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Why Nestle can't forfeit brand Maggi

Sentinel Digital DeskBy : Sentinel Digital Desk

  |  8 Jun 2015 12:00 AM GMT

By Arvind Padmabhan and Aparajita Gupta

As Nestle braces to regain consumer trust over safety of its popular noodles, the jolt on its India operations will be severe, given the position “Brand Maggi” has enjoyed in its ecosystem, alysts said. But all may not be lost either, for a marquee brand built over three decades.

Little wonder, the stock may have lost 15 percent in some six sessions since a sample of Maggi noodles from a small town in India’s most populous state, Uttar Pradesh, allegedly found higher-than-allowed levels of some harmful substances (lead), eventually resulting in India’s food safety watchdog banning its further production, sale and export.

But investors still appeared to have hope.

At noon on June 5, for example, when the packed press conference of Nestle, addressed among others by its global chief executive Paul Bulcke, was in full swing at the Oberoi Hotel here - and the food safety authority’s order was out by then - the stock actually rose, from the day’s low of Rs.5,718 to a high of Rs.6,127.

“The fall in the Nestle stock isn’t very significant. The price reflects investor sentiment, which is driven by consumer sentiments. Nestle’s consumers are now anxious,” said Dipen Seth, head of institutiol research at leading brokerage HDFC Securities.

What the alysts did concede was that the developments would affect the stock for some time.

“Nestle’s effort towards driving premiumisation and improving the overall growth trajectory may take a hit because of change in focus to damage control and revive the Maggi brand,” said Edelweiss, an investment advisory, maintaining that costs on this can hit margins.

“Also, during this phase, the brand may lose market share to rivals like ITC’s Yippee, adding further fuel to fire,” it said. “In a bid to revive the brand, the company will have to invest heavily to communicate that its products are safe — similar to what Cadbury did in 2003.”

A closer look at the numbers on Nestle’s operations reveals how Maggi dents its top line.

Among the four divisions of Nestle India, the category of “prepared dishes and cooking aids”, which broadly translate into Maggi, accounted for 31.5 percent of sales in 2014, as per the last presentation the company made before alysts.

Among the remaining divisions, the category of “milk products and nutrition” had the largest share of 47.1 percent, followed by 12.2 percent for “chocolates and confectionery” and 9.2 percent for “beverages”.

The Maggi unit saw a 1.8 percent increase in volumes in 2014 over the previous year and 8.1-percent rise in value at Rs.21.4 billion. “Value market share stable at 80 percent in noodles. Good response to Maggi oats noodles. Strong performance of fortified seasoning,” it said.

What about exports?

“Nestle India currently exports small quantities of Maggi noodles to the US, Cada, UK, Australia, Singapore and Kenya,” Nestle said. “We also make Maggi noodles in other countries and these are not affected by the situation in India,” it added.

“We are working closely with the regulators in each country to explain the situation in India and, where they want to test the products, we are cooperating fully with them.”

Globally, the consolidated revenues from Maggi alone for 2014 are not available. But the category of “prepared dishes and cooking aids” accounted for 13.54 billion Swiss francs ($14.4 billion) out of the total group sales of 91.6 billion Swiss francs ($97.5 billion).

Also Brand Fince, the London-based intangible asset valuation consultancy, in its latest report for 2015 ranked Maggi 23rd globally, with a value of $2.4 billion. Nestle, its parent, topped the list with an assigned value of $21.2 billion.

This apart, the brand, which extends to a range of products, has a significant share in the annual global market for instant noodles of 102.74 billion packets. In India and Malaysia, where Maggi has significant presence, the market size is estimated at 5.34 billion and 1.34 billion packets, respectively.

What does it take to recover from the crisis?

It is not going to be easy. The Maggi brand, which came into existence in Switzerland in 1872, and came into the Nestle fold in 1947, has products ranging from soups and noodles to sauces and seasonings.

In India, it was launched in 1982-83. Today, after 32 years, it ranks among the most recognised brands, almost synonymous with instant noodles. While it cannot really fade away from memories — nor will Nestle allow it — salvaging the trust will also require pro-active action by the firm.

“The best way to get over this is: Nestle should start communicating with stakeholders. Written communications are very important. The company should make some audio-visual and post it on their site for people to see,” said noted market alyst Deven Choksey.

“To recover from this, there are two key elements — trust of consumer and trust of investors. The business performance of the company origites from the consumer performance. At the end of the day, the truth should come out whether the product is safe or not,” Seth added.

The company, perhaps, also realises as much. Rebuilding trust and consumer confident was one phrase that was repeated several times over at the press meet by chief executive Bulcke, who was specifically dispatched to India to clear the air with all sections of stakeholders, from regulators to consumers.

“Maggi has been trusted in India for over 30 years. Trust of our consumers and safety of our products is our first priority anywhere in the world,” Bulcke said, adding: “Our priority now is to engage all stakeholders to clear the confusion. Maggi will be back on store shelves soon.”

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