An Environmental Review Regarding the Practices of Nestle Company - Report Example

Abstract

The report is focused on evaluating the environment that Nestle operates. To do so, it will focus on determining the factors that affect this environment: competition, consumers, price and product. The paper begins by evaluating the market positioning of one of their main brands Nescafe and determine how well it is fairing against its other competitors in the American market. The report determines that the Nescafe brand is a global brand that has been able to dominate many markets. An evaluation of the pricing strategies applied by Nestle will shed light on how well the company maintains and attracts new customers. The product portfolio of the company is also a competitive advantage due to its enhancement of target marketing. At the end, the paper reviews the opportunities and threats facing the company and highlights its strengths and weaknesses. To conclude, the report discovers that there is room for growth and if the company continues to apply its research and development advantage then it will remain at the top of the industry.

Introduction

Nestle’s motto of ‘Good Food, Good Life’ may somewhat have contributed to its continued dominance of the world’s wellness, nutrition and health industry. The company has always strived to produce quality tasting and nutritious choices for its consumers. It delves into the production of a comprehensive range of food and beverages categories across many world markets (Nestle Global, 2017a). The Nestle company traces its history back to 1866 where an enterprise by the name of Anglo-Swiss Condensed Milk began its operations in Cham, Switzerland. A year later, cereals for infants was introduced by a pharmacist Henri Nestle. Thereafter, in 1905, these two enterprises merged and were headquartered at Vevey, Switzerland. Currently, the company employs over 300,000 individuals in 191 countries. The global sales number for the year 2016 amounted to CHF 89.5 billion and in that CHF 19.8 billion was from selling liquid and powdered beverages (Nestle Annual Review, 2016). The companies competitive advantage comes from its unrivalled geographical presence. The company has continued to develop strong alliances with farmers and other suppliers coupled with growing investments in its research and development and manufacturing departments and its management team.

Nescafe is one of the company’s biggest brands and particularly its instant coffee variety. The Nescafe product line was introduced in 1938 as the company sought to infuse its milk making techniques into the coffee business. The product was the production of a soluble kind of coffee that could readily mix with milk. Another consideration for its introduction was the Brazilian farmer, and they targeted reducing their wastage of coffee beans. As the product grew, it got new varieties in terms of different flavours. This aided the brand take a foothold in the global arena. On that note, the essay will do an environmental analysis of Nestle company reviewing the fundamental practices of Nestle, ending with a SWOT analysis. The analysis will compromise an evaluation of its competitive, customer, product, and pricing environment. The expectation is to produce a marketing strategy for Nescafe from Nestle’s powdered and liquid beverage division.

Part A: Competitive Review

Nestle is a multinational company that delves into the production of a variety of products. Some of these include chocolates, water, coffee, baby food among other things. In fact, Nestle is classified as the number food and drink company in the world servicing more than 190 countries. Moreover, the company is the biggest producer and seller of coffee: Nestle and utilises the Nespresso home brewing production system. Most of the segments in which Nestle operate in, it has dominated, and if not, it is one of the biggest players.

Nestle’s innovation in the coffee segment led it to become the biggest coffee maker introducing the capsule machines in 1986. The company is reported to control a sizeable 23 percent of the market, but the speedy rise of JAB holdings is pushing Nestle back to the innovation table. JAB holdings, one of Nestle’s fiercest competitors in the coffee market has bought out nine companies and as a result gained a market share of 16 percent (Geller, Koltrowitz, $ Roelf, 2016). Nestle has been forced to revamp its competitive campaign by developing products for both the lower and upper ends of the segment. The lower end is serviced by Nescafe’s instant coffee Dolce Gusto single-serve system, and the high end has the Nespresso VertuoLine (Geller, Koltrowitz, & Roelf, 2016). On the other hand, JAB holding is concentrating on cost control measures to boost its earnings growth. It also acquired companies that deal in capsule coffee and has now become the largest capsule trader—which many view as the fastest growing coffee segment. Another competitor is 3G who formed a food company to oversee its coffee business in the United States. The Company acquired two prominent coffee houses to boost its market position. Moreover, it has a strong backing of venture capitalists willing to help it expand into the coffee space (Geller, Koltrowitz, & Roelf, 2016).

