Innovation at Nestle

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CORPORATE TECHNICAL PRODUCTION AND R&D1 Name of chairmanNovember 2006

Innovation and RenovationConsumers at the heart of Nestlé's R&D

Werner BauerWerner Bauer

Good morning Ladies and Gentlemen, I am Werner Bauer, Nestlé's Head of Technical, Production and R&D. As such, the subject of innovation and renovation is very close to my heart, and I am glad to have this opportunity to give you the broader framework of today's conference.

Every day of the year, over one billion consumers choose to buy a Nestléproduct. I say choose because this is a purely voluntary act - they could be buying from a competitor. It therefore comes as no surprise that consumers are very much front-of-mind when it comes to Nestlé R&D: its mission is to find ideal solutions to help consumers improve the quality of their lives.

Nestlé is in the midst of a strategic transformation into a nutrition, health and wellness company, and R&D will increasingly drive and contribute to the acceleration of this process as we go forward. Indeed, I will become Chief Technology Officer next February, so that I can devote my full and undivided attention to broadening and speeding up the innovation process throughout the company.

Presentation Werner Bauer

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Responsibilities of the CTO

Science & Research• Lausanne• St Louis

17 Research &

Development Centres

Intellectual Property

Basic Research in

Nutrition

Food Science

Safety

Innovation Acceleration Teams

Product

Packaging

Technology

Quality

Intellectual property management

Protection strategies

Accelerate innovation & renovation launches

Benchmark best practices

Regulatory

Innovation claims

Substantiation

Innovation Partnerships

Packaging and Design

As CTO, I will continue to have global responsibility for R&D, from fundamental research here at NRC to other research and product technology centres around the world. I will also be in charge of innovation acceleration teams, technological intellectual property and its protection, innovation partnership management, packaging and packaging design and, finally, regulatory, which is becoming increasingly important as we need to substantiate more and more claims as we go forward.

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Nestlé R & D

275 Application

Groups

17 Research &

Development Centres

1Research

Centre

Markets

Corporate R&D

2,400people

1,300people

R&D InvestmentCHF Billion

1.50

0.81

0.90

1.04

1.16

1.21

1.21

1.43

2005

1998

1999

2000

2001

2002

2003

2004Suppliers

BiotechStart-ups

Universities Research Institutes

Ladies and Gentlemen, we spent 1.5 billion Swiss francs on R&D in 2005, equivalent to 1.6% of our yearly turnover. This is the largest amount spent on R&D in the food industry. We have 2,400 people working at the NRC and the 17 research and product development centres worldwide, and 1,300 in the 275 application groups which adapt product ideas to local market conditions. However, even if we do have the best R&D set-up in the world, by the sheer law of numbers there are potentially more good ideas for new products outside Nestlé than inside the company.

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Partnering in Basic Research

Today, we are on a permanent look-out for new ideas. This is why we are increasingly working in open partnership with many of our suppliers, with start-up companies through our venture capital funds, and with a wide array of research institutes across the world: the number of such partnerships has trebled over the last five years. Indeed, the agreement with EPFL we are signing here today is typical of this approach.

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Innovation runs through the whole company

Supply Chain

Regulatory

Intellectual Property

Marketing

Strategic Business Units

SalesManufacturing

Research

Market Research

Competitive Analysis

Innovation Renovation

Consumer Services

Development

Integrated cross-functional teams

Value-adding, profitable innovation and renovation

Use of global platforms

Relevance to local consumers

Furthermore, within Nestlé, the innovation and renovation process underway is by no means limited to R&D, it is very much a network involving most functions across the company. We use integrated cross-functional teams for each project – these are the previously-mentioned acceleration teams –forming global platforms while ensuring relevance to local consumers. In this context, I would like to point out that the innovation process is very different for each product category: for example, culinary products tend to be highly influenced by local culture and traditions, while healthcare nutrition is often more a case of science-driven, globally-similar needs.

