Nestle Boxed Water Executive Summary Management Essay

Nestle Boxed Water Executive Summary Management Essay The main point of this report is to show how Nestle will implement their Boxed Water products in the United Kingdom for diversification of their product line. The report starts by giving some historical data about Nestle, and providing a list of products that Nestle offers to their customers worldwide. It will analyze the business proficiency of Nestle, and analyze the bottled water industry, supplemented by a further analysis of our competitors and the macro environment. It continues by discussing the business principles of the United Kingdom, and show some key business challenges for Nestle. Finally, the study recommends some suggestions to Nestle regarding the business principles and products required to achieve sustainable growth in the long run and the process of the manufacture and sale of Boxed Water in the United Kingdom. Table of Contents 1.0 Nestle Nestle is a well-known Swiss multinational company that specializes in nutritional food and consumer goods. The company is headquartered in Vevey, Switzerland, and was established by Henri Nestle in the year 1866. In its initial year they were named Anglo-Swiss Condensed Milk Company, and in the next thirty nine years the company would change their name twice. Finally, in the year 1905 the company changed their name to Nestle. Nestle is the largest food company in the world in terms of annual revenue, and also acts as major shareholder for LOreal (largest cosmetics company in the world). Nestle offers various products such as Maggi, Stouffers, Nespresso, KitKat, Nescafe, Smarties, Vittel, and Nesquik to global customers. Nestle employs more than 330000 people all together in over 150 countries, and has 461 factories established across the globe. Sales revenue for the company in the year 2011 was CHF 83.7 billion. Major milestones for the company can be summarized in the following man ner: Time Period Event 1866-1905 The Anglo-Swiss Condensed Milk Company merged with Nestle. 1906-1918 Number of factories decreased due to world war I but the company started their operations in the USA. 1919-1945 The company launched Nescafe. 1946-1975 The company acquired Alimentana in order to gain access to Maggi products. They also became a major shareholder with LOreal. 1976-1980 The company entered in pharmaceutical market by acquiring Alcon Laboratories of USA 1981-1995 The company acquired American food giant Carnation to improve their bottom line. In 1986, the company entered espresso coffee segment by launching Nespresso. 1996-2005 The company expanded their operation in the segment of health, nutrition, and wellness with the help of series of acquisition. 2006-2009 The company acquired Medical Nutrition unit of Novartis. The company established shared value forum in New York. 2010-2012 The company launched Cocoa Plan in order to supply disease resistant plantlets to farmers. (Source: Nestle, 2012) 1.1 Nestle Bottled Water The bottled water segment contributes a significant amount of product diversification for the company. A way that Nestle has been able to maintain their dominance of the bottled water industry worldwide is through offering different brands of bottled water. Some of these brands are: Nestle Pure Life The company launched Pure Life in the year 1998. This product is currently being sold in over twenty countries. Perrier This is a form of sparkling mineral water. Nestle introduced this brand in order to enter the sparkling mineral water segment. Poland Spring This is the oldest mineral water brand in the world. Nestle has maintained the brand for many years. S. Pellegrino Nestle launched this brand in order to gain access to top restaurants in the world. S. Pellegrino is a form of drinking water mixed with minerals (Nestle, 2012). 1.2 Analysis of Product portfolio of Nestle Most people know Nestle by their brand and product portfolio. The product portfolio of Nestle can be summarized in the following chart: (Source: Nestle, 2012) The company maintains a broad product portfolio in order to compensate loss from any single segment. Sales volume for the company is increasing at a rate of more than 3% during the last few years. Segment wise product portfolio can be divided into three segments like food beverages, nutrition and ice cream. The company is always thriving to find excellence in product innovation and service delivery. The company achieved 7.7% of organic growth in the year of 2011 by maintain their large product portfolio. The following section will discuss about product innovation in Nestle. Segment Product Target Market Business Strategy Ice Cream Nestle Gold Portugal, Spain, and Greece The company collaborated with Haagen- Dazs in order to provide premium quality ice cream to customers and they did it in order to achieve product diversification Water Perrier 150 countries across the globe Nestle diversified their business into the bottled water segment. The company used a digital platform to engage customers with the Perrier brand Coffee Nescafe Alegria More than 60 countries The company launched an easy to use instant coffee machine to flip the brand. Pet Product Purina Netherlands , Austria and Germany Special TV commercial for dogs and dog owners. With help of this activity the company entered the web 4.0 era Nutritional milk MOM me South Asian countries They expanded their distribution channels by recruiting nutrition officers (Source: Nestle, 2012a) Top performing brands of the company have helped them earn respect from customers. The following section will discuss contribution of brands carried by the company towards overall organic growth. Overall Organic Growth 7.7% Nescafe Nan Milo Nespresso Pure Life Nido Maggi 11% 18% 13% 22% 11% 11% 10% (Source: Nestle, 2012) 1.3 Organizational Structure of Nestle (Nestle, 2012) D. P. Frick (Corporate Service Governance) J.