NESCAFE

3G

JAB HOLDING

Figure 1: Positioning Map

As illustrated, Nescafe is perceived as a coffee with an average price and quality. Conversely, JAB Holding acquisitions with its moneyed backing have been able to keep the price low and the quality above average. 3G, on the other hand, is new to the market and the takeover of the two coffee houses has not yet been able to get firmly into the market segment. However, it has a lower price as compared to Nescafe but of lower quality. The points of parity for all market players is that they offer affordable coffee which is easily available, they utilise almost similar ingredients and have same product offerings in terms of servicing the market segments. Points of difference come in where Nescafe is a global brand whereas the others are locally stationed, and there is a corporate social responsibility associated with the Nestle, Nescafe’s parent company.

Part B: Customer Review

Consumers rely on two forms of stimuli to make their purchasing decision. That is consumer external and consumer internal stimuli. The internal consumer stimuli come from within in the form of a desire to partake of a product. Factors that drive this desire include thirst, flavour, addiction or health concerns. The external stimuli involve influence for third parties. It could be family members, friends or advertising. However, before a customer purchases a product, they may evaluate it using different paradigms. One, the consumer may review the brand name then determine the ingredients and packaging of the product. Normally, the decision-making process for buying a product has five steps. First, the consumer recognises the need for a certain product. At this stage, the external stimuli of advertising may highlight an unmet need for the consumer. Second, the consumer seeks out information about the product. This can either be through a web search or asking family and friends for details. Some of the times infomercials do a pretty job of describing a product’s superiority and performance (Michael, 2007). Third, the customer may compare alternatives. They evaluate their choices based on the identified attributes of the product. After evaluation, the consumer settles on a product and goes ahead to buy it. Advertisements could have highlighted convenient locations for purchasing the product. The final stage involves a post-purchase dissatisfaction or appeasement. After consumption of the product, the customer can determine if they are satisfied with the product. Consumers can utilise post-purchase communication channels to air their feedback (Michael, 2007).

Buying a Nestle product, like coffee, prompts customers to act in either a habitual buying behaviour or in a variety seeking buying behaviour. Reasons behind this include degree buyer involvement and degree of differentiation among brands. In the case of Nescafe, the degree of consumer involvement is low since the product has a low price and does not necessitate too much involvement or attention to purchase. Nestle insists on making sure their display shelves are fully stocked and place many adverts to act as reminders. Consequently, purchase of Nescafe product can be classified as variety seeking or habitual in nature. Moreover, the degree of differentiation between brands is low. Considering the decisions perceived by coffee consumers about what brand to buy are not heavy, then constant advertisements will ensure that there is brand familiarity instead of brand conviction. Therefore, if this procedure is followed by buying, then the behaviour will become habitual over time. Additionally, the taste of coffee would become addictive to the consumer. This elaborates the consumer’s propensity to behave in a habitual manner of buying a commodity.

Of note also is that customers can buy the brand without much evaluation of coffee qualities and instead evaluate them while consuming. Accordingly, they will choose their preference in regards to taste next time they purchase a similar product. They can decide to opt for a different variety of Nescafe to determine if that is better. Switching of brands occurs since consumers of such a product are after variety and want to try something new. It is evident that their loyalty would not be to the product but the brand.

Part C: Review of Product and Services

Nestle’s product mix consists of a variety of product lines with their own lengths, width, depth and consistency. The width of the product mix alludes to the various product lines within the company. They include products like milk, baby food, confectionery, dairy products, chocolates, ice cream, pet care foods, culinary and cereals. Moreover, there are myriad of flavoured and nutritional beverages. The product mix length refers to the number of items within the mix. The average product length for Nestle is 2.9. For instance, within the milk product line there are full cream, growing up milk, adult milk and filled milk. The product mix length shows how many variants of a product are available. For example, Nestle adult milk comes with tow functions for heart or bone health. The product mix consistency is the relationship between the different product lines and how close they are in terms of distribution channels, requirements of production, among other things. The consistency of Nestle products comes in since they are consumer goods that are distributed using the same channels.

