The Deceptive Acts of Nestle Philippines

Deceptive Act No. 1: The Bait of Initial Support

1. NESTLE lures Filipino businessmen, to become Nestle products distributors, with intricate and multi-layered deceptive practices, that start with priming activities such as large amounts of actual start-up promotions, incentives and assistance (i.e. monetary, equipment or services). Once a distributor takes the bait, they are slowly reeled in, with promising rates of return, and promises of even greater rewards. With good early net earnings, distributors, such as our client, were encouraged to invest more money into the distribution business.

Once engaged by the hook of early success, NESTLE systematically and deliberately withdraws these initial incentives over time. The distributor is then scooped into the net of the investments game, where the rules are pre-determined by NESTLE, and where both NESTLE’s gain, and the distributor’s demise, becomes inevitable.

When the distributors are irretrievably committed, in substantial financial, manpower and equipment investments, NESTLE bullies its local distributors to absorb nearly the entirety of the financial risks starting in the year 2006. All the hard work is passed on to the distributors, through cleverly worded contracts of adhesion, to earn the lowest return on capital (i.e. 4.12% per attached 2006 Comparative Study) among the distributors of major consumer goods in the country.

Deceptive Act No. 2: Non-Disclosure to Local Banks

2. When trade receivables from its distributors started to average about 45 days, sometime in 2006, NESTLE arranged to transfer its inventories financing from in-house to either BPI and MBTC using a tri-partite NESTLE-Bank-Distributor revolving promissory notes line (RPNL) deal.

The transfer of the inventories financing by NESTLE paved the way for reducing its receivables by 45.7%, or from Php 6.9 billion in 2006, to Php 3.7 billion in 2007. NESTLE’s financing costs dropped 60.7%, or from Php 734 million to Php 288 million for the same period. Ostensibly, this would appear as a stroke of financial management finesse. However, NESTLE only swept all the liabilities under the rug of its distributors. Ultimately, NESTLE declared freedom from the burden of collection, and conveniently insulated itself from the perils of not being paid by wholesalers, in a scheme that they euphemistically called the “Revolving Promissory Notes Line (RPNL).

NESTLE did not disclose to the local banks that some of the distributors were already having financial difficulties. This fact alone characterizes NESTLE’s propensity for highhanded and manipulative practices. Worse, NESTLE cultivated this financial arrangement into a full-blown and textbook example of abuse of right. The local distributors were then forced to accept the terms and conditions negotiated by NESTLE with the banks, such as the fixed 30-day maturity of the RPNL, even when NESTLE’s own key accounts, as well as the big groceries, supermarket chains, and wholesalers, stretched their payment terms to 45 days or longer, on the average. The resulting scenario is a reverse “pour attrui,” where an unwilling victim was handed down the raw end of a deal, where NESTLE reaps the rewards, while the distributors step into an even deeper pit of financial quagmire.

Deceptive Act No. 3: Imposing Unreasonable Quotas Under Constant Threat of Termination

3. Whenever a distributor is forced to max-out its bank credit lines, up to the critical loan to capital ratio of 12:1, any further delay in collections of trade receivables would prove to be disastrous. But since NESTLE progressively imposes stretched sales volumes, the average distributor is perennially plagued by two evils: to ignore the sales results imposed by NESTLE or to grant substantial discounts to big customers. The first option leads to termination of their contract. The second option sinks them deeper into debt. Clearly, the lesser of two evils is the second one, where NESTLE’s distributors get to keep their valued distributorship contracts, but it would ironically entail sacrificing its own business viability.

The financially trapped distributor would desperately try to continue operating, until either the bank stopped giving credit, or NESTLE terminated the contract. This unfortunate scenario happened to FDI 2 and sister company Service Edge Distributors, Inc. (“SEDI”), except that SEDI was able to solve its liquidity problems, through means that are external to, and independent from, its distribution business.

Feedback from the market indicated that at least two other NESTLE distributors, whose annual turnover of over 1 billion pesos each, are currently on the brink of financial collapse, due to the same circumstances that are programmed to squeeze the distributors dry.

