Nestle's dominance under threat; profit may take 15-20% knock on brand building efforts

Nestle India is facing serious headwinds in India as the lead-in-noodles controversy is snowballing into a global crisis for its multinational parent company. After the product was banned in various states in India for excessive lead content and monosodium glutamate or MSG, now reports says the UK too is testing samples. The product was banned in Nepal yesterday, a country where noodles are one of the most popular foods. The whole controversy is seen affecting the company negatively, despite some experts expressing doubts about the veracity of the tests being conducted in India. [caption id=“attachment_2281000” align=“alignleft” width=“380”]  AFP[/caption] Brokerages, meanwhile, have started downgrading the company’s shares and cutting their price targets. Reliance Securities sees a threat to the company’s dominance in the market. “Despite increased competition from other private labels and national entrants in the instant noodles space including ITC (Yipee), Nissin (Top Ramen), HUL (Knorr) and GSK Consumer (Foodles), Nestle has been able to maintain its dominant share. However, its dominance seems to be under threat, given the pessimism surrounding the brand and if Nestle India does not take appropriate brand building and reputation damage control exercise at the earliest,” says the brokerage in a report today. It sees the 15-90 days ban in Uttarakhand, Delhi, Kerala, J&K, Gujarat, Jharkhand and all government controlled stores (including Army canteen sales departments), shaving off 6-7 percent of Nestle’s volumes. “Any extension of this ban or a potential domino impact on other geographies will result in volume shave off by 15-25% for Maggi,” it said. Maggi’s pain unlikely to be others’ gain The brokerage sees FSSAI strictly implementing new norms on food safety across all packaged food products. This would force all the companies in the segment, like Dabur (in Honey), ITC (Sunfeast, Yipee, Kitchens of India), Britannia, Parle, Pepsico and HUL (Knorr, Kissan, Magnum), to declare in detail the ingredients used in their packaged products. Moreover, it sees the ignominy is likely to extend to the category in general and not just dent one particular brand. It has cut the revenue Nestle’s revenue estimate by 5 percent for calendar year 2015 and by 9 percent for 2016. It will have to pump in huge amounts of cash in brand building which will likely knock off 15-20 percent of profit after tax during 2015 and 2016. Edelweiss too see the company taking significant hit on sales. Noodles was one segment where the company was witnessing positive volume growth, while its other business segments have been seeing declining volumes, says Abneesh Roy of the brokerage in a report in The Economic Times. It will have to invest heavily to bring back the brand, he said, without giving any estimate about the investment. How trustworthy are  govt tests? Not all are blindly supporting the ban on Maggi, though. Some, like Sunil Alagh of SKA Consultants, have raised doubts about the ability of the government-run labs to test international products. And he cannot be blamed. Consider this: There is one state Food and Drug Administration that has found the product safe. Some others which earlier found it safe have again sent the product for tests. As many as six states  have banned it. Why are the test results so varying? Are we applying the same standard across the country or do we have different sets for different states? “These labs have bright brilliant technicians but do they have the facilities to test an international product?” he asked in an interview to CNBC-TV18. “You have destroyed a brand before getting any conclusive evidence,” he adds, accusing media of not asking the right questions. Lead content in Maggi, which has kicked off the controversy, stands at 0.5-0.6 parts per million (ppm) in just the noodles, says Alagh. The permissible limit as per the government rules is 2.5 ppm. The sachet inside it has got slightly higher lead content - around 4. According to him, what the labs have done is extrapolating the sachet result to the whole product. “The way you are supposed to eat it is to mix it. how many labs have checked the mix product?” he asks. Nestle is confidently defending its product too. “We have tested around 1,000 batches of MAGGI Noodles in our own laboratories and also asked an independent lab to test an additional 600 product batches. Almost 125 million or 12.5 Crore packets were tested in total. The test results confirm that MAGGI Noodles are safe, with lead levels well within the food safety limits specified by the Indian authorities,” the company says on its website. The company is as confident when it comes to monosodium glutamate or MSG, the other contentious ingredient, too. “We do not add the flavour enhancer MSG (E621) to Maggi. However, the noodles contain glutamate from hydrolysed groundnut protein, onion powder and wheat flour. Glutamate produces a positive result in a test for MSG,” the company has been quoted as saying in this report. Further it has said it has no plans to reduce the “quantities of the natural ingredients which provide glutamate as it improves aroma and taste”. Wrong strategy? The end result of all this is utter confusion for the consumer. In this context, what Nestle did today - withdrawing product from the shops - seems to be the right strategy. It may have come a bit too late, though. But then, the company has been backfooted in the whole controversy. The crisis started on 30 April when authorities in Lucknow asked it to recall batches of Maggi from the market. A full fledged response from Nestle came only yesterday. Nestle may argue that it was caught off guard and it will take time to devise a strategy. But in the age of social media and other various channels quick response is what matters. It faltered on that. Even Alagh, who is fully supporting Maggi, feels so. “I think it is about time somebody from Nestle comes on TV and expalin its stance,” he tells CNBC-TV18. But Nestle seems to be becoming more incommunicado. A report in _The Economic Times t_oday says it has banned Indian executives from speaking about the developments in public. They have been told “not to engage directly with stakeholders, trade partners, dealers and distributors without approval”, the report says. However, Nestle is holding a press conference at noon to explain its withdrawal. This implies that it may have finally started the journey to win back  consumer confidence.