Nestle's branding woes

The absence of new blockbusters is putting its bread and butter brands under a cloud as well

The instant noodles aisle in a supermarket still has Nestle Maggi's yellow as the dominant colour. But a closer look might reveal some of the yellow packs to be another brand's, most likely than not, ITC's Sunfeast Yippiee. Despite the default colour for India's much-loved masala flavour, there would also be Capital Food's Ching's multi-coloured Hot Garlic and Manchurian, and Yippiee's brown Chinese masala breaking up the yellow fest on a rack.

It has been years since Nestle experimented with Maggi's flavours. It earlier had flavours like tomato and a series of 'rice' noodles such as lemon rice. But deviant flavours, in a category created by Maggi and still led by it, are now being provided by other brands, some of which are geared to take it head on, not just in variety but distribution and advertising moneys. (YET TO CHURN OUT BRANDS)

Of course, taste has been a hit and miss in instant noodles. FMCG stalwarts such as GSK and Hindustan Unilever (HUL) had tried their hands at getting flavour and differentiation right, but with tepid results. For now, Maggi is continuing with its flagship masala variant, which has two more versions fortified with nutrients and vegetables. Then there is atta noodles, launched after GSK had introduced Foodles in 2010, a healthier whole-wheat version of the processed-wheat original. Maggi Hungroo, which had campaigned heavily with Amitabh Bachchan, was added late last year.

Uptrading mantra
But Hungroo is not a new flavour. It is a larger pack of Maggi Masala, priced higher. Nestle had cut down its standard pack from 100-gm to 75-gm for Rs 10 a while back, and with Hungroo, it is looking to sell 112-gm for Rs 15, a 50 per cent higher price-point.

With a name alluding to a large appetite, Hungroo exemplifies how Nestle is redoing its portfolio. But it is also reminiscent of the Swiss company's strategy of high margins that Indian analysts are seeing red over.

After its latest annual result, out in mid-February, analysts are now united in demanding that Nestle does not ignore volumes. In the last couple of years, Nestle has been doing everything to chisel a portfolio to cater to a premium audience, who are less susceptible to cost fluctuations.

While in instant noodles, it is a higher price-point, in chocolates it has meant a Ferrero Rocher-challenger in Alpino. In baby food, its Nan Pro Toddler caters to urban markets. Edelweiss Capital Associate Director Abneesh Roy says, "With products such as Nan, Nestle has pricing power and high margins. It has been able to take high price hikes."

Backstage rationalisation
Nestle has been withdrawing less differentiated-low margin products such as its eclairs toffee in retail and tea-whitening milk powder in wholesale, which it had called low value-add propositions. It has also stopped distributing its largest product category, milk products, in institutional channels that return lower margins than retail. Analysts, such as those at Deutsche Bank, observe that it has bifurcated its sales-force for shops that do not overlap for chocolates and beverages (kiosks) and packaged food and milk products (chemists etc.). The company did not respond to a request for an interaction.

Nestle logged the slowest domestic sales growth in nine years, of 3.7 per cent year on year. It had raised prices by around 5 per cent, but operating margins, too, have hovered around 21-22 per cent of profits, contracting on increased input prices, in the last couple of quarters (chart below). As JP Morgan analysts note, margins still suffer despite high pricing and improved mix. Volume growth continues to elude the company. The solution? Brand-building is the unanimous verdict.

Nestle has been taking out anything that forms a drag on its pursuit of margins. It has assigned no less than Rs 3,500 crore capex to expand capacity. Observers say that rationalisation should have borne fruit by now and the added capacity put to the task of churning out innovations and relaunches. But the market's wait for an influx of new brands only got compounded by rising input prices and cut in discretionary spends. Yet, the bigger problem lies elsewhere.

Re-enter brand-building
Despite blockbuster brands such as Maggi, KitKat and Nescafe, the clamour for Nestle to step up its branding has only got louder. An analyst with an investment bank says, "It needs to push more products into the pipeline. With more capacity, it is time to go in for big brand launches."

A senior market research analyst with an MNC bank says, "Nestle could have been a bit more smart and passionate with its existing brands. Even Alpino has not had any blazing 360-degree campaign. We need not one but five such launches to increase volumes in the near future. Higher sales have not come from increased capacity because of the lack of new products." Roy says, "In FMCG, strong profits can only come from good volumes, given the high competition in most categories." The Deutsche Bank report says that Nestle's trade-off of volumes for margins is surprising as its categories have huge headroom for volume growth, and insists that it should invest behind category adjacencies and brands.

Localisation is a must
Instant noodles, for example, is a market for Nestle to lose, say analysts. A J P Morgan report on Asian instant noodles market says that while in Japan, China and Korea, instant noodle sales is a single digit percentage of their GDP, India is one of its fastest growing markets, at more than 20 per cent, as the per capita consumption is around 0.03 per cent of income. Nestle still rules the category, though its share has been eroded.

Roy says, "In branded packaged food, localisation can't be ignored. But there has been a lack of big-ticket innovation from Nestle." ITC, according to market estimates, has already secured over 20 per cent share in instant noodles in large metros and has innovated with a Chinese flavour, in tune with Indian preferences, priced at Rs 15.

HUL's precedence
Nestle's zeal for overhauling its portfolio is a cause for concern. Roy says, "It made sense to prioritise when Nestle had a capacity constraint but not anymore. Vacating a price-point can always get tricky. Small SKUs help in sampling. That is why it is rare in FMCG to rationalise a portfolio." HUL had tried paring down its regional brands in early-2000s, and focus on its top 30 power brands. But it abandoned the strategy when the impact went straight to its volumes. The UK-based FMCG multinational is working to uptrade consumers with its newer set of brands such as Dove. Nestle in a meeting with analysts in June, 2013, had shared volume growth for the first half of 2013 (please see chart on right).

Turning a new leaf
With the new MD Etienne Benet settling in, the Rs 9,101-crore company could be seen gathering pace in 2014. On the year 2013, Benet says in a press release, "The growth dynamics in some core products and categories like Maggi Noodles, Nescafe and KitKat has compensated the headwinds in some of the other businesses." He says that the reshaping journey could require "bold changes, swift adaptations and tough decisions" to evolve a product portfolio more focused on premium ranges. This, he says, would let Nestle take on current and future competitive challenges.

With competitors like HUL, GSK Consumer, ITC, Mondelez International that have deep pockets for R&D and promotions, and dairy cooperatives like Amul and Mother Dairy who pursue volumes over margins, across its many categories, Nestle would have to work faster on its product pipeline either in its existing brands or new ones.