How Nestle is rebuilding in India18

months after the Maggi ban

Since the Maggi ban in 2015, Nestle has
reworked its strategy and now plans to focus on
new product categories such as cereals,
healthcare and skincare
Sounak Mitra

New Delhi: In the autumn of 2015, in its 103rd year in the country, Nestle
India Ltd was a house demolished.

Maggi Two-Minute Noodles, a brand it built over three decades in India

and loved by hikers, hostellers and housewives alike, had crumbled. That
June, the national food safety regulator had banned the sale of Maggi
noodles and directed Nestle to withdraw the product. As the flagship
product went up in flames38,000 tonnes, literallyMaggi-branded jams,
ketchups and beverages too took the heat. From commanding 80% share
of Indias noodles market, (as estimated by Nomura Securities in May
2015) Maggi went down to zero in just a month.

FSSAI had in May 2015 banned Maggi Two-Minute Noodles for high lead
and MSG content. Photo: HT

Clinically dead, is how the companys India boss loves to describe the
Nestle of those days.

A year later

Its June of 2016, a year after the safety crackdown. At the Centre, Nestle
SAs global headquarters in Switzerlands picturesque Vevey, the global
companys board and management are trying to finalize a three-year
strategy for the India market. Maggi, which returned to shelves in
November, has since reconquered 57% of the market, a far cry from its
heydays, but a major fightback still.

From commanding 80% share of Indias

noodles market in May 2015, Maggi went
down to zero in just a month.

Whats at stake if we dont take any action?

The question was directed at 56-year-old Suresh Narayanan, chairman and

managing director of Nestle India, who was parachuted in from
Philippines a year earlier to put out the noodle fire.

The Maggi ban: How Indias favourite two-minute noodles lost

80% market share

The question was unusual even for Narayanan, who had attended such
strategy sessions for various markets during his two decades at Nestle. But
the man, who had just successfully sailed through one of the biggest crises
in Nestles history globally, knew this was coming.

Suresh Narayanan, chairman and managing director of Nestle India, was

parachuted in from Philippines a year earlier to put out the noodle fire.
Photo: Ramesh Pathania/Mint

The rest of the day, Narayanan briefed the top management on what Nestle
should do in India over the next four years to ensure a safer future.

This was the last in a series of several meetings in Vevey between

September 2015 and June 2016, after the 5 June 2015 order by the Food
Safety and Standards Authority of India (FSSAI) that took Maggi out of the
market. What started as Plan-B of staying afloat without Maggi noodles
finally shaped up as a three-year strategy that Nestle would follow in India
a market that fetched less than 2% of its 2015 global revenue of 88.7
billion Swiss franc despite a century of doing business here.
Click here for enlarge

Nestle declined to share details of its three-year plan framed at the Vevey
conclaves. However, according to Narayanan, the company is looking at
entering new business segments. Thats some change for the company,
which stepped out of its comfort zone last in 1990 when it launched
chocolates.

Consigments of Maggi noodles before being sent for burning at Indo Arya
Logistic Park in Hasangarh, Sonepat, on 15 June 2015. Photo: HT

The reason: Narayanan wants to push what he calls motion initiatives, or

initiatives that will help the company grow faster, that will gradually
ensure the companys portfolio is a lot more balanced beyond the 30%
dependence that it has on Maggi today. The primary topic at Vevey even
on the final day of the strategy meet was on how to restore Maggi noodles
to its former glory in terms of market share, volume and trust.

The Nestle we are building is for another 100 years: MD Suresh

Narayanan

Nestles concern is understandable. In the three decades since it launched

Maggi noodles in India in 1983, Nestle had a smooth journey. Growth was
steady Maggi noodles earned 29.23% of Nestle Indias total sales in 2014,
more than double the revenue share in 2001. Given the steady growth, the
company even stopped looking at new segments or product categories.
Maggi reached every nook and corner of the countryfrom remote villages
in the plains to mountain ranges 18,000-ft above sea level, to become the
most popular packaged snack in India.

Nestle is looking at entering new business

segmentsthats some change for the
company, which stepped out of its comfort
zone last in 1990 when it launched
 chocolates

Then came 5 June 2015 when Nestle Indias single-largest revenue earner
faced a nationwide ban for a six-month period on allegations that it
contained monosodium glutamatea flavour enhancerand lead in excess
of prescribed limits. Between 5 June and 1 September 2015, Nestle had to
recall 38,000 tonnes of Maggi noodles from millions of retail shelves,
destroy them, tackle regulators and other government authorities to
establish that Maggi was safe.

It was a body blow.

