Nestle has bigger appetite for India; increasing presence in rurban markets

The Swiss processed foods maker has significantly upped investments in its Indian subsidiary to expand its penetration in 'rurban' markets

In September, Mark Schneider, chief executive officer, Nestlé SA, announced that the Swiss processed foods maker would be investing Rs 5,000 crore by 2025 in India. This investment comes two years after Nestlé India announced an investment of Rs 2,600 crore.

The significance of these announcements lies in the fact that they almost equalled the Rs 8,000-crore investment that the company had committed to the Indian market over the past 60 years. With India’s economy projected to buck the trend of an impending global slowdown, especially in the developed markets of Europe and the US, the Indian market is emerging as a priority for the Vevey-headquartered conglomerate.

At its recently concluded analysts’ meet, Nestlé SA’s management offered a glimpse of how India will become a more important market for Nestlé. Though India’s contribution to the parent corporation’s revenue is in low single digits, the country still figures among Nestlé’s top 10 markets.

In its investor call towards the end of November, Schneider told analysts, “I’m a huge fan of India and what it has to offer. Tremendous growth at the present time, but also from all we can see looking ahead, significant growth in this economy going forward.”

The money that Nestlé is putting into India is not only for accelerating and ramping up capital expenditure, he added, but also into “a whole lot of development work, brand building and meaningful contributions on the ground”.

The focus on India followed a field visit to India from the parent’s board of directors in September. Schneider said it was the first visit of that type after the pandemic. “I think the entire board and leadership team came away being very, very impressed with how the country has transformed,” he added.

Among others, the principal transformation that Nestlé’s management flagged was the growing prominence of digital transactions in India. Schneider told investors that compared with personal trips to India before the pandemic he was amazed how digital transactions had gained traction “all of a sudden” at all levels of Indian society. The use of digital transactions, not just in the big cities but also in the rural areas, made him bullish about India going forward.

Accordingly, the makers of KitKat and Maggi instant noodles are working on increasing its presence in rural and small-town India — a strategy that the company commonly refers to as “rurban” (rural + urban).

In an analyst call after announcing its June quarter earnings, Suresh Narayanan, chairman and managing director of Nestlé India, said, “The objective of this company is to cover 120,000 villages with more than 2,000 population. We have covered 70,000-80,000 of these villages. We are seeing an uptick happening in terms of our sales.”

The expansion to the hinterlands marks an interesting shift because Nestlé had so far managed to avoid the plunge that other fast-moving consumer goods companies witnessed when rural demand dipped these past two years. Indeed, Nestlé India managed to stand out purely because it doesn’t have a high dependency on rural markets.

As JPMorgan pointed out in a recent report, “Nestlé India is currently under-indexed in ‘rurban’ versus peers with 25-30 per cent revenue share and we see significant headroom for more penetration here.”

“I have a lower base in rural markets,” Narayanan admitted, but explained that the acceleration of the rural strategy is a product of the “uptake and penetration happening in those markets”.

He added, “The good news for us is that our brands are getting accepted and that is why the last three-four quarters, together with infrastructure and with orchestration of infrastructure, of investments, of brands and of communication, we have been able to build traction on these.”

This rural push also helped the company reap the benefits in the third quarter (Nestlé India follows a calendar year) as its revenue grew by 18 per cent. JPMorgan in its report said that “Nestlé India witnessed healthy growth in rural (it is under-indexed here) besides very strong growth in large metros and mega cities”.

A Jefferies report added that the management (Nestlé India) highlighted strong growth in large metros and mega cities, as well as small towns and rural markets (tailwinds from distribution expansion).

JPMorgan also pointed out that the company’s consistent double-digit volume and price mix-led revenue growth delivery, supported by a fairly diversified portfolio, aggression on innovation and distribution, supported a positive investment case for the company.

In its report following Nestlé’s global analysts’ meet, ICICI Securities said, “Sales force dashboard, an analytics interface dashboard, has enabled efficiency in sales and distribution. It has driven a 4 per cent increase in average purchase per outlet in India.” The brokerage added, “The analytics tools have improved the monthly forecast accuracy by 97 per cent, enabling improvement in demand planning accuracy by 3 per cent to 5 per cent in India as well.”

India has been an important market for its peers like Unilever for the last few years — it has now become the second largest market in value for the maker of Dove soaps, after the US. By upping the pace of its investments in the country, Nestlé clearly hopes to derive similar volumes for its food products from India.