Marketing: Nestlé Sugar-Coats Its Growth Pill

MARKETING
Nestlé Sugar-Coats Its Growth Pill

CEO Carlo Donati has chalked out a master plan to crack the Indian market. And it hinges on milk and water.

By Shamni Pande

The defining moment in our mid-September meeting with Carlo M. Donati, the Swiss Italian who heads Nestlé's operations in the country comes when he's responding to a query on Nestlé's plans in the ice cream product category. ''Every week, every month, I look at ice creams,'' rues Donati. And what happens (after he has finished looking at the category)? ''Nothing. So far, nothing.'' Can that be attributed to the company's unwillingness to take on the challenge of building a distribution network for ice cream? ''I am not afraid of challenges. I am afraid of losses-continuous losses,'' declares Donati.

That prudence marks the growth strategy Donati has worked out for Nestlé India. The unlikely protagonists of that strategy are milk and water (See Nestlé's Growth Strategies). Donati shies away from venturing an estimate of the proportion of Nestlé's turnover that will come from the two categories. But a research report by First Global says the company expects the two to account for 60 per cent of its turnover in 10 years. ''The company's decision to get into milk and water is sound as these are businesses with a potential for growth,'' says Hozefa Topiwalla, 28, Senior Analyst, ask Raymond-James. ''But it will be a long time before these start showing any results.''

Nestlé, evidently, is willing to wait. And this time the company isn't talking numbers. Its 1999 turnover was, at Rs 1,552 crore well below the target of Rs 3,000 crore the company had set for itself in 1998. Still, Donati has managed to maintain prices of most of the company's products, cut costs, and, as he is quick to point out, brought back order to the company's work-processes. Now, it's time for Act II and no one is sure of how that's meant to end. As an analyst at a Mumbai-based broking firm puts it: ''Donati has done a fantastic job over the last two years. He has introduced products at lower price points and improved profitability by removing inefficiencies at various levels. But effective stabilising measures can never be a substitute for long-term growth plans. And those are an area of concern for Nestlé.''

Water and milk...
What about the rest?

Milk & infant nutrition

Milk is the company's great white hope. A separate channel brings the product to the upper middle class, but Amul and Britannia pose a threat.

Existing milk and infant nutrition products ranging from Milkmaid to Cerelac will serve as cash cows.

Beverages

Sunrise and Nescafé are established brands, but Nestea is floundering. Growth will come from innovative pack sizes and new launches like Frappe (a cold coffee mix).

Milo has the disadvantage of operating in a mature market, but, like Horlicks and Complan, it provides an entry platform into categories like biscuits.

Culinary Products

Maggi is still the queen of the noodles market, but cracking the Indian culinary products market isn't easy.

Maggi Ketchup has gone head-to-head against HLL's Kissan and emerged on top with nearly 50 per cent of the market, but has had little success in categories like pickles and seasonings.

Confectionery

KitKat has been a success, but Nestle's other chocolate brands have had little impact. Besides, per capita consumption is just 20 grams, and Cadbury is a formidable rival.

Sugar-boiled confectionery is a fragmented market in India, and Nestlé (which through umbrella brand Allens has several offerings) isn't too keen to operate at the 50-paise-and-below price points it takes to build volumes.

Today, almost two-thirds of Nestlé's turnover comes from culinary products, confectionery, and beverages. The company boasts successes in all three: Nescafe and Sunrise in beverages; Maggi noodles and ketchup in culinary products, and KitKat in confectionery. If there's a pattern to these success-stories it's in the fact that they are all old (the most recent, KitKat, dates back a few years). ''Nestlé is too busy handling its existing success stories in coffee, noodles and sauces to look further,'' says Jagdeep Kapoor, 39, Managing Director, Samsika, a Mumbai-based marketing consultancy.

And the competition, from Hindustan Lever (in coffee and ketchup), Tata Coffee, Indo-Nissin, and Cadbury, is intense. In noodles for instance, Indo-Nissin claims a 20-per cent share of the market (the balance must be Nestlé's since there aren't any other players in the market), and is gung-ho about its future. Avers Y. Matsuura, 52, Managing Director, Indo Nissin: ''We aim to be market leaders. Already our experiment in targeted communication using Shah Rukh Khan has proved beneficial.'' And in confectionery, Cadbury is the market leader with, according to ORG-MARG, a 74-per cent share (in terms of value) of the market (org Retail Audit 99).