4. In the Philippines, Fast Moving Consumer Goods (“FMCG”) distribution is generally, a high-volume, low-margin business. Since trading and retailing in the country, by law and by design, is dominated by small and medium scale enterprises, the average distributors of most FMCG manufacturers only have between Php 2 million to Php 5 million paid-up capital. When its inventories financing was transferred to local banks in 2006, NESTLE started to unfairly “push” and “require” its distributors to “break barriers and get the job of selling more Nestle products done,” year in and year out, even as it insulated itself without assuming any risks of its own.

NESTLE imposed unreasonable sales targets, and increased them geometrically, unduly stretching the distributors’ financial capacities to a dangerously snapping taut, and ensnaring them in a fatal “money trap.”

5. To be financially viable, an FMCG distributor, with only Php 5 million paid-up capital, should buy and sell at most Php 30 million of inventories, every month for a reasonable gearing (i.e. loans to capital) ratio of 6:1. Since on the average, about 40% of a distributor’s customers were big groceries, supermarkets and wholesalers that would not pay within 30 days, then at least Php 12 million of trade receivables would not be collected in any given month.

NESTLE, however, would require the distributor to maintain the monthly sales, and even steeps the sales volumes, under threat of contract termination. So within a short period of 6 to 12 months, the average distributor would find itself buried in Php 50 million to Php 60 million debt with a very unhealthy gearing ratio of 10:1 to 12:1. NESTLE forces its distributors to defy and abandon all business and common sense, under constant threat of contract termination.

Deceptive Act No. 4: Unexplained and Non-Transparent Pull-out of its Products from the Market

6. Ethical practice dictates full disclosure and accountability to the public. On 06 April 2009, under the pretext of a “Traceability Drill,” NESTLE ordered the pull-out of its Bear Brand products covered by a specific batch of delivery. NESTLE verbally advised SEDI that “all Bear Brand stocks that arrived at the warehouse after March 30, 2009 shall be put on hold.” Batch codes were ordered inventoried to be sent back to NESTLE. NESTLE then replied to identify which batches should be pulled-out, without giving any reason or explanation. By Tuesday, April 7, 2009, NESTLE informed SEDI that this is a “mere simulation exercise” to measure the response time. By April 8, 2009, they pulled out all the stock batches that they earlier identified.

But this is not an isolated instance. NESTLE has engaged in similar covert operations in the past. They have done similar “drills” in September 2007 for Nestle Fresh milk; in May 8, 2008 for Chuckie chocolate drink; in May 27, 2008 for Chuckie chocolate drink; and in October 28, 2008 for Bear Brand sterilized milk.

These deceptive acts of pulling out the products, without full disclosure to the public of the reasons, do not only constitute fraud upon public, but also a clear manifestation of reckless disregard for the public health and welfare.

Deceptive Act No. 5: Instigating and Fueling a Price War

7. The current Nestle FMCG distribution business in the Philippines is a “buyers market,” where the big customers, such as the big groceries, supermarket chains and wholesalers, practically dictate the prices or trade discounts. This was caused by an undeclared price war started in 2004 by NESTLE Food Service distributors selling grocery packs, and sustained by NESTLE’s key accounts that are entitled to VAT-free purchases, and who are selling some of their excess inventories in the distribution areas.

NESTLE management was aware of the prevailing price war, but instead of immediately correcting the root causes of the problem, NESTLE threatened to sanction any distributor that would sell with big discounts or below FOB prices.

8. NESTLE not only tolerated, but in fact, instigated and fueled the frenzied price war that gripped all its distributors by their necks.

In a letter dated January 2007 (see attached) to George Cua, NESTLE agreed to give the Welcome Chain total of 5% discount for COD sales when account was turned over to SEDI. At 5% discount, SEDI earned nothing from the account, or at most, it earned the incentive of 1%, but only if SEDI reached the total sales target for the month, at the cutthroat levels that NESTLE dictated.

