Nestle: A Global Multinational company

5159 words (21 pages) Essay

19th May 2017 Marketing Reference this

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Brief of company: Nestlé with headquarters in Vevey, Switzerland was founded in 1866 by Henri Nestlé and is today the world’s leading nutrition, health and wellness company. Its sales for 2009 were $ 112.3 billion, with a net profit of $ 11.1 billion. They employ around 276,050 people and have factories or operations in almost every country in the world.

Reasons for selecting the company: Nestlé can trace back its origins to 1867, from selling milk-based baby foods and condensed milk as its primary products to a market leader in today’s Food & Beverage Industry with more than 6000 brands under its belt ranging from coffee and candy to hotdogs and pasta. Instead of just reaping the profits from the market, Nestlé has given back to the community by adopting social responsibilities, showing above the bar ethical behaviour and in many cases raising the standards in the industry. Its founding ethos reflects the basic ideas of fairness, honesty, and a general concern for people.

Main strategic issues facing the company:

Nestlé has been facing ‘Nestlé boycott’ since 1977 due to its promotions of the use of artificial infant foods.

Growing resistance of consumers against the use of genetically engineered foods in Nestlé’s products.

Increasing competition.

Increasing awareness in the consumers with the demand of being socially and ethically responsible increasing day by day.

Increasing control and regulations in the policies of the governments worldwide.

Company’s contribution to the National Economy: Switzerland’s GDP for the year 2009 was estimated at $522.4 billion with GDP growth rate of 2.8% (2010 estimate). Out of which Merchandise exports for 2009 were of $173 billion.

*Company’s contribution to the regional economy: Nestlé employs around 280,000 people all over the world and have factories or operations in almost every country in the world. Nestlé’s gross revenue for the year 2009 was $ 112.3 billion and R&D investment was $ 2.11 billion.

*Recent strategic dilemma:

Environmental impact of palm oil and the role of multi-nationals such as Nestlé in this.

Recent strategic choice:

In March 2010, Nestlé purchased Kraft’s North American frozen pizza business for $3.7 billion.

Nestlé has been heavily investing in Africa.

Source of Information on Company:

http://www.nestle.com

(334 words)

Executive Summary

This assignment analyzes Nestlé’s current situation and strategies in context of Global Food & Beverage Industry and then recommends the key strategies Nestlé should use to be more successful and retain its status as the global market leader in future.

To analyze the F&B Industry on a higher level and examine Nestlé’s external environment, the following business models are used in this assignment: Industry Life Cycle, Key Success Factors and Porter’s Five Forces. And to analyze Nestlé’s current status and its internal environment the business models used are: SWOT analysis, Strategic Factor Analysis, TOWS Matrix.

After analyzing the information based on the above mentioned models, Nestlé is currently facing issues like product recalls, stagnant growth, high logistical costs, negative publicity and false allegations which are damaging its image and goodwill in the market. To combat some of these issues Nestlé has introduced innovative and healthier food products to cater the rising number of health conscious consumers, started focusing on the rising middle class consumers in developing and emerging economies, which has helped Nestlé to increase their growth again post the 2009 Financial Crisis.

For further improvement in the market share and company image, key strategies recommended to Nestlé are Expansion strategy through strategically acquiring and merging with its competitors and investing in production facilities in developing economies and Growth through Innovation in health & nutrition food segment. One area that Nestlé has to care of immediately is improvement in its Public Relations management to create a high level of loyalty and trust in its customers by building and reinforcing the notion that Nestlé still follows its founding ethos of fairness, honesty, and a general concern for people.

(277 words)

Industry Life Cycle

Introduction

Growth

Maturity

Decline

Time

I

ND

U

S

T

R

Y

SALES

The Global Food, Beverage and Tobacco Industry’s growth has slowed down in recent years. But all this is set to change due to the recent technological advancements, rapid globalisation and opening up of the many restricted markets worldwide such as India, China, African nations, etc. With the technological advancements in food processing, handling and storing capacity and the rapid emergence of organized retailing in Asia, Africa, and other third world countries, along with fast changing demographics and habits has changed consumption the patterns and is fuelling the next growth trajectory for the global food, beverage and tobacco industry.

