Case Analysis

Nestl
Group 3
11 February 2010

David Chol, Whitney Drost, Raynard Geason, Sarah Laborde, Casey Landers, Darren McNeely,
Vanessa Robicheaux, Nicholas Knight, Taylor Mendel, Jonathan Bush, John Priola, William
Ratcliff
















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Table of Contents
Introduction ....................................................................................................................................3
Goals ...................................................................................................................................3
Constraints.........................................................................................................................3




















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Introduction
Through the years, Nestl has emerged as a multi-national company that serves as a
brand in itself as well as an umbrella company for many well-recognized processed food
commodity brands. Nestl was established in 1867, with the distribution of its first product,
dehydrated baby food; this product quickly made the company profitable. Through a series of
well-coordinated mergers and the growth of a vast selection of innovative food products, Nestl
became the global giant it is today. Nestls success can be attributed to its deep agricultural
supply chain, strong local market teams, hiring from within, and long tenured CEOs. Nestl has
become the epitome of innovation and success in the retail food product industry.
In 1996 Nestl established the Nestl Environmental Management System (NEMS) in an
attempt to produce more environmentally friendly products. NEMS required innovative eco-
design in the companys products and activities, and gave preference to suppliers who worked to
improve their levels of efficiency and sustainability regarding their use of resources. Aside from
this, NEMS also requires independent environmental auditing regarding the practices of the
company. In addition, environmental awareness training for the employees and business partners
is required.
Nestl launched Sustainable Agriculture Initiative Nestl (SAIN) in 2000 in order to
optimize the transparency from farm-to-table and to increase efficiency and productivity. Nestl
took a big risk as it was the first to implement this type of program. The program was effective,
and other companies such as Unilever and Groupe Danone adopted the idea. In 2006 it further
expanded the program to make water a central area of concentration.
Five Forces Model



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Porters Five Forces Model was created to act as a framework for industry analysis and
business strategy development. Porter singled out five different forces that impact competitive
intensity which portrays an image of the overall attractiveness and profitability of a market. To
aid in our evaluation of Nestl and its status in the industry, we will apply Porters Five Forces
Model to the company.
Threat of New Entrants
The food processing industry is very large and competitive; it is not uncommon for firms
within the industry to do quite well. As a result, many companies enter into the market every
year in an attempt to gain a portion of the profitable market. Luckily for Nestl, the company
has been around for over a century and boasts a long history of quality products and consumer
satisfaction, which has allowed the company to obtain a considerable share of the market. As a
result, new entrants into the industry must attempt to seize a portion of Nestls market share in
order to survive. Essentially, Nestl is constantly a target, and so the threat of new entrants is
moderate.
Threat of Substitute Goods
Due to the nature of the industry, Nestl is beset with the threat of substitute goods.
From bottled water to lean pockets, there are arrays of similar products that compete directly
with Nestl. It is vital for Nestl to continuously find new ways to improve its products because
competition is so fierce. In recent years, Nestl has focused on the health and wellness aspects
of its products to maintain its competitive edge in the market.
Bargaining Power of Suppliers
Nestl prides itself on creating and maintaining positive relationships with its suppliers
all over the world. Due to the large purchasing power of Nestl, and because the suppliers of


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agricultural commodities offer a product that is far from unique, Nestl holds more bargaining
power than its suppliers. Aside from this, Nestl prefers to create and preserve long-term
relationships with its suppliers as this helps to ensure the quality of the raw materials being
purchased. In addition, Nestl also offers useful advice to its suppliers on how to perform more
efficiently to minimize unnecessary costs.
Bargaining Power of Customers
Customers have a large amount of bargaining power regarding their consumption of
Nestl products. As stated previously, there are close substitutes for Nestl products which
allows for the preferences of the customer to be very influential. Nestl understands the power
of the customer and has taken specific steps to meet the needs of its products consumers.
Specifically, Nestl is incorporating health and wellness into the creation of its products as
society has started becoming more health conscious.
Competitive Rivalry within the Industry
Nestl is a powerhouse in the food processing industry but so are Kraft Foods and
Groupe Danone. These companies, among others, are in a constant and continuous battle to
outperform one another. Regarding advertising alone, these companies spend hundreds of
millions of dollars in an attempt to appear more desirable than the competition. Rivalry is fierce
in the food processing industry, and this is a good thing for consumers. As long as these
companies continue striving to one up one another, consumers will continue to enjoy ever-
improving product lines.
When applied to Nestl, Porters Five Forces Model depicts a competitive, but
profitable market for the food processing industry. Furthermore, the model places Nestl in a
somewhat comfortable position within the food processing industry, while acknowledging the


