Nestle Pakistan: Nestle Pakistan Ltd is a subsidiary of Nestle S. A. – a company of Swiss origin headquartered in Vevey, Switzerland. In Pakistan, it is the leading Nutrition, Health and Wellness Company with a mission to positively enhance the quality of life of the people of Pakistan by all that they do through their people, their brands and products and their CSV activities. Nestle in Pakistan is divided into 4 major business units each headed by a business unit manager.
The BM is given all decision making power with respect to his business as long as it is in accordance with Nestle Business Principles and is supervised by the Core Management Team sitting at the Head Office in Lahore. The biggest contributor is the Food and Beverages Unit which contributes 81% of the revenue followed by Nestle Waters 9%, Nestle Nutrition 8% and Nestle Professional 2%. The divisional hierarchy is shown below to better explain how it is structured. This paper will primarily focus on the Water Business of Nestle Pakistan. [pic]Nestle Water Business: The Nestle Water Business looks after the bottled water brands of Nestle.
Even though Nestle has multiple brands in different markets worldwide, it understands that Pakistan is still a developing bottled water market and is thus operating with just a single brand NESTLE PURE LIFE. The bottled water division is further divided into 2 separate divisions, PET (contributes 56%) and Bulk Water (44%) of the revenues. Analysis of the Water Business: The bottled water business is still in its growth phase with the concept of purchasing water being alien to a majority of people. This can be concluded from the low consumption of bottled water per capita even in major cities of the country.
Brands, like Nestle Pure Life is considered a luxury product by many due to its high cost in comparison to the traditional boiled water used at homes. The cost structure has been affected considerably due to 2 major reasons, one is the cost of plastic related raw material used for manufacturing the bottles and the increasing fuel prices which hamper production and distribution side of this business. Threat of New Entry: The business even though looks very lucrative as there are high volumes that can be achieved; the margins however are very thin.
Coupled with high costs of production and high energy cost, the bigger players are having a tough time meeting up with facility costs. Secondly the rising fuel prices have impacted the distribution of bottled water both in the case of BULK business and the PET business. Smaller Players have taken share of the market by operating in close vicinity to lower their distribution cost. Secondly due to lack of monitoring and increased corruption in the country, the quality of water goes unchecked further reducing the cost of production of these small manufacturers.
Rivalry amongst Existing Firms: Competition is intense among the big players in the industry with Nestle’s Pure Life Brand being the market leader with 47% Market Share followed by Pepsi’s Aquafina brand 22% and Coca Cola’s Kinley Brand 13%. Leveraging on the heavy marketing budgets and extensive distribution networks of their parent companies, both Aquafina and Kinley have given a tough time to Nestle. There are other smaller players who operate in specific geographically divided areas in various cities of the country. Threat of Substitutes
There are approximately 75 mineral water brands in the Pakistani market as water is basically a commodity so there is virtually no product differentiation. All major players in the market try to grab a share of the pie by advertising in an attempt to increase brand loyalty. There are little or no switching costs involved. Customers with low brand loyalty tend to switch between brands due to the low cost. Another factor is the availability which Pepsi and Coca Cola leverage due to their extensive distribution networks across the country leading to their water brands also being available in remote areas.
Bargaining Power of Suppliers Major suppliers in this industry are minerals importers and plastic bottle manufacturers. There are quite a few of them so they virtually enjoy no or very less power. Furthermore, there is centralized procurement from suppliers so Nestle has a lot of bargaining power in dealing with them. There is a pool of international suppliers which is maintained by Nestle Global and that offers assistance to the local factories when making procurement decisions. The main raw material i. e. water is a natural resource so each company extracts water for its own production. pic]Bargaining Power of Customers The Customers are mainly retailers and their bargaining power is weak as Nestle enjoys significant brand loyalty and consumers demand Nestle products. Margins offered to them are also low based on increased turnover. They are also fragmented and buy in small volume, apart from the Modern Trade Outlets which buy in bulk but they only constitute a smaller share of the volume for Nestle. As far as Bulk Water is concerned, the consumers are the direct customers but since they are brand loyal, Nestle can charge premium from them as well.