Nestle applies a differentiated or selective marketing policy. This occurs when an enterprise targets different market segments each with its own offer (Kotler & Armstrong, 2010). Nestle differentiates its products in a number of categories so as they can target different consumers. For instance, its subsidiary Nescafe targets different segments of its market using customised products like Nescafe Collection, Nescafe Gold, Nescafe Cappuccino and Nescafe Xpress. Additionally, the company utilises niche marketing. This is evidenced by its new product the Nescafe Green blend which is aimed at potential customers that wish to live a healthier lifestyle. The product’s ingredients are all natural, and the coffee beans are unroasted. This is a product with a new strategy: category development.

Part D: Review of Prices

The Nescafe brand is a convenience product that customers opt for either immediately, frequently and with minimum comparison to other products or buying effort. As such, these products tend to be low priced and are placed in many different locations. These makes them readily available whenever a consumer requires them. Nescafe is already a market leader and as such it pricing would heavily rely on the material quality supplied by Nestle. It is also dependent on the demand for the product and its competitors. Nescafe produces a high-quality product, and accordingly, it will be highly priced. However, such prices have limited the number of consumers of the product. To counter this, the company introduced a variety of other products, and this increased their customer base (Kotler & Armstrong, 2010).

There are a variety of pricing strategies that could be applied to this market segment. One is value-based pricing. This is a strategy whereby the company sets low prices but continues to offer goods of high quality and efficient customer services. The prices set are not the lowest nor the highest in the market and are unvarying with the costs and benefits linked to acquiring the product (Ferrell & Hartline, 2008). This strategy was implemented by Nestle when they re-introduced the Nestle branded range of take-home tubs containing high calcium. This was an initiative that was in-line with corporate’s wellness community strategy aimed at improving the company’s position in the affordable segment (Nestle, 2008).

Another pricing strategy is the competitive matching strategy. This strategy is aimed at ensuring the competitor’s prices, and those of the company are similar and if they change so too does the company price. However, the price change might differ but not by a big margin. Most set a price that is normally referred to as the industry going rate (Ferrell & Hartline, 2008). This was used by Nestle when they set their menu prices at the going rate as their competitor Old town coffee.

Another pricing strategy is for adjusting for instance promotion discounting. This is a strategy applied by almost all firms in the industry even those that practice a value-based pricing model as they will at one time run promotional programs in a bid to attract customers and generate a buzz around a product (Ferrell & Hartline, 2008). This is a pricing model Nestle has relied upon many times to retain old customers and attract new ones. The other price adjusting policy is the reference pricing. This occurs whenever a firm compares their present selling price to either an external or internal reference price. Consumers have their own internal reference prices or internal expectations of what a product should cost. This is attributable to the experience of being a consumer and provides them with an expectation of what price they expect of a certain product (Ferrell & Hartline, 2008).

Part E: SWOT Analysis and Issue Analysis

Strengths

First noticeable strength is Nestle’s peerless brand and product portfolio. In the FMCG industry, Nestle possesses the widest portfolio compared to all its competitors. It has over 2000 various offerings in about seven main segments (Nestle Global, 2017b). These categories are ice cream and milk products, cooking aids and prepared dishes, powdered and liquid beverages, Nestle nutrition, PetCare, Water and confectionery. Its beverage category includes brands like Nestea, Nescafe, Nespresso and Nescafe Dolce Gusto. The strength of a wider product portfolio comes in the company’s ability to satisfy their customer preferences and needs and even target a bigger customer segment. Additionally, the company is shielded from haphazard changes in customer tastes or adverse reactions to one of its brands by consumers.

