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Nestlé has seen better months than February 2015， when 500 tons of sellable powdered coffee worth approximately 10 million yuan were destroyed in Dongguan， Guangdong Province. Nestlé declared officially that the destruction of the stock was a move to keep its product fresh. The dumping of the instant coffee sold by Nestlé（China） Co.， Ltd. was the largest of its kind since its establishment in 1992.
“It was equivalent to the milk dump not long ago，” opines Xu Xiongjun， a food and beverage strategic positioning specialist.“Productivity increased ahead of schedule while growth slowed， resulting in supply exceeding demand. The product had to be dumped to balance the market price.”
Overly Optimistic about Instant Coffee
The 2014 annual report released in February by Nestlé shows its global sales volume at 91.6 billion Swiss franc， with organic growth of 4.5 percent – the lowest ever over the past five years. Its organic growth in Asia， Oceania and Africa was 2.6 percent， most of which was earned from food and health products.
Wan Ling Martello， chief financial officer （CFO） of Nestlé， revealed at the company’s 2014 financial analyst meeting that one factor behind Nestlé’s slowing performance was emerging competition in the Chinese coffee market from ready-to-drink brands such as Silk.
“Instant coffee has been stagnant in China since 2009，” explains Qiu Hao， an analyst from Mintel International.
“Nestlé might have been overly optimistic in predicting its market growth， which was lost between production plans and weak marketing，” says Hu Lu， deputy secretary general of the Coffee Industry Association of Yunnan Province. “Nestléno longer dominates the Chinese market after the arrival of over 100 coffee brands， which have been clawing at the market over the last few years. Meanwhile， the country has seen growing consumption of instant coffee while the global market has been shrinking.”
According to State of the Industry Report from Mintel International， over the past five years， China has seen a boom in coffee marketing – from 5.554 billion yuan in 2009 to 10.343 billion yuan in 2013. Coffee has become one of the most rapid growth points amongst non-alcoholic beverages in China with an annual average compound growth rate of 16.2 percent from 2009 to 2013. Other statistics show that the consumer market size for coffee in China was 70 billion yuan in 2012， which is expected to double and exceed 150 billion yuan by 2017. Still， the leading position of Nestléinstant coffee has yet to be threatened. According to Qiu Hao， its market share dropped from 71.2 percent in 2012 down to 70.8 percent in 2013， a loss carved up by numerous brands led by Maxwell House.
The Siege
As predicted by Mintel International， by 2019， Nestlé’s share of instant coffee， its dominant product， would drop five percentage points to 66 percent. Today， Nestlé faces stiff challenges from emerging brands including made-to-order coffee from Starbucks.
State of the Industry Report also reveals that coffee shops’ retail market volume in China was 5.07 billion yuan in 2014 and is predicted to hit 8.68 billion yuan in 2019.
China has seen an increasing number of coffee shops as many international chains reached the country， led by Starbucks in 1999 and Costa in 2007. Earlier Chinese chains such as UBC and DIO helped fuel foreign coffee culture in the country. The numbers of Starbucks and Costa locations have increased by 45 percent and 29 percent respectively between 2012 and 2013.
“The runaway growth of coffee shops is bound to influence other coffee markets，”insists Qiu Hao， but Starbucks would love to dominate them too. On March 19， 2015， the company signed an agreement with Tingyi Holding Corp to jointly produce Starbucks ready-to-drink beverage on China’s mainland： Starbucks provides raw materials， R&D， innovation， and brand development， while its partner handles production and marketing on China’s mainland. It was reported that even China Resource’s C’estbon， a water brand with no previous interest in coffee， is planning vitamin-infused coffee beverages.
“The arrival of Starbucks and China Resource to the instant coffee market has undoubtedly impacted Nestlé’s competing products， not to mention Starbucks’ highend made-to-order beverages，” noted Qiu Hao. “Not only the coffee market but plenty of other sectors of the food and beverage industry have moved towards high-end products， which are becoming within reach of the middle-class and even humbler earners in China.”
Mergers and Acquisitions： Good or Bad？
Another factor influencing Nestlé’s weak 2014 is widely believed to be mergers and acquisitions， which have hindered its market. During his three-year tenure as chairman and CEO of Nestlé China， Roland Decorvet experienced a torrent of mergers： The company purchased 60 percent of Silver Heron and Hsu Fu Chi and acquired Wyeth with US$11.8 billion. In 2013， Nestlé earned US$7 billion in sales in China， one third from its brand and the rest from subsidiaries. Despite the fact that China became its second largest market， trailing only the United States that year， Nestlé suffered a drastic drop in the growth rate of its sales from 91.4 percent in 2012 down to 27.6 percent.
In 2013， Silver Heron， after merging with Nestlé， realized a year-on-year growth by 15 percent in sales， but suffered in a bearish market the next year due to fierce competition from mighty opponents such as Wahaha as well as breakneck development of substitutes such as walnut sauce.
“The injection of Nestlé capital widened the marketing channel， but didn’t produce the expected growth，” illustrates specialist Xu Junxiong. The situation was even worse for Hsu Fu Chi， which was merged at the same time with Silver Heron： Its market share and sales volume descended drastically for successive years despite the brand maintaining its position – third – in the Chinese candy market.