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threats to its market share. Specifically, the model notes a moderate threat of new entrants into
the market and a substantial threat of substitute goods. In addition, the model shows that Nestl
tends to maintain the upper hand over its suppliers as commodities have exact substitutes in the
market. Also, customers have a considerable amount of bargaining power, as Nestl must adhere
to consumer wants and needs because there are so many close substitutes. For the final force, the
model depicts a large amount of rivalry within the food processing industry.
Goals
Nestl has established many goals throughout the life of its company. Being a highly
innovative company, it is always looking for new ways to develop higher quality products. In
order to maintain a competitive edge over top competitors, Nestl should improve its innovative
technology; this will create new products and lead to better efficiency which will minimize costs
for Nestl and its consumers. Another goal is to maintain growth by continuing to create value
for consumers and shareholders through implementing an effective risk management policy.
This can be done by ensuring compliance with Nestl business principles and international law.
In addition, Nestl will ensure that its actions are environmentally sound, socially just, and
economically viable. Lastly, it should continue to uphold and expand environmental policies
(i.e. SAIN, NEMS). This will be done by improving the communication between farmers,
employees, managers, and distributors.
Constraints
There are a few pertinent constraints that will affect the implementation of the goals.
First, is the loss of brand loyalty due to the current economic recession. With a strain on
household incomes, Nestl consumers are more likely to choose less costly and lower quality
alternative products from generic brands of competitors. Nestl must improve its certification


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process of raw materials to meet higher quality standards. An accurate trail of material/product
quality information through the various levels of the food chain is key to Nestl maintaining the
overall quality of Nestl end-products. The last constraint is the increasing cost of energy, which
affects all levels of input, production, and distribution.
Nestl is constantly expanding its horizons. One example is that the company has taken
on an ambitious task such as doubling sales and expanding its buyer market. As stated above
Nestl continues to search for opportunities to increase efficiency to expand its profitability.
With the ever-changing price of commodities, supplies, and consumer tastes, Nestl will
continue to struggle with its market position. Nestl has stayed strong and adjusted well through
many obstacles over its lifetime. Nestls executives are confident they can accomplish just
about any goal and are developing new strategies to make this happen.
Central Problem
Peter Brabeck, the chief executive, for Nestle uses the approachwhen you arent
growing, you are dyingin how he runs the company. For the past 30 years, this notion has
worked for Nestle. Its shares have outperformed competitors in the S&P 100. Internally, a central
problem for Nestle is how it plans to continue its global capitalization while resisting plateaus or
stagnation. Externally, Nestls problem is how it will keep the lead on competitors.
Nestle has managed its organization around decentralization. This is the idea that globally
there is no one specific taste or preference wanted by all. Instead, Nestle has made its
productions more regional. This will ensure that it produces products to the wants of the local
communities. This strategy has helped Nestle outperform its competitors in different regions.


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The problem is, companies have taken notice of this practice and are implementing similar
strategies.
Alternatives
Alternative One
Cocoa is essential to 40-50 million peoples lives worldwide. Over five million small
holder farms produce it. Over the last 20 years, chocolate consumption has doubled, and in the
last five years, it has increased 14 percent globally. There has been a shortage of cocoa for four
consecutive years now because farmers are producing lower yields as demand continues to rise.
Many farmers struggle on small plots with aging trees that are vulnerable to disease. Economic
pressures mean that farmers are focused on the short term and are not able to invest in good farm
management which would help them secure better quality, higher quantity yields in the long
term. This quote from Nestl.com states the most apparent reason for the cocoa shortage, which
are poor resources for farmers in other countries. The shortage of cocoa has caused the prices to
increase continuously. Nestl is one of the worlds biggest buyers of cocoa, and it has pioneered
advanced technology in cocoa and coffee for 30 years.
Several years ago Nestl created The Cocoa Plan as part of its goal of Creating Shared
Value for shareholders, employees, farmers, consumers, and the communities where it operates.
The plan will improve sustainability of the cocoa (and coffee) supply. This plan is a long term
solution, not just a quick fix. It requires a step-by-step approach and implementation process.
Over the next 10 years, Nestl will invest CHF 110 million in plant science and sustainability
initiatives for cocoa.


