Nestle Philippines Essay

I. INTRODUCTIONNestl Philippines, Inc. (NPI) is a leading manufacturer of food and beverage in the Philippines. It was established in the country in the early 1930s, initially as a trading conjunction. By the year 1962, it formed a joint venture with San Miguel Corporation (SMC), a company specializing in brewing with extensive interests in agribusiness and food products. In 1996, San Miguels Magnolia Foods variance had been merged with Nestl. It drived and interchange products like Magnolia ice creams and tetra relative majority juices, Bear Brand and Carnation condensed milk, Bertolli pastas and love apple sauce, Maggi seasonings, pasta and mayonnaise, and Smarties candies.Nestls Instant Drink Division produced and sold Nescaf, Nestea, Milo, Coffee Mate and Milkmaid powdered milk. Nestl Philippines is ranked good turn 10 among Nestl subsidiaries worldwide and number 3 in Asia-Pacific, target Japan and Australia. Nestl is the only foreign-owned umber producer in the Philipp ines. Nescaf already a household name in the Philippines needs to move to major changes in the environment. Competing brands like Great Taste and Nescafs nearest competitor, Blend 45 already get downd or are planning to reduce their termss.There are also major changes in Government Regulation, Imports and Market Entry resulting to the potential meekness of foreign brands like Kraft General Foodss Maxwell House and Procter & Gambles Folgers Coffee. The company needs to decide whether it should import Arabica beans for blending Master Roaster coffee, change the composition of Nescaf by importing Arabica beans to the alike composition as those sold abroad, and whether it should continue producing Tasters Choice which are do from Philippine-grown Robusta and Imported Arabica.II. STATEMENT OF FACTSNestls Instant Drink Division contributes 75% of the companys total sales Nescaf contributes 53% of the department sales. In 1996, Nescafs market dowry increased from 52% to 66%. Nestl score 40 independently-owned warehouses rigid throughout the Philippines. These warehouses, along with 200 salespersons cater 20,000 dealers who had accounts with Nestl, with direct access for orders and credit lines. The companys production facilities however are already strained to the limit. The company spent 5%of sales on advertising and promotion of Nescaf which includes decorative streamers and raffle draws. The company also offered volume bonus discounts. harmonise to market research, the bonus promotions are Nestls most effective promotional offering.However, Nestl doesnt buy shelf space, which is a common practice in the Philippines and separate Asian countries. Instead it prefers rental of special display space for promotion, which is trusted as the most expensive real estate in the Philippines. There is a of import increase in the number of households that purchased coffee within two weeks, from 67% in 1974, to 96% in 1995. This is due to the relatively high usage of 1.7 gee foil packs in the Philippines. These 1.7 gram exclusive packs contribute 8% of Nescafs sales. Coffee is typically drunk with sugar and without milk or non-dairy whiteners. However, there is a 350% increase in the use of such(prenominal) whiteners over the past decade. The Carnation brand which produces whiteners, condensed milk and powdered milk is owned by Nestl. One of the reasons behind the rapid increase in volume and market share is the fall of green coffee bean costs both(prenominal) in the world market and Philippines.The price of green coffee beans, where Nestl sourced all its coffee fell by 50% these beans comprised about 30% of the delivery costs. Nestl and former(a) producers are able to lower their prices because of the savings. other reason is the introduction of cheaper packaging. Bottles make up 30% of the total cost. Hence, coffee sold on bottles are much expensive at PHP 26.25 for a 50-gram pack while those in foil packaging are sold only at PHP 20.45 . Research by Nestl shows that its market share is highest in small stores located in large cities. Conversely, among small stores, its market share is highest extracurricular big cities. People outside big cities prefer to shop in sari-sari stores. The prices of commodities sold in sari-sari stores are 15% higher than in supermarkets outside big cities and 20% higher than those in big cities.Over the past decade, other producers, who sold their coffee 10% infra the price of Nescaf, entered the market. Nescaf gradually lost market share from 75% in 1965, to 60% in 1975, and finally, 55% in 1985. However, there was a decline in coffee prices in the 1980s, giving Nestl a window to reduce its prices to within 5% of its competitors and still preserve its margins. Other major producers of coffee in the Philippines include Blend 45 which has 15% market share in 1996, Great Taste with 10% market share, Kafe de Oro with 6%market share and Caf Filipino which has 3% market share. The Gokong wei Groups Blend 45 employs a cheaper blend of coffee and carbohydrates. In 1996, they dropped the price of Blend 45.They are sold 28% below Nestls price and 20% below most of the other brands sold in the market. So far the price increase made no significant effect yet on the market share of Nescaf. Prior to 1996, the import of coffee beans, both unprocessed or processed is prohibited. every of the coffee sold within the Philippines had to be produced within the country. The quality of Robusta beans grown in the country was of international quality. On the other hand, the quality