Value Chain Analysis: Headquartered in Lahore, the Company operates four production facilities. Two of its factories in Sheikhupura and Kabirwala are multi product factories. One factory in Islamabad and one in Karachi produce bottled water. Through its effective marketing and a vast sales and distribution network throughout the country, it ensures that its products are made available to consumers whenever, wherever and however. It is able to leverage the expertise of the corporate headquarters and the global brand image to better operate in a highly competitive market. Primary Activities |Inbound Logistics |Operations | | |Human Resource Management | | | |Top Management is from the global team, competitive compensation, consistent HR policies throughout the | | | |organization, focus on values over results | | | |Management Trainee Programs, Local and International Trainings | | | |Technology and Product Development | | | |The sharing of expertise with global headquarters helped develop new products focusing on the health and | | | |wellbeing of the consumer. Frequent visits by international teams to develop in-house expertise locally. | | |Procurement | | | |Centralized procurement | | | |Efficient working with suppliers to streamline the process of procurement | | | |Suppliers and Manufactures were located nearby | | Nestle boasts an extensive distribution network which is supported by regional distributors which supply its products to the retail, modern trade and out of home segments of the market. Distribution is outsourced while regional managers and area managers overlook the operations ensuring visibility, availability and timely execution of operational tasks. Since Nestle is a market leader, due to its brand equity and strength, its focus has now shifted from the brand to the bottled water category. All its activities which include advertisements, consumer promotions, trade romotions and sponsorships deliver a consistent message which is to highlight the importance of water in our daily lives. Campaigns such as “8 glasses a day for a healthy life style”, “Jee uthay zindagi”, “Water is good for Health”, “Taste’s better” are focusing on developing the category as a whole and then benefiting from it being the market leader. Long term strategy is to create a market which offers sustainable growth. Supported by in-house manufacturing and quality control to deliver consistent quality products to the customer, Nestle has maintained its image in front of the consumer and this allows it to charge a premium over other brands.
With so many different categories and products being sold with the Nestle Brand Name, the awareness is high, so the brand does not have to be pushed to sell. Retailers are forced to keep Nestle Products due to the demand of the customers. The Nestle Culture is based on set values and guiding principles which lead to ethical conduct and professionalism on the part of employees. Nestle Pakistan operates in many ways but people, products and brands are the main flag bearers of the Company’s image, and the focus is to continue to enhance the quality of life of people. Consistency in HR policies throughout the organization leads to higher employee morale. Local as well as international training opportunities exist for the employees depending on the job requirement.
There is a lot of autonomy extended to the managers down the chain as well and that allows for employees to enhance their performance with increased responsibility and accountability. Strong financial control systems are in place to maintain transparency throughout the organization. Line Managers have firing authority as well which normally happens when Nestle value system is abused by any employee. Nestle spends a good chunk of its resources on research & development so its existing products grow through innovation and renovation while maintaining a balance in geographic activities and product lines. Long-term potential is always given importance over short-term performance. There is lot of interaction with Global headquarters in terms of research and development and international teams visit frequently to transfer and train regional teams. Conclusion: Nestle is a household name and it enjoys significant brand loyalty. As Nestle targets the premium segment, these people are not likely to change their brand preferences due to higher prices. But, at the same time Pakistani consumers belonging to lower socio-economic classes are very price conscious so they do actively look for cheaper alternatives. The Mix of activities and the strong presence in the market do show a lot of promise for Nestle in the future as currently they serve only 9% of the consumers in the market.
As far as the water category is concerned, consumers are more aware of the health benefits of Water and bottled water category is set to grow. ———————– Threat of Substitutes: HIGH Mushroom Brands available in SEC C&D Areas Low Switching Costs Similar Offerings at Lower Price Points by Competition Threat of New Entrants: Medium Cost of Core Raw Material such as plastic has gone up. Higher Distribution Costs due to increasing Fuel Prices. Inflation Depends on Scale: Inexpensive entry for smaller players High Production Costs for Larger Players Smaller Plants can be setup in multiple locations to serve that community only Rivalry amongst Existing Firms: HIGH
Commodity product: Availability and Visibility is key for Sale Competitors boast Similar Strength in terms of Marketing Budgets, Distribution, Size and Sales Force Bargaining Power of Buyers: LOW Retailers have low power due to consumer demand for Nestle Products Lower Margins for Retailers/ Low Volumes per Retailer Modern Trade Outlets exert some power Rivalry amongst Existing Firms Threat of New Entrants Bargaining Power of Buyers Threat of substitutes Bargaining power of Suppliers Bargaining Power of Suppliers: LOW Large no of suppliers available Supplier power is low Can be substituted for others Centralized procurement International Supplier Pool