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Nestle - A SWOT analysis - Views on News from Equitymaster
 
 
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  • Feb 17, 2005

    Nestle - A SWOT analysis

    Nestle India Limited is the Indian arm of Nestle SA, which holds a 51% stake in the company. It is one of the leading branded processed food companies in the country with a large market share in products like instant coffee, weaning foods, instant foods, milk products, etc. It also has a significant share in the chocolates and other semi-processed foods market.

    Nestle's leading brands include Cerelac, Nestum, Nescafe, Maggie, Kitkat, Munch and Milkmaid. To strengthen its presence, it has been the company's endeavor to launch new products at a brisk pace and has been quite successful in its launches.

    Nestle business break-up
    Segments Brands CY01 sales CY02 sales CY03 sales
    Milk Products &
    nutrition
    Everyday Dairy Whitener,
    milk powder, Milkmaid, Milk,
    Dahi, Butter, Cerelac, Nestogen
    8,159 8,847 9,880
    % of sales 42.5% 43.2% 43.4%
    % growth 10.6% 8.4% 11.7%
    Beverages Nescafe, Milo, Nestea 5,627 4,894 5,449
    % of sales 29.3% 23.9% 23.9%
    % growth 14.7% -13.0% 11.3%
    Prepared dishes/
    cooking aids (Culinary)
    Maggi (noodles, pickles,
    soups, sauces)
    2,765 3,503 4,094
    % of sales 14.4% 17.1% 18.0%
    % growth 19.6% 26.7% 16.9%
    Chocolates &
    confectionery
    Munch, KitKat, Bar One, Classic,
    Choco Stick, MilkyBar Choo,
    Nestle Fruit & Nut
    2,646 3,227 3,366
    % of sales 13.8% 15.8% 14.8%
    % growth 21.4% 21.9% 4.3%
    Total Sales 19,197 20,470 22,790
    % growth 14.4% 6.6%
    *(figures in Rs m)

    Strengths
    Parent support - Nestle India has a strong support from its parent company, which is the world's largest processed food and beverage company, with a presence in almost every country. The company has access to the parent's hugely successful global folio of products and brands.

    Brand strength - In India, Nestle has some very strong brands like Nescafe, Maggi and Cerelac. These brands are almost generic to their product categories.

    Product innovation - The company has been continuously introducing new products for its Indian patrons on a frequent basis, thus expanding its product offerings.

    Weakness
    Exports - The company's exports stood at Rs 2,571 m at the end of 2003 (11% of revenues) and continue to grow at a decent pace. But a major portion of this comprises of Coffee (around 67% of the exports were that of Nescafe instant to Russia). This constitutes a big chunk of the total exports to a single location. Historically, Russia has been a very volatile market for Nestle, and its overall performance takes a hit often due to this factor.

    Supply chain - The company has a complex supply chain management and the main issue for Nestle India is traceability. The food industry requires high standards of hygiene, quality of edible inputs and personnel. The fragmented nature of the Indian market place complicates things more.

    Opportunities
    Expansion - The company has the potential to expand to smaller towns and other geographies. Existing markets are not fully tapped and the company can increase presence by penetrating further. With India's demographic profile changing in favour of the consuming class, the per capita consumption of most FMCG products is likely to grow. Nestle will have the inherent advantage of this trend.

    Product offerings - The company has the option to expand its product folio by introducing more brands which its parents are famed for like breakfast cereals, Smarties Chocolates, Carnation, etc.

    Global hub - Since manufacturing of some products is cheaper in India than in other South East Asian countries, Nestle India could become an export hub for the parent in certain product categories.

    Threat
    Competition - The company faces immense competition from the organised as well as the unorganised sectors. Off late, to liberalise its trade and investment policies to enable the country to better function in the globalised economy, the Indian Government has reduced the import duty of food segments thus intensifying the battle.

    Changing consumer trends - Trend of increased consumer spends on consumer durables resulting in lower spending on FMCG products. In the past 2-3 years, the performance of the FMCG sector has been lackluster, despite the economy growing at a decent pace. Although, off late the situation has been improving, the dependence on monsoon is very high.

    Sectoral woes - Rising prices of raw materials and fuels, and inturn, increasing packaging and manufacturing costs. But the companies' may not be able to pass on the full burden of these onto the customers.

    Conclusion
    The food processing business in India is at a nascent stage. Currently, only about 10% of the output is processed and consumed in packaged form thus highlighting huge potential for expansion and growth. Traditionally, Indians believe in consuming fresh stuff rather then packaged or frozen, but the trend is changing and the new fast food generation is slowly changing.

    At Rs 604, the Nestle stock trades at nearly 25 times annualised 9mCY04 earnings and market cap to sales of 2.4x. The stock trades at a premium valuation over peers owing to its superior growth and quality product profile. Nestle is a leader in food processing in India and given the opportunity of growth along with the parent's keen interest in developing its Indian subsidiary, the company is likely to continue being a dominant force in the Indian FMCG space.

     

     

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