By giving such big discounts to the Welcome group, SEDI was pressured and cornered into granting the same terms to its other big wholesalers and supermarket customers, who may otherwise claim discrimination. As a result, SEDI gave up P8.4 million in 2007 and P8.6 million in 2008, in lost discounts, while spending Php 4.7 million in 2007, and Php 5 million in 2008, to service the Welcome account.

All these battles left the distributors scrounging for thin margins that were not even enough to keep them afloat. Through all of these wars, NESTLE remained the immovable beneficiary, unmoved and unharmed.

Deceptive Act No. 6: Uneven Sharing of Profits

9. When a big and highly profitable manufacturer like NESTLE demanded consistent delivery of aggressive sales targets, it is only fair that NESTLE shares in the risks.

But having cleverly shifted the inventories financing to the Filipino bankers and SME businessmen, NESTLE bullies the distributors to generate uncompromising sales targets using the threat of termination. NESTLE gets all the profits, of about 15% EBIT, which is even better than the Group or industry average of 14%. Any NESTLE distributor would be very lucky to earn 1.5% EBIT or 10 times less than what NESTLE gets.

10. While NESTLE continually exceeded its sales and profit targets and objectives, most of its former distributors like FDI 2, On Target Distribution, Inc., Cosmo Fortune and Leader Foodline had to close down for poor or unacceptable returns on capital at best or in the case of FDI 2 for massive financial losses in spite of all the money and efforts put into the business.

Deceptive Act No. 7: Condoning Tax Evasion

11. Because the current NESTLE distribution system leaves little room for profitability, an average distributor earns the 1% to 1.5% EBIT by managing (i.e. mainly by under-reporting sales) its tax liabilities particularly the local government or municipal taxes. Various distributors, in several Distributors’ Meetings, raised this issue in plenary with NESTLE management since 2002. But NESTLE chose not act, smug in their own profitability, and callous to the plight of the distributors.

By its inaction, NESTLE management likewise condoned, if not directly abetted its distributors’ non-compliance with local tax laws.

Deceptive Act No. 8: Oppression and Bad Faith in Deliberately Delaying Just Claims for Reimbursements

12. The industry practice finds the distributors advancing weekly payments of promotion expenses to their key outlets. NESTLE, however, usually and deliberately delays the reimbursements due to its distributors. NESTLE takes about 2 to 3 months to process the payment of the distributors’ claims, that on average ran from P3 million to P4 million in monthly accounts receivables. Worse, NESTLE unilaterally pays these claims in installments, and never in full.

Delayed reimbursement of legitimate business claims, and installment payments of such claims by NESTLE, has forced its distributors to borrow more money, and pay more interest, and effectively determined the fate of its distributors from one “liquidity dead-end” to another.

Deceptive Act No. 9: Handing Over the “Empty Bag”

13. In the specific case of our client leading to its illegal and unjust termination, the one-sided business relationship between NESTLE and FDI 2 was perpetrated and perpetuated through the supervision and control of NESTLE’s officers, particularly its Area Sales Manager (ASM), Ma. Elisa Lupena. As ASM, Lupena exerted pressure on FDI 2 to meet its increasing sales targets - and when those targets were met (resulting in the 2005 and 2006 awards) increasing the targets even more – FDI 2’s commitments to NESTLE escalated. FDI 2, through its then President, Mark de Vega, goaded by NESTLE though ASM Lupena, fell into a trap of getting the results for NESTLE, at all costs, and in exceeding upwardly moving targets.

NESTLE force-fed the scraps of bad debts and obstinate debtors to its distributors. Lupena exploited NESTLE’s superior contract position to put pressure on FDI 2 management, not only to meet increasing sales targets, but also to accept transfer of other slow and poorly paying accounts not covered by the original distributorship.

The pressure to accept this unconscionable burden was made within the context of a stagnant market area, where there were no material increases in the number of outlets covered by the distributorship agreement. Worse, just as FDI 2 was saddled by increasing sales burdens from galloping targets, the extent of NESTLE support- which was a crucial factor in the initial sweetening of the distributorship deal – was progressively being withdrawn.

