Nestle's turnaround: Steps taken after Maggi crisis seem to be paying off

Minutes after the trading began at the Bombay Stock Exchange (BSE) last Friday, the stock price for Nestle India shot up — touching its highest point ever at Rs 15,599. That’s three times the value of the stock at the time of the 2015 Maggi fiasco; that’s also one of the highest among its peers in the fast-moving consumer goods (FMCG) sector today.
 

In the last one year, its stock has gained over 38 per cent. Among contemporaries, Hindustan Unilever stands at 17.58 per cent, Dabur at 16.48 per cent, Marico -8.11 per cent and ITC -18.31 per cent. Nestle also outperformed the BSE Sensex (15.36 per cent) and the sector (11.88 per cent) by a broad margin.

The food major’s superior performance amid an overall consumption slowdown in the FMCG sector is no fluke. It came on the back of a series of well-orchestrated moves adopted by the company since the bad days of 2015/16. From changing its communication stance vis-a-vis the target consumer to shifting its focus to volume-led growth, all the measures adopted since the Maggi crisis seem to be finally paying off.

In the September quarter, its net sales, operating profit and net profit before tax were highest in the last five quarters. And its earnings per share jumped to Rs 61.75 — aided by the cut in corporate tax rate. While the financial numbers for the October-December period have not been released yet, market analysts such as Edelweiss Securities expect Nestle to register the highest topline growth in the sector. As per its research, Nestle is expected to grow its revenue by 9 per cent with volume growth outpacing that of rivals. Food major Britannia, to give a perspective, may deliver a topline growth of 7.5 per cent.

Nestlé will maintain its lead over rivals with its price-earnings ratio as well. While it was the highest in the sector in 2018-19 (at 84.5), in 2019-20, Edelweiss estimates its P/E to remain at 68.4 — higher than all other FMCG players.

So what are those key changes that seem to be working out for the company?

Suresh Narayanan, chairman and managing director, Nestle India, acknowledges the change in its “attitude” and “focus”. It was a necessity, he had said, after taking charge of the India unit amid the Maggi crisis in August, 2015.

From being a predominantly urban-focused company, over the past few years Nestle India has begun searching for growth in the rural market. To add new consumers, the focus has been on improving penetration — adding new outlets and encouraging sampling by launching smaller pack sizes and pushing its products through region-specific promotional schemes. Resultantly, the share of rural market in Nestle India sales surged to over 20 per cent by end-2019 from some 10 per cent in 2015.

That said, while the entire FMCG market has suffered from subdued sales growth in rural areas, Nestlé’s historically urban-focused strategy may have turned out to be a blessing in disguise. As the company’s exposure to the hinterlands continue to be lower than the industry average, the pressure of poor demand, too, was felt less. As per Nielsen’s analysis, while the rural market contributes 36 per cent towards FMCG sales, it contributed 60 per cent towards the overall growth slowdown.

Shedding the tag of being a slow mover, in the past three years Nestle has followed an aggressive launch strategy. Take its move into the breakfast category. Last month, to expand its portfolio in the fast growing breakfast cereals market, Nestle extended its brand Maggi with Indian dishes such as poha and upma. As per Euromonitor’s estimates, the packaged breakfast foods market is growing at over 20 per cent CAGR.

Overall, it has introduced over four dozen new products, besides extending its stronger brands like Maggi, Munch, Nescafe and relaunching brands such as Milo and Nescafe Gold. During 2019, the firm has gained market share in infant cereals (represented by Cerelac), instant noodles and pasta (Maggi), white chocolate (Milkybar), wafers (Kitkat) and instant coffee (Nescafe).

Promotional activities and new launches have helped the world’s biggest packaged-food company maintain leadership positions in more than 85 per cent of the product categories it is present in. Brands such as Lactogen, Nan, Cerelac, KitKat, Munch, Milkybar and Nescafé are market leaders in their respective categories. Maggi regained the top spot, too, with 60 per cent market share as it went past the pre-ban levels by volume and value.

Another factor that helped it moving the organisation from a pan-Indian framework to a cluster framework dividing the country into 15 clusters. Sharp positioning, resourcing and monitoring activities across the geographies opened up incremental opportunities for growth. This strategy of offering localised solutions also entails increased use of local media. From banking on national media vehicles the company has started using regional media vehicles in a big way. The company credits the power of data analytics for much of its new focus and recent success.

Beating slowdown blues

• Share price gained over 38 per cent in the last one year
• Expected to grow revenue by 9 per cent in 18-19, comfortably outpacing most rivals 
• Low exposure to rural India meant pressure of poor demand too was felt less 
• Maintaining leadership positions in more than 85 per cent of the product categories it’s present in
• Maggi noodles went past the pre-ban levels by volume and by value