Lean times challenge Nestle's appetite for growth

Last Updated: Thu, Jan 03, 2013 20:07 hrs

Nestlé SA, the world’s largest food company by revenue, is estimated to derive less than 2 per cent of its global revenue from India; but, it remains immensely upbeat about its prospects in the country.

“We have had 20 per cent-plus growth in the past 26 quarters in India and that’s marvellous,” Nandu Nandkishore, executive vice-president and zone director for Asia, Oceania, Africa and West Asia (Zone AOA), told Business Standard in a recent interview.

So, ramping up its capability in the Indian market is an essential part of its global plans. Nestlé’s growth in Europe, which is struggling with a debt crisis, has slowed sharply, and the Vevey, Switzerland-based company is looking to treble sales in Asia, Oceania and Africa to about SFr50 billion ($54.12 billion) over the next decade or so.

Indeed, strong emerging market demand has been helping Nestlé and rival Unilever buck a more negative trend set by its French and US rivals Danone and Procter & Gamble, respectively. “Fundamentally, emerging markets have to be the growth engines of the global economy and also of our business,” says the company, which is among the oldest and the biggest players in the domestic fast-moving consumer goods (FMCG) segment.

Going by past trends, Nandkishore’s optimism about the “role India will play in its growth momentum” is not misplaced: With sales of Rs 7,490 crore in 2011, Nestlé India — which has a presence in categories such as milk products and nutrition (45 per cent of net sales, according to analysts ), prepared dishes and cooking aids (29 per cent), chocolate and confectionery (13 per cent), and beverages (13 per cent) — already contributes 8 per cent of the company’s Zone AOA sales.

But “keeping the growth momentum steady” is not going to be a walkover, by any means. The consumer goods market in India, the fourth-largest sector in the economy, with a market size in excess of $13.1 billion, has been facing the challenges which follow high inflation rates — higher raw material and fuel costs, leading to a spike in distribution costs. Sector analysts say the slowdown in the economy will further lower demand, particularly in the premium sector, putting pressure on volumes. Above all, the standardisation of packaging norms that is likely to be implemented by the government by the end of this month, is expected to increase the cost of products across the board, further impacting sales volumes.

Shrinking volumes 
As for many of its peers, volumes remain the bugbear for Nestlé in India. “Globally, Nestlé is very protective about its bottom line and it has done a fantastic job of balancing growth and bottom line,” says a Mumbai-based analyst who doesn’t want to be named. “The world has changed in the past few years and volumes are under pressure, globally. In a new world, where consumers are more and more value conscious, the real question will be whether the company is able to protect both its top line and the bottom line.”

Over the past two years, Nestlé’s India strategy — exaggerated focus on margins and relentless increase in prices of several key products — has not gone down well with analysts. In milk products alone — the largest contributor to its sales basket at 45 per cent — Nestlé has raised prices by 30 per cent over 2010 and 2011. It has also steeply raised prices over the past two-three quarters for its prepared food and dishes segment to offset the rising input costs. The move, say analysts, has impacted volumes, which the company is now trying to reverse — at least in part — by large scale consumer promotions.

Marketing efforts to boost volumes pose another challenge for Nestlé: Increased spending on marketing can offset the improved profitability. So, what is the way ahead for Nestlé? Steep price rises are ruled out: Nestlé India has already expanded Ebitda margin in the past three-four quarters with sharp price hikes in most brands and change in the revenue mix towards products with better margin. So, will the focus move to new products and newer markets? Looks like it, if the Nestlé brass’ pronouncements at various points in time are anything to go by. Nestlé did not participate in this story. To a questionnaire sent by Business Standard, the company said, “This article seems to be in the realm of speculation and we don’t comment on speculation.”

At various occasions over the past few quarters, the company has said it is planning to revitalise its business. At the Nestlé Investor Seminar in Shanghai in September last year, Antonio Helio Waszyk, chairman and managing director, Nestlé India, was optimistic about the income pyramid (in India) “moving from a triangle to a diamond… generating additional genuine inclusive growth… equally distributed across income tiers.” Does the company have a game plan to tap into this opportunity? Waszyk had said at the same meet that Nestlé “will accelerate penetration and increase frequency and develop winning concepts.” By penetration, he meant “sell same to new”; by frequency, he was alluding to “sell more to same”, while new products and business stood for “selling new to same and new to new”, he had explained.

In effect, the crux of the new strategy will be innovation. “Slowing growth depresses a little bit of all books, but then we have to think of innovation and we have to work harder to create growth momentum, which India has created in the last three years for us,” he had said earlier in an interview to Business Standard. 

Strength and weakness 
That said, the company has a leadership position in most of the markets it is present in (number one in dairy whitener, baby food and infant formula; number one in instant noodles, sauces and pasta; number one in soups; number one in instant coffee. While it is a distant number two in the chocolate market, it does have a leading presence in the wafer-chocolate sub-segment).

The segment where it has the best chance for growth is food-processing. It is already expanding production capacity for some of its products — noodles, confectionery and chocolates — to meet the rising demand.

The company believes its investments in the country will help the cause of innovation, which in turn will boost returns. “We have invested $500 million in the last three years to create the capacities, be it chocolates, noodles, coffees; so, we need to use those capacities and use targeted innovation to create growth that GDP tide may not be able to provide,” says Waszyk.

This accent on innovation will help it prise open two big markets — that for the affluent and for the semi-urban class. “Our innovations have to cater to both,” believes Waszyk. Historically, the company has been good with semi-urban and rural markets with price points like Rs 2, Rs 5 and Rs 10. The company says, for the semi-urban and rural category, pricing is the challenge while in the premium segment, product innovation holds the key to growth — a sore point with the company. “How you bring innovative products at the top of the pyramid, where there’s a huge demand, is what we have not fulfilled yet,” says Waszyk.

Distribution may be the key here and Nestlé has worked to beef up its muscle over the years. From a reach of 2.5 million outlets in 2008, it has steadily worked up to 3.7 million at the end of 2011.

With bigger reach, it is no surprise there will be plans to bring in new products, but the company is being extremely choosy about its offerings. “We have to learn our way into this market because historically, we haven’t been very good at it in India,” the company has admitted.

In all likelihood, the company is expected to bring in new products in coffee, chocolate, premium noodles and other such categories. It could also launch its Nescafe Dolce Gusto, a premium single-serve coffee maker that has seen great success in Europe over the past five years.

The company is evaluating its options. “We are doing some research in some large cities at this point of time and trying to identify where we should enter,” says Nestlé. Its new global research & development (R&D) facility in Manesar, near Delhi, is aimed at fostering research in partnership with a few universities and coming up with new products in noodles and nutrition. Globally, Nestlé has 30 R&D centres with 5,000 employees.

Some analysts say, as prices of key inputs are rising at a slower pace compared to previous quarters, the gross profitability can be improved with a marginal hike in prices. Keeping close to customers will be critical for success. Fundamental innovation is something FMCG companies have been relatively poor at. So, despite the heroic scale of Nestlé’s investment and ambitions, the best way to increase its share of the pie is through the introduction of genuinely new categories.

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