Nestle India …on a Massive Elimination Drive

In India, about 45 percent of Nestlé’s revenues come from milk products and
nutrition, another 30 percent from prepared dishes and cooking aids, which constitute
a growing business, and 13 percent from chocolates, and the rest from beverages.
But the contribution by milk products and nutrition, for Nestle, has declined in the
past couple of quarters. This is happening in a scenario wherein the external
environment is showing massive positivity. Increasing demand for fluid milk as well
as value added products is happening right when the dairy industry has been
liberalized. While milk production is growing at slightly above 5.5 %, the demand is
showing an edge over it at around 8.8 %. Now the market is becoming conscious of
the quality of milk and is ready to pay more for better quality and varieties of packed
milk and milk products.

Nestle Éclairs, Nescafe Mild, and milk sachets are low-margin and low-growth
products. While Maggi is also a low-margin product, the company has been
increasing its offerings of instant noodles under the Maggi brand.

Analysts are unsure which products the company will eliminate. "While the tone and
tenor of their statement yesterday (while announcing results) seemed to suggest
that the culling exercise would continue, it is difficult to gauge what they will do next,"
said Amnish Aggarwal, FMCG analyst at brokerage Prabhudas Lilladher.

“My sense is that the company is moving towards the end of the culling exercise.
They exited the B2B space where they were supplying coffee and milk to offices. But
guess that’s where they should end,” said Abneesh Roy, associate director of
research for institutional equities at Edelweiss Securities.
Benet, in his statement, also said that Nestle would remain cautious as it was yet to
sense buoyancy in the external environment. Like it had done in the recent past,
a Mumbai-based equity analyst said, Nestle was likely to take “tough decisions” as it
moved to build a premium portfolio.
In the July-September quarter, Maggi Oat Noodles, Maggi Vegetable Atta Noodles,
Maggi Masala-ae-Magic, Kit Kat chocolates, Nescafé, Milkmaid, and Everyday were
the products that performed well. The company has seen a two percent dip in the
sales volume of chocolate and confectionery products. Besides, milk and nutrition
products also dropped about 1 percent in sales volume in the quarter.

With ITC entering the instant coffee market early next year, Nestle will face stiff
competition in the segment apart from Hindustan Unilever’s Bru. It is also facing
competition in chocolates from Cadbury.

Company needs to rationalize with respect to products in the portfolio that are not
star performers and do not fit well with Nestle’s strategy of health and wellness.

“There has been no change in the company’s strategy with a continued focus on
portfolio rationalization and margins. We do not see recent new launches such as
Maggi Oats as material innovations which can move the needle,” Credit Suisse
said in a note.

On the other hand, Barclays noted that Nestle needed a strong pick-up in urban
consumption to revive growth in its largely city-focused product portfolio.

In addition, a very discouraging external environment, which has become more

precarious with the successful entry of Patanjali, is all set to put Nestle on a new
product launch drive and it has recently announced the launch of 25 new products.
Given these colors in markets, Product elimination will be an important portfolio
exercise of rationalization and is spreading far and wide. With increasing stress on
new and newer, the popularity of ‘elimination’ tool is set to rise.