The Global Food, Beverage and Tobacco Industry is in the High Growth stage of the growth phase as the increase in sales has slowed down in recent years. The global food, beverage & tobacco industry generated total revenues of $6,319.2 billion in 2009, growing at a compound annual growth rate (CAGR) of 3.4% for the period spanning 2005-2009. Food sales generated total revenues of $4,235.4 billion, equivalent to 67.1% of the industry’s overall value and sale of beverages generated revenues of $1,581.7 billion in 2009, equating to 25% of the industry’s aggregate revenues. The industry is forecasted to grow at CAGR of 3.8% for the five year period 2009-2014.

Nestlé recorded revenues of $99 billion in year ending December 2009, showing decrease of 2.1% compared to fiscal 2008. In 2009, Nestlé renovated 7,252 products for nutrition or health reasons, as health awareness among consumers is rapidly increasing and it wants capitalize on the health conscious trend. Nestlé has been active in Developing &Emerging (D&E) economies through its subsidiaries in Asia Pacific, Africa, the Middle East, Turkey and Latin America. Nestlé’s sales in emerging countries accounted for almost 32.5% of total revenue and reached $32.32 billion in 2009. According to IMF, the advanced economies are set to grow at 2.1% and 2.4%, respectively, in 2010 and 2011, while the D&E economies are forecasted to grow at 6% and 6.3% in 2010 and 2011, respectively. Therefore in the future, Nestlé’s growth will be driven by high-growth D&E economies.

Key Factors for Success

Key Success Factors

Weight

Rating

Weighted Scorecard

Rating

Weighted Scorecard

Rating

Weighted Scorecard

Branding

0.20

5.00

1.00

4.00

0.80

4.50

0.90

Diversification

0.15

4.50

0.67

4.00

0.60

4.50

0.67

Product Quality

0.15

4.00

0.60

4.00

0.60

4.00

0.60

Pricing

0.15

3.50

0.52

3.50

0.52

4.00

0.60

Distribution Network

0.10

5.00

0.50

3.50

0.35

5.00

0.50

Packaging

0.10

4.00

0.40

3.50

0.35

4.50

0.45

R & D

0.10

5.00

0.50

3.00

0.30

4.50

0.45

Market Dominance

0.05

5.00

0.25

4.50

0.22

4.00

0.20

Total

1.00

4.44

3.74

4.37

Key Factors for Success in the Food and Beverage Industry:

Branding in F&B industry is of utmost importance as people do not prefer to buy products that they are not familiar with; also in this industry brand image is everything as it can attract consumers to a company’s new products if it is already reputable in the market. Diversification in F&B industry are almost always related as companies prefer to have a healthy portfolio of products while still maintaining their core competencies and using them in their related products; as by having a large range of products a company will be more competitive and would not have to rely on a single product.

Product quality is very important in F&B industry, as bad quality products can & will lead to consumer boycott of the company’s products, health issues in consumers and lawsuits against the company. While quality of the products also have to justify their prices, such as normal milk chocolates (Nestlé, Cadbury, etc.) cannot be priced high while specialty chocolates (Lindt, Godiva, etc.) are high priced. A strong distribution network is a must in F&B industry as it gives the companies low costs operations, fast delivery, and optimal shelf presence in retail stores. R&D is vital for gaining market share for the companies as development of better tasting, more nutritional and new foods & beverages is the fastest way of capitalizing on the fast changing trends of the consumers (like current healthy & organic food trend).

Two of the many competitors that Nestlé has, I have chosen Kraft Foods and Unilever for the comparison of KFS. After analyzing the KFS it is clear that Nestlé’s response to the current and expected key success factors is above the industry average, with Unilever quite close behind and Kraft Foods just managing the industry average. So the analysis of KFS also reinforces Nestlé’s position as the largest F&B Company in the world.

