We attended the analyst meet of Nestle India. Our key takeaways: Spate of new launches, performance incentives for innovations encouraging. Company will continue to focus on the urban consumer.
There has been great improvement in processing customer feedback. Management commentary is a refreshing change from the past; however challenges remain.
Management admitted that the noodles category has still not completely recovered consumer trust and that competition has intensified. Under the new MD, Nestle is finally pressing the right buttons but results will be gradual in our view. Retain neutral on expensive valuations.
Must win battles include focus on double digit sales growth, insight led innovation, execution brilliance, responsiveness to environment, 100% compliance, having its people fit for battle, constant consumer engagement, being nimble-footed, having systems for rewards and recognition for the above and last but not the least, leadership in Nutrition, Health and Wellness.
The seven dynamics in the FMCG sector that the company pointed out are urbanisation, the tide of technology (354 m internet users), importance of women’s worth — decision on 90% of Nestle’s product portfolio is made by women— continuing propensity of the customer to premiumise, valourising value provided to consumer across segments, quest for goodness and shifting the sweet spot between taste indulgence and health.
‘Nestle’s problem is not too few brands’: Management commented that Nestle’s problem is not too few brands and there is a vast deal of work that can be done within the brands and segments. The company has launched 25 products in the past 3-4 months.
These include Maggi Cuppa noodles (4 variants), Maggi Hotheads (4 variants), Maggi (no onion and no garlic) noodles, Nestle Bar one Charge, Munch Nuts, Nestle Greek yogurt, Nestle Pro-grow, Nestle Everyday Masala Fusion, Nestle Ceregrow and a few beverage launches.
While it is still early days, the management called out that the Masala whitener, Munch Nuts and Maggi Hot Heads had received encouraging response.
What is interesting is the reward structure is also getting aligned towards this. The company is calibrating its incentive structure in such a way that there are Incentives on getting new products out and based on performance of those new products.
There are ways being devised to measure performance on activation and merchandising. There has been a conscious fast tracking of newer launches and there is emphasis on getting feedback faster so that quicker decisions can be made.
Management did share that some new launches will be relevant nationally while some will remain regional. There will be categories like Greek Yogurt which are likely to remain in the top cities only due to the nature of the product and the need for cold chain infrastructure.
‘It is better to be intensive and relevant rather than extensive and irrelevant’: Management maintained its focus on the urban consumer. Its product portfolio and strengths align well with this set of customers and penetration is still low in many of their categories in urban India.
Over 315m consumers is certainly a sizeable target market in their view and fits in very well with their focus on indulgence, premiumisation of consumer preferences and shift towards more healthy but yet tasty snacking options.
Management also defended getting out of the low price points by stating that at those price points the company would not be able to offer the quality that they desire.
Customer contact has improved tremendously: One of the areas which the management cited as an example where things have improved tremendously in a short period of time is customer interface. Customer feedback is now received 24/7.
Earlier there were 4 people in charge of this aspect and the lead time to respond was 24 hours and now it is a 60 member team and the lead time for the first response is 30 minutes.
While these are impressive numbers, where we think the company could benefit more is that the more they actually listen to direct feedback from the customer the better it is in terms of learning.
HUL has pointed out earlier that such interactions provide strong feedbacks that can be used in strategic decisions.
Changing for the better, huge challenges remain: Our conviction on the welcome change in thought process was strengthened by statements like being fast, focused and flexible in thought and action, embracing powerful way of working, consumer-centric Innovation and renovation across categories, priority on growth, and being nimble footed but the management was also at pains to point out that ‘We are presenting the picture as it is and not as rosy as you want it to be’.
Sector has taken a turn for the worse in the last quarter: The overall FMCG segment worth $ 40 bn grew at 7.2% in Q1CY16 and grew at 4.4% in Q2CY16, Food and Beverage segment which is a $21 bn segment grew at 7.4% and 5.3% respectively, processed foods, a $14 bn category, grew at 5% and 2.7% respectively while categories where Nestle is focused currently, $4 bn in size, grew by 1.3% and 1%.
Nestle’s own sales declined on a sequential basis despite Maggi’s reach scaling up substantially and market share increasing.
Volume in non-noodles segment was tepid in H1CY16 and is likely to have been negative in Milk and nutrition.
We are also puzzled by the decision to stick to the wafers segment in Chocolates and Confectionary.
As we highlighted in our annual report analysis a few months ago Nestle’s problems did not begin with Maggi and there are a lot of issues that need to be addressed.
‘Stigma on noodles has affected trust’: Interestingly the management did admit that while the noodles category has recovered strongly from a low base last year and Maggi itself has recovered in terms of market share to 57% now, some consumers have still not recovered the trust on the category itself, others have moved on to more healthier options and competitive intensity has also increased.
This was obviously proven to be no fault of theirs but there has been some effect to the sentiment towards the category. Management did not share their numbers on annualised basis for the category but did quote Technopak numbers stating that the category in CY16 is likely to be around R22 bn, considerably lower than the R32 bn in 2014, the last calendar year before the crisis. Maggi had launched a successful campaign rightly focusing on mothers, emphasising recovery of trust after all tests cleared the company, but this campaign obviously wasn’t a complete success.
Ecommerce and digital media spend: Management expects sales from ecommerce to be 5% of total sales by 2020. Interestingly Maggi relaunch and Maggi Hotheads were first done through the E-Commerce channel. Digital media spend is now 15% and even higher in some categories.
Maintain neutral: We are highly encouraged by strategic changes led by the new CEO over the past year.
We are also enthused by the fact that there has been a spate of new launches ahead of our expectations.
Volume growth has been insipid for many years and continues to be so. Huge challenges still remain but we believe the company is on the right track.
There are no changes to our EPS growth estimates. Valuations of 43.2x June 2018 EPS, prevent us from being more constructive, leading us to maintain our Neutral rating and target price R6,846 (44x June 2018 EPS, in line with 5-year average).