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Thursday, December 20, 2001

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Reinventing Nestle


Ratna Bhushan

Topline growth, bottomline contribution, difficult market situations. Nestle India's trademark `renovate and innovate' strategy is churning with action. Catalyst finds out more.

JUST how much can a housewife influence a Rs 1,688-crore company? Carlo M. Donati, the non-conformist Chairman and Managing Director of foods giant Nestle India Ltd, doesn't disappoint. "She's someone whose needs we anticipate," he exclaims. You've got to give that to him.

Take, for example, the exhaustive experimental kitchen and sensory laboratory at the plush corporate headquarters of Nestle India at Gurgaon. It's obviously a first-of-its-kind facility and research centre for any food company in India.

The objective? Consistent product development. Also, achieving a preference ratio of 60:40 for every Nestle product as opposed to competition. The kitchen comprises a panel of application groups and 15 professional tasters checking out new products for consistency in quality and product evolution on a regular basis.

The exercise, informs Donati, has resulted in the creation of two different flavours of Maggi noodles (curry and tomato), Fruitips candy, besides new formulations of Nescafe and Bar One chocolate in recent months. "And this research model isn't a substitute for consumer research, or regular test-marketing with the real consumer," points out Donati.

Based on an international research and development model proprietary to Nestle SA, the kitchen is just one component of the Rs 3,000 crore allocated for a centralised research and development cell for the foods conglomerate worldwide, against Rs 2,500 crore spent on the same earlier. Another component is the third in a series of multi-cuisine recipe collections cutting across all Nestle products, in place of the two earlier ones which centered around Milkmaid and Maggi.

The Nestle `renovate and innovate' mantra, meanwhile, is on in full swing.

Four existing brands - Nescafe, Milo, Bar One chocolates and Maggi super seasonings - have been relaunched in new tastes, packaging and pack sizes. And another variant of KitKat - white chocolate - has just been rolled out.

On the launch block a month from now are 10 new product variants spread across the culinary and confectionery segments. The restructuring exercise of Excelcia Foods Ltd - the joint venture company in which Nestle acquired management control following Dabur India's decision to exit non-core areas - has neared completion. Following that, Nestle proposes to enter fresh product categories such as biscuits in the forthcoming months.

Beverage Partners Worldwide (BPW), the joint venture between Nestle SA and the Coca Cola Company, too is looking to tap the Indian market for possible coffee and tea variants.

But it's the food major's most keenly awaited venture - ice-cream - that's got the FMCG industry abuzz. While Donati doesn't divulge plans, he does concede that "we are very much interested in the domestic ice-creams market". Of course, that requires putting in place a cold chain, besides stabilising its milk and UHT businesses first. Meanwhile, though there's no confirmation from Nestle, the industry grapevine suggests that Nestle has begun negotiations with Vadilal for manufacturing and marketing ice-cream.

Another category where Nestle could give Hindustan Lever a run for its money is candy. The company has recently rolled out a candy brand by the name of Fruitips.

On the beverage front, following the introduction of chocolate-and-coffee formulation Choc Cafe and Frappe under the Nescafe umbrella, Nestle has been setting up slosh-type vending machines for iced tea in two flavours - peach and lemon. In an economy that's in a downturn, Nestle's performance has been impressive. Net sales for third quarter this year were Rs 533 crore against Rs 469 crore in the same period last year, recording a growth of 13.5 per cent. While domestic sales grew at 11.4 per cent in value terms, export sales for the quarter increased by 24.6 per cent. Sales during the first nine months of the year improved by 17.4 per cent, with a net profit increase of 28.6 per cent over the same period last year.

Donati, however, is playing the caution card. "Despite excellent topline and impressive bottomline contribution, the uncertain and difficult domestic and international market environment, coupled with seasonality factors, will affect our performance in the fourth quarter," he says. Market analysts warn that incremental selling and advertising expenditure on new launches would dampen margins and that it would take time before the new products begin contributions to turnover or profitability.

While the success of the new variants is yet to be gauged, Nestle's star performers remain Nescafe, baby food Cerelac, Maggi and Everyday. Says Jagdeep Kapoor, Managing Director, Samsika Marketing Consultants, "Nestle's biggest strength lies in creating brands with distinct positioning. Hence, Nescafe is generic to coffee, just the way Maggi has become generic to instant noodles." Maggi noodles faces no direct competition, with Top Ramen barely managing to hold ground in the instant noodles category. Another winner has been Maggi ketchup, which, FMCG analysts say, has been built from scratch to market leadership position, outperforming Kissan.

However, Kapoor adds that while Nestle has done exceptionally well in Western food categories such as ketchup, condensed milk, noodles, coffee and weaning foods, the company hasn't been able to handle Indian product categories such as pickles and tea too well. But, as a Dabur official points out, "No one is really making money in pickles. Not only is the unorganised and made-at-home sector too well-entrenched, even the consumer shows no brand loyalty towards pickles. What drives her purchase pattern is new taste and not brand preference."

The market for ready-to-cook mixes and soups too has been largely fragmented with a distinct skew towards the unorganised sector.

In chocolates, while Cadbury India continues its stranglehold of the market, Nestle's KitKat, Bar One, Munch and Classic have been performing reasonably. Two recent entrants to this category have been ChocoStick and Milkybar Choco, the latter a soft chewy fudge in stick format priced at Rs 5.

In the chilled dairy segment, Nestle dahi has recently been extended to Mumbai and Pune. While the market for this continues to be very small with only Mother Dairy and Amul giving Nestle competition in the organised sector, milk in cartons is a concept that's yet to go down well with the Indian consumer. "Apart from being expensive, the Indian consumer is still not ready to consume milk without boiling it. And research has proved that three-fourths of Indians prefer hot milk," says an official at a leading FMCG company. On the pricing front, Nestle continues to target the premium segment. As Donati says, "We will make inroads into markets which represent not only potential for consumption, but also potential for bottomline." According to Kapoor, Nestle's premium pricing strategy is a strength that's worked in most categories it operates in.

Fruitips, therefore, occupies price points of 50 paise and Re 1 per unit against HLL's Max which attacks the unorganised sector with an extremely aggressive 25 paise per unit price.

According to Kapoor, it's the association with quality that works in Nestle's favour in most product categories. That this hasn't really worked in case of Nestle's bottled water brand, Pure Life, is more distribution-related, feel industry watchers. Pure Life, launched earlier this year at a price point of Rs 12, has been a lukewarm performer compared to Coca-Cola's Kinley and Pepsi Aquafina besides, of course, market leader Bisleri. According to Donati, discounting at the trade level has been a problem area with bottled water.

And while spends on advertising have been raised at a macro level, brand-wise spends have been re-allocated accordingly.

According to the A&M Annual survey on India's top 200 ad and marketing spenders, Nestle was the country's sixth largest advertising spender in 2000-01, recording an ad spend of Rs 128.46 crore which amounts to a 13.6 per cent growth over the previous year.

Picture by Kamal Narang

 
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