Nestle has outstanding environmental sustainability initiatives. The company’s initiatives have enabled it to minimise waste, amount of packaging material used and increased the overall cleanliness of the environment. Since the beginning of the 20th century, the organisation has been able to save over 500 million kilograms of material used for packaging as it has adapted better design for its product. Whenever possible, the company leans towards recycled materials or those that come from a renewable source. In 2016, the company boasted of having 182 of its factories recording zero waste during production—a remarkable feat in the FMCG industry (Nestle Annual Review, 2016). Such environmental efforts lead to happier communities and lower costs of production.

A third strength is the company’s ownership of some of the most recognised brands in the marketplace. Some of these brands include KitKat, Pure Life, Nan, Nestle, Nescafe, Purina and Maggi. Forbes (2017) remarks that Nescafe, a Nestle brand, is the 31st most valuable brand at a value of $16.8 billion a position higher than it was last year. Similarly, a report by Interbrand (2017) puts Nescafe at position 36 with a valuation of $12.7 billion one percent higher than the previous year. Moreover, Nestle as a brand by itself is in the top 50 rank. Recognising brand value helps determine brand recognition. The company’s brand recognition is improved by its geographical presence in over 190 countries. Nestle’s brand awareness empowers it to market its current products more efficiently and also introduce new offerings.

The company’s forth strength is its unrivalled research and development capacity. One of Nestle’s most impressive competitive advantage is its research and development prowess (Nestle Annual Review, 2016). In 2016, the company spent about $1.75 billion in research and development which accounted for almost 2% of the total revenue. This compared to almost nothing spent by Coca Cola company while Pepsi—Nestle’s chief rival—spent less than 1.5% in the same period (check Appendix 1) (Ycharts, 2017). Its research and development capabilities are increasingly enhanced by its networks. The company has very many research and development networks in comparison to other FMCG companies. They number 34 centres employing over 5000 employees.

The fifth strength stems from its geographic presence illustrated in its diversified revenue streams. Its operations in 191 countries divided into three regions—Oceanic and Sub-Saharan Africa, Asia, EMENA, and the Americas—each contributes a sizeable share to the total revenue with none owning more than 50% of it. The company does not rely on a single nation or a few of them for revenue (Check Appendix 2). For example, the United States, its largest market, contributes only 28% of the revenue while China, the second largest market, contributes only 8% of the revenue (Nestle Annual Review, 2016). In comparison to its industry competitors, PepsiCo earns 56%, and Coca Cola earns 45% from the United States alone—a far cry (Jurevicius, 2017). Its geographical presence and a diversified revenue stream give it a competitive edge over its competitors particularly in a situation whereby the United States market gets into a slump.

Weaknesses

The company produces and sells a variety of foods on a daily basis. Even with all its strengths, the company is still susceptible to producing and selling contaminated food. Even with its stringent company control policies it still experiences a lot of food recalls. Most notable is the Maggi noodles recall of almost 37000 tonnes from the Indian Market in 2014. This culminated in huge loss of sales and a damaged reputation (Fry, 2016). Recently, the company was forced to recall prepared dishes from the United States market which were thought to contain glass pieces (U.S Food and Drug Administration, 2016). Food recalls lead to negative publicity and consequently affect the brand and its bottom line.

Another failure on the part of the company is the criticism that it utilises a lot of water, may be engaged in forced child labour practices, is willingly selling contaminated food and participating in other unethical practices. Nestle, being one of the biggest companies worldwide, tends to attract a lot of attention: both good and bad. However, most of it comes in the form of criticism over its business practices. Over its existence, the company has been faulted for its assertion that water should be privatised, for being anti-union, for using misleading labelling, for unethical marketing of its baby formula, among others. The latest of its reproval is their uncontrollable use of water, especially in California where there is a prolonged drought. Nestle gets its water from aquifers in reservation zones, and they are not restricted by law on how much they can use. The company has been criticised for ignoring the community needs in California, and many are calling for a boycott of its products. Such negative publicity damages the company’s reputation leading to loss of customer confidence and diminished sales volume.

