Nestlé: It’s Not Over

Sixth june, 2015. A date that will always rake up bad corporate memories about a product otherwise so loved by its consumers. It was the day the Delhi High Court ordered ban of Maggi, India’s favourite noodle snack as it was thought to have excess lead and monosodium glutamate. Suddenly, the trusted snack became a source of worry and put the Swiss multinational, Nestlé’s reputation very much at stake.

Nestlé’s flagship brand Maggi, which brought in Rs 2,000 crore worth of business for the company, failed to pass the test conducted by the UP Food Safety and Drug Administration. That was not all. It failed follow-up tests by the Central Food Laboratory in Kolkata, Delhi, Mumbai and Goa, all of which came up with similar results.

This prompted the country’s food regulator, the Food Safety and Standards of India (FSSAI), to ban Maggi across the country and recall products worth Rs 320 crore and destroy a whopping 30,000 tonnes of noodles.

Nestlé India has had a trying time but good leadership under Suresh Narayanan, the newly-appointed chairman and managing director, might just see it through.
“After I took over the leadership of Nestlé India, one of my priorities has been to bring Maggi back on the shelves and move beyond the crisis, that not only impacted us, but the entire ecosystem,” says Narayanan, adding: “The affected includes farmers, suppliers, packaging manufacturers, distributors, retailers, transporters, and other vendors whose regular business and livelihood were dependent on Maggi Noodles.”

The Nestlé chief has been travelling extensively to every nook and corner of the country meeting everyone in the Maggi supply chain.“I felt that a lot more engagement with stakeholders is needed to remind them that we give phenomenal emphasis to quality and consumer trust,” he said. “I have maintained that a crisis is an opportunity to trigger and nurture positive relationships.”

Coming Out Clean
The Bombay high court lifted the ban on 13 August. By 4 November, Maggi Noodles had a clean chit from all three National Accreditation Boards for Testing and Calibration Laboratories (NABL) as mandated by the Bombay high court, and on November 12, it was back with a bang. It re-entered a market it had once led, through a unique ‘flash sale’ on Snapdeal and sold over 2.5 million packets. “We are new in the e-commerce space which is really growing. The Maggi flash sale on Snapdeal was a great idea and it created more hype for the brand than any amount of advertising could have,” says Narayanan.

The Weight Of Losses
The Maggi Noodles saw sales of more than Rs 2,000 crore before the ban. The recall exercise has cost Nestlé Rs 303.7 crore and another Rs 1,270 crore in brand loss according to global valuation consultancy Brand Finance. Narayanan had a tough task ahead, post the Maggi comeback, and he says the firm has reached out to over 600 towns and cities, covered about two lakh outlets and sold over 4.5 crore packs of Maggi Noodles.

Narayanan says that the disruption to the business resulted in loss of sales, and net sales worth Rs 303.7 crore have had to be reversed relating to Maggi Noodles stock being withdrawn from trade partners and the market. “When we include the cost of the stock that was withdrawn and other costs of withdrawal including reverse transportation and other exceptional items, the impact is Rs 476.2 crores. That is big money. The idea is not to recover it by increases in prices or short-term activities, but to commit to healthy growth and to bring back double-digit growth,” says Narayanan. Nestlé had also said sales in Asia, Oceania and sub-Saharan Africa (AOA) markets were “overshadowed” by the issue in India.

Bouncing Back
How does Narayanan plan to increase the product volume and capture market share? He says “For me, the big focus is to move beyond the Maggi crisis, bring Nestlé India back to stability and bring back double-digit growth.”

To grow in a market where the macro and economic picture is fast changing, with many indigenous companies posing threat to MNC’s in various FMCG categories, Narayanan feels that he has to be “fast, focused and flexible”, in terms of consumer insights. That sustainability lies in the sharpness of the proposition, and innovation and renovation are going to be key dimensions for profitable growth. “We will relook at our distribution model and see where it needs to be modified,” says Narayanan.

Earning Trust Again
To regain lost ground Nestlé significantly ramped up its spending on advertising and promotions. It has spent Rs 400 crore between January and September, more than 7 per cent of the company’s domestic sales during the period, according to an investor presentation. The firm typically spends less than 5 per cent of sales on such activities. This is about 90 per cent of its annual advertising spent in 2014 and about 22 per cent more than the spend between January and September 2014.

“We will not be conservative in our advertising and marketing expenditure on brands,” says Narayanan.

Reeling under the Maggi ban, Nestlé India had on 29 October reported 60.1 per cent drop in standalone net profit at Rs 124.20 crore for the third quarter ended September 2015. Its net sales had declined 32.12 per cent to Rs 1,736.20 crore as against Rs 2,557.80 crore in the same quarter a year ago. It had reported a standalone loss of Rs.64.40 crore in the quarter from April to June for the first time in the past 15 years due to the ban.