-M. Duvoisin (Human Resource) R. Ramsauer (Corporate Communication) P. Bulcke (CEO) L. Cantarell (Nestle Health Science) P. Brabeck-Letmathe (Chairman) Executive Board (P. Bulcke, W. Bauer, J. Lopez, J. J. Harris, L. Freixe, C. Johnson, P. Bula, N. Nandkishore, W.L. Martello, M. Caira, J.-M. Duvoisin, K. Schmidt and D.P. Frick C. Johnson (USA Head) N. Nandkishore (Asia/Africa/Oceania Head) L. Freixe (Europe Zone Head) J. J. Harris (Nestle Water) M. Caira (Nestle Professional) K. Schmidt (Nestle Nutrition) W. Bauer (Technology, RD P. Bula (Marketing Sales) J. Lopez (Operation) W.L. Martello (Finance Control) P. Bulcke (CEO) 1.4 Global Presence of Nestle The company operates in more than one hundred and fifty countries. Recently the company has launched their nutrition product segment in the South Asian Market. Africa is also becoming lucrative in terms of nutritional product for the company. The corporation started their first global operation almost 100 years ago, and the business has segmented their international operation into two parts: developed market and emerging market. The following chart will explain the international business growth of Nestle. Developed Market Total Contribution to group Sales Organic Growth 60% 4.3% France 6.4% Portugal, Spain, UK 3.7% Japan 3.6% North America 2.5% Emerging Market Total Contribution to group Sales Organic Growth 40% 13% China 23% India 20% Africa 18% Mexico 14% (Source: Nestle, 2012) Global operation of the company understood with the help of zone wide analysis: 1.4.1 American Zone The American market is already saturated due to the presence of a large number of consumer durable companies. In this situation Nestle has diversified their business into the frozen foods and chocolate segment by launching DiGiorno and Skinny Cow to attract customers. The company also did partnership with Hà ¤agen-Dazs in order to increase variation in their ice cream products. In Latin America, the company performed well with their soluble coffee products and achieved double digit growth. 1.4.2 Europe Zone The European market is going through a financial crisis, so overall sales growth for the company has not been very attractive for last two years. In this uncertain period, Nestle has adopted an innovation strategy to counterbalance poor performance in their different product segments. Nestle has introduced an innovative product line: Nescafe Dolce Gusto, Herta, and Nescafe Sensazione, to attract customers. This strategy was successful for the company to fetch sales from east and central Europe. 1.4.3 Asia, Africa Oceania Zone The company has had a presence in this region for more than 100 years. Recently, they have celebrated their 100 year anniversary in the following countries: Turkey (1908-2008), Philippines (1911-2011) and India (1912-2012). Maggi and Nescafe are one of the most popular products in this region while the company extended their product line with Nido essential and Nescafe Milky in order to cater demand of people belong to the Afro-Asian region. The company recently launched their nutrition division to increase penetration in the region. 1.5 Mission Objective of Nestle The company always thrives for achieving leadership position in Health Wellness, and nutrition segment. Nestle also wants to be a reference in the industry for their financial performance. 1.6 Strategic Advantage of Nestle 1.6.1 Competitive Advantage The company has carefully designed their product portfolio in order to a maintain balance with market demand. The product portfolio maintained by the company cannot be easily copied by their competitors. The company has planned their product portfolio in accordance to demand of each zone such as America, Europe and Asia. The corporation invests large amount of capital on research and development to produce better products. The company already made an agreement with a renowned university to open a research division for their nutritional products. Nestle emphasizes on using local ingredients in their products in order to satisfy demand of local customers. For example, in Malaysia, the company introduced a nutritional product complemented with Asian ingredients such as ginger, Chinese red grass and ginseng to lure local customers (Oxford Business Group Malaysia, 2008, p. 132). The brand has presence in more than 150 countries. They have the opportunity to channelize revenue from strong business unit to a poor performing region. The company also adopted a parent company strategy to control business operations internationally. Nestle has opened multiple strategic business units (SBU) across the globe to expand their business (Pride Ferrell, 2007, p. 32). The company believes employees are their asset and treat them with utmost care. Nestle feels that their employees are their biggest strength. The company has also adopted green earth strategy to decrease their carbon footprint caused by their products, working with Forest Trust in order to prevent Deforestation and decrease carbon footprint in the supply chain (Emmett Sood, 2010, p. 192). The company has announced that they will use befouls instead of tree oils in their future products in order to make their products more environment friendly. 