NESCAFE PLAN IN CHINA - · PDF fileNESCAFE PLAN IN CHINA ... How does Nestle create shared...
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NESCAFE PLAN IN CHINA
Caffeinated Consultants Eric Postma | Tom Epp Jesse Perry | Amanda Macdonald Asper School of Business
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AGENDA
Analysis of Opportunity
Evaluation of Alternatives
Recommendation
Financial Analysis
Risks & Risk Mitigation
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KEY ISSUE
How does Nestle create shared value for the NESCAFE supply chain?
Analysis Alternatives Recommendation Financials Risks
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ANALYSIS OF OPPORTUNITY
Nestle Value Proposition
Nutrition Health Wellness
Analysis Alternatives Recommendation Financials Risks
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ANALYSIS: EVOLUTION OF SUSTAINABILITY
Analysis Alternatives Recommendation Financials Risks
Creating Shared Value
Nutrition Water Rural Development
Sustainability
Preserve natural resources for future generations
Corporate Social Responsibility
Compliance
Philanthropy
Giving back
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ANALYSIS OF OPPORTUNITY: CERTIFICATIONS
Analysis Alternatives Recommendation Financials Risks
International Federation of Organic Agriculture Movements • Standards • Certification
Rainforest Alliance • Preservation of
biodiversity • Environment,
social, economic audits
Bird Friendly • Promotes
growth in shade of trees
UTZ • Farming
methods • Working
conditions
Common Code for the Coffee Community • Green coffee
supply chain
Fairtrade • Safeguard
interests of farmers and their families
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ANALYSIS OF OPPORTUNITY
Analysis Alternatives Recommendation Financials Risks
• Green coffee beans Product • Sold as a commodity • Volatile; influenced by speculators Price • Sourced worldwide; requires roasting and processing • Dependent on farmers Place • NESCAFE Plan Promotion
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ANALYSIS OF OPPORTUNITY: SUPPLY CHAIN
Analysis Alternatives Recommendation Financials Risks
Cultivation Harvesting Bean treatment Transportation Storing,
Cleaning, Weighing
Roasting Cooling Blending, Grinding Transportation Distribution
Consumption Waste Management
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ANALYSIS OF OPPORTUNITY
Analysis Alternatives Recommendation Financials Risks
Coffee Farming
Small farms
Labour intensive
Living in poverty
Women do 70% of work
Average age: 62
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ANALYSIS OF OPPORTUNITY
Analysis Alternatives Recommendation Financials Risks
2011 2012 2013 2014 2015Sales (in billions USD) $68.60 $74.70 $79.18 $83.93 $87.70
Global Sales of Coffee
90% sold through
grocery stores
Nestle holds 22.4% market
share
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ANALYSIS OF OPPORTUNITY
Analysis Alternatives Recommendation Financials Risks
Retail Sales of Coffee in China
Coffee Beans - 0.89%
Fresh Ground Coffee - 0.40%
Instant Coffee - 99.60%
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ANALYSIS OF OPPORTUNITY
Analysis Alternatives Recommendation Financials Risks
Strengths • Nescafe size • Commitment to CSV • Brand succes
Concerns • Relationships with
farmers • Complex supply chain • Livelihood of farmers
Threats • Volatility of prices • Public perception
Opportunities • Chinese coffee
market • Consumer desire for
certified coffee
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ALTERNATIVES
Analysis Alternatives Recommendation Financials Risks
• Take control of entire supply chain • Lease land and grow coffee
Backward Integration
• Offer premium prices annually • Farmers incentivized to produce more
Premium Pricing
• Certify farmer to sustainable farming techniques • Provide price quota’s for production levels
Sustainable Growing
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ALTERNATIVE 1 – BACKWARD INTEGRATION
Analysis Alternatives Recommendation Financials Risks
Advantages Disadvantages
Core Strength
Exploitation
Damage Market
Process Control
Profit
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ALTERNATIVE 2 – PREMIUM PRICING
Analysis Alternatives Recommendation Financials Risks
Advantages Disadvantages
Over Supply
No CSV
Environment
Local Prosperity
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ALTERNATIVE 3 – SUSTAINABLE GROWING
Analysis Alternatives Recommendation Financials Risks
Advantages Disadvantages
Long Term
Shared Value
Prosperity
Profitability
Time
Risky
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CRITERIA
Analysis Alternatives Recommendation Financials Risks
Long Term Supply
Sustainable Practices
Creating Shared Value
Producer Prosperity
Revenue Growth
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CRITERIA MATRIX
Analysis Alternatives Recommendation Financials Risks
Long Term Supply
Sustainable Practice
Creating Shared Value
Producer Prosperity
Revenue Growth
Backward Integration Y Y X X Y Premium Pricing Y X X X X Sustainable Growing Y Y Y Y Y
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RECOMMENDATION
Analysis Alternatives Recommendation Financials Risks
Promote prosperity with sustainable
growing, roasting and community investment
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IMPLEMENTATION
Analysis Alternatives Recommendation Financials Risks