Narayanan has still another quarter or two to go before recovering the losses from the Maggi ban, analysts say. This month, at the first analyst meeting with Narayanan, analysts were optimistic. “He (Narayanan) is confident of regaining market share,” says Nitin Mathur, research analyst, Emerging Markets Consumer, Société Générale.“But, he hasn’t a time frame. He is embracing the new e-commerce distribution channel for brand equity accretion, which is a very well thought-out strategy,” he says.

Analysts also feel Nestlé’s recent price cuts in milk should give an impetus to volumes, on which there has been a lack of focus over the past few years. “After Narayanan took over, management has shifted its focus to volume and market share gains, which is a welcome surprise and we could see growth rates revive in CY16/17 as the moving parts are rebalanced,” says Mathur.

A Tangle Of Trouble
On 12 December, the Supreme Court sought a response from Nestlé and Maharashtra on a plea filed by food regulator FSSAI against the Bombay high court verdict and the lifting of the ban. The company was being asked to go in for fresh tests.

To add to that, the consumer affairs ministry has filed a class action suit against Nestlé India, seeking about Rs 640 crore in damages for alleged unfair trade practices, false labelling and misleading advertisements. It was for the first time that the ministry dragged a company to the National Consumer Disputes Redressal Commission (NCDRC) using a provision in the nearly three-decade-old Consumer Protection Act. The company has not yet challenged the move, but it will have to lobby hard within the corridors of power to waive off the amount, say industry insiders.

Not yet out of the storm, Nestlé India is in another soup. This time the National Food Analysis Laboratory, Lucknow, found the lead limit in Nestlé’s Maggi Pazzta to be 6 ppm, beyond the permissible limit of 2.5 ppm. Once bitten twice shy, the company was quick to retort challenging the validity of the tests. “The Pazzta manufactured by us is 100 per cent safe. We need to see the reports and confirm whether these supposed tests have been conducted at FSSAI notified and NABL accredited laboratories and are certified for testing lead under the FSSAI Act. We will work with the authorities to resolve the situation as quickly as possible,” said Narayanan.

Conspiracy theories swirl around Nestlé’s troubles. It has been suggested that the Bharatiya Janata Party government is arm-twisting Swiss Banks through Nestlé. Another speculation is that the Indian government is trying to help the local competition, Baba Ramdev’s Patanjali.

Narayanan seems unperturbed by such theories, though he admitted that the Maggi ban was the result of a major breakdown in communication with the government and its agencies.

‘A Crisis Is An Opportunity’

Suresh Naryanan Chairman and managing director, Nestlé India

Q: After you took over the leadership of Nestlé India, you played a major role in pulling back the company from crisis. What was your strategy from day one?
A: One of my priorities has been to bring Nestlé noodles back on the shelves and move beyond the Maggi crisis. I have identified 10 priorities for ourselves that are focused on motivating, energising, revamping and you may say, recalibrating ourselves to be fit for battle. I am proud that my people are working together to come back stronger.

Q: What will be your strategy to re-gain your market share?
A: Every brand will define its competitiveness based on its intrinsic strengths. Maggi is the most relevant, trusted and valuable food brand in India. We will reach out in the most impactful and efficient manner as a 360 degree integrated approach.

Q: How will you recover losses?
A: The disruption to our business resulted in loss of sales and net sales worth Rs 303.7 cr. When we include the cost of the stock withdrawn from trade partners and market, reverse transportation and other costs the impact is Rs 476.2 cr. That is big money. We will not recover it by increases in prices or short term activities.

Q: You earlier admitted the ban on Maggi was the result of a major breakdown in communication with the government and other authorities. What will be your communication approach now with all stakeholders?
A: What happened in recent months, for whatever reason, is unfortunate. We have seen the need for a lot more engagement with stakeholders to help them see the friendly face of Nestlé and the phenomenal emphasis that we give to quality and consumer trust. I have always maintained that a crisis is an opportunity, and for me, very clearly, this is an opportunity to trigger and nurture positive relationships.

Q: What is your big focus now? How do you plan to increase the product volume?
A: I believe that growth comes from volumes, which come from greater consumption, better penetration and distribution, and similar efficiencies. My team and I are working on various strategies to achieve this. We will strive for greater innovation with brands where we have the opportunity to create differentiation, either geographically or income segment wise. To grow in a market that is changing, we have to be ‘fast, focused and flexible’, in terms of consumer insights, commercialisation and in rolling out of our products and strategies.

monica@businessworld.in; @MonicaBehura

(This story was published in BW | Businessworld Issue Dated 28-12-2015)