Marketing Strategy for Nescafe

Marketing Strategy for Nescafe

Table of Contents1.Introduction to Product and Competition22.Category Analysis22.1.Aggregate Market Factors22.1.1.Market Size22.1.2.Growth32.1.3.Seasonality32.1.4.Profits32.2.Macro Environment Factors32.2.1.Technological32.2.2.Political42.2.3.Economic42.2.4.Social42.2.5.Legal52.3.Micro Environment Analysis52.3.1.Competitor Analysis5

1. Introduction to Product and Competition

Nescafe is a brand of instant coffee owned by Nestle. The name is a combination of the words "Nestle" and "cafe", in which Nes- means magic and -cafe means coffee. Nestle's flagship powdered coffee product was introduced in Switzerland on April 1, 1938 after being developed for 7-8 years by Max Rudolf Morgenthaler, a Swiss food chemist considered to be inventor of Nescafe. In the United States, the Nescafe name was used on its products until the 1960s. Nestle has association with India for over 100 years. The Moga manufacturing and packaging facility in Punjab is dedicated specifically for the production of instant coffee by Nestle. Coffee Board of India awarded Nestle as leading exporter of Coffee from India in 2012-13. Nestle follows a region specific marketing strategy, housing different brands of instant coffee under the umbrella brand Nescafe. With already established brands, the competition in coffee market is stiff. The other major players in this segment are Tata Coffee and BRU. Nescafe is the leader with about three fourths share, with Hindustan Unilever's Bru at second slot. 2. Category Analysis2.1. Aggregate Market Factors2.1.1. Market SizeCoffee is worth over $100 billion worldwide. The world consumption of soluble coffee is rising relatively strongly after a number of years of stagnation, expanding from 21.4 million bags (green bean equivalent) in 1999 to 81.12 million bags in 2013. According to the International Coffee Organization statistics of year 2013, India is the fifth largest coffee producer in the world. Karnataka alone is responsible for producing 70% of the total coffee output of the country. India is responsible for producing only a 4% share of world coffee output and the industry directly provides employment to about 6 lakh people. Indias coffee plantation industry has grown to a production level of about 275,000 tonnes of coffee beans. In the past, India has been exporting most of its production of coffee beans. However, currently domestic consumption is on the rise. Now, more than a quarter of the coffee beans are used for domestic processing and consumption. Furthermore, volume of sales has increased by about 30% in the last 5 years. Apart from establishing numerous manufacturing units the company has also gone a step ahead and installed numerous coffee machines in various public places. The company has a record of selling almost 700mn cups of hot and cold coffee per day.