1.6.2 Growth Drivers The business has understood that the consumer food market is becoming saturated day by day due to presence of many players. Nestle has diversified their business into Nutrition Health, and Wellness segment in order to avoid saturation in food market. Nutrition segment is showing more than 20% growth rate for past three years, which is greater than their overall organic growth of 7.7%. The company has shifted their focus on emerging markets because developed markets are already becoming saturated. Nutrition product segment of the company has readily become popular in Asian markets, while Oceanic region has contributed high sales volume for the companys coffee segment. Nestle has recently launched instant coffee machine for customers in order to give them out of home consumption experience. Many schools, colleges, and offices have already installed instant coffee machine to enjoy Nescafe. The strategy helped the company to increase their brand equity among young people. The company adopted premium pricing for their products in order to show status and quality to customers. Customers purchase Nestle products in order to experience high quality products and they are ready to pay for it. 1.7 Shared Value Model for Nestle Shared value model for the company works in triplet format such as sustainable development in water management and nutrition products, protect environment, and maintaining ethical business practices. Stage 1 The corporation invested a huge amount of money in research and development in order to create nutritional products for customers. In recent times, the Vevey based company has introduced nutritional compass customers to measure the nutrition value of food. Nutritional compass is complemented with the nutrition information box, which indicates amount of specific nutrients such as carbohydrates, fats, protein and sugars present in a Nestle product, as well as health related tips, and question boxes. In Poland, the company has partnered with two major retailers to provide health related advice to customers. Ninety nine percent of Nestle products contain nutrient specification in order to provide information to customers. The brand has opened rural factories in order to provide agricultural support to farmers. They have taken an open system approach to boost the growth of the rural economy. Nestle established factories in order to employ rural people and help farmers to sell their product without any middlemen. Survey reports suggest that the company is performing pretty well in developing nations to generate revenue and incentivize the morale of rural people. The company took various initiatives for water resource management. They have planned to implement aquifers, watersheds, and artificial river basins to create efficient water resource management. Nestle started water management initiatives by engaging stakeholders into multiphase pilot projects to increase sustainability of the development. (Sources: Nestle, 2011) Stage 2 Nestle has changed their supply chain management and product packaging in order to decrease their overall carbon footprint. The company uses 12% renewable energy in their factories and also they have planned to achieve zero wastage within the next two years. The company is using recyclable products for packaging in order to decrease plastic contamination and hazards. For example, the company used recyclable packaging products instead of plastic for Ninho caps in Brazil and Purina ONE packaged drinking water in France. The corporation not only reduced the use of plastic in their product, but also optimized environmental performance of the product. Nestle uses Global Environmental Footprint (GEF) and Packaging Impact Quick Evaluation Tool (PIQET) to measure the environment sustainability of bottled water. Environment impact of new packaging systems for bottled water can be analyzed by the following picture: (Source: Nestle, 2011) Stage 3 Nestle has established an Alignment board to measure quarterly performance share value objectives. This board acts as an Umbrella Corporation to design strategic implementation Shared Value objectives. The company implements leadership principles to design proper business ethics conduct. Also, United Nations Global Compact Principles helped the company to create a sustainable business environment. Nestle follows the United Nations guidelines for creating shared value in terms of labor law, human rights, corruption free business policy, sustainable environment, and other important issues. 1.8 Value Chain of Nestle (Bottled Water) 1.8.1 Source The company has developed spring water sites to source their water products. Nestle has transformed open land sources into spring water resources to strengthen their value chain. Generally, the business uses 87% of their spring water sites to source water products. 1.8.2 Manufacturing Nestle has implemented solar panels in their water plants in order to reduce energy consumption and maintain purity of minerals used in the manufacturing process. The company manufactures 98% of packaged bottles in their owned plants in order to reduce cost regarding transportation of empty bottles. The total manufacturing process saves 6.5 million gallons of fuel and eliminates more than 6,100 metric tons of CO2 emissions. 