Deceptive Act No. 10: Tolerating a Situation of Conflict-of-Interest as Long as it Served NESTLE’s Interest

14. Not only did Lupena exert pressure on the targets, she even began to interfere in the day-to-day operations of FDI 2’s distributorship. which at first, seemed odd. The progressive stretching of targets, and NESTLE’s actual interference through ASM Lupena increasingly put a strain on FDI 2’s resources and its capacity to meet its commitments. In 2005, NESTLE imposed a target of Php 498 million. In 2006, this was increased to Php 561 million and in 2007, the figure was jacked-up to Php 776 million. These figures translated into an imposed 12.7% annual growth in 2006, and 36.2% in 2007, respectively, without taking into consideration FDI 2’s limited working capital that already strained by an ever-growing past due accounts receivables.

When one compares these growth figures to NESTLE’s own sales growth of 3.71% in 2006 and 8.3% in 2007, one can clearly see that NESTLE’s expectations for its North Quezon City area distributor were patently unreasonable and unconscionable.

Through these targets, NESTLE was setting up FDI 2 for failure, and thus, making it appear that FDI 2 was running an apparently profitable distribution to the ground.

15. On October 2007, FDI 2’s owners realized that instead of earning money, FDI 2 were only raking in more debts. When they investigated the matter, they found that their own President, Mark de Vega, incurred substantial losses in the process of blindly adhering to NESTLE’s ever-increasing impositions, demands and pressures. De Vega confirmed the increasing pressure of NESTLE on FDI 2 in an e-mailed response to the owners.

16. The discovery put the FDI 2 owners in a firefighting mode. In a desperate effort to keep FDI 2 afloat, the owners raised and invested a total estimated amount of P300 million to save the company.

17. At about this time, FDI 2 owners were confronted by an unusual and unexpected twist of events, brought about by a seemingly innocuous exchange of cellular phone SIM cards between Mr. Joseph Derrick Yambao, FDI 2’s current President and Mark de Vega. De Vega’s cell phone lost battery power. So he borrowed Mr. Yambao’s phone and he inserted his SIM card there. After he had returned the cell phone, Mr. Yambao discovered that de Vega’s SIM messages were still in his phone. The messages in de Vega’s SIM card were viewable in Mr. Yambao’s phone. In one of these messages sent by NESTLE’s ASM Lupena to FDI 2’s de Vega the following exchange appeared:

SENDER ELISA LUPENA: “Baby which one do you like better, me on top or you on

top.”

SENDER ELISA LUPENA: “Depends on what? If you’re too lazy Oh I’m just

daydreaming while waiting for stupid email. Not good

to feel horny so early in the morning.”

18. Through this message, and after an internal investigation, FDI 2 discovered that the extent of Ms. Lupena’s interference in the affairs of the company crossed the line from an ordinary business relationship, albeit, skewed in favor of NESTLE – to something more personal, and that she and Mark de Vega were having an affair.

19. In November 2007, FDI 2 informed NESTLE of this affair. They warned NESTLE of a conflict-of-interest situation arising from the illicit relationship between ASM Elisa Lupena who wielded great power over FDI 2’s contractual obligations and commitments and its operations, and Mark De Vega who was charged with complying with NESTLE’s demands and sales objectives for the distributorship area.

The illicit affair compounded and aggravated the growing financial problems of FDI 2, and the existence of conflict-of-interest made it difficult to separate at which point ASM Lupena’s demands on FDI 2 were the result of her influence as NESTLE’s enforcer in the area, and her undue personal influence over de Vega to meet her own sales targets. On the part of de Vega, this conflict-of-interest made it difficult to pinpoint exactly where the line stopped between his legitimate actions as FDI 2 President, acting to increase targets to meet his company’s goals, and his actions as ASM Lupena’s lover seeking to please the former’s demands for big sales targets as part of her NESTLE Key Result Areas.

20. Instead of conducting a formal investigation after the conflict-of-interest was duly reported, NESTLE dismissed the illicit relationship as a “purely personal affair between two consenting adults.”