Opportunities

Studies indicate that if products are labelled accurately, and clearly customers will be more willing to buy them (Renner & Ringquist, 2016). More than 50% of those surveyed indicated that they are willing to buy products that are clearly labelled: higher than any other factor. Nestle, which has been accused of using misleading labels should take this opportunity to correct such practices by accurately labelling their goods and displaying all the relevant information. This is sure to shore up their reputation.

Another opportunity that arises is the consumers need for increased transparency of sourcing of materials. Customers are increasingly more conscious of where their food originates and how it was produced. It has now become important, to a large section of young consumers, to determine the sustainability efforts behind the production process. Price has taken a back banner after social responsibility of purchasing products that are grown in a sustainable manner (Dhar, Comstock, & Chouinard, 2010). Consequently, Nestle should focus on sourcing materials from farms that practice sustainability.

Another opportunity comes in the form of mushrooming small food start-ups. Such start-ups have already attracted a lot of attention raising over $5 billion in capital in 2015 (CB Insights, 2016). These small food start-ups have already identified the next food and drinks frontier. With the dwindling sales and increased competition, Nestle could utilise its reserves and invest in these start-ups helping it address future obstacles and improve its sales volume.

Another simmering opportunity is the growth of ready-to-drink coffee and tea segments. This, according to Beverage Marketing Corporation (2017) is the fastest growing segment in the United States and has been growing for the past four years. When compared to the growth of the overall beverage market (refer to appendix 3) the ready-to-drink market far outpaced it eight times over (refer to appendix 4). Nestle boasts of being the biggest sellers of coffee, but it does not have a leading brand in the ready-to-drink segment of coffee and tea. There exist smaller brands that Nestle could acquire or they could opt to initiate their own brands so as to take advantage of this emerging segment.

Threats

Water is a production component for the beverage segment of Nestle. However, the scarcity and poor quality of water is a threat to the production process. The scarcity of water is compounded upon by increasing demand for food products, changes in climate, population growth, pollution, mismanagement and overexploitation of scarce resources and poor waste water treatment. As the demand for water increases, it will become more difficult for Nestle to get inexpensive and clean water sources. Consequently, it will increase production costs and decrease profitability. The problem of water scarcity coupled with the company’s bad reputation of mismanaging water resources will eventually have an adverse impact on the overall operations of the firm.

Nestle also notes in the Nestle Annual Review (2016) that competition is a fundamental threat to its growth. The FMCG industry is highly competitive and is composed of large and small multinational organisations. Moreover, food, beverages and snacks compete on taste, brand recognition, price, variety, packaging, advertising, promotional activity, distribution, service and the capability of a company to anticipate and respond to customer trends. Also, the food and beverage industries are growing at a very slow pace, and with limited barriers to entry, there are always new start-ups in the market. If this trend holds, then Nestle will have a difficult competitive environment in the future.

Another threat to Nestles beverage division is the unstable coffee prices attributable to disruptive weather patterns. Coffee generates approximately 10% of the total sales revenue, and coffee beans are the major production materials. Hence, Nestle profits are tied, to some extent, to the price of coffee beans which have increasingly become volatile over the years. The haphazard weather patterns of drought, low temperatures and Brazil weather disasters disrupt coffee beans production. Moreover, the growing demand for the best quality coffee beans has put upward pressure on the prices.

Conclusion

Nestle company has its roots back at the beginning of the 19th century. And over the years it has grown to become the largest food and beverage company in the industry. One of its leading brands, Nescafe, is in the top 50 most valuable brands of the 21st century. The company has utilised a price, product, place and promotion to catapult it to the top level. An environmental review of the company indicates that it has stable market dominance due to its product diversification portfolio. Moreover, the company embraces an innovative culture that has seen it compete favourably in the market. A SWOT analysis of the company reveals that it needs to take care of its reputation particularly because it has been under fire the past few years. This is necessary since most of its customers identify with the company brand and are loyal to it. Damage to their reputation could erode their customer base. Furthermore, there is an opportunity for the company to take advantage of the start-ups so as to cushion itself against market shocks. In conclusion, the company is stable, albeit with many competitors and an industry with almost no barriers to entry. Still, the future looks bright.