1.8.3 Packaging Nestle has invested a huge amount of capital to change packaging of the water bottles in order to create an eco-friendly bottled water. The corporation is planning to use paper instead of plastic to reduce the carbon footprint produced by their company. The Vevey based company has already introduced the Eco Shape bottle which contains only 60% PET plastic in order to save 250 million pounds of plastic per year. Nestle reduced the bottle size by 33% in order to save 10 million pounds of packaging paper yearly. 1.8.4 Transportation Nestle started to use hybrid vehicles for transportation in the year 2008. Heavy duty trucks and environment friendly trucks are used by the company for transportation purposes. The company has forecasted that they will reach 25% fuel economy within the next three years by using hybrid transportation models. 1.8.5 Retail Retail channels for Nestle water products are focused regionally in order to increase penetration levels. The company transports 90% of bottled water directly to the retailers in order to eliminate warehouse storage and costs associated with storing products. The whole process helped the company to reduce 10,900 metric tons of carbon footprint or carbon dioxide emissions yearly. Benefits of green value chain maintained by Nestle can be summarized in the following chart: (Source: Nestle-water, 2011) 1.9 Financial Performance of Nestle Total group sales for the company were $ 83.6 billion in year 2011 with an organic growth of more than 7.5% annually. It is interesting to note that the company has achieved annual sales growth in a multi-dimensional way without depending on a single product segment. The company achieved maximum sales growth from their nutritional product division. Operating profit has also increased to $ 12.5 billion with a growth rate of 15.0%. The company has also performed well in terms of shareholders value and return on investment. Shareholders return can be analyzed in the following table: Net Cash Returned to Shareholders Return on Investment Dividend per Share $10.7 billion 44.4% $ 5.9 billion through dividend $ 4.8 billion through share buy back 14.1% from goodwill 30.3% from external operation $1.95 + 5.4% (Source: Nestle, 2012) Financial statement of the company is explained in the Appendix A to C. 2.0 Global Bottled Water Industry Research scholars and market research reports suggest that the bottled water industry is dynamic as well as multidimensional. Global reports suggest various companies sold more than 200 billion water bottles in the year 2011. Consumer Food Companies such as Nestle or beverage giant, Coca-Cola, and many others have entered the bottled water market in order to explore business opportunities. Retail channel sales are growing at rate of 11% and analysts have forecasted that the market will reach $150 billion within next couple of years. Although bottled water market is growing at a steady rate, the penetration level is not homogeneous in the entire region. Customers prefer to drink mineral water in order to experience purity and freshness. Nestle also emphasizes on the purity of their bottled water in order to sell the item. Global players try to create their bottled water using underground aquifers, minerals, and springs in order to show purity. Nestle also did the same by changing their product line by adding minerals and aquifers in three of the products: S.Pellegrino, Perrier, and Poland Spring. Industry analysis shows that bottled water market can be segmented into three portions. 2.1 Product Characteristics Bottled water can be segregated into three types: Still (dominant with more than 70% penetration), Sparkling (penetration level is low such as 21%), and Flavored (near about 6% penetration). Nestle has maintained a product line complemented with Still and Sparkling category while they have not took any initiative to add flavored water in portfolio 2.2 Water Source Two types of water sources are available for manufacturers are chemically purified and natural spring water, and both are used in order to manufacture bottled water. Water sourced from natural spring has two subdivisions: Single Spring (bottled near the source location without any chemical treatment except filtration) and Multiple Spring (bottled far from source location after multiple chemical treatments). Nestle offers customers only Single Spring bottled water but they have a future plan of entering in the Multi Spring segment. 2.3 Marketing Channel Companies in the bottled water industry follow two types of marketing channel: on trade- off trade, or retail sales in order to distribute their products to customers. On trade channels focus on distributing bottled water directly to business, houses, hospitals, catering, and various event sponsors while retail channel focuses on tertiary sales. Global sales volume in terms of unit for on trade channel is only 16% but striking fact is that sales volume in terms of monetary value for on trade channel is 55%. These differentiation occurs due to the fact that water bottle price is three times higher in contrast to off trade channel (Gimeno, 2012). 3.0 Competitors Analysis 3.1 Danone Danone is the major competitor for Nestle in the water industry. The company is the market leader in Spain and United Kingdom for purified water business. Danone uses merger acquisitions in order to expand their business and they have achieved more than 24% market penetration by following the same strategy. The company maintains product portfolio complemented with Sparkletts, Alhambra, and Crystal in order to offer still and spring water to customers. 