And why not? At this time, NESTLE awarded to ASM Lupena the Metro Manila ASM of the Year for years 2005 and 2006, on the record high’s that were chalked up by distributors under her area of responsibility, including FDI 2. NESTLE recognized FDI 2 as Metro Manila Distributor of the Year for the same years.

Deceptive Act No. 11: Coercion and Forcing the Termination of a Distributor

21. Worse, instead of helping the owners of FDI 2 to address the financial problems created by Mr. De Vega, with the evident and direct participation of NESTLE’s Ms. Lupena, and from which NESTLE actually profited by eventually achieving its aggressive sales targets, NESTLE demanded FDI 2’s immediate termination as distributor.

To tighten the screws further, the threat of termination was not limited to FDI 2, but also included SEDI, another NESTLE distributor that is owned by the same owners of FDI 2. SEDI was not in the same financial bind as FDI 2. The lumping of SEDI with FDI 2, despite being separate and distinct corporate entities, was obviously a calculated move that was intended to force FDI 2’s resignation or desistance from its distributorship agreement. The owners of FDI 2 and SEDI were given an all-or-nothing, take-it-or-leave-it ultimatum: “drop FDI 2, or lose even SEDI.”

Deceptive Act No. 12: “Take-Over vs. Simple Taking”

22. And this is not all. After the unjust termination of FDI 2, the owners of FDI 2 (and SEDI) claimed the amount of ELEVEN MILLION SEVENTY THOUSAND SEVEN HUNDRED SEVENTY THREE PESOS (Php 11,070,773.20), representing inventory taken back by NESTLE, advances made by FDI 2 for NESTLE’s promotional activities, and performance incentives due from NESTLE, and P930,920.84 representing claims for refund of withheld EVAT for 2007. These claims are due and owing to FDI 2. They were not disputed claims; in fact these claims were actually acknowledged by NESTLE. Given FDI 2’s financial condition, FDI 2 desperately needed these amounts to meet its increasing debt, unpaid wages, 13^th month pay and separation benefits for around 80 employees that were let go during Christmas time of 2007, among others.

These obligations threatened to spill over into SEDI, and FDI 2, sans De Vega, had to scramble for whatever cash they could scrape from whatever source.

23. NESTLE initially ignored the claim, or gave the FDI 2/SEDI owners the run-around, in spite of the fact that the claims were not disputed, and in spite of the fact that the NESTLE executives, who had been in constant communication with the FDI 2/SEDI owners, knew that the amount would bring some relief to FDI 2, and reduce pressure upon SEDI. FDI 2’s group made several demands for the settlement of the claim. However, NESTLE continued to unjustly resist payment, obviously dangling the same as a bargaining chip in its ongoing negotiations with FDI 2/SEDI.

24. NESTLE’s indifferent posture vis-à-vis the claim for the amount of Php 11,070,773.20, and its nonchalance towards the illicit affair between NESTLE’s Lupena and FDI 2’s De Vega, took a different turn in January 2008.

NESTLE was then ready to talk to FDI 2/SEDI about the Php 11,070,773.20 claim and in fact informed the group that a check was being prepared. What precipitated this change in position was a complaint from the wife of Mark de Vega to NESTLE regarding the affair. To address this, NESTLE conveniently allowed ASM Lupena to resign, thereby washing its hands from the sordid affair and all the entanglements it entailed.

25. Clearly, NESTLE recognized that there is a problem with their business policies, as evidenced by this sudden change in position. But then again, NESTLE saw this valid claim as an opportunity to sweep the entire sordid affair from under the proverbial rug. The FDI 2/ SEDI owners were in dire need of capital. The undisputed claim for the amount due to FDI 2 was being dangled as a bargaining chip. NESTLE saw the unfortunate situation of FDI 2 as an opportunity to procure a quitclaim from FDI 2/SEDI. The NESTLE officials smelled the desperation of FDI 2/SEDI in their efforts to obtain from NESTLE what was rightfully theirs. NESTLE held all of the cards stacked in their favor, and exploited every advantage to the hilt.

