Mark to Market | Nestle’s strategy in a new normal

Firm expects Asia, Oceania and Africa sales in constant currency terms to triple between 2011 and 2020

Ravi Ananthanarayanan

First Published: Thu, Sep 27 2012. 07 48 PM IST

India is part of markets that Nestle calls the hot zone opportunity, or markets that will benefit from increased prosperity, urbanization and competition. Photo: Hemant Mishra/Mint

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Updated: Thu, Sep 27 2012. 08 51 PM IST

Nestle SA hosted a recent investor meet in Shanghai, with specific presentations dwelling on its operations in Asia, Oceania and Africa (AOA). India contributes about 8% to the sales of this region, and is one of its faster growing markets, and hence Nestle’s regional plans should influence its Indian game plan, too.

A key message for investors is that Nestle expects the region’s sales in constant currency terms to triple between 2011 and 2020 or at an annualized growth rate of about 13%. That does not seem like a very stiff target, when one considers that sales in AOA grew by 13.1% in 2011 and by 12.6% in the first half of 2012.

One reason for this conservative growth estimate could be the diverse markets in this region. 

India is part of markets that Nestle calls the hot zone opportunity, or markets that will benefit from increased prosperity, urbanization and competition. But AOA also includes markets such as Japan, South Korea, Israel and Oceania that are in the cool zone. Nestle may also be factoring in some conservatism based on its current experience, where economic growth in large emerging markets has slowed.

In a presentation made by Nestle India’s chairman and managing director at the meet, he talked about winning in the new reality. 

India’s strengths of a young population, urban-rural opportunity, increasing awareness and digitization remain but the reality is that its economic growth has slowed to 5.4% this year, down from 8.5% in 2010. What’s worse, inflation is giving company to slowing growth, having a direct impact on Nestle India, whose commodity basket price index rose by 20% between 2010 and 2012.

Nestle India had decided on a twin focus on growth and margins. It passed on cost increases to customers to protect margins but that has affected volume growth. For growth, it is investing in increasing its distribution reach, driving usage, launching new products, and has invested significant sums in creating capacity to support an anticipated growth in demand.

Nestle’s market view for AOA is optimistic on one side, but tempered by caution as reflected in its growth target. The question that Nestle India’s investors may be pondering over is when will volume growth recover, and by how much. That is the main reason why the share has been underperforming its peers in the BSE FMCG index. That may continue until the macro picture improves—either through declining food inflation or rising economic growth