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The Nestlé Innovation Model

What is technicallypossible ?

What iscommerciallyachievable ?

What doconsumers

need ?

If you look at the Nestlé innovation model, I have largely covered the R&D side. But there are two more aspects which are at least as important as R&D, and which are fully integrated into our model: major market trends and consumer insight.

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Major Market Trends

Growth in tier relative to market average, CAGR 1999-2004

Premium+8.7%

Value+4.2%

-5.7%

A new, first-to-market premium wet dog foodcreated with proprietary new productand packaging technology

A new premium light ice cream offerringeverything that Haagen-Dazs stands for,with no compromise except half the fat

Superior value for money chocolateenrobed wafer.# 1 brand in rural India

One very important trend is market polarisation: middle-of-the road products are being squeezed. According to a recent McKinsey study of 25 industries and product categories all over the world, the middle ground has trailed the market average by nearly 6% a year between 1999 and 2004, while the premium and value segments have been showing healthy growth. In other words consumers are either trading up to premium and super premium products, or they are trading down to value for money.

Indeed, hard discounters and private label are continuing to grow in Europe and are now worth over 100 billion euros. Market polarisation is already clear in Nestlé's existing product range: from premium light ice cream and premium wet dog food in North America and Europe, to our number one brand in rural India, a superior value-for-money chocolate wafer.

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Popularly Positioned Products

0

1

2

3

4

5

6

7

Bill

ion

Peop

le

4 billion peopleearn less than

1’500 USD per year

2.5 billion peopleearn more than1’500 USD per year

Addressing nutrient deficiencies,improving the lives of millions ofconsumers with relevant andnutritious products

In other words, it is not enough to address the needs of the 2.5 billion consumers who earn more than 1,500 US dollars per year, we also have to think about the 4 billion people who earn less than 1,500 dollars per year, providing them with products relevant to their nutritional needs. A recently-launched programme of Popularly Positioned Products, or PPPs, is providing products with high nutritional value to the less well-off in the north-east of Brazil. I expect we will see many more such initiatives in future in other parts of the world.

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Most consumers see a strong linkbetween food and their health

And this brings me to the third leg of the Nestlé innovation model: consumer insight. In all our major markets, it is perfectly obvious that the vast majority of consumers see a strong link between food and their health.

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"Natural"• Bio• Organic• Freshness• Natural

Nutrition, Health & Wellness• Enhanced• Enriched• Reduced• Invent

Liquification• Convenience / On the Go• Wholesome / Fresh• Functional Benefits• Innovation / New Occasions

Consumer trends

Not only that, but this fact can be broken down into three distinct sub-trends: (1) food has to be natural and fresh; (2) it has to contribute to nutrition, health and wellness in a tangible way, either by adding new benefits such as vitamins or fiber, by boosting existing benefits, or by reducing certain substances such as sugar, fat or salt; and (3) people are increasingly consuming liquid products as this is often more convenient, and because liquids are excellent vectors for functional benefits.

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Nutrition, Health and Wellness

Source: AC Nielsen/GNPD Mintel

Nestlé products and brands at each life stage fulfillingdifferent nutritional needs

Mainstream Specific nutritional needs

All these factors will be central to our innovation and renovation drive as we renew Nestlé's entire product range over the next four years.

All mainstream products, which consumers buy mainly because of the pleasure their taste provides, will have to go through the 60/40+ process. This means that no new or renovated product will be put on the market if it does not achieve consumer preference of over 60% in blind tasting, and if its nutritional properties are not superior to those of the nearest competitor's product, either because it has added benefits or because the amount of certain existing ingredients have been reduced.

On the other hand, the products of our newly-created Nutrition Division – infant, healthcare and performance nutrition with sales of around 5.2 billion last year –are bought because of their nutritional properties rather than because of their taste. These products, ranging from advanced immune protection and allergy prevention in infants to immune system reinforcement after chemotherapy, are especially reliant on top-of-the-range R&D.