3.2 PepsiCo The company entered the packaged drinking water industry in the year 1994 by establishing cooperation with bottlers. The company provides spring, flavored, and still water to global customers. Aquafina is the major bottle water brand for the company while the brand has achieved more than 10% penetration in UK market. Distribution channels maintained by the company can be termed as their core competency. PepsiCo sells their water product in UK with the help of Directo Store Delivery Method (DSD) and also the company is planning for category extension in the sparkling water segment. 3.3 Coca Cola The company launched their bottled water brand Dasani in the year 1999, spending more than $20 million dollars in sales promotion and advertising to push the brand during its initial period. Coca Cola Enterprise (CCE) is also a big bottler worldwide. The company has launched their multi spring water brand BonAqua in European countries. Market share for the company in the UK is not more than 3%. Hence they have planned to increase market share by incorporating product differentiation in the future. 4.0 Analysis of the Packaged Water Industry in United Kingdom 4.1 SWOT The SWOT analysis method can be done in order to analyze business scenario for the packaged water segment in UK (Ferrell Hartline, 2010, p. 122). 4.1.1 Strength The lifestyle of people in the country is changing with time, and as a result, the demand for pure water is increasing. Packaged water gives people the opportunity to carry mineral water or sparkling water with convenience. 4.1.2 Weakness Companies need to find open water sources to manufacture bottled water, but availability of such resources is low in the UK compared to other European countries. Government is strict about environment norms and pushes foreign companies to decrease carbon footprint throughout business operation. Companies trying to expand business in UK need to redesign value chain in order to decrease environment pollution. Because of this, the Boxed Water product is fitting to combat this weakness. 4.1.3 Opportunity People in the country have become more health conscious in recent times due to the increase of epidemic diseases. The quality of open source water has also degraded randomly within the last ten years. Companies have the opportunity to manipulate market demand by offering mineral and spring waters to customers of the country, and it is Nestles opportunity to offer the Boxed Water idea to fulfill this demand. 4.1.4 Threat Multinational companies are facing threat from regional and small local players in the country. Many small level companies are counterfeiting and imitating product portfolios of large players such as Nestle, Danone, and others. Counterfeiters are selling products at a price lower than market average in order to spoil competition. 4.2 Porters Five Forces Porters five force model can be used to analyze bottled water industry in United Kingdom (Ahlstrom Bruton, 2009, pp. 131-140). 4.2.1 Threat of Substitute There is no substitute for water but the same cannot be said for bottled drinking water. Substitutes such as vitamin and mineral water, and single and multi-spring water can be termed as close competitor for purified bottled water. Tea, beer, and soft drinks are the distant competitors for packaged drinking water; therefore, the threat of substitute for packaged water is moderate. 4.2.2 Threat of New Entrants Threat of new entrant is low for the packaged water industry due to three reasons. Huge financial resources are needed to establish water plants and a wide distribution channels to retailers nationwide. Companies must have sufficient resources to offer high retail margins to distributors (industry average is more than 15% but Nestle offers 33%) in order to survive in market competition. Companies must have the capability to compete against multinational giants such as Coca Cola, PepsiCo, Nestle, and Danone to be successful in the long run. 4.2.3 Bargaining Power of Supplier Nestle uses their own hybrid transportation model in order to decrease dependency on suppliers. In general, companies manufacture and bottle their products near the water source in order to decrease stages of value chain. Large bottlers can purchase bulk volume of 1 liter, 2 liter or 5 liter bottles from manufacturers at minimal cost. Presence of many alternatives has decreased bargaining power of suppliers. 4.2.4 Bargaining Power of Customers Packaged water is seen as a basic product and price sensitivity issue of customers is not a major concern. This means that big brands such as Nestle can charge a premium price for their multi spring and single spring water segments. Bargaining power of customers is moderate for the industry. 4.2.5 Competition Market competition is high for the bottled water industry due to presence multinational players as well as regional sellers. They mainly compete in terms of retailer margin, product price, and product differentiation. Companies are investing a huge amount money in developing distribution channels while there is no doubt that beverage giants such as PepsiCo and Coca Cola have a clear advantage due to their long association with retailers. Nestle needs to design distribution network by maintaining equilibrium between on trade and off trade channel. Factors Threat of new Entrants Threat of substitutes products Bargaining power of buyers Bargaining Power of Suppliers Existing Rivalry Level of Impact High Medium Low 4.3 Porters Diamond Model Nestle needