|Nestle CEO Carlo Donati
For a Rs 1,937
crore company, Nestle India makes little noise. It lives life in
a competitive cocoon, its Chairman and Managing Director and senior
execs rarely speak to the press or to analysts out of turn, and
it has acquired, in its 90-year stay in India, a more conservative-than-conservative
image. The man at the helm, 55-year old Swiss national Carlo Donati,
is the very image of his company: large, well-built, careful with
his words, conservative, and yet, not above showing his disdain
when it needs to be showed. Understanding both man and company,
then, would require some reading between the lines, and there are
enough lines to be read.
Exhibit A: "Within a month of coming here
I saw an internal report referring to price increases. I asked who
decided product prices. I was told that it was the product manager
and I said that from now on only I will make that decision."
Exhibit B: "If you keep increasing prices
and continuously push volumes into the system it will choke the
pipeline. At some point, this approach will backfire."
Exhibit C: "What do you believe in, profits
The first two were spoken in the course of
these correspondents' meeting with Donati. The third was the man's
response to persistent questions by an analyst on the company's
entry into the high-volume, low-margin dairy business.
| Over the past three years Nestle has lowered
| Nescafe 16%
Nestle Kit Kat 20%
Maggi Ketchup 10-12%
Maggi Soups 15%
Sampling of products on which prices have been reduced.
| Nestle has also introduced 25 new low price
point packs such as
| Maggi 2-minute Noodles
Maggi Imli Sauce
Take the three, stir them together, add a pinch
of Donati's oft-repeated 'bottom-line dictating top-line' philosophy
and the result is something that should shake up all preconceived
notions about the Swiss MNC: that the route to the market-beating
quarter-on-quarter profit growth the company boasts will increasingly
depend on its ability to play the price card-with its existing products,
and with its new products.
To cut to the chase, Nestle is going mass,
exploring the math of low-priced offerings, and low margins-something
that should increase usage across its product portfolio. Not too
long back, the least-expensive Nestle chocolate was the Rs 5 Munch
(the largest-selling chocolate offering in the country). Today,
it is the Rs 2 Chocostick. Over the past two decades Nestle's two-minute
brand Maggi noodles has become a household name in India. So much
so that a taste-refurbishing exercise caused an uproar of the new-Coke
variety. In 2000, the brand's franchise became even wider: low-income
households could sample the product, available in a 50 gram pack
priced at Rs 5. And starting July 2002, Nescafe has been available
in a single-use sachet (Rs 3). Why, yesterday's premium player is
even entering paisa territory, with Frutips Twins (confectionery).
If that isn't enough indication of Nestle's
new-found enthusiasm for the mass-market, its track-record in 2001
surely is: it reduced prices of two brands, Maggi Tomato Ketchup,
and Maggi Soups, launched a staggering 18 new low-priced brands
or packs, and forayed into the dairy market where it competes with
price-warriors such as the Rs 2,336 crore, 800-pound gorilla of
the business, Gujarat Co-operative Milk Marketing Federation (gcmmf),
popularly known as Amul after its larger than life brand. "We
are now getting into the everyday consumption arena, with affordability
driving new consumer segments," says Suresh Narayanan, Executive
Vice President, Nestle. 'Everyday-consumption' and 'affordability'
may be part of some marketers' vocabulary, but it certainly is new
Not enough reach
India's dairy majors aren't unduly worried
by Nestle's foray into the business. "They're very small in
the fresh dairy business," says R.S. Sodhi, General Manager
(Marketing), GCMMF. "They still seem to be in the experimental
stage." Nestle's dairy-strategy is tinged with caution, and
with good reason. As Amul Gogna, Executive Director, ICRA, a credit
rating agency points out, "It would be quite difficult, both
financially and technically, for a new player to develop cold chains
in India." GCMMF's cold chain is the largest (all of 18,000
deep freezes), and this, after 45 years in the business. And another
MNC, Britannia Industries promises to pose a challenge to Nestle
with its recent joint venture with New Zealand-based Fonterra, Britannia
New Zealand Foods. ''With Fonterra as a partner, we will aggressively
push to become a leading dairy company in the country,'' says Naveen
Chopra, Marketing Manager, Britannia New Zealand Foods.