of Arabica beans was of inferior quality. Consequently, Nestl utilise 100% Robusta unlike those processed in the U.S. or Europe which are blends. Nestls Master Roaster coffee is made from locally grown Robusta and Arabica beans. Tasters Choice, on the other hand is made from locally grown Robusta and imported Arabica. In 1996, the Philippine Government committed under GATT and WTO to remove import prohib itions on agricultural products. Hence, a Minimum Access Volume (MAV) was set. Imports of green and roasted beans and packaged products are charged a tariff of 30% while those outside the MAV are charged 100%.The government, however committed to increase the MAV and reduce the tariff in imports both within the MAV and outside it. Nestl is facing the threat of importers, both from the U.S. and regional coffee producers. One of which is Indonesias Indocaf which already begun production in Malaysia and exporting to Vietnam and is rumored to invest in China and export to the Philippines. Indocaf is sold 10% below the price of Nescaf in both markets. It has backward integration with its own coffee plantations so it was buffered from price swings. another(prenominal) possible importer is Singapores Supermix who pioneered in individual 3-in-1 packs within Singapore and in other nearby countries. In the 1990s, the Philippine Government liberalized regulations on Foreign Direct Investments.P rior to that, investments with sales direct to national market had to be 40% Filipino-owned. In 1992, the government allowed 100% foreign ownership in most industries. As a result, Kraft General Foods which had substantive production operations in the Philippines is rumored to produce Maxwell House within the country. Procter & Gamble which also had substantial production in the Philippines also announced that it would produce Folgers Coffee in the country.IV. ALTERNATIVE COURSES OF ACTIONOne of the possible alternative courses of action is to increase the production capacity of Nestls facilities. Upgrading the capacity would enable Nestl to prove on product development without the possible reduction of Nescafs already established market share. However, the upgrade would require $3 million worth of investments. Another possible option is to focus substantial amount of investment for the marketing and sales of Master Roaster coffee which is currently made up of locally produced Ro busta and Arabica. Nestl could either import Arabica beans to improve the taste of Master Roaster, which is now possible due to the major changes in import regulation.The brand would cater Nestls high-end consumers. However, it would reduce the companys current production capacity of the current blends. Lastly, Nestl could modify the Nescaf and use imported Arabica and locally produced Robusta to copy the foreign blend. This would make Nescaf a high-end product which could come to imported brands. Again, this is possible because of the favorable changes in import regulation. However, this modification might result in Nescaf losing significant amount of market share and household penetration. V. certaintyTo react to the major changes in the environment, Nestl should lower the price of Nescaf closer to its competitors. According to research, there is a direct relationship between coffee prices and household penetration.Hence, the price reduction would make the product even more acce ssible to the masses. In return, the company would gain even higher market share. In response to the threats of the entry of imported brands in the country, Nestl should continue producing Tasters Choice and discontinue the unsuccessful Master Roaster. Tasters Choice would both accommodate a separate market segment and the increasing import mentality of Filipinos. Importation of either Arabica beans or finished product is possible because of the changes in import regulation. Lastly, Nestl should consider buying shelf spaces. Besides the fact that it is a proven and common practice not only in the Philippines but also in other Asian countries, it is more economical than renting special display spaces. Nonetheless, Nestl should only lessen, not stop renting special display spaces.VI. CHANGE MANAGEMENTIn order to sustain the changes made, Nestl should explore the use even cheaper packaging materials. The savings, in turn would enable the company to reduce the prices of Nescaf. The comp any should also actively press its 1.7 gram individual packs and 3-in-1 packs. This would result to the brand gaining more market penetration, translating to a better market position. It should also aggressively promote both Nescaf and Tasters Choice which satisfies different market segments. VII. RECOMMENDATIONNestl should engage in more product development activities, like for example new flavors of coffee. Considering it is a multinational company, it go out have the advantage of increased awareness in the current trends abroad. A development in the existing product lines would not only generate more market shares but also create new market segments. Filipinos would accept the idea of these improvements because of their import mentality.However, there should be enough market research regarding such improvements to make sure they are feasible in the Philippine setting. Also, Nestl should capitalize on its strength of having close relationships with its farmers. It should procure its raw materials in a look that would benefit farmers. There should be more capacity building trainings among its coffee suppliers in order to promote increased productivity.