Version 2.0

Sitting in his glass-walled cabin at the five-storey Nestle building in

Gurgaon overlooking the expressway to Delhi, Narayanan sounds
confident: We are reconstructing the demolished house.

How?

Enter new categories, build a balanced portfolio to reduce dependence on a

single product, focus on health and nutrition, increase penetration in top
towns, beef up advertising, and, most importantly, communicate much
more with the consumers directly: that was the crux of what Narayanan
returned with from Vevey. Our actions for the next four years would set
the tone for the next few decades, he says.

Our actions for the next four years would

set the tone for the next few decades-
Suresh Narayanan

Over the coming quarters, Nestle will enter a few of the five new product
categories. These are: Nespresso (a coffee machine), Dolce Gusto (a coffee
capsule system), pet care, healthcare and skincare. In August last year, it
entered the cereals market with kids breakfast cereal Nestle Ceregrow. Its
India portfolio has been crying out for expansionout of its global bouquet
of about 20,000-odd brands, it sells only a paltry 20 in India.

Out of its global bouquet of about 20,000-odd brands, Nestle sells only a
paltry 20 in India.

Work has already started. In the last two quarters, it has introduced some
30 products, including a few extensions of its coffee brand Nescafe, Nestle
Ceregrow cereal, health food drink Nestle A+ Pro-Grow, a new range of
Greek yoghurt called Nestle a+ Grekyo and a few new variants of Maggi
instant noodles, and increased its focus on larger cities.

Unlike Maggi noodles, it wont be a volume game anymore. The Swiss

company wants to quickly leverage Indias rapid urbanization, tap the
educated middle class and working women, as well as benefit from rising
health awareness. All this, with an eye on maintaining profitability.

Over the coming quarters, Nestle will

enter a few of the five new product
categories. These are: Nespresso (a coffee
machine), Dolce Gusto (a coffee capsule
system), pet care, healthcare and skincare

Narayanan cites research to show Indias top 600 cities will account for
half of the consumption growth expected in the country over the next
decade or so. Thats clearly an opportunity for a company like ours. With
the increasing participation of more women in the workforce, the need of
the hour is a marriage between nutrition, health and convenience. And,
that is the area Nestle is looking at in terms of product innovation as we go
forward, he adds.

While about 70% of Indias population still lives in its 638,000 villages,
more than 55% of retailing actually happens in metros, mini-metros and
tier-I cities, according to a Technopak study. These are the places where
Nestle wants to go deeper, instead of stepping into places where logistics
and supply chain are a big challenge. However, its products are available at
3.5 million of Indias estimated nine million retail outlets.

With the increasing participation of more

women in the workforce, the need of the
hour is a marriage between nutrition,
health and convenience. And, that is the
area Nestle is looking at in terms of
product innovation as we go forward-
Suresh Narayanan

Nestles products are relevant to a particular lifestyle, income group, and

are urban-centric. Rapid urbanization is a huge opportunity as is the
increasing participation of women in decision-making. We need more
products that are convenience-based, nutrition-based and some in the on-
the-go category. We need to bring products relevant for every segment,
says Narayanan.

This top-down approach has other reasons as well. First, its easier to
convey the message and convince the (educated) middle class through
marketing communications, advertising and social media campaigns. Plus,
theres better scope for premiumization. Nestle India is no longer doing
what it has been doing well for the past few decades; rather, it needs to
look at doing things that it has not done before. Selectively seed them
(products in new categories) in order to grow other frontiers of business, is
what we are looking at. Thats why we are entering new categories and new
businesses, says Narayanan.

Nestle India is no longer doing what it has been doing well for the past few
decades; rather, it needs to look at doing things that it has not done before.
Photo: Pradeep Gaur/Mint

The branded packaged food market accounts for about 20% of the Rs3.2
trillion-a-year packaged consumer products market in India. The
consumer packaged food market is projected to grow at around 12-15%
annually till 2019, according to a September 2015 report by industry lobby
Federation of Indian Chambers of Commerce and Industry and advisory
firm KPMG.

At the same time, Nestle must find avenues beyond branded packaged food
productsa segment that is estimated to get a new brand almost every day.

Even before the Maggi crisis blew up, Nestle India was struggling to stay in
sync with Indias consumption story. It was losing market share in almost
every product categorymilk, baby food, coffee and chocolate. Except, of
course, noodles.

During CY10-15, Nestle India lost market share in most categories

(chocolates, coffee and baby food) due to new competition, lack of
innovation and pricing errors, Sunita Sachdev, an analyst with UBS
Securities India, said in a note on 1 November 2016.