Porter’s Five Forces Model:

Potential Entrants:

Product Differentiation

Switching Costs

Distribution Channels

Cost Disadvantages

Suppliers:

Financially weak

Large no. of suppliers

Buyers can do Backward Integration

Substitutes:

Private label products

Niche products

Cheaper alternatives available

Buyers:

Large Retailers

Financially strong

Backward Integration

Low Profit margin

Other Stakeholders:

Health Groups

Environmental Groups

Fair Trade Organizations

Rivalry among existing firms:

Large number of players

Dominance of big players

Highly diversified markets

Analysis of Porter’s Five Forces:

The Bargaining Power of Suppliers (Low):

The bargaining power of suppliers in F&B Industry low as the raw materials for this industry includes fruits and vegetables, meat and fish, dairy products and grains, tobacco, cereals and grains, etc which could be purchased in the open markets around the world. And some F&B producers have integrated backwards into producing their own raw materials, negating the need for suppliers. Also suppliers tend to be financially quite weak giving market players upper hand.

The Bargaining Power of Buyers (High):

The bargaining power of suppliers on the other hand is quite high as typical buyers are large retailers such as Wal-Mart, Carrefour, etc. who are financially very strong and usually make large purchases and enter into long term contracts with market players; as the profit margins for the buyers is quite low. So loss of one retailer could significantly impact upon a manufacturer’s revenue. Buyers are frequently integrating backwards, with many retail chains offering their own branded packaged food goods usually referred to as Private label products.

The Threat of Potential New Entrants (Present):

The threat of new entrants is high for small players who only serve few products and few markets (regional or national players) but is low for highly diversified big market players such as Nestlé, Unilever, etc. who operate globally. Since it’s a highly fragmented market small-scale entrance by occupying a niche in the industry is possible and high these days. But new entrants have to bear switching costs (which can be quite high) as it’s very hard to convince consumers to try new brands/products. Also big players can restrict the access to distribution channels for new players through their contacts and power in the market.

The Threat of Substitutes (High):

The substitutes are often cheaper and just as popular with consumers in F&B Industry as most of the products in this industry are in a way a substitute of some other products, like Tea for Coffee, Coke for Pepsi, NutraSweet for Sugar, etc. These days private label products, organic foods; nutritional foods, etc. are also rapidly substituting the packaged foods. And there are almost no switching costs for end consumers as they just pick any new products instead of their regular ones if they want to experiment.

The Extent of Competitive Rivalry (High):

The competitive rivalry among the firms is quite high in this industry as the enormous size of the industry creates endless opportunities for the players to compete for. Large number of players, ready availability of substitutes, low entry barriers, low bargaining power of suppliers and fast changing customer tastes intensifies rivalry in the F&B Industry. And also slow down of sales in the industry in 2009 will intensify the competition in the market, as everyone would try and gain market share now by take sales away from other competitors.

Relative Power of Other Stakeholders (High):

SWOT Analysis:

Internal Factors Analysis Summary (IFAS):

Internal Factors

Weight

Rating

Weighted Score

Comments

Strengths

S1: Finance

0.15

5.00

0.75

Low debt/asset ratio

S2: Global Presence

0.10

4.50

0.45

Market Leader

S3: Brand

0.10

4.50

0.45

One of USA’s most admired

S4: R&D

0.10

5.00

0.50

Industry leader

S5: Diversified Portfolio

0.05

4.50

0.22

More than 6000 brands

Weaknesses

W1: Quality Control

0.20

3.50

0.70

Increase in product recalls

W2: Growth

0.10

3.00

0.30

Growth recovery slow

W3: Emerging Markets

0.10

3.20

0.32

Less emphasis

W4: Logistics Cost

0.05

2.00

0.10

Quite high

W5: Perceived Image

0.05

2.00

0.10

Considered to put profit first

Total Score

1.00

3.89

Strengths:

Nestlé apart from being the market leader in F&B Industry is also financially very strong with highly diversified portfolio of more than 6000 brands, global presence, and strong R&D capabilities; and in the process has developed a very strong brand image which it uses as leverage to generate high sales. As it has global presence it has customized its products according to consumer preferences in the local markets. Nestlé is also the leading company to invest heavily in R&D (annual invest of $ 1.8 billon approx.) as it considers innovation as one of its primary growth drivers.

