- In an effort to cut costs, Nestlé is closing one manufacturing plant a month, Chief Financial Officer François-Xavier Roger told CFO Journal, according to a story reported by The Wall Street Journal. Some of the facilities are being repurposed, and current manufacturing functions are being transferred and consolidated between plants.
- So far, Nestlé has only generated 35% of its planned cost savings in manufacturing as it works to boost efficiency. The manufacturer is also centralizing procurement as a cost-cutting measure, and it's about 65% to its target savings. The company plans to save a total of $1.99 billion to $2.49 billion by 2020.
- There is no forecast for job cuts as a result of factory closures. At the end of last year, there were 413 factories in operation.
Nestlé is focusing on closing and consolidating plants and changing its old model, and this has been effective. Already, according to a recent investor presentation, the company’s capital expenditures as a percentage of sales fell to 4.2% in 2018 from 5.9% in 2012.
Direct-to-store delivery is being replaced by direct-to-consumer delivery as more people are looking for ways to save time. The result is that the complex distribution channels that allowed manufacturers to employ merchandisers to go into stores, look at inventory levels on shelves, and refill them from their respective companies' warehouses are no longer efficient.
Now with more people shopping online and fewer people perusing physical shelves in supermarkets, centralized warehouses are a more attractive option. In the United States, Nestlé is beginning this consolidation with frozen pizza and ice cream in the third quarter of 2019. The switch will result in shuttering eight frozen distribution centers and inventory transfer points. It will also result in the dismissal of about 4,000 workers, according to Bloomberg.
That job loss is the result of only eight plant closures within a year time span. Nestlé is expecting to complete its full plant reduction initiative by the second quarter of 2020. If the Swiss conglomerate plans to close a plant a month to get its finances back on track, it could potentially spell the end of thousands of careers worldwide.
The impact of this decision is not lost on CEO Mark Schneider. According to a transcript of a recent investor Q&A, he said the U.S. distribution shift is one of the largest changes the global company has made in terms of optimizing how products get to market.
"I also want to reiterate to everyone here this is, not only in terms of the absolute numbers, a pretty massive decision," Schneider said in the transcript. "This is also a fairly significant execution challenge for the US leadership team. I am very glad that they took this on. I think ... this will really position those businesses for better profitable growth and we'll be benefiting from this for a long time to come."
Although this cost savings approach is financially effective, Nestlé should be careful not to rock the boat too much. The company has the advantage of worldwide operations that allow it to spread the impact and avoid closing plants in a concentrated location. Doing so will alleviate too many jobs lost in a single economy. However, with 4,000 job cuts predicted in the U.S. alone, Nestlé still has a high amount of job loss as a result of restructuring.
As consumer shopping habits change, Nestlé is not alone in its cost-cutting initiatives. In 2017, Kellogg also switched from DSD to a warehouse model closing some of its distribution centers and putting 1,100 people out of work. Other companies have also had large layoffs. TreeHouse Foods has cut more than 800 jobs in the last two years by closing plants and its former office in Omaha, Nebraska. The private label manufacturer is cutting 170 more jobs when its St. Louis office — the company's former headquarters — shutters next month. Conagra also cut 100 jobs this year, closing the former Pinnacle Foods office in Boulder, Colorado. In 2016 and 2017, Kraft Heinz cut more than 1,200 jobs in the name of consolidation. And last year, General Mills cut 625 jobs to cut costs and improve performance in yogurt and baking brands.
If Nestlé is cutting its staff so severely, the company should be careful that morale doesn’t flag, which could cause bigger problems. With thousands of fewer people to get the job done, Nestlé is going to need to rely on workers’ efficiency to keep up the same pace of production. However, if workers are fearing for their jobs or feeling demoralized from constant cuts, the Swiss giant may not be able to get the expected efficiencies out of its workers. Worse yet, employees could take a page out of the book of Kellogg employees and demand compensation for terminated contracts.
Cost cutting through employee reduction is a complicated dance that requires precise steps. By taking this path, Nestlé is going to need to tread carefully and keep the human factor in mind as it continues to work toward achieving its bottom line. After all, humans are not as predictable as numbers.