Even before the Maggi ban, Nestle India

was struggling to stay in sync with Indias
consumption story. It was losing market
share in almost every product category
except, of course, noodles

Still, people at Nestle and its shareholders were happy. The company had
managed to keep profits growing. There was no need to fix something that
wasnt broken.

In its new avatar, Nestle India is flexible, responsive and result-oriented.

Some of its recent launches have already started showing resultscoffee
and beverages have returned to growth, but milk and nutrition are still
under stress. According to Narayanan, the boards of Nestle India and
Nestle SA have agreed that there is a need to accelerate the game in
India, which will require fresh investments in the existing portfolio, new
products, renovation and innovationall this aimed at doubling revenue in
the country within four to five years.

Some of its recent launches have already started showing resultscoffee

and beverages have returned to growth, but milk and nutrition are still
under stress. Photo: Pradeep Gaur/Mint

Nestle India has the potential to reach that level. But things change fast.
As a company, we could not exploit the true potential of India as a market.
But theres no reason why it should not happen. If we cant make this
happen in India, where else? asks Narayanan.

Financially, the company has seen better days. In calendar year 2014,
Nestle India had a revenue of Rs9,854.84 crore. Sales for the year 2015
stood at Rs8,175.31 crore. In the quarter ended 30 September, it reported a
revenue of Rs2,190.2 crore. It was Rs2,332.6 crore in the quarter ended 31
March 2015 (the quarter before the Maggi ban). Results for 2016 (full year)
are to be declared on Wednesday.

As a company, we could not exploit the

true potential of India as a market. But
theres no reason why it should not
happen. If we cant make this happen in
India, where else?- Suresh Narayanan

Meanwhile, Nestle India has crunched the time between a product idea
and its launchfrom a typical 12-18 months to four-six months. And, more
of its new products are developed based on local consumer insights, unlike
earlier when more than 60% of its products had significant global
interventions. It now needs to sustain this strategy for the next few years.

While analysts did not want to comment on the long-term projections of

the company, they maintain a positive outlook on Nestle India.

The slew of new launches is a step in the right direction in our view.
However, in the coffee and beverages segment, we believe the move is
behind time, given the company has lost its leadership position in terms of
value share to HUL (Hindustan Unilever) in the category, Sachdev of UBS
said in a note last year. Nestles recent launches, brokerage firm IIFL in a
report said, are likely to add 5-6% to the companys sales by 2020.

Health is wealth

One of Nestles big bets is health. There are around 70 million diabetics in
the country, about 60% of Indians are anaemic and a high percentage of
children die of malnutrition, according to different studies. Meanwhile,
consumers in general are becoming health conscious, more so in urban
areas where Nestle India intends to focus.

One of Nestles big bets is health. Consumers in general are becoming

health conscious, more so in urban areas where Nestle India intends to
focus. Photo: Reuters

India is moving from a health and pleasure dimension to a healthy-

indulgence dimension which is becoming a part of consumers choice.
Products addressing issues related to diabetes, cardiovascular health,
micronutrient deficiencies, fortificationsthese would be another big
platform for the company. These are some things that we have not done as
aggressively as we should have, says Narayanan.

To support all the above, it will leverage online salesa route that it first
used successfully when it relaunched Maggi noodles on Snapdeal. With
this, Nestle will reach out to more consumers beyond the top towns, across
the smaller towns and semi-rural areas at almost no cost. It has already
partnered with top e-commerce platforms like Amazon, Snapdeal and
BigBasket among others. It may also introduce online-only products in the
health and nutrition category.

Nestle plans to leverage online sales to

push new products, a move that will help
reach out to smaller towns and semi-rural
areas at almost no cost

There will be some hits and some misses, admits Narayanan. Nestle in
India will continue to support its winners that it already has in the
marketplace through focused marketing and advertising push, and keeping
a healthy balance between revenue and profit.

Like its parent, Nestle India will stay away from the pricing game to
maintain profitability. It will not get into discounting or launch low-margin
products. If something needs a pricing game, we would rather keep that
out of our focus. This is something that has helped us as an organization
globally and we would replicate that in India as well, adds Narayanan.

Advertising push

One of the key reasons why Nestle failed to tackle the Maggi mess
estimated to have caused the company a half a billion-dollar lossis a
communication failure.

The first thing Narayanan did after coming to India was to start
communicating with all stakeholdersregulators, media, consumers. He
ensured every question gets a satisfactory answer. And then, he pushed
advertising.

One of the key reasons why Nestle failed to tackle the Maggi mess
estimated to have caused the company a half a billion-dollar lossis a
communication failure. Photo: PTI
Nestle India has always been a low spender on advertisements. Between
2010 and 2014, its spending on advertising and sales promotions was 4.2-
4.8% of its total income, according to its annual reports. In 2015, the
company spent Rs525.21 crore, or 6.42% of its total sales, on advertising
and promotions.