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Adding health to our products

At Nestlé, highly specific nutritional benefits addressing such issues as heart health, cholesterol control and bone strength are usually provided by adding Branded Active Benefits, or BABs, to existing products. These Branded Active Benefits are the result of proprietary scientific research, they are clinically tested along the lines of what is done in the pharmaceutical industry and, obviously, they cannot be used by our competitors. Sales of Nestléproducts containing BABs amounted to just under three billion Swiss francs last year and continue to grow fast. This demonstrates that consumers are prepared to pay a premium for products which provide them with a clear, recognisable and relevant health benefit.

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Bone Health

Bonjour JP et al (1997) J Clin Invest 99:1287-94, Bonjour JP et al (2001) Lancet 358:1208-12

Bone Mineral Density(% / year)

6

4

2

0Placebo

Calci-N

8 years old girls (n=150) - Calci-N enriched nutrition versus placebo for 1 year4 years later : Calci-N group had significant higher bone mineral density – still higher thancontrol

Adding nutritional value: Branded Active Benefits

Let me just give you a couple of examples: clinical tests of Nesquik enriched with Calci-N showed that, over a period of four years, the bone mineral density of 8 year-old girls who had consumed the product was significantly higher than those who hadn't.

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Inhibits cholesterol absorption inside the intestine

Clinical trials have demonstrated efficacy

Control 1.2g/day 1.6g/day% Change in Blood LDL-Cholesterol

-12

- 8

- 4

0

Lowering Blood Cholesterol

Adding nutritional value: Branded Active Benefits

Another good example is the enrichment of NesVita, a low-fat filled milk sold in Asia, with ActiCol. Clinical trials clearly demonstrated the effectiveness of this added health benefit, which inhibits the transfer of cholesterol from the intestine into the blood.

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Our science helps to optimisenutritional profiles

However, as already mentioned, the nutritional qualities of food are not improved by enrichment alone. Reducing the quantity of certain ingredients can also contribute to nutritional improvement, although this can be a dangerous exercise: consumers are understandably very conservative when it comes to their favourite tastes and, indeed, they may stop buying a product if the recipe is changed. Nevertheless, Nestlé is committed to reducing the quantity of sugar, fat and salt used in its overall product portfolio. Since 2002, Nestlé has reduced the use of sugar in its product portfolio by more than 100,000 million tonnes of sugar, more than 25,000 tonnes of trans-fatty acids and more than 5,000 tonnes of salt.

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Science Alignment withConsumer Benefit Areas

Health Benefits

• Protection

• Growth & Development

• Digestive comfort

• Weight management

• Performance

• Healthy ageing

• Skin Health & Beauty

I am often asked, particularly in relation to Branded Active Benefits, whether Nestlé is getting closer to the pharmaceutical industry. The answer is a clear no, as all our scientific research very much concentrates on prevention rather than cures. And, because the field of scientific research is almost limitless, we have aligned our resources with the following, clearly-defined consumer benefits: protection; growth and development; digestive comfort; weight management; performance; healthy ageing; and skin health and beauty.

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By 2015, 1.5 billion people worldwide will be

obese or overweight – a rise of 50% from 2005.

Obesity: A major concern in growingnumber of countries

There is no doubt, however, that obesity, a major societal concern in many countries the world over, will be a strong focus point for Nestlé in years to come. In 10 years time, some 1.5 billion people worldwide will be obese or overweight. That is an increase of more that 50 percent over today. A rise in obesity leads to more metabolic diseases, most notably diabetes, and a corresponding rise in health care costs. These problems also point to opportunities, especially for a company serving consumers' needs. So how are we responding ?

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nutritional and lifestyle landscape

Metabolic health perspectivesin nutrition

Risk Management

Drug intervention

Changes in pathway dynamicsto maintain homeostasis

Health management Onset of

disregulation

Prognosticmarkers

Diagnosticmarkers

If you look at this graph, the green part is where nutritional and lifestyle problems can basically be managed through appropriate nutrition. As soon as you get into this yellow zone here, before you reach the red zone which means you require medical treatment, there is an intermediary zone where the situation can be approached through a judicious mix of goods – value-added food products – and services, that is to say nutritional and lifestyle advice.

