result, Rowntree in York would be "assured of a significant role in the enlarged Nestle group".

Very little of this actually happened, and of what did get started virtually nothing now remains. Dixon duly set up the chocolate strategy group, and indeed joined the main Nestle management committee. But after six months he retired - along with all but a tiny handful of the former Rowntree directors and senior executives - and handed over to his long-designated successor Peter Blackburn. It is under Blackburn, as head of Nestle UK, that the York-based "international strategy" function has been quietly allowed to wither away. Blackburn, a Bradford-born accountant now in his fifties, has emerged as one of the major beneficiaries of the merger. He first came into Rowntree when the company itself swallowed the Norwich toffee-makers, Mackintosh, in the early 1970s. He was quickly spotted as a future high-flyer. By lucky chance he went to school in Douai and travelled widely in Europe before graduating in philosophy and French at Leeds University. He thereby qualifies as that considerable rarity, the British businessman who is also fluent in several languages and thus ideally fitted to thrive in Nestle's essentially multi-lingual culture.

The Nestle UK job puts him in charge of all the 22,000 UK employees, with responsibility for Nescafe, Carnation Milk, Crosse and Blackwell soups and Findus frozen foods, as well as all the assorted sweet and chocolate brands. These are split up into four divisions, covering grocery, food and food services as well as Nestle Rowntree, which came into existence on 1 January 1992. And although it remains substantially the largest, in terms of sales and employee numbers, there is no gainsaying that it has been downgraded in organisational significance, or that Graham Miller, as divisional chairman, reports to Blackburn in Croydon, not to Maucher in Vevey.

One consequent danger of that, as Neil Moore uncomfortably recognises, is that gradually more and more management functions will be centralised and drawn away from York, leaving it with a purely manfacturing function. But for the moment that threat does not look very immediate. In fact, the growth of the chocolate research centre and the 1991 decision to close down the Croydon computer centre and shift its workload (and most of its jobs) to York suggests that the traffic may well remain two-way - at least as long as the city is able to maintain and market its many locational advantages.

That may well be the best answer for the pessimists like Donald Barron. In the booming mid-'80s, when the main complaint from local employers was about skill shortages and the whole picturesque central area looked like turning into a gigantic souvenir bazaar, there was a real possibility that a recession like the present would leave the whole place defenceless. But if the 1988 struggle for Rowntree did nothing else, it jarred the City authorities out of any complacent reliance on economic continuity.

Reg Pulleyn took over as Lord Mayor in May 1988, just five weeks before Nestle emerged victorious, and it fell to him to utter the first words of the new realism. "We called them predators," he told his fellow citizens. "But now, dare I say it, I'm going to invite the predators to lunch." And then he, and the rest of the council sat down to plan a concerted, cross-party initiative to make sure that, whatever happened to chocolate, railways, tourism or any other of the staple job providers, there would be a steady stream of new investment and new employment to take up at least the worst of the slack.

The fruit of those deliberations was a major beefing up for the city's directorate of development services, and a just under £1 million annual budget to convey the "come to York" message. Among others this has attracted the Ministry of Agriculture, which is bringing £250 million and well over 1,000 jobs to set up its Plant Health and Pesticide Safety HQ and new Central Services Laboratory.

George Tuthill speaks for York as well as Nestle Rowntree when he affirms: "I've no worries. It's not what we're doing; it's what the rest of the country is doing."

Before commenting please read our rules for commenting on articles.

If you see a comment you find offensive, you can flag it as inappropriate. In the top right-hand corner of an individual comment, you will see 'flag as inappropriate'. Clicking this prompts us to review the comment. For further information see our rules for commenting on articles.

comments powered by Disqus

Additional Information

Latest from MT

Google tests delivery drones

Google tests delivery drones

The tech giant that brought the world to your fingertips now wants to bring it to your door. With flying robots.

 

10 things we learned this week

 

House price rise beats expectations (or doesn't)

 

Malaysia Airlines is slashing 6,000 staff

 

Dyson could be about to launch a robotic vacuum cleaner