This is still lower than what its rivals spend. The countrys largest packaged
goods company Hindustan Unilever Ltd (HUL) spent about 11.8% of
revenue on advertising and sales promotions in the year ended 31 March
2016, and Britannia Industries Ltd, a relatively low spender, had shelled
out 7.5% of revenue in advertising and sales promotions in fiscal year 2016.

Nestle India has always been a low

spender on ads. Between 2010 and 2014,
its spending on promotions was 4.2-4.8%
of its total income

In the next four-five years, we would like to increase that (advertising

spend) to at least 7-8% of turnover. For some (products), it may even go
higher depending on the scale of the opportunity and competitiveness in
the market that we would see, says Narayanan. All major opportunities,
he adds, will be fully resourced, and fully funded in terms of both
advertising and sales promotions.

Still, Nestle India may not invest much in capacity enhancement. It has, as
Narayanan says, invested close to Rs5,000 crore in capacity building and
scale in the past four years. Now, the time for us has come to be reaping
the benefits of these investments. So during the next couple of years, the
strategy clearly is incremental investments where we need new technology
frontiers to be tapped into by the company, he adds.

In the next four-five years, we would like

to increase that (advertising spend) to at
 least 7-8% of turnover. For some
(products), it may even go higher...- Suresh
Narayanan

Untangling the noodles

According to executives from Nestles competitors in India, the Maggi

fiasco blew up because the company was too confident and it failed to see
when that confidence turned into complacency. Trade partners agreed.
They say that before the Maggi crisis, Nestle suffered from a superiority
complex, if not arrogance. None of these trade partners, however, want to
go on record with their comments. However, the same people say the
company has changed after the Maggi crisis.

According to executives from Nestles competitors in India, the Maggi

fiasco blew up because the company was too confident and it failed to see
when that confidence turned into complacency. Photo: HT

The Maggi crisis was as much about the perceived quality of the product
as it was about the way communication was handled in the media,
especially on social media. Its important to reach out and explainthe
first response on digital platforms is critical, given their unstructured and
viral nature Perhaps Nestle did not prioritize and publicize these steps
enough, even if they were being actioned, says Arvind Mediratta,
managing director and chief executive officer of Metro Cash and Carry
India Pvt. Ltd.

An executive working with a packaged food distribution firm agrees:

People at Nestle were arrogant and rigid about their business terms.
Before the Maggi crisis, we had to tweak our models to get in sync with
Nestle. At times, it was difficult. But things changed after the Maggi fiasco.
The company has become aggressive, yet, more flexible. It has become
easier to do business with Nestle. Now, Nestles salespeople push products
something I have never seen in the past two decades of my career, says
the executive, asking not to be named.

People at Nestle were arrogant and rigid

about their business terms... But things
changed after the Maggi fiasco. The
company has become aggressive, yet,
more flexible- An executive with a distribution
firm

Nestle India general manager (foods) Maarten Geraets says he had never
seen such a big crisis before. The impact the Maggi issue had on the minds
of people involved or associated with it was immense Looking back, it
has given us an opportunity to be more fast, focused and flexible; the
innovation and renovation pipeline has been strengthened and that is
evident, he adds.

Nikhil Chand, general manager (chocolate and confectionery) at Nestle

India, had joined the company after the Maggi ban. He saw the company
manage its crisis from the outside. Even from the outside, you could see
the scale and impact. However, crisis is always an opportunity. The
company has taken the challenge and is raising the game with innovation
and renovation. There is increased focus on all our brands, adds Chand,
who was working with the Russian unit of Nestle during the Maggi crisis.

Simplifying organizational structure

Ever since it emerged from the crisis, Nestle India has been trying to get
rid of its complexities (Narayanan calls it decomplexification) in its
operational structure here.It has set a target to cut down layers to help
reduce 30-40% of process time by cutting down the number of meetings
and interventions by half, besides ensuring empowerment in decision-
making (of the younger generation).
 The company has taken the challenge and
is raising the game with innovation and
renovation. There is increased focus on all
our brands- Nikhil Chand, general manager
(chocolates and confectionery) at Nestle India

We are trying to simplify our commercial structure, increase engagements

with state governments, environmental gauging the market and also
interfaces to get to know issues in real timesomething we learnt from the
Maggi issue, says Narayanan.

Also, unlike the pre-crisis era, Nestle India now has people in each state to
engage with local regulators and government authorities. It has also
formed a new team for communications and public affairs at its head
office.

