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Tricky Act

Maggi Noodles is back, but for Nestle India, the road ahead is full of challenges.
By Ajita Shashidhar | Print Edition: December 18, 2016
Tricky Act
Suresh Narayanan, Chairman and Managing Director, Nestle India, has a tough task (Photo: Vivan Mehra)

It has been over a year since Nestle India reinstated Maggi Noodles after it was unceremoniously ousted in May 2015 when a Food Safety and Drug Administration official in UP declared that it contained monosodium glutamate (a taste enhancer, better known as ajinomoto) beyond accepted levels. The brand, ever since, has regained its position as market leader with a market share of 42 per cent (according to Euromonitor), with ITC's Sunfeast Noodles a distant No. 2 with a 24 per cent share of the Rs 3,180-crore instant noodles market.

At Nestle House, the plush headquarters of the Rs 8,175-crore Nestle India in Gurgaon, the 56-year-oldSuresh Narayanan, who was hastily brought in as Chairman and MD last July to save the company from the worst crisis it faced in its 104-year history in India, admits that the Maggi episode had threatened the existence of the company. "However, l never thought we would have a recovery as fast as we had. There was so much badgering of the brand that had happened, but the groundswell on the brand and the fact that people felt the company had been wronged was pretty high. That has made the recovery that much more memorable." The crisis pushed down Nestle India's revenue in 2015 to Rs 8,175 crore from Rs 9,855 crore in 2014; Net profits had dipped by 53 per cent.

Maggi's return is Narayanan's brightest accolade in his over three-decade long professional career. But when he took over the reins of the company last year, he had realised that while Maggi Noodles was the most apparent reason for his return to India, he had a lot more to worry about. The largest food company's market share had halved to 15 per cent in the past four to five years, and it was being perceived as being out of sync with the great Indian consumption story.

Barring Maggi, the food company was struggling in every other category that it was present in. With barely any new product launches or innovations to talk about and the one-off launches (such as Alpino chocolates, Milkmaid Creations) being disasters, the analyst community had written off Nestle. On the other hand, local competitors had started giving tough competition with innovative launches, which led to erosion of market share.

Maggi Noodles itself has competition from 300-odd brands. In dairy, where Nestle is present in yoghurts and value-added milk, it not only has competition from mammoths such as Amul and Mother Dairy, but also from smaller players such as Danone, Britannia and Parag Milk Foods. As per a Euromonitor report, Nestle has a meagre 7 per cent market share in yoghurts, despite being one of the first movers. Ditto UHT and flavoured milk, where again it has a low single-digit share, while Amul controls over 18 per cent of the market.

In fact, Alpana Parida, MD of marketing consultancy DY Works, says that most of the Nestle brands, barring Maggi, have no differentiated offering. "There is absolutely no compelling reason for a consumer to buy Nestle Milk and not Amul or Mother Dairy," she says.

The other challenge has been its obsession with high margins and profitability, which has kept Nestle away from the mass market. Since the high-margin game is possible only through premiumisation, the company has also consciously limited its target audience to 400 million, leaving more than half the Indian consumers untouched. While this strategy has given Nestle the desired profit growth of over 20 per cent year-on-year, its volume growth in the past four-five years has been in low single digits.

The analyst community has been urging the company to invest in rejuvenating its volume growth, which would mean that the company will have to sacrifice its robust margin growth to a great extent. Despite the drop in revenue growth last year due to the Maggi episode, the company has managed to maintain healthy profit margins. "The company's low volume growth is becoming a huge area of concern, which it needs to quickly correct with an invest-to-grow strategy," says Sridhar Sivaram, Investment Director, Enam Holdings.

Tough Job

No wonder, in the past year-and-half, Nestle has been doing stuff it hasn't done for decades. The makers of Maggi Noodles, Nescafé Coffee and the iconic Milkmaid had hitherto never launched more than 2-3 new products in a year, which typically have been inconsequential product extensions. However, in the past six months, the company has launched as many as 30 new products - including Maggi Hot Heads, Grekyo (Greek yoghurt), Nestle Everyday Masala Fusion and Munch Nuts.

"We have taken a conscious decision of pursuing a strategy of increased penetration across categories, which means increased level of innovation, leveraging capabilities, delivering propositions that are superior and competitive across categories. As a consequence of this, we are not only leveraging all the cylinders of the engine, but are also growing the portfolio far more than before," says Narayanan, who has pushed aggressively to develop the new products at the company's local innovation centre. Earlier, over 60 per cent of the products had considerable levels of global intervention.

Narayanan's decision to penetrate deeper into each of the categories Nestle is present in comes as a desperate move. The company has been over dependent on Maggi. This was evident when its other brands such as Nescafé, Nestle Milk, chocolates, etc. witnessed a sharp dip in sales when the Maggi crisis hit. The 30 per cent increase in the company's share price in the past six months has also come on the back of the revival of Maggi. "When the star brand got hit, the image of the company also got impacted. Nestle has been relying too heavily on brands such as Maggi and Nescafé, and hasn't been as aggressive with their other products," says Raghu Vishwanath, MD of brand valuation company, Vertebrand. Narayanan, of course, counters that over 70 per cent of revenue comes from other brands in the portfolio.

Unsuccessful Record

However, Nestle India's track record as far as new launches are concerned is not impressive. Most of their successes have come with the brand extensions of Maggi; the rest, be it Alpino chocolates, Milo, Milkmaid creations, Nestle Ice Cafe, etc. have been disastrous. According to a report on Nestle India by brokerage firm IIFL, Nestle's new launches in the past 10 years have contributed just 5 per cent to the sales.

