International Issues

Chapter 13
Balancing Operating and Financial Risks at Nestlé

Nestlé is a huge, multinational Swiss foods corporation with operations in at least 150 countries. The overwhelming majority of its sales occur outside Switzerland. Nestlé’s various foreign operating subsidiaries enjoy considerable decentralized operational flexibility. Local division managers handle all marketing and production decisions.

In contrast to its decentralized operating policy, Nestlé uses a highly centralized financing strategy. All financing decisions are handled at corporate headquarters. The small corporate finance staff makes all funding decisions for the subsidiaries, establishes the firm’s worldwide consolidated capital structure, sets individual subsidiary capital structures, manages worldwide currency exposure risk, and mandates the dividend policy for subsidiaries.

When a subsidiary is first formed, about one-half of the needed financing—the funds used to acquire fixed assets—comes from equity contributions by the parent. The balance of the needed funds, primarily to support working capital investments, is acquired in the host country through the banking system or the sale of commercial paper. In some countries, where there is little or no risk of capital expropriation, the parent company may finance working capital needs, depending on the relative cost of funds for the parent compared to the local cost of funds for the subsidiary.

Each subsidiary normally pays a dividend of 100 percent of its profits back to the parent. This guarantees central control over the capital structure of each subsidiary. If additional funds are needed for investment, the parent provides them using the lowest-cost source of capital available. Nestlé manages its overall sources of capital with the objective of maintaining a top credit rating and thereby minimizing its capital costs.

Why does Nestlé follow such a conservative financing strategy? Senior vice president of finance Daniel Regolatti states, “Our basic strategy is that we are an industrial company. We have a lot of risks in a lot of countries, so we should not add high financial risks.”3 This strategy recognizes the trade-offs between business risk and financial risk that have been discussed in this chapter.

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