2.1.2. GrowthConsumption growth in many Asian countries has been driven primarily by demand for Robusta coffee, which is used in soluble coffee and ready-to-drink products such as 3-in-1 mixes (coffee with whitener and sweetener) or 4-in-1 preparations (coffee with whitener, sugar and flavourings or dietary additions). In India, Nestle continues to lead coffee with a value share of 38% in 2013, mainly due to its long-established presence in instant coffee. Nestles brands including Nescafe Classic and Nescafe Sunrise enjoy huge popularity amongst consumers. The Nescafe enjoys countrywide distribution and widespread presence in all retail formats. Company sells small single sachets of instant coffee at affordable price at Rs 2-5. Sachets are quite popular amongst consumers in rural areas and tier three cities, as well as with consumers who only consume coffee occasionally.Over last 5 years, Nescafes market share in India has stagnated or moderately reduced by about a per cent annually due to entry of coffee chains such as Caf Coffee Day, Barista, and Starbucks. Furthermore, the HULs Bru, Nescafes major competitor in domestic markets have managed to penetrate into many semi urban markets of tier-II cities. As per the annual report of Nestle, India, the coffee business growth was supported by good growth of Nescafe Classic and Nescafe Sunrise. The re-launch of Nescafe in the new, premium jars and the focus shift to cups led the growth for the brand. 2.1.3. SeasonalityNormally colder seasons attract more customers towards coffee businesses which in turn results in better sales, however because of drastic changes in seasons especially because of global warming, monsoon is getting disturbed and day by day years are getting hotter. Though we could not see any significant variation of demand in coffee consumption across India seasonally, the trend of coffee consumption seems to be on the rise over last decade 2.1.4. ProfitsWorldwide Nescafe is the largest profit making category with different ranges of coffee starting from instant coffee to coffee specialties. Instant coffee market in India is a duopoly of Nestl and HUL for decades. They also differentiate their products through branding. In fact, instant coffee can be considered as a part of a larger beverage market with numerous competing products. With trade liberalization, imports have also started trickling in. Thus, circumstantial evidence regarding degree of competition or the market power in the instant coffee market is rather mixed one. Despite all these challenges, Nestle is focused on its efforts towards breakthrough innovations, value chain improvements and impactful advertisements. Since Nestle India does not breakup its profit figure among different lines of business such as Nescafe, Maggi, milk products etc, specific data regarding Nescafe is not reported.2.2. Macro Environment Factors2.2.1. TechnologicalFast technological advances at production as well as communication methodology levels are having much impact on globalized operations for coffee brands. World is getter closer and fast growing communication technologies making marketing efforts more effective. Most of the channels such as Facebook, YouTube, Twitter, World Web, Mobility adding extra value to the marketing strategies of these brands. Nestle is also using all these promising modes to make customers aware about their brands like Nescafe. Technologies are a vital part of Nestles R&D. They have engineers working in R&D in a variety of fields from packaging and equipment, to food processing technologies and manufacturing new beverage systems such as Nespresso, Nescafe Dolce Gusto and Special.Foam booster technology produces the creamy head for Nescafe Cappuccino, with less fat, and which is much denser and longer-lasting than regular foam. Somewhere around 2002, Nestle re-launched Nescafe Cappuccino with new foaming mix products, which were created using this foam booster technology.2.2.2. PoliticalIn a country like India, any legislation or political situation will have a direct impact on the performance of any business. Especially during election season, democratic countries might also experience few incidents of politically motivated attacks on business entities. Also discussions regarding FDI take various shapes as per the political agendas of the ruling and opposition parties.Though huge population, large proportion of the young people, unemployment and underemployment provides an abundant supply of potential employees, illiteracy acts as main hurdle on labour productivity in the work force as a whole. Antiquated laws, unionization of labour and their links with political heavyweights gives rise to random challenges and hence only way ahead in these situations is to successfully pressure provincial governments to exempt them from many of these antiquated Laws which ultimately lead to corruption.2.2.3. EconomicAfter 1991, India liberalized trade and economic policies. With continued effort towards removal of barriers in international trade, the Indian government is successful in enhancing economic growth and strengthening local industries. As a result of these reforms, India has emerged as one of the most promising markets in today's global economy. Similarly, these factors have resulted in significant increases in consumer demand for imports. Hence looking at the possibility of reaching out to the Indian low income population, Nestle is coming up with cost effective products and processes while maintaining the same standard. With reliable supply of high-quality raw materials Nestle brings sustained growth for the local economy. It also contributes to increase in agricultural production, the socio-economic status of the farmers, rural communities and in production systems to make them more environmentally sustainable.2.2.4. SocialBecause of the diversity, there are lot of parameters which needs to be taken into consideration while doing business in India. Different region and culture leads to different behaviour and perspective, hence for Nestle, its very important to note these differences and avoid any possibility of any conflict between India culture and company culture.Consumer awareness regarding the health risks due to excessive intake of coffee and its extensive media coverage may need to be tacked by Nestle for brands like Nescafe. It has been observed that the consumers are not reacting to these by simply eliminating coffee intake altogether and they are actually looking for more premium or quality variants, such as Nescafe. With growing influence from leading coffee makers, consumers have started to consume coffee at home, as an alternative to tea. This trend is gaining popularity in almost all regions of India, where tea was considered as a traditional daily drink. This is a driving force for Nestles Nescafe.Hence in country like India where the people are more inclined towards milk products is profitable market for Nestle. Moreover looking at increasing young population, nestle can introduce new flavours of its coffee line with added health benefits as well. 2.2.5. LegalThough India has several laws and regulations (e.g. Prevention of Corruption Act, 1988; The Code of Criminal Procedures, 1973; The Companies Act, 1956; and The Indian Contract Act, 1872) that address corruption, corruption remains one of the biggest hurdles for foreign investors while doing business in India. Moreover, things like unionization of the labour force and that too having good linkage with political parties or influential politicians may play a spoilsport in path of the business.For most of the employers, one of the key obstacles is antiquated set of draconian Labour Laws. For example: Companies with employee strength more than 100 must seek government approval before they can fire workers or close down (and getting such permission is almost impossible) Women may not work night shifts. Hence Nestle shall try at their best to have good compliance with business related laws and at the same time they should have good understanding and working relationship with labour force. 2.3. Micro Environment Analysis2.3.1. Competitor Analysis2.3.1.1. Threats of New EntrantThe saturated condition of the coffee industry in India and South Asia is a strong deterrent for any emerging players to come into the picture. The large players are well established backed by brawny financial supplements. Though in recent past emerging brands such as Star, backed by Tata group of India has seized market share from Nescafe and Bru. The brand is marketed over the retail outlets of Tata and is the sole supplier of Starbucks coffee shop chain. The Super group Singapore is eyeing a 100m $ acquisition of major instant coffee local brands of Indonesia and Philippines and soon to target India and other part of the subcontinent. Niche players such as Trung Nguyn are to follow suit. The following are few factors new entrants shall take into consideration and their speculative impacts on Nescafe.