Weaknesses:

Due to the sheer size and geographical diversity of Nestlé, controlling quality in many of its factories and supply chains is becoming difficult for Nestlé; which in turn is resulting in product recalls, loss of goodwill, and effect to the brand image of the company, which can lead to low customer loyalty. Another one aspect where Nestlé is lagging behind is that it has not been focusing much on emerging markets as majority of its sales are from developed markets. Its logistical costs and inventory management costs are also quite high due to its geographical diversity. Its growth has been has slow after the economic downturn as compared the industry as a whole, which has been on the recovery track since.

External Factors Analysis Summary (EFAS):

External Factors

Weight

Rating

Weighted Score

Comments

Opportunities

O1: Health food trend

0.15

4.50

0.67

Rise in health consciousness

O2: Developing & Emerging economies

0.10

3.50

0.35

High growth rate

O3: Opening of Eastern Europe

0.05

3.00

0.15

Can expand there

O4: Out-of-home consumption

0.10

3.50

0.35

More than 40% in Americas

O5: Premiumisation

0.10

3.20

0.32

Growing incomes

Threats

T1: Rising prices of raw materials

0.10

3.00

0.30

Climate change & food shortages

T2: Specialized competitors

0.15

3.50

0.52

General Mills in Yogurt Mkt.

T3: Increasing Regulations

0.15

4.00

0.60

Spats with FDA

T4: Currency Fluctuations

0.05

2.50

0.12

Strong Swiss Franc

T5: Negative Publicity

0.05

3.00

0.15

Due to alleged unethical business practices

Total Score

1.00

3.53

Opportunities:

One of the major opportunities which can be the future growth driver for Nestlé is healthy and nutritional foods segment, as by 2014 the global organic food market is forecasted grow by 60.7% since 2009 and while the global functional drinks market is forecasted to grow by 32.9% since 2009. Also further penetrating the Asian, African and Eastern European markets by using merger, acquisition and joint venture strategies can also be a major growth driver for Nestlé. The growing level of incomes of the middle class around the world is also providing Nestlé with opportunities for launching its premium products such as Mövenpick, etc. in the developing economies.

Threats:

Two of the major factors threatening Nestlé are specialized competitors and increasing regulations by government bodies. As Nestlé is highly diversified it faces problems when it has to compete with competitors who are highly specialized in one product such General Mills in US Yogurt Market. Also any change or stricter enforcement of regulations by government bodies like FDA, tend to threaten Nestlé as it would have to change its production process or may even face lawsuits & pay fines due to some violations of the regulations, which will also give rise negative publicity about the company. Due to the economic downturn of 2009, currencies fluctuations have been hurting Nestlé as Swiss Franc has strong against the most of the other currencies.

Strategic Factors Analysis Summary:

Strategic Factors

Weight

Rating

Weighted Score

Duration

Comments

S

H

O

R

T

I

N

T

E

R

M

E

D

I

A

T

E

L

O

N

G

S1: Finance (S)

S3: Brand (S)

0.15

5.00

0.75

X

Large amount of cash

0.10

4.50

0.45

X

Major global brand

W1: Quality Control (W)

W3: Emerging Markets (W+O)

0.20

3.50

0.70

X

Recent product recalls

0.10

3.20

0.32

X

Give more emphasis

O1: Health Food Trend (O+S)

O5: Premiumisation (O)

0.15

4.50

0.67

X

Major growth area

0.10

3.20

0.32

X

Increasing incomes

T2: Specialized Competitors (T+O)

T5: Negative Publicity (T)

