Reference no: EM132722077

"Nestlé spent three decades building a beloved noodle brand in India. Then the world's biggest food and beverage company stumbled into a public relations debacle that cost it half a billion dollars."?-?Fortune Nestlé has sold Maggi in India for over 30 years now and it's one of the most recognised brands in modern India. It accounts for about 23% of the total revenues and its popularity with the millennial segment is perpetually on the rise. And yet, in 2015, when India's central food regulator, FSSAI announced a temporary ban on the manufacture, sale, and distribution of Maggi noodles, it shook the very foundation of the brand and the company. The crisis was so debilitating that the CEO of the parent company, Nestle S.A, flew down to India in a bid to boost morale at a time when the Nestle India business contributed to a paltry 0.15% to the worldwide business. But despite all this, it's no secret that Maggi Instant Noodles has seen a resurgence in popularity and is now back to being the market leader and with it, Nestle India has seemingly risen from the ashes to challenge for the top berth in the Fast Moving Consumer Goods (FMCG) space once again.

Playing it Safe

Now before we delve into the business operations and the financials, readers must bear with us while we take you on a small detour. A subtle detail about the whole crisis is that at its worst, Nestle's stock price tanked 15%. This was the day Maggi was taken off retailers' shelves and the ban was enforced?-?You'd expect the crisis to affect the price more than it did but you must also bear in mind that Nestle, in addition to making Instant Noodles also dabbles with chocolates, baby food and coffee powder in a bid to grow, but more importantly to reduce its dependence on a single brand/product.

The underlying premise is called diversification. To diversify is to do a safety net in case your prized possession falters and it's not just Nestle. Investors also often employ this technique to reduce their own dependence on individual stocks in a bid to reduce, what economists call unsystematic risk. Unsystematic risk is variation in stock price that arises from factors intrinsic to specific companies. A ban on Maggi affects Nestle alone. It does not affect the outside market and betting on other companies would have reduced the exposure to the ensuing losses. So the risk associated with such variabilities can be reduced by simply diversifying your portfolio i.e. buying a few shares of multiple companies from different sectors as opposed to many shares of just one company. While this move does reduce a lot of the risk associated with investing in stocks, there is a very different kind of risk that you can't diversify away, a risk that we will address later in the story.
But for Nestle, diversification was a saving grace and even with Maggi gone for 5 months, it continued to stay tall.

The Big Four

While Maggi is, after all, a prominent brand within the company's portfolio, it doesn't contribute to revenues nearly as much as another core segment?-?Milk Products and Nutrition. Over the past 5 years, this segment has posted the best growth figures at a compounded annual growth rate (CAGR) of 4.5% and forms about 48% of the total sales. Within the segment, a considerable portion of the revenue comes from Infant Formula, baby food for babies less than a year old. However, this segment offers two rather interesting challenges.

The first problem is that there only so many babies you can feed. As the population of this country plateaus, babies will be hard to come by and potential for growth will be largely limited to this single statistic. The only saving grace is the potential rise in income that will allow more people to buy Nestle's products, but in any case, we don't expect exponential growth here despite the company commanding a market share of over 96% thanks to Cerelac and Lactogen. The second challenge is within the regulatory domain. India has laws that specifically prohibit baby food manufacturers from engaging in any type of promotion or marketing for infant formula and several non-governmental organisations, both within and outside India have joined hands to promote breast milk, instead of ready-made formulas. These efforts don't aid Nestle's cause but despite the severe handicap, baby food manufacturers continue to approach doctors and paediatricians through their medical representatives and the segment continues to trudge along.

Then there's chocolates and confectionaries. Although a rather delightful product category, this segment has registered a paltry 0.9% CAGR in 5 years. With many failed product launches and intense competition from the likes of Snickers, Ferrero Rocher, Galaxy and Dairy Milk Silk, Nestle continues to remain sidelined. Finally, there is the Powdered & Liquid beverages segment. Nestle maintains a market share of ~50% in the powdered coffee segment with Nescafe while Bru (HUL) occupies the rest. Despite the apparent lack of competition in this segment, growth has been hard to come by in almost every segment and so the company has decided to go on the offensive.

What mistakes did Nestle make in handling the situation or was their response correct?

Did they miss any specific issues in their responses?

Was the organization was organized properly to handle the crisis?

What advise or recommendation should be given to Nestle?