Nestle’s low-price domestic focus

The move by Nestle India to reduce the price of its flagship coffee brand, Nescafe, by 15 per cent, and to introduce special low-priced packs, is seen as an effort to increase focus on the domestic market and enlarge the brand’s consumer base. Price and affordability are critical factors to a large segment of coffee consumers in India. Alongwith the price cut, the company has also launched a new ad campaign.

Nestle, which is a large exporter of coffee to Russia and various other countries, has been facing rough weather because of the ongoing economic turmoil in that country and depressed market conditions in other parts of the world. This year has seen its exports to Russia crashing by 61 per cent. Russia accounts for 80 per cent of the company’s coffee exports. Sources in the company say, the crash was partly due to a fall in the purchasing power of Russians as the country faces troubled economic times, and partly due the devaluation of the Brazilian currency which rendered Indian coffee exports less competitive.

Nestle also partly blames policies of the government of India to its poor showing on the exports front. The policies of the government resulted in packaging costs going up and products becoming uncompetitive in the export markets.

For instance, the company cannot import tinplate (packaging material for coffee) at a price less than the government-determined Rs 720 a tonne. If a company exports raw coffee beans in bags, it is not liable to pay tax. However, if it processes green coffee into instant coffee, packages and sells it, it pays a purchase tax. All this pushes up the price of packaged coffee.

Surprisingly, the Indian market has come to the company’s rescue. In the first half of 1999, while Nestle’s net sales plummeted to Rs 704 crore as against Rs 787.6 crore in the corresponding period the previous year, net profit jumped by over 40 per cent to Rs 49 crore from Rs 35 crore last year (corresponding). The fall in exports was more than offset by a nine per cent rise in domestic sales to Rs 618 crore in the first half of 1999, compared to Rs 565 crore in the corresponding ’98 period. The company says it has retained profitability with this rise in sales, and in the supply chain innovations that were ushered in, in the third quarter of 1998. The company’s warehouses are now better linked with new software.

Analysts say that the nine per cent increase in domestic sales is largely due to buoyant domestic market conditions and a favourable response to Maggi 2-minute noodles, which were relaunched towards the end of the first quarter of 1999. They add that other product launches have also added to the benefit.

Nestle is also planning to sell about 20 per cent of its instant tea, produced at Choladi, its Nilgiri-based 100 per cent export-oriented unit, in the domestic market. This has become possible because of the recently amended Exim Policy--it is possible to sell instant tea in the domestic market.

Nestle's Nescafe dominates the premium segment of the coffee market. Its other coffee brands are ‘Sunrise Premium’ and ‘Sunrise Extra.’ Exports contribute 23 per cent to the company’s turnover. Nestle is the second largest coffee exporter in the country. Instant coffee export markets are Russia, Hungary, Poland and Taiwan. The company also exports instant coffee to USA and Japan.

Nestle has been slowly consolidating its position in the Indian market. It launched Milo, a chocolate flavoured drink, in 1996. The product is expected to record volume growth in the current year. In 1998, it launched two vitamin-fortified drinks--Nestle Growing Up Milk and Nestle Cereal Milk Drink--for children in the one-three year age group.

The company is relaunching its sugar confectionery products under the umbrella brand Allen's. Polo has been extended to Polo Paan, Polo Spearmint and Polo Saunf. New confectionery products launched during the year were Allen's Soothers, Frootos and Milkybar Eclairs. The company has been test marketing imported brands like Quality Street, Lions and After Eight as well.

Nestle introduced its brands of chocolates and confectionery in India in 1990 and since then has introduced products catering to all price segments of the market. KitKat is the largest selling chocolate brand in the world. Other brands include Milky Bar, Nestle Marbles, Nestle Crunch, Nestle Rich Dark, and Nestle Bar-One. The company introduced two new brands, Charge and Crunch, in 1998.

Culinary products contribute eight per cent to the turnover and comprise of ready-to-cook noodles, ketchup and other foods under the umbrella brand name of Maggie. Nestle has an 80 per cent share of the baby cereals market with Cerelac and Nestum. Baby food accounts for 10 per cent of turnover. Infant milk powder (75 per cent market share) sold under the Lactogen and Nestogen brands, contribute 16 per cent to turnover. Brand loyalties are very high in categories such as infant food and weaning cereals, enabling the company to command a price premium.

Other milk products include dairy whiteners EveryDay and Tea Mate, sweetened condensed milk and ready-to-cook mixes for traditional Indian sweets under the Milkmaid brand and ghee under the EveryDay brand.