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Weight ManagementPersonalising nutrition & lifestyle

• One-on-one solutions– programme tailored to client's

lifestyle– personalised counselling on

nutrition & lifestyle– nutritionally balanced, portion-

controlled dishes

• 600+ branded centres – US & Canada– Australia & New Zealand

Nestlé has now truly started down this path, first with the acquisition of Proteika, a small company in France, and the creation of the Nutrition Home Service there, which offer a combination of goods an services to consumers. Then, earlier this year, Nestlé Nutrition entered the strategic weight-management market in a bigger way with the acquisition of the Jenny Craig company and brand.

Founded in Australia in 1983 by a woman called Jenny Craig, the US-based company offers consumers personalised weight-management programmes tailored to their specific needs. Through a local Jenny Craig centre, consumers receive one-on-one advice on weight management and lifestyle from trained consultants. Each individual programme includes a range of nutritionally balanced and portion-controlled prepared food products designed to meet the consumer's lifestyle and nutritional needs. The Jenny Craig business includes more than 600 branded Jenny Craig centres, which operate today in North America and Oceania, and gives us access to the strategic US market, which is valued at 30 billion US dollars a year and accounts for 70% of the global weight-management market.

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Nestlé Nutrition Council

Nutrition & food safetypolicies & generalguidance

Examples:• Food Fortification• Trans Fatty Acids• Salt• Sugar• Iron• Obesity• Glycemic Index• Whole grain• Low-Carbohydrate Diets

External Members Nestlé Members

Dominique Belli MD Werner Bauer PhD (Chairman)Geneva Children Hospital, CH Executive Vice President

Bruce Bistrian MD Richard LaubeHarvard Medical School, USA Deputy Executice Vice President

Günter Blobel MD PhD Peter van Bladeren PhDThe Rockefeller University, NY, USA Vice President

Michael Gibney, PhD Thomas Schweizer PhDTrinity College Dublin Vice President

Robert Kroes PhD Ferdinand Haschke MDUniversity of Utrecht, NL Vice President

Demetre Labadarios MD PhD Edward Fern PhDUniversity of Stellenbosch Assistant Vice President

Tadashi Noguchi PhDChubu University, Japan

Irwin Rosenberg MD,Tufts University Boston

Bruno Vellas MDUniversity of Toulouse

Ladies and Gentlemen, ever since Henri Nestlé invented the farine lactéeNestlé to save the lives of malnourished children over 140 years ago, science-based research and development has been part of the DNA of this Company. So before I give the floor to Bruce German and Sandrine Andrieu, I have to say a few words about the Nestlé Nutrition Council, a consultative body established 28 years ago. The NNC is made up of world-class scientists providing Nestlé with general guidance on nutrition and food safety. As such, the NNC is an integral part of the overall scientific research resources at the Company's disposal. One of its members, Professor Günther Blobel, a Nobel prize winner in medicine, is also a member of Nestlé's Board of Directors. Furthermore, a wide range of specialized or local bodies also advise us both on general and specialised nutrition in area such as infant, healthcare and performance. These Councils and the Nestlé Nutrition Institute are closely interlinked through overlapping participants: for example, the vice chairman of the Japan Nutrition Council, Peter van Bladeren, is also a member of the NNC.I also have to mention the cycle of annual International Nutrition Symposia we launched three years ago, having realised there was no proper world-class scientific forum to discuss food and health. The first of these events dealt with genomics and personalised nutrition, the second with metabolism and the third – which has just taken place – with the brain. But more on that from the other speakers.Ladies and Gentlemen, thank you for your attention, and I am ready to answer any questions you may have at the end of the presentations. Bruce German, you have the floor.

Innovation at Nestle

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