Paul Bulcke， CEO of Nestlé， has outlined the company’s place for future development. Even though they are striving for remarkable market achievements in a short period of time， their long-term strategy will be maintained with an eye on future growth. Their goals are organic growth of 5 percent in 2015， similar to 2014， and improvements in realms of basic earnings per share and capital efficiency on the basis of profitability and fixed exchange rates.
“It was equivalent to the milk dump not long ago，” opines Xu Xiongjun， a food and beverage strategic positioning specialist.“Productivity increased ahead of schedule while growth slowed， resulting in supply exceeding demand. The product had to be dumped to balance the market price.”
Overly Optimistic about Instant Coffee
The 2014 annual report released in February by Nestlé shows its global sales volume at 91.6 billion Swiss franc， with organic growth of 4.5 percent – the lowest ever over the past five years. Its organic growth in Asia， Oceania and Africa was 2.6 percent， most of which was earned from food and health products.
Wan Ling Martello， chief financial officer （CFO） of Nestlé， revealed at the company’s 2014 financial analyst meeting that one factor behind Nestlé’s slowing performance was emerging competition in the Chinese coffee market from ready-to-drink brands such as Silk.
“Instant coffee has been stagnant in China since 2009，” explains Qiu Hao， an analyst from Mintel International.
“Nestlé might have been overly optimistic in predicting its market growth， which was lost between production plans and weak marketing，” says Hu Lu， deputy secretary general of the Coffee Industry Association of Yunnan Province. “Nestléno longer dominates the Chinese market after the arrival of over 100 coffee brands， which have been clawing at the market over the last few years. Meanwhile， the country has seen growing consumption of instant coffee while the global market has been shrinking.”
According to State of the Industry Report from Mintel International， over the past five years， China has seen a boom in coffee marketing – from 5.554 billion yuan in 2009 to 10.343 billion yuan in 2013. Coffee has become one of the most rapid growth points amongst non-alcoholic beverages in China with an annual average compound growth rate of 16.2 percent from 2009 to 2013. Other statistics show that the consumer market size for coffee in China was 70 billion yuan in 2012， which is expected to double and exceed 150 billion yuan by 2017. Still， the leading position of Nestléinstant coffee has yet to be threatened. According to Qiu Hao， its market share dropped from 71.2 percent in 2012 down to 70.8 percent in 2013， a loss carved up by numerous brands led by Maxwell House.
The Siege
As predicted by Mintel International， by 2019， Nestlé’s share of instant coffee， its dominant product， would drop five percentage points to 66 percent. Today， Nestlé faces stiff challenges from emerging brands including made-to-order coffee from Starbucks.
State of the Industry Report also reveals that coffee shops’ retail market volume in China was 5.07 billion yuan in 2014 and is predicted to hit 8.68 billion yuan in 2019.
China has seen an increasing number of coffee shops as many international chains reached the country， led by Starbucks in 1999 and Costa in 2007. Earlier Chinese chains such as UBC and DIO helped fuel foreign coffee culture in the country. The numbers of Starbucks and Costa locations have increased by 45 percent and 29 percent respectively between 2012 and 2013.
“The runaway growth of coffee shops is bound to influence other coffee markets，”insists Qiu Hao， but Starbucks would love to dominate them too. On March 19， 2015， the company signed an agreement with Tingyi Holding Corp to jointly produce Starbucks ready-to-drink beverage on China’s mainland： Starbucks provides raw materials， R&D， innovation， and brand development， while its partner handles production and marketing on China’s mainland. It was reported that even China Resource’s C’estbon， a water brand with no previous interest in coffee， is planning vitamin-infused coffee beverages.
“The arrival of Starbucks and China Resource to the instant coffee market has undoubtedly impacted Nestlé’s competing products， not to mention Starbucks’ highend made-to-order beverages，” noted Qiu Hao. “Not only the coffee market but plenty of other sectors of the food and beverage industry have moved towards high-end products， which are becoming within reach of the middle-class and even humbler earners in China.”
Mergers and Acquisitions： Good or Bad？
Another factor influencing Nestlé’s weak 2014 is widely believed to be mergers and acquisitions， which have hindered its market. During his three-year tenure as chairman and CEO of Nestlé China， Roland Decorvet experienced a torrent of mergers： The company purchased 60 percent of Silver Heron and Hsu Fu Chi and acquired Wyeth with US$11.8 billion. In 2013， Nestlé earned US$7 billion in sales in China， one third from its brand and the rest from subsidiaries. Despite the fact that China became its second largest market， trailing only the United States that year， Nestlé suffered a drastic drop in the growth rate of its sales from 91.4 percent in 2012 down to 27.6 percent.
In 2013， Silver Heron， after merging with Nestlé， realized a year-on-year growth by 15 percent in sales， but suffered in a bearish market the next year due to fierce competition from mighty opponents such as Wahaha as well as breakneck development of substitutes such as walnut sauce.
“The injection of Nestlé capital widened the marketing channel， but didn’t produce the expected growth，” illustrates specialist Xu Junxiong. The situation was even worse for Hsu Fu Chi， which was merged at the same time with Silver Heron： Its market share and sales volume descended drastically for successive years despite the brand maintaining its position – third – in the Chinese candy market.
Paul Bulcke， CEO of Nestlé， has outlined the company’s place for future development. Even though they are striving for remarkable market achievements in a short period of time， their long-term strategy will be maintained with an eye on future growth. Their goals are organic growth of 5 percent in 2015， similar to 2014， and improvements in realms of basic earnings per share and capital efficiency on the basis of profitability and fixed exchange rates.