Sustainable Supply • Education and contracts
Community Investment • Coffee co-op and roasting facilities
Customize to Chinese market • Instant coffee
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SUSTAINABLE SUPPLY
Analysis Alternatives Recommendation Financials Risks
• Teach sustainable practices • Utilize existing farmers as teachers • Build education and capacity
Sustainable Farming Academy
• Nescafe Sustainable Certification • Safe working conditions • Contract price – Quality SOL
Sustainable Certification
• Long term predictable supply • Incent sustainable practices • Share profits above contract price
Guaranteed Contract
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CONTRACT PRICING
Analysis Alternatives Recommendation Financials Risks
Standard Contract Pricing Price per ton USDMinimum Value 2,500$ Standard Premium 100$
2,600$ IncentivesWaste water management 50$ Lower energy usage 50$ Soil conservation 50$
2,750$
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COMMUNITY INVESTMENT
Analysis Alternatives Recommendation Financials Risks
• Invest in local communities • Infrastructure for the long term • Combined market power
Coffee Co-op
• Efficient tech/sustainable processing • Reduce supply chain tiers • More profit to share with growers
Responsible Roasting
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CUSTOMIZE TO CHINESE MARKET
Analysis Alternatives Recommendation Financials Risks
• Generations of tea drinkers • Can’t change cultural habits • Product must match consumption
Local Customs
• Prepare and drink at home • Utilize existing means/practices • Possible innovation – coffee bags
Instant Coffee
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IMPLEMENTATION TIMELINE
Analysis Alternatives Recommendation Financials Risks
2013 2014 2015 2016 2017
Sustainable Supply
Farming Academy
Enrollment
Sustainable Cer8fica8on
Contracts
Backward Integra8on
Coffee Co-‐op
Roas8ng Facili8es
Marke8ng
Farming Academy
Instant Coffee
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FINANCIAL ANALYSIS
Analysis Alternatives Recommendation Financials Risks
Projected Income USD Millions -‐ China2012 2013 2014 2015 2016 2017
Total Revenues 1,140,000,000$ 1,425,000,000$ 1,781,250,000$ 2,226,562,500$ 2,783,203,125$ 3,479,003,906$
Cost of Goods Sold 608,640,000 760,800,000 951,000,000 1,188,750,000 1,485,937,500 1,857,421,875
Gross Margin 531,360,000$ 664,200,000$ 830,250,000$ 1,037,812,500$ 1,297,265,625$ 1,621,582,031$
Overhead Expenses 398,520,000$ 498,150,000$ 622,687,500$ 778,359,375$ 972,949,219$ 1,216,186,523$
Operating Margin 132,840,000$ 166,050,000$ 207,562,500$ 259,453,125$ 324,316,406$ 405,395,508$ Interest 5,405,555$ 5,459,611$ 5,514,207$ 5,569,349$ 5,625,042$ 5,681,293$ Taxes 46,494,000$ 58,117,500$ 72,646,875$ 90,808,594$ 113,510,742$ 141,888,428$
Net Income 80,940,445$ 102,472,889$ 129,401,418$ 163,075,183$ 205,180,622$ 257,825,787$
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FINANCIAL ANALYSIS
Analysis Alternatives Recommendation Financials Risks
Sensitivity Analysis
Revenue Profit Growth RatesWorst Case 2,261,352,539$ 193,369,341$ 0.12Normal Case 3,479,003,906$ 257,825,787$ 0.25Best Case 4,348,754,883$ 322,282,234$ 0.35
2017
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FINANCIAL ANALYSIS
Analysis Alternatives Recommendation Financials Risks
Beginning Cash Balance 50,000,000$ 43,000,000$ 39,949,700$ 22,883,044$ 4,304,232$
Implementation Plan Costs (USD Million)2012 2013 2014 2015 2016 2017 Total
Broaden Academy 5,000,000$ -‐$ 6,500,000$ 7,000,000$ -‐$ 18,500,000$ Training Implementation 500,000$ 525,000$ 551,250$ 578,813$ 607,753$ 2,762,816$ Develop Sustainable Certification 1,000,000$ 1,020,000$ -‐$ -‐$ -‐$ 2,020,000$ Coffee Co-‐ops 500,000$ 1,000,000$ 1,500,000$ 2,000,000$ -‐$ 5,000,000$ Roasting Facilities -‐$ -‐$ 8,000,000$ 8,000,000$ -‐$ 16,000,000$ Marketing for Academy -‐$ 505,300$ 515,406$ -‐$ -‐$ 1,020,706$ Marketing for Instant Coffee -‐$ -‐$ -‐$ 1,000,000$ 1,020,000$ 2,020,000$
7,000,000$ 3,050,300$ 17,066,656$ 18,578,813$ 1,627,753$ 47,323,522$
Ending Cash 43,000,000$ 39,949,700$ 22,883,044$ 4,304,232$ 2,676,478$
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FINANCIAL ANALYSIS
Analysis Alternatives Recommendation Financials Risks
Key Performance Indicators2013 2014 2015 2016 2017
Individuals Trained & Certified 500 1000 1500 2000 2500Number of Coffee Co-‐ops 10 20 30 40 50Number of Roasting facilities 0 0 1 1 0Revenue Growth >20% >25% >25% >25% >25%
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RISKS & RISK MITIGATION
Analysis Alternatives Recommendation Financials Risks
• Sustainability incentives promote training • Local shared knowledge leverages relationships and expertise
1. Training does not attract farmers
• Market research determines demand, contracts and production match demand
• Long shelf-life of instant coffee 2. Over/under production
• Farmers incentivized to use sustainability practices • Audits ensure practices are followed
3. Coffee growers don’t follow sustainability
practices
Impact
Prob
abili
ty
1
2
3
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CONCLUSION
Analysis Alternatives Recommendation Financials Risks
Create shared value
from bean to cup
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APPENDIX
Analysis Alternatives Recommendation Financials Risks
Production Levels2012 2013 2014 2015 2016 2017
Total Production 40,576 50,720 63,400 79,250 99,063 123,828