The analyst community is sceptical whether the food major would be able to pull off 25-30 product launches at one go when it couldn't manage the one-off launches earlier. Narayanan, on the other hand, is optimistic that the array of launches would help the company generate the much-needed volume growth.

The unanimous opinion is to focus on the existing portfolio, and milk it to its full potential, rather than launch newer products. Parida of DY Works says that the company's focus should be Maggi and Nescafe. "Despite being market leaders in instant coffee, they are not the last word in coffee. When the young is moving to coffee, they should own the world of coffee."

Adds Vishwanath of Vertebrand: "Nestle should stay focused on a few segments and go deeper. If they get into diverse segments, they will be caught between the devil and the deep sea." The IIFL report on Nestle, in fact, predicts that the recent launches would at the most add 5-6 per cent to Nestle's sales by 2020.

ALPANA PARIDA Managing Director, DY Works

"When the young is moving to coffee, Nestle should own the world of coffee"

Instead of splurging on new launches, wisdom rather lies in the company spending on high-decibel advertising campaigns to strengthen the existing portfolio. In fact, the food major has also been known for being the lowest ad spender in the FMCG industry, with spends as low as 6 per cent. Despite the Maggi crisis, the brand's ad spends in the first half of 2016 dipped, claims the IIFL report.

Narayanan rebuts that the company never believed in creating too much noise about what it stands for. However, it has increased its digital media spends by over 15 per cent in the past one year. "The classical marketing strategy at a time when we were out of shelves would have been to not speak. But we continued to do so through various digital platforms and that really helped us bounce back faster. Going forward, we will look at digital in a big way as that's where our consumers are." But isn't India still a mass media country? Is it prudent not to be mass media savvy? In fact, Nestle has a host of products in the ready-to-cook segment that most Indians wouldn't be aware of.

Too Premium

The other big reason why Nestle's new launches could have limited success is because they are priced at a huge premium to competition. Nestle's Greek yoghurt, Grekyo, for instance, is priced at a 38-40 per cent premium compared to competition. Similarly Nestle a+ Progrow is priced at least 20 per cent higher to others like Danone, Mother Dairy and Amul. The Hot Heads range of Maggi Noodles is 70 per cent more expensive than a basic pack of Maggi Noodles. Further, a basic Maggi Noodles is priced at a 70 per cent premium to competition such as Sunfeast, while a bar of KitKat is 150 per cent more expensive than Cadbury's Perk.

It is this strategy of premiumisation, coupled with the conscious decision to focus only on 400 million consumers, which has resulted in market share erosion in the past few years. For example, the company has been focusing on dairy to reduce its dependence on Maggi. But expert opinion says a strategy of premiumisation especially in dairy can be severely counter-productive. "Dairy can never be an engine of growth for Nestle as it is a hugely price-sensitive category," says Sivaram of Enam.

In the dairy business, Nestle has competition from co-operatives such as Amul, Nandini and Mother Dairy, which focus more on volume growth than on profits. To add to that, myriad local players have jumped into the fray, offering good quality products at extremely competitive prices. "Products such as Greek yoghurt may sell, but it will never add to the company's top line," remarks the head of a leading dairy company.

Parida's advice to Nestle is that instead of going completely niche, it would make more sense for them to stick to a 'masstige' positioning so that they could service more consumers and thereby ensure better volume growth.

The Indian consumption story is, after all, centred on the mass urban market, and every brand is striving to get a bite of this huge pie. Isn't Narayanan scared of losing out? Narayanan's response is that had Nestle been playing only at the premium end, it would not have had a Maggi Noodles or a Munch bar. As far as reaching out to more consumers is concerned, with mass products, he is not too sure whether he will be able to offer a good quality product at that price. "There is a fundamental tenet in Nestle, that quality equals trust. If you are asking me if I am going to be launching a really inexpensive product in order to capitalise on a common base, but also compromise on the value delivery to the consumer, the answer is no." While value packs in noodles are more likely, says Narayanan, he completely rules out playing the value game in the health and nutrition category where quality could become a serious issue. "We choose categories where there is competence, growth and salience, and some element of decent return on investment. If that doesn't happen, then it's not an area that we would choose to be in. We are more of an urban centric company because of this," he adds.

Vertebrand's Vishwanath says that targeting only the premium customers may be a good idea, but the challenge will be able to stick to this positioning in the long term. "Most brands lose patience and go the volume way, as their global parents want quick returns. Changing strategy mid-way to get volumes could be detrimental."

RAGHU VISHWANATH Managing Director, Vertebrand (PHOTO: NILOTPAL BARUAH)

"Nestle has been relying too heavily on brands such as Maggi and Nescafe"

Margin v/s Volume

The spate of new launches in a span of just six months clearly shows that the Nestle India CMD has a mandate to invest to grow in India. He makes it a point to clarify that despite the conservative perception of the company as far as investment is concerned, it has actually invested close to Rs 5,000 crore in the past four years. "What is increasingly being appreciated in a global context is that growth comes with a certain level of investment and certain level of breaking the old barriers of the models that we operate in. That's getting increasingly accepted as an operating model for the company."

Even though the industry predicts that the company's new launches would contribute to its growth in the next five years only by 6 per cent, Narayanan says his goal is to ensure that a third of the growth comes from recent innovations over the next five years.

However, the dilemma to let go the margin growth in order to ensure volume growth continues. "What has been mandated by the board is to accelerate innovation, investment on growth, but yes if I am making 20 per cent operating profit today and tomorrow I recommend that I am going to make 10 per cent, there will be questions asked," explains Narayanan.

For sure, Nestle India is trying hard to break down the walls of conservatism. But accelerating volume growth, without compromising on margins and profitability, can be a tough balancing act.

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