New products, segments & digital push to prime Nestle’s next leg of growth

Anubhav SahuMoneycontrol research

Nestle has been working on revamping its image as well as products ever since the Maggi noodles crises. Setting up a Rs 7 crore food safety institute in Haryana can be partially attributed to that.

Crisis has also been the catalyst for change in the company. The focus areas of future are volume growth, portfolio innovations and digital push. While Nestle has recouped a large part of market share lost in instant noodles, its incremental growth will increasingly come from new products where its digital push will help in getting aligned with the end target market.

In its recent analyst meet, the company also hinted at new categories under evaluation. Given this changing landscape, it may be worth taking a look at the evolving Nestle.

New product launches add 25 percent of incremental growth

New product share in the domestic sales has increased consistently from 0.7 percent of domestic sales in H1 2016 to 2.8 percent in H1 2017. Out of 43 new launches during January-May 2017, 36 were in the value-up/ mainstream category.

Reported H1 2017 sales growth (9.3 percent) break-up

Source: Nestle, Moneycontrol research

In terms of contribution towards incremental revenue growth, new products account for 25 percent. Clearly, this emphasis is well articulated as it talks about allocating 20-25 percent of ad spend for the new launches.

Focus on digital channel for advertising

Nestle mentioned that there is a significant transition in terms of media consumption by the some of the target groups (like millennials) it is catering to. As a result, spend on advertising through the digital route has increased to the range of 15-50 percent for a given brand.

In fact, the campaign for some of the product offerings (Nutrilicious Maggi) going through the e-commerce route (Amazon) would exclusively be available in the digital format (and not TV medium).

So while the advertising spend growth is just 6 percent YoY in H1 2017, a part of it is explained by higher contribution of digital medium which is 35-40 percent cheaper than TV ad spends.

New categories under radar

Nestle’s global management team had recently identified core categories of growth like water, coffee and pet care for their global operations. Management of the Indian operations has clarified that while their focus on coffee and beverages segment remains and would grow, the other two categories are still getting evaluated.

Pet Care: A high growth market

It’s worthwhile to note that, pet care (14 percent of H1 2017 global sales of Nestle group) and water (9 percent) segments are a significant part of Nestles global operations. In particular, pet care, is a USD 70 billion market wherein Nestle commands a global market share of 18 percent and competes closely with Mars.

Source: Nestle, Euromonitor, TechSci Research, Moneycontrol research

The Indian pet care market size is estimated to be about Rs 1700 crore and if Nestle is able to garner market share similar to the global average, sales contribution of this new category would be about 3 percent of sales.

Though prima facie, in terms of market size, it may not appear as lucrative but the pet food category is expected to clock 40 percent CAGR (2016-20) and so for Nestle, participation in a high growth segment wherein it has a global expertise may make sense.

Shift to healthy and safe food options

Another growing area in the Nestle’s portfolio is shift towards healthier products. Last week, the company agreed to buy Sweet Earth – a US-based maker of meatless frozen foods and decided to sell confectionary business in the US (brands like Butterfinger, Baby Ruth bars).

News flow from the Indian unit is mimicking this trend. Nestle India is, reportedly, focusing on supporting home cooking with healthier options by introducing initiatives such as simplifying ingredients, reducing sodium, increasing micronutrient fortification etc.

Valuation and recommendation

Overall, we like the Nestle’s transformational story post the food safety crises with respect to its key product in India – Maggi. Since then Nestle’s share in instant noodles space has crawled back to the range of 60 percent (Under 50 percent in Q1 2016). Though it is still way off from the dominance it enjoyed (75-80 percent) before the crises, Nestle is repositioning itself with a broader portfolio of value added products.

Further, new product launches along with a changed strategy with respect to promotion and channel (e-commerce) should yield results. While topline growth would be driven by market share consolidation in existing categories and foray into newer segments, margin expansion is expected on account of digital initiatives and value-added products.

Stock is currently trading at 47x 2018 earnings. While it is ahead of both its long-term average and the sector average, for long-term investors, the journey of Nestle to rediscover itself beckons attention.

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