Deceptive Act No. 13: Simple Blackmail

26. So on March 2008, the FDI 2 and NESTLE officials met regarding this claim. Ordinarily, the NESTLE representatives would just turn over the check and ask FDI 2 to sign an acknowledgment receipt. To their surprise, instead of a simple acknowledgment receipt, NESTLE officials showed a check to the FDI 2 group, and informed them that they have to sign a “Release and Quitclaim,” directly implying that the signing of Release and Quitclaim was a pre-condition for the release of the check.

27. FDI 2 then informed NESTLE that there could be possible claims that the audit might uncover which were not part of the original claim and that the document that NESTLE was foisting as a condition of payment would have forced FDI 2 to waive other just and valid claims resulting from the ongoing audit. But NESTLE was adamant that FDI 2 sign the quitclaim. FDI 2’s legal counsel strongly advised his clients not to sign the quitclaim, wanting no part of the farce.

28. But despite the absence of any legal representation, NESTLE (through its legal counsel) seized upon the situation and had FDI 2 sign this quitclaim, insisting on this as a pre-condition to the release of the check, and on the misrepresentation that NESTLE would honor a bona fide claim, should there be some arising after the forensic audit being conducted by FDI 2.

29. To reiterate, NESTLE prevailed upon FDI 2 to sign the document as a condition sine qua non to the turning over of the claim check, in spite of the absence of the latter’s counsel. FDI 2 asked NESTLE at least three (3) times for assurance that NESTLE will honor legitimate claims, even if this quitclaim was signed. All three times, NESTLE said yes. So under these circumstances FDI 2, through Mr. Yambao reluctantly signed the Release and Quitclaim document.

30. As if this was not enough, NESTLE’s legal counsel, to say the least, irregularly notarized this document, when she was a negotiating party to the same.

31. When FDI 2 made such a good faith claim, NESTLE declared in a letter dated 21 October 2008 that the FDI 2 issue was “closed as far as NESTLE is concerned,” contradicting its verbal assurances and representation that NESTLE would address any other just and valid claims, and leaving FDI 2 “holding the bag.”

Clearly, under existing policies and specific acts stated above, NESTLE has demonstrated its monopolistic, anti-Filipino and anti-SME stance against its distributors. By virtue of the specific acts against our client, NESTLE has likewise shown an utter lack of scruples. It has demonstrated its opportunistic and predatory attitude towards the very same distributor that has performed for NESTLE, even beyond its already-aggressive sales targets.

Our client has “delivered” to NESTLE, even at the expense of its own financial demise. But instead of rewards, NESTLE has “delivered” to our client a veritable “death blow.”

Your good office is aware that it is State policy to develop a self-reliant and independent national economy effectively controlled by Filipinos. Likewise, the State recognizes the indispensable role of the private sector, encourages private enterprise, and provides incentives to needed investments. (Sections 19 and 20, Article 2 of the 1987 Constitution).

To this end, Section 1, Article 12 of the same Constitution states:

[T]he State shall protect Filipino enterprises against unfair foreign competition and trade practices.

In the pursuit of these goals, all sectors of the economy and all regions of the country shall be given optimum opportunity to develop. Private enterprises, including corporations, cooperatives, and similar collective organizations, shall be encouraged to broaden the base of their ownership.

Also, Article 28 of the Civil Code provides:

Unfair competition in agricultural, commercial or industrial enterprises or in labor through the use of force, intimidation, deceit, machination or any other unjust, oppressive or highhanded method shall give rise to a right of action by the person who thereby suffers damage.

The foregoing actions of NESTLE are clearly indicative of its unfair trade and distribution practices. Its practices, while designed to ensure maximum profitability and minimum risk to itself, are destructive to its Filipino distributors, as well as the Philippine economy. Worse, there is no doubt that all the profitability is channeled directly to NESTLE’s main office in Vevey, Switzerland, with the Philippine entrepreneur and ultimately the Philippine economy taking all the risks and losses.