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December 15, 2010

Nestlé steps up investment in India

Analyst Insight by Francisco Redruello.

On 24 November 2010, Nestlé announced plans to accelerate its investment in India with the construction of new food production facilities.

The firm said the investment will "re-emphasise its confidence in the country's growth potential". Nestlé has spent over CHF15 million (US$15.1 million) in India over the last three years, according to company sources

New R&D centre to become operational in 2012

In addition to the expansion of its existing production sites in Moga, Samalkha, Nanjangud, Ponda and Bicholim, Nestlé reported that its Indian division will construct new "multi-category" production facilities. The statement follows the announcement detailing the planned construction of a CHF50 million R&D centre in the country from September 2011, which will become operational in 2012.

Nestlé leads baby food sales

Nestlé's packaged food sales in India reached US$845 million in retail value terms in 2009, according to Euromonitor International's estimates. One of the company's main strengths in the Indian packaged food market is baby food.

The company enjoys strong brand recognition among Indian consumers, to the extent that brands such as Cerelac are largely synonymous with packaged baby food in major Indian cities. Furthermore, it has the largest distribution network among baby food manufacturers competing in the country and has benefited from the launch of several new flavour variants in upmarket urban areas, as well as more affordable products in smaller pack sizes intended for sale in rural areas.

Noodles is another important product for Nestlé in India, with sales worth US$235 million in 2009. Nestlé led the category in 2009. Its core brand Maggi is the most entrenched and widely recognised noodles brand in India, while its wide distribution and dominant position are helping the company to continually increase its share.

Within instant noodles, Maggi offers a broad range of products in a variety of flavours, which has boosted its consumer appeal. Brand loyalty has also remained high as it was the first brand in the Indian instant noodles market. The company has steadily expanded its offerings under the Maggi banner, introducing new instant noodle varieties like Maggi Rasile Chow in 2009, which targets low-income consumers.

Maggi's 25th anniversary underpins Nestlé's performance in dried processed food

Dried processed food is another category in which Nestlé commands a large share. Indeed, Nestlé India was the leading player in dried processed food in 2009. This leadership was established and has been further consolidated by Nestlé's Maggi instant noodles and dehydrated soup.

The second-ranked player, REI Agro Ltd, leads the rice category with brands positioned in the premium, standard and economy segments. KRBL Ltd retained third position as its India Gate rice brand continues to be popular.

Interestingly, Nestlé India recorded the biggest increase in retail value share in 2009, gaining one percentage point on the previous year. The celebratory marketing campaign marking Maggi's 25th anniversary in India helped to sustain consumer interest, while the development of Maggi Rasile Chow helped the company to also appeal to lower-income consumers.

Future direction

India is one of the emerging economies attracting the most attention from major packaged food multinationals. Unlike other large emerging markets like China, India is not a heavily regulated country, making strategic investment easier for foreign corporations.

Furthermore, there is consensus about the relative security of innovation and intellectual property among foreign companies, with India tending to have fewer problems with piracy than China, where intellectual property legislation is still fairly lax and open to local interpretation.

This partly explains Nestlé's move to set up an R&D centre in the country, to be used as a broader innovation platform for the entire Southern Asia region.

Research also shows that demographic and macro-economic trends are expected to play a positive role in the expanding consumer demand for packaged food in India.

GDP is expected to grow by 10% and 8% in real terms over 2010 and 2011, respectively, according to Euromonitor International's Countries and Consumers database. Most of this growth will take place in urban areas, traditionally hungry for added-value packaged food products.

In addition, the urban population in India will grow by 45 million over the 2009-2014 period, according to Euromonitor International's Countries and Consumers database.

As such, international companies like Nestlé should tap into India's huge potential for expansion over the short term. High added-value categories like chocolate confectionery and baby food, for instance, will be of crucial importance to the long-term growth of packaged food manufacturers seeking to expand from mature markets in Western Europe and North America to emerging markets in Asia, such as India.

There is broad industry consensus, however, that such expansion will need to be carefully balanced against relatively limited disposable income in the region.

The focus for further product innovation and development should therefore be two-pronged. On the one hand, premium lines should meet the demands of the flourishing upper and middle-classes in urban areas, which are fairly insensitive to price fluctuations.

On the other hand, food innovation targeting the emerging lower-middle classes should be specifically tailored to take into account price considerations. Regular price promotions should play a key role in category and company expansion through larger-sized modern retail formats like supermarkets.

According to Euromonitor International's Countries and Consumers database, over 70% of Indian households still have an annual disposable income of less than US$5,000. Only companies able to position themselves in both market segments – premium and economy - will be able to tap into the full growth potential of Indian, if not developing Asian, cities in the coming years.


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