Tough ride ahead

Starting calendar year 2012, Nestle India has been reporting a steep
decline in volume of milk products, chocolates and coffee every year, and
the companys overall market share almost halved to around 15% in the
past four-five years due to stiff competition from both multinationals and
home-grown brands, the latest being yoga-guru-turned-businessman Baba
Ramdevs Patanjali Ayurved Ltd.

Besides directly attacking Nestle on various issues, Ramdev launched

noodles just a week after Nestle India relaunched Maggi noodles in the
market. Maggi, alone, has a few dozen competitors.

Ramdev launched noodles just a week after Nestle India relaunched Maggi
noodles in the market. Photo: HT

During the period when sale of Maggi noodles was banned, ITC Ltds
Yippee noodles and Wai Wai noodles from Nepals CG Foods gained
market share, filling a gap in a Rs3,182-crore noodles market.

In the segments Nestle intends to enter, the company will also have to fight
established firms.

In skincare, Nestle will have to take on HUL that dominated the estimated
Rs10,369-crore market with a 47.2% market share in 2015. Other key firms
in the segment include LOral, home-grown Himalaya Drug Co. and
Emami, according to market research firm Euromonitor International.

During the period when sale of Maggi

noodles was banned, ITCs Yippee noodles
and Wai Wai noodles gained market
share, filling a gap in a Rs3,182-crore
market

The Rs1,736-crore breakfast cereals market in India is dominated by

Kellogs (35.8% market share), Bagrrys and PepsiCo India, says
Euromonitor. Pet care, estimated at Rs1,712 crore, has rivals such a Mars
Inc. and Indian Broiler Group in the segment.While Nestle leads the
Rs2,501 crore instant coffee market with Nescafe, it has, in the recent past,
lost market share to HULs Bru.

Nestles focus on innovation has sharpened with many products at

different stages of launch. The companys new avatar is encouraging. With
strong product launches, we remain positive on Nestle from two-three
years perspective and are enthused by the aggression showed by the
turnaround MD, says Abneesh Roy, an analyst with Edelweiss Securities.

Nestle has, as credit rating firm Moodys pointed out in a 30 September

note, in recent years strengthened its nutrition, health and wellness
business with a number of acquisitions. Nestle management has indicated
an increasing focus in these segments for Indian market too. Its global
rivals, like Danone and home-grown competitors like Himalaya and
Patanjali have been strengthening their portfolios in the same areas as
well. Earlier in January, Danone India managing director Rodrigo Lima
said the company will launch about 10 new products (most of which would
be in nutrition) in 2017 aiming to double country revenue by 2020.
Danone has already shifted focus from dairy to nutrition in India for
growth.

The companys new avatar is

encouraging. With strong product
launches, we remain positive on
Nestle...and are enthused by the
aggression showed by the turnaround
MD- Abneesh Roy, analyst with Edelweiss
Securities

However, these are significant businesses for Nestle globally. In 2015, 13%
of its total sales came from pet care (non-existent in India), 17% from
nutrition and health science, 22% from powdered and liquid beverages, 8%
from water (non-existent in India), 16% from milk products and ice
creams, 14% from prepared dishes and cooking aids and 10% from
confectionary.

Nestles growth is increasingly driven by a portfolio of billionaire brands

and increasing presence in emerging markets. In addition to its core
business, Nestle has a 23.4% stake in cosmetics giant LOreal, which was
reduced in 2014 from 29.7%. The company also operates through joint
ventures, such as Cereal Partners Worldwide with General Mills outside
North America, Moodys said in the note.

Photo: HT

Narayanan has his plate full. He will have to ensure that Nestle India does
not get into the mode of complacency or superiority again.If Maggi
crisis would not have happened, Nestle would probably have preferred to
stay the way it was confident, content, and non aggressive. As Mediratta
of Metro Cash & Carry says, Nestle will be more careful now about taking
its success for granted.

Over the next 10 years, Nestle will slowly

move from packaged food, to focus on
health and nutrition products.

Can Nestle build another brand as big as Maggi noodles again in India?
Narayanan does not think so, given the competitive landscape and the fast-
changing consumer behaviour. But the endeavour of the local arm of the
Swiss company is to spot at least one, if not two, brands that could emerge
as big as Maggi noodles, at least in terms of sales numbers. Over the next
10 years, Nestle will slowly move from packaged food, to focus on health
and nutrition products.

Was the Maggi crisis a blessing in disguise for Nestle in India? Narayanan
smiles, his gaze settling on a desktop idol of Ganesha, the elephant god
worshipped as a remover of obstacles.

First Published: Wed, Feb 15 2017. 05 37 AM IST