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There are five activities in their implementation plan. The first activity is plant
expertise. Nestl has a research and development center in Abidjan in the Cote dIvoire in West
Africa and also gives training to plant scientists in other cocoa producing countries such as
Ecuador and Indonesia. During this first activity, The Cocoa Plan looks to improve quantity
and quality of yields by bringing 12 million plantlets to producer countries. The second activity
is farmer training and assistance. This process will attempt to improve yields and to ensure
sustainability by teaching better farming methods. The third is improving the supply chain. This
is a commitment by Nestl to buy beans strictly from farmers who use sustainable practice and to
help cooperatives by speeding up the process from farm to shipping. The fourth is better social
condition that looks to improve conditions where there is poor access to healthcare and
education, and child labor. Nestle is partnered with the World Cocoa Foundation and others in
order to achieve these improved conditions. The fifth and last activity is consumer
communication. Consumer communication utilizes a Cocoa Plan logo and a Web site dedicated
to inviting consumers to learn about the cocoa supply chain and Nestls work with farming
communities.
Our alternative solution comes in at activity one, plant expertise. Nestl could supply
these countries with genetically modified seeds and fertilizer, such as the products produced by
Monsanto Co., in addition to supplying producer countries with plantlets. Monsanto uses two
techniques to develop seeds that meet the needs of farmers. The first type is breeding the seeds
delivering superior genetics, allowing farmers to get higher yields from each seed. The second
type is inserting one or more genes into the seed, which in turn protects against insects, controls
weeds, and yields are preserved through the growing season. Better seeds make crops healthier
and easier to grow, which then allows farmers to be more effective when producing food, feed,


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and fuel. The benefits of farmers use of these products are the following: increased productivity
and reduced costs, healthier crops that are easier to grow, conserved time and inputs, and
possibly the most important to producer countriesimproved protection from insects or disease
and increasing crop tolerance to heat, drought, and other environmental stress. Monsanto also
offers conservation tillage. Conservation tillage is a protective cover of mulch over crops when
they are not in season. This cover holds soil in place, minimizes runoff, and decreases erosion
drastically.
An advantage to implementing this strategy into The Cocoa Plan would be decreased
cost in cocoa due to increased production. By obtaining these suppliers through this plan, Nestle
would gain a competitive edge over competitors in the industry by having the best, most
efficient, cocoa producers. Another advantage is that it would help to expand environmental
policies such as SAIN because it will increase efficiency and productivity. It would help to
overcome some of the constraints. The plan would allow Nestl to keep an accurate trail of
product quality information. Nestl would know the quality of the products by contributing to
the production process. It could ensure the farmers know the proper way to produce quality
cocoa. It would also help with the constraint of increasing costs. By increasing production and
reducing the cost of cocoa, Nestl would be reducing input costs.
A disadvantage to providing producer countries with seed products is Nestls cost of
supplying the products. Nestl has a planned budget of CHF 110 million for cocoa and would
use part of this budget to purchase the products. Another disadvantage would be that the existing
decrease in brand loyalty would not be improved through these methods. The cost of the product
could potentially even increase slightly. The key to overcoming this issue would be to advertise
and demonstrate to cocoa consumers Nestls efforts and attempts to positively impact less


