Can Nescafe, Maggi, KitKat dig deeper into India?

Nestle is mapping culture

clusters to crack it
While the FMCG giant’s domestic sales have logged consistent double-digit growth, it faces a
challenge from tier II and tier III markets, where cultural mores often vary at every step.
Therefore, rather than frame strategies based on geography, Nestle is banking on hyperlocal
clusters that share consumer habits and preferences.

BY RATNA BHUSHAN 25 Feb 2020 •

From getting ground-level insights across the nondescript Mana village near Badrinath to the
ancient Tiruchirappalli city in Tamil Nadu, and to the far-off Northeast, hyper-localisation has
kicked off in earnest at the India unit of the Swiss packaged-food giant Nestle.

Suresh Narayanan, now in his fifth year as India chief of the over INR12,000 crore company, is
pushing a top-down approach with some three to five market visits a month. The company’s
operating model has also been split into 14 clusters. While routinely meeting retailers,
distributors, and consumers are the thing for chief executives, Narayanan has also been doing the
rounds of educational institutes and military cantonments.

“There cannot be a single strategy for the entire country. The need is to look at the country from
the lens of the consumer rather than geography,” says Narayanan. Having just been reappointed
as the managing director for another five years, he reasons that the hyperlocal model will help
increase penetration and expand reach, leading to faster growth.

Going the cluster way

With tailor-made localisation as its key target, the maker of Maggi noodles, KitKat chocolates,
and Nescafe coffee is betting on individualised product placements, decentralised decision
making, distribution, marketing, and promotions for each cluster based on ground-level insights
through its 14 clusters.

These clusters have been differentiated by data and analytics, which Nestle says are aimed at
enabling a sharp understanding of consumer demography, attitude, media, and shopping habits.
One such example is the Northeast cluster, where it created vernacular campaigns to support
EveryDay dairy whitener.

Analysts and market watchers say while Nestle has been outperforming many peers in the fast-
moving consumer goods (FMCG) space on the back of premiumisation, product innovation, and
less rural exposure, the company needs to keep pushing for growth and capture latent market
spaces.

“It’s a distribution-outreach game and capturing latent demand in a rapidly growing foods
space,” says Sagarika Mukherjee, vice-president at Elara Capital. “Nestle is addressing the

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cluster strategy at various levels — multiple variants for Maggi, deep inroads into distribution
for KitKat, and pushing its infant food Nan, as more women join the workforce, are just some
examples,” Mukherjee says.

The cluster approach involves setting up individual teams of about two dozen people each,
spanning marketing to supply chain, which over some time could develop multiple variants of
the same product.

The strategy is being pushed even as the Gurugram-headquartered Nestle, which follows a
January-December financial year, remains among the few FMCG companies that have bucked
the consumption slowdown. Nestle India reported its tenth consecutive quarter of double-digit
domestic revenue growth for October-December 2019. Following the December quarter
numbers, which were ahead of many peers and more than double the industry average growth
rate of 4%, Nestle’s shares hit a 52-week high of INR16,753.45 on the BSE. The numbers
include a 38% increase in net profit at INR473.02 crore for the December quarter, with sales up
8.7% year-on-year at INR3,130.74 crore.

Why the change in strategy?

What gives the reversal in strategy for a company, which for decades, has been focused mainly
on urban markets in terms of both products and distribution? In other words, why fix something
that isn’t broken?

While Nestle’s total domestic sales are up 10% year-on-year with consistent double-digit growth,
industry watchers say for most consumer-facing companies, demand is being generated from tier
II and tier III markets. Cultural differences are distinct in these markets, neglecting which could
be a huge risk.

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“There is a compelling need to fight the local battle locally, more so, if the many categories one
operates in are in the market-development stage. Unless you familiarise yourself with the local
culture, you cannot penetrate the market and can risk losing share to smaller markets,” says a top
official at another FMCG company, which has also been adopting a region-specific strategy now.
He requested not to be named.

Market-research firm Nielsen, which follows a January-December year, has forecast 9%-10%
value growth for 2020, like the 9.7% value growth in 2019. Similarly, in 2018 the FMCG sector
had grown 13.5%. Companies cannot afford to miss the momentum.

Nestle says it is addressing the fast-changing consumer base as a priority. “The consumer
landscape is evolving rapidly, and brands need to engage with as many consumers as possible
within India. Every lookm, there’s diverse consumer behaviour,” says Ravi Ramchandran,
executive vice-president and director, sales, at Nestle India. For example, coffee consumption in
the south is a daily ritual. On the contrary, in the north, tea remains the everyday consumption
choice and coffee is consumed more out of home rather than as a daily habit.

“We are responding to diverse consumer needs with new formats, compelling experiences, the
introduction of ethnic flavours, exotic ingredients, and regional specialities, keeping the
consumer at the centre,” adds Ramchandran.

Nestle isn’t the first consumer-facing company to adopt the hyperlocal approach. Hindustan
Unilever (HUL) and ITC have also followed the same strategy in the past. In 2016, cigarettes and
foods maker conglomerate ITC took to a similar game plan, while HUL had a strategy called
“winning in many Indias”.

“Nestle’s cluster-based distribution strategy, innovation, and premiumisation agenda are on

track, and we believe this trend will sustain,” Abneesh Roy, executive vice-president at
Edelweiss Securities, wrote in a report earlier this month. “While higher raw-material prices led
to a fourth consecutive quarter of gross-margin compression, we expect the pressure on margins
to persist over the coming quarters,” Roy wrote.

Nestle is convinced that the move will work. “This (strategy) facilitates growth potential and
leads to a seamless and more transparent planning process, better execution, problems being
solved at local levels, and easier-to-track product performance,” Ramchandran says. “The idea
now is to identify the needs and preferences of the consumers in each geography on priority.”

( Graphic byMohammad Arshad)