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Nestle-Campco deal goes sour - Views on News from Equitymaster
Processed foods major Nestle India Limited is planning an early exit from Central Arecanut and Cocoa Marketing and Processing Co-operative Limited's (Campco) production facility at Puttur in Karnataka. Nestle's current contract with Campco is scheduled to end by December 2000.
Nestle is a market leader in infant foods, instant coffee and culinary products (noodles and ketchup) and has the second largest market share in chocolates. It has the widest portfolio of products in the food and beverage industry with some of the best known brands in the world such as Kit-Kat, Milo, Polo, and Maggi.
Campco's chocolate factory at Puttur contract-manufactures about 3,000 tonnes of finished products and some 2,000 tonnes of semi-finished products annually, for Nestle. Campco is earning approximately Rs 750 m by manufacturing finished products, mainly chocolates. Relations between the two turned sour when Nestle offered to take over the chocolate factory. It had offered Campco Rs 2.9 bn over a period of 30 years with an advance payment of Rs 200 m for the first year. Subsequently, Campco had decided to go on its own and launch a range of new products once the agreement with Nestle ended in December 2000.
However, Nestle has stated that it would be interested in working with Campco in the area of cocoa production and procurement, and also cocoa bean fermentation, drying and further processing, namely the production of cocoa mass, cocoa butter and cocoa powder.
Exiting from this arrangement will not hamper Nestle's chocolate producing capabilities and it has sufficiently enhanced its production facilities over the years. It will save the manufacturing cost of Rs 750 m, by producing in-house. But, Campco might be reluctant to accept the early exit offer because of lack of strategy in wake of such a sudden move.
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Nestle announced its results for the quarter ended March 2016. The company's revenues declined by 9% YoY, while profits declined by about 19% YoY during the quarter.
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