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fortunate countries. Customers are attracted when businesses help communities in need and
know the money they spend on a product will benefit others in need.
Alternative Two
Nestle currently offers an athletic/ sports nutrition line of products geared towards smart
energy production and endurance called PowerBar. Nestle bought PowerBar on February 22,
2000, in an effort to expand its influence in the sports nutrition industry as well as show its
commitment to a healthy nutritious lifestyle for its consumers.
PowerBar is the largest energy and nutrition bar business in the United States. The
PowerBar brand is widely distributed and a recognized name in the sports nutrition industry, but
it provides a relatively low variety of products and seems to only focus on one segment of the
sports nutrition market. When compared to other suppliers such as Apex and GNC, it falls short
on many levels. This is because PowerBar, while being a smart energy source, does not
provide nearly the punch that the other brands offer. The competitors in this industry offer
products for people looking to jump-start, reinvigorate, or maintain their fitness routine. Its
products specifically focus on high protein intake, electrolyte replenishment, and natural
vitamins, amino acids, and molecular combinations geared towards rapid absorption into the
bodys functions. Nestles PowerBar products are mainly geared towards maintaining light to
medium intensity fitness regimens and recreational activity. None of its products appeal to the
avid sports enthusiast/ highly athletic consumer looking to increase their performance.
There are four main categories of sports products: energy/protein bars, protein shakes,
electrolyte replenishing sports drinks, and daily vitamin/nutrient packs. For example, GNC and
Apex provide an array of energy bars ranging from high protein, endurance, and snack bars to
meal replacement, and Pro performance bars. These energy bars all provide high protein content,


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amino complexes and rapid absorption properties, but only some are considered all natural or
organic. While all of Nestls PowerBar products are considered all natural, its highest protein
bar has only 10 grams of protein whereas GNCs highest protein bar has more than three times
the protein with 32 grams. Nestls PowerBar does not provide a line of protein shakes or
vitamin packs. It has a line of powder sports drinks that nutritionally compare about evenly with
competitors; however, it is a powder. It is not offered pre-mixed and bottled, so it will not be
found at a local convenience store like Gatorade or Powerade.
The sports nutrition market has continued to increase during the recession with an
estimated growth of almost 7% in 2008. This development has been accredited to people trying
to avoid pricey doctor visits by staying healthy as well as turning toward sports recreation as a
substitute to pricier forms of entertainment. Despite the recession GNC saw an increase of 2.5%
in the first six months of 2009. Nestls PowerBar is a much larger company than GNC;
however, GNC is just one of the many suppliers seeing market increases in this industry. This
shows that the sports nutrition market is growing, and there is definitely room for expansion and
the potential to increase profits even during the recession.
We propose that Nestle use its PowerBar brand to create a specialized segment of sports
nutrition that focuses on all natural, organic superior training products providing the same or
more benefit than the competition. This new segment would provide a whole body plan that
includes supercharged vitamin packs, energy drinks, and protein shakes and bars marketed
towards the GNC high intensity athlete consumer. By increasing its product diversity and
appealing to a larger group of consumers, PowerBar could begin creating higher brand loyalty
and capture a larger share of the market. Currently, PowerBar is a product that is found only on
the shelves of distributor stores, but with this expansion, it could eventually be its own store.


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Consumers could go to the PowerBar wellness and nutrition store and get outfitted with
everything they need for any type of athletic life style and level of performance they desire.
Success in this type of product has the potential to be a flagship line for Nestle that could bring
focus to the whole Nestle company as a leader in all natural, healthy foods.
There are several disadvantages that stem from this alternative. One disadvantage is an
increase in cost to expand Nestls line and establish its own distribution stores in hopes of the
market continuing to expand and the line gaining market share. PowerBar focuses on a
segmented market and expanding the product line could potentially dilute Nestles image
resulting in loss of brand loyalty from customers.
Alternative Three
One of Nestls most popular product lines is its pet care brands. Nestle owns many
common household brands such as Purina, Beneful, and Alpo. It currently operates its dog food
production factories in Venezuela, Thailand, and China. Quality standards in these countries fall
below that of the United States, and as a result, there have been recent recalls of dog food
produced by Nestle in these particular countries. Recentralizing production by returning to
factories in the United States would prevent these problems from occurring due to superior
production standards.
The advantages of returning to U.S.-based production would be higher quality products
and less risk of product recall due to contamination. Several disadvantages present themselves if
Nestle recentralizes operations: First, there will be increased costs of labor, which in turn, causes
increased production costs. Second, increased costs associated with exportation of goods to
foreign markets.



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