It isn't as if Nestlé hasn't tried: Allens (the company's umbrella brand for sugar-boiled confectionery) has launched brands like Splash; Donati rattles off a number of variants (including Chatpata) in the company's noodles range; and innovations in terms of pack sizes and product launches (like Frappé, a cold coffee mix) abound. And the easing of import restrictions means the company can import and test a few of its niche offerings, like Fox's mints, different kinds of pasta, and olive oil.

Still, Nestlé's growth in these categories is constrained by several factors. The per capita consumption of chocolates in India is a mere 20 gm. And as Donati concedes, it isn't easy to create unique food-offerings for the Indian market. ''There is no reason why the Indian should change her food habits. It's like expecting the French and the Italians to do so. They make good food, so they will stay with it. The Germans, now may be they have reason to change, because their cuisine is very average,'' laughs Donati.

The most relevant constraint though has to do with the size of the product. Nestlé has no illusions about reaching out to a vast Indian middle class spread across urban and rural regions. ''My target group-that section of the population consuming Nestlé's products on a regular or occasional basis-is around 50 million people. We're an urban, semi-urban company. But 50 million is the population of several big European nations. And Nestlé's operations there make ten times our turnover,'' admits Donati. In the short-term, then, milk and water constitute the company's great white hope.

Getting things right
In water and milk

Nestle's Growth Strategies

» Tap categories like purified water and milk that provide scope for value addition
» Use import route to reinforce brand image and test niche offerings in the market
» Innovate around pack sizes in existing categories to increase penetration
» Try and create offerings in the culinary segment that build around the promise of convenience
» Focus on building operational and distribution efficiencies and remain open to acquisitions

Aware that its existing distribution network won't do for a product like milk, Nestlé has set up a parallel one for it. Thus, while the normal stock replenishment cycle for other Nestle products is every five weeks, that for milk is between seven and 15 days. And this network-although the company refuses to comment-could be the same one it uses when it launches its Pure Life brand of purified water. Admits Donati: ''These two products offer very low potential for value-addition, and the volumes will put some pressure on profitability in the short-term, but it is a strategic decision.''

The company defends its decision to enter these markets by citing the potential for growth and the scope for value-addition that these two categories offer. That value-addition, though, will only be evident over time, and if the basic offerings succeed. Water, for instance, won't be an easy market to crack. It may be a big business for Nestlé globally, but the bulk of the revenues come from mineral water brands like Perrier and San Pellagrino. Purified water is a growing business for the company in developing countries like China, Pakistan, and parts of Latin America, but the Indian market for the product is already over-crowded and highly competitive. As Ramesh Chauhan, 60, the CEO of Parle Bisleri Ltd, the company that owns the country's largest selling brand of purified water puts it: ''It will be tough for anyone to beat us in this game. We will remain market leaders.''

Milk may be a better bet for the company: as concerns about the safety of milk increase in the urban areas, and as the number of nuclear, double income families go up, demand for milk in cartons (which is what Amul and Nestlé have launched) will zoom. However, reach is critical in this market. ''Our milk in cartons is already a national brand barring the North-Eastern states, Orissa, and Jammu and Kashmir. We are priced competitively. Nestlé, or any other player simply cannot match our strengths in terms of processing and distribution,'' claims R.S. Sodhi, General Manager, Marketing, gcmmf.

And if Nestlé wishes to launch value-added variants it could go up against its largest global rival in the milk and water segments, Danone (Britannia in India). ''Milk is a potentially huge business,'' explains Naveen Chopra, 40, Marketing Manager, New Business, Britannia, ''and there is no category in the dairy segment we are not looking at. At the moment though we have restricted ourselves to flavoured milk, cold coffee, and lassi.''

Where does that
Leave Nestlé

Water and milk, despite issues related to competition, present the best short-term opportunity for growth to Nestlé. Donati concedes that the gestation time involved in cracking the culinary segment is longer. Categories like milk and water could well help Nestlé meet its growth objectives for the next few years while Nestlé cracks the consumer-enigma in the culinary products segment and the Indian consumer grows mature enough to use Nestlé's offerings.

Most importantly, milk and water are global businesses for the company. They satisfy the two criteria Nestlé insists its businesses meet (tech-intensive and a high potential for value-addition), and they seem to be happening markets in urban India at this point in time. Now, that's appeal enough for even a normally impassive Swiss company to lower its guard just that little bit.

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