0.15

3.50

0.52

X

Possibilities of JV’s

0.05

3.00

0.15

X

Significant impact on customer loyalty

Total:

1.00

3.88

Short Term:

The F&B Industry can see short and explosive bursts of growth, so it is necessary for Nestlé to always have few strategies ready for short periods or it might not be able to capitalize on important trends or fads. For short term Nestlé should focus on Premiumisation in developing and emerging economies as the incomes of the middle classes is rising there, which is fuelling their want of premium products now. Since Nestlé already has lot of products in the premium segment, so all it has to do is to launch them into developing and emerging economies now; which will only take short time period to do and with minimum costs.

Intermediate Term:

Quality Control, Emerging markets, health food trend and specialized competitors are factors which Nestlé will have to address in the intermediate time period, as they can adversely its sales if left unchecked. Nestlé has to bring its quality in to control quickly otherwise it will be at risk of losing its loyal customers and might even face lawsuits. By expanding and capitalizing in emerging markets like India, China, etc. and current health food trend Nestlé will be able to compete with its competitors and maybe also gain market share in the process. Collaborating with its competitors or buying them out in the segments which require specialized skills will take some time but is a necessary step or in long term they might become a huge threat to it.

Long Term:

Nestlé’s long term scenario is quite balanced as it is financially very strong with a brand name that is counted among the top 25 brands in the world, but it also has repair its deteriorating image in customers minds. Being the market leader in the industry and with worldwide renowned brand Nestlé’s sales revenue is far greater than that of its competitors which gives it high leverage capabilities while operating in the market. It has been coming under attacks from various social groups in recent years, which has been damaging its goodwill among its customers. Nestlé has to strongly address this issue slowly and carefully so that it is come back to haunt it, and do that it has to invest heavily in very effective and efficient Public Relations management team.

TOWS Matrix:

Internal Factors

(IFAS):

External Factors

(EFAS):

Strengths (S):

Finance

Global Presence

Brand

R&D

Diversified Portfolio

Weaknesses (W):

Quality Control

Growth

Emerging Markets

Logistics Cost

Perceived Image

Opportunities (O):

Health Food Trend

Developing and Emerging Economies

Opening up of Eastern Europe

Out-of-home consumption

Premiumisation

SO Strategies:

Develop products for health & nutrition segment.

Find joint venture partners in Eastern Europe.

WO Strategies:

Expand Nestlé’s presence in Eastern Europe & Asia.

Change Nestlé’s perceived image.

Threats (T):

Rising prices of raw materials

Specialized Competitors

Increasing Regulations

Currency Fluctuations

Negative Publicity

ST Strategies:

Do backward integration.

Either use joint venture & acquisition strategies or R&D to gain market share.

WT Strategies:

Invest in PR management to improve the image of Nestlé.

Emphasize on developing & emerging markets to gain market share.

SO Strategies (Maxi-Maxi):

SO strategies are formed so that the strengths of a company can be used to capitalize on its external opportunities. So by analyzing Nestlé’s strengths and opportunities available to it I have decided to use two strategies for Nestlé’s future growth. As the demand of healthy & nutritional foods is increasing Nestlé can use its strong R&D capabilities to develop products for this segment. Another strategy that Nestlé can use is to find partners for joint ventures in Eastern European market as it being relatively new, it might not be aware of how things happen there; so it should first do joint ventures there to study the market first as opposed to moving with full force in the market.

ST Strategies (Maxi-Mini):

A company applies ST strategies to avoid its external threats using its strengths. As Nestlé is financially very string it has the capabilities to do backward integration with its suppliers, which will in turn insure Nestlé of a secure & steady supply chain and quality of its raw materials. Another strategy that Nestlé can also use is that through its financial strength, brand image and global presence it can either acquire or enter into joint ventures with its competitors who are highly specialized; or it can use its strong R&D to also develop specialized products for that segment.