The befuddling logistics of mass-market distribution,
in dairy and in other businesses, could overturn Nestle's apple
cart. Donati may pat himself on the back for the company's monsoon-proof
urban focus but to really succeed in the volumes game-and the mass-market
is all about volumes-the company has to look at the lower economic
strata in urban areas, even explore the semi-urban hinterland for
If it doesn't, the competition will. In the
Rs 1,200-crore confectionery market, for instance, Nestle has launched
products at all the right price points-Frutips, Polo Holes, Chocostick,
and Activ V-but it is up against the might of ITC's 2.5 million
strong distribution chain. The tobacco major bought Polo rival Mint-O
from Candico earlier this year. And Amul's milk, butter, and curd
are available in some 100,000 stores. Donati is defiant-"It
is necessary to have an efficient supply chain. But it is also important
to develop products and price points that provide value for money
to customers"-but the company will need more than that to compete
in price-sensitive, man-eat-man, distribution-led categories. As
for that defiance, much of it seems misplaced, especially in the
context of what has happened in Nestle's water business. Its Pure
Life brand is a non-starter of sorts, unable to compete with Bisleri
and Kinley. "Nestle has over-estimated the market for a premium
brand," explains Nirav Seth who tracks the Fast Moving Consumer
Goods sector for Mumbai-based SSKI. " It has to necessarily
bring down the price (of Pure Life)."
"I still believe water is a good idea,"
defends Donati. "At Rs 12 we currently have some problems with
volumes but if we have to manage for the long-run then our pricing
should allow the business to be sustainable." Meanwhile, the
Nestle team is working to reengineer the water business.
If milk and water pose one kind of distribution
challenge, then its traditional product categories do another. To
reap rewards from its 25 new low-priced stock keeping units (or
packs), Nestle will have to extend its 650,000-strong distribution
network into 3700 remote towns. Narayanan claims the company plans
a separate distribution network for its low-priced offerings. This
network will deliver a portfolio of products to smaller towns. Some
of Nestle's product launches need to be seen in the context of this
portfolio. Butter and fresh milk are virtually commodities and there's
no way Nestle can really compete with GCMMF and with regional milk
co-operatives on price. Ergo, they're probably portfolio builders
that make it economically viable for Nestle to reach smaller towns.
"The cost of distributing products to remote towns is more,"
admits Vineet Khanna, Vice President (Supply Chain), Nestle. "That's
why we are putting together a portfolio of products that can go
to C-class towns." Adds Sujay Mishra, a FMCG-analyst at Kotak
Securities, "Nestle defines its market in terms of what it
can serve with its value added products, unlike HLL which is not
unwilling to play the commodity game." Milk and butter, then,
will make dairy distribution viable, and yoghurt (Dahi) and a clutch
of value-added products (flavoured milk, lassi, even ice cream),
will, the company reckons, take care of the rest.
The conservative core
The competition may claim Nestle's newly discovered
love of the low-end is a reactive strategy-"They're under too
much price pressure from us," chuckes Amul's Sodhi-but analysts
believe the Swiss multinational has a larger gameplan. "It
is true they're finding the going tough in dairy, thanks to Amul,"
says SSKI's Seth, "but Nestle traditionally enters any market
with the long-term in mind."
Conservatism, then, continues to call the shots
at Nestle. Two recent launches, Maggi Chinese Noodles and Maggi
Imli Sauce, have been contained to two markets, Delhi and Mumbai,
for close to six months now.
"We plan everything for sustainability
over the long-term," says Narayanan. "We do not live quarter-by-quarter
as some other FMCG companies tend to do." That may be one reason
why Nestle isn't committing itself, yet, to the biscuit market.
And that is perhaps the reason Nestle is immune
to the buzz being created by Barista, Qwiky's, and Café Coffee
Day in the coffee bar business where its own Nescafe Cafés
are a distant also-ran. Donati is quick to counter that Nestle's
wait and watch strategy is largely driven by the fact that the cafes
are an image building exercise. "Coffee cafes are very high
cost models and I do not know how money can be made in a sustainable
manner," he adds referring to the huge rents and operating
expenses coffee chains tot up.
It is unlikely that Nestle loses its conservative
core in its gambit to become a mass-market player. The memories
of its 1997 debacle, when its then CEO (Donati's predecessor) Darius
Ardeshir launched 31 new products and line extensions (most were
unsuccessful) are fresh in its mind. Still, that fondness for firm
ground hasn't prevented the company from putting in motion efforts
targeted at making a go of the mass-market strategy: an alliance
with Nilgiris Dairy, a large player in the southern markets; and
the possible acquisition of a stake in Maharashtra-based Dynamix
Dairy which will give it a local-edge in the Western markets.
Ironically, what was until yesterday considered
Nestle's biggest weakness-conservatism-could today help its mass-market
strategy succeed. Donati, however, rumoured to be up for his next
posting in December this year, may not be around to see it.