Advantage of efficient production to Incumbents Since the incumbent brands have achieved minimization of cost through years of operation, the new entrants will be at a cost disadvantage and will have little surplus to invest in research whereas brands like Nescafe can produce large volumes at lower cost. Incentives and Freebies offered New entrants will find it difficult to attract the consumers with any incentives or discount. Nescafe can offer a plethora of other products by Nestle (chocolates and health drinks) as freebie to attract sales or give discount at bulk purchases. Bru along with Tata Caf too are part of large conglomerates and have impressive tie ups with their other in-house products. LoyaltyEstablished brands have greater customer loyalty and consumers will find it hard to switch brands as they are accustomed to the taste of the existing brands hence emotionally attached to them. Initial Capital RequirementsThe new entrants shall require significant capital for R & D and advertisements and marketing cost. Distribution and logisticsThe shop owners and retail stores have very limited space to store coffee items and generally favour the incumbent brands, so it is difficult for new entrants to get visibility, distribution channels and capture imagination of the people. Price WarsThe incumbent brands can lower their prices to counter the threats from new brands as they have significant financial backing and come out as winner in price wars.Nescafe is a well-established brand and have financial backing. New entrants do not pose threat to the brand but the expansion plans from other major Asian players in new markets may challenge Nescafe in the near future.2.3.1.2. Bargaining Power of BuyersThe price elasticity of demand of coffee is generally very high. As seen in the industry of commodity products, the differentiations from competitors are not remarkably significant and products are replaced if there is any change in the prices. Nescafe buyers are generally private consumers who are loyal followers of the brand. The brand enjoys higher bargaining power with buyers compared to its competitors as it has successfully launched higher price range labels (Premix, Gold and Caramel Macchiato) with profitability. Nescafe reaches out to consumers through feedback channels and social media. The brand has taken social outreach initiatives and has increased popularity among youth through connections in popular websites. The My Nescafe section in their website is targeted to build strong relationship with buyers. The brand still holds more than 50% share in Instant coffee market and growing in R & G coffee market. Bru also enjoys popularity among sophisticated self-independent and young higher and middle income demographic who have accepted higher price labels Bru Gold and Bru Exotica.Tata Coffee concentrates on sales through their retail outlets and their growing power in the retail industry adds significant customer channel to the brand.In recent time health consciousness crusades and campaigns about ill effects of caffeine intake has diminished the bargaining power. The same has been countered by Nescafe and Bru by significant investments in advertisements and awareness about health benefits of coffee.2.3.1.3. Bargaining Power of SuppliersFarmers are the basic suppliers for Nescafe, India. Nestle hold more bargaining power than its suppliers. The suppliers are not having adequate fund and are not in position to raise the prices. Nescafe prefer to have long term relationship with its suppliers, which ensures quality of its coffee. Nestl supports farmers in conducting assessments and obtaining certification from the Common Code for the Coffee Community (4C Association). Nestle established three 4C units at Kushalnagar, Kalpetta and Mudigere in 2012. Nescafe provides training on better farming practices, soil testing / recommendations and also medical check-up facilities. Nescafe offers advices to its suppliers on how to reduce cost and perform effectively. Nescafe involves themselves in the lives of suppliers through trade fair or help their technical issues. The Coffee Board of India which is involved in research, development, extension, quality checks, market information and the domestic and external promotion of coffee from India is supported by Nestle.2.3.1.4. Pressure from SubstitutesThe biggest pressure for Nescafe substitute in India is Tea. Tea is preferred over Coffee in most of regions of India. Going beyond the scope of hot beverages, Coffee finds stiff pressure from soft drinks. Most portion of India lies near equator and temperature is on higher side, this regional attribute leads to the preference of cold soft drink. Nescafe Coffee faces pressure from substitutes such as pasteurized drinking yogurt, beer, sterilized milk, alcoholic drink, soya milk, fruit juices, etc.

Hot Beverage Market Segmentation

2.3.1.5. Current Rivalry in CategoryET Brand Equity survey 2013: Nescafe amongst the Top 5 brands in Hot Beverages and in the top 100 most trusted brands. The rivalry in coffee is stiff, which already established brands. The major players in this segment are Tata Coffee and BRU. Nescafe is the leader with about three fourths share, with Hindustan Unilever's Bru at second slot.Bru in spite of capturing 2.6% of market share of Nescafe, Bru is still number two. Nescafe India, is promoting its coffee through coffee outlets and vending machines, which Bru is not doing.

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