WO Strategies (Mini-Maxi):

WO strategies are aimed to improve a company’s internal weaknesses by capitalizing on its external opportunities. Nestlé can reduce its logistical and inventory management costs by expanding its presence to Eastern Europe and Asia. Another strategy that Nestlé can use is to change its Perceived image (of putting profit first) by developing and introducing more healthy & nutritional products.

WT Strategies (Mini-Mini):

WT strategies are defensive tactics employed by a company to reduce its weaknesses and avoiding its external threats. As the image of Nestlé is being tarnished by negative publicity arising out of recent product recalls, compliance issues for violating regulations, etc. it should heavily invest in its PR management; so that such negative publicity could be avoided next time. Nestlé should put more emphasis on selling in developing and emerging markets to continue steady growth while increasing market share and also for purchasing and producing there to counter the rising prices of raw materials and labor costs.

Assessment of Current Company Performance:

Efficiency:

Nestlé’s recently been following the strategically expanding through acquisitions and investments. It has been quite successful in expand its line of frozen foods in North America through the acquisition of Kraft Foods frozen pizza line for $ 3.7 billion in cash. Nestlé also had several other small acquisitions in the first quarter of 2010 which did not have a significant impact on the Group’s sales and profit for the period. Nestlé’s acquisition related costs in the first quarter of 2010 were about $ 13.4 million.

Effectiveness:

Nestlé was effective in carrying out its expansion strategy through acquiring frozen pizza line from Kraft Foods as where the company had only a minor presence until now; it is the market leader in frozen food segment in North America. It successfully integrated Kraft Foods’ pizza business into the Nestlé Group as well as its 3,620 employees, with their valuable talent and expertise in Nestlé. The frozen pizza line showed 14% organic growth in the first quarter of 2010. Sales and profit of Kraft Foods’ frozen pizza business in the first quarter of 2010 amount respectively to $ 6.11 billion and $ 65.2 million.

Return to Investors:

Nestlé paid dividend of $ 5.632 billion in the first quarter of 2010 which showed an increase of 7.8% when compared to the dividend payment of $ 5.223 billion in 2009 for the same period. Increase in dividend shows that Nestlé is starting to recover from the financial crisis of 2009. The share value of Nestlé went up by $ 0.91 per share for 2010.

Review of Options for Future Direction

In order to address its weaknesses and external threats Nestlé has to critically use its strengths and capitalize on its external opportunities by using some of the strategies mentioned in the TOWS matrix earlier.

One of the strategies that Nestlé can use is expansion strategy through strategically acquiring and merging with its competitors and investing in production facilities in developing economies. It should acquire or start joint ventures with firms in developing markets like India, China, Russia, etc. to capitalize on their booming economies and gain market share quickly before other global players enter the markets as it has the financial backing to support such expensive ventures. Also it should start investing in developing markets to develop its own production and distribution facilities so as to eliminate dependency on local players.

Another strategy that Nestlé should undertake is Growth through Innovation in health & nutrition food segment. Due to the rising education levels and general awareness around the world consumers are becoming more & more health conscious, which is an important opportunity and will be a future growth driver for Nestlé. It should use its highly developed R&D capabilities to develop more healthy and nutritional foods to cater to this growing group of consumers.

Implementation of New Strategies

Structure:

Nestlé has a decentralized organizational structure which has been very beneficial to it as far flung divisions could take decisions in real time to exploit the opportunities present to them; but due the huge technological advancements in the past few years this autonomy has led to conflicting practices within the company; making it a nightmare to coordinate activities between divisions in different geographical zones. It has to centralize its operations to gain a tighter control over its far flung divisions and businesses, so that Nestlé can (with a unified & centralized system) leverage its products in real time on a worldwide scale to generate higher sales.

Systems:

Nestlé has its production and logistical systems under control to meet any unexpected growth surge in a short period of time and to fuel growth for expanding in developing markets. But Nestlé has to take care of its supply chains as they can virtually leave Nestlé hanging in the air if any change in natural & political environment takes place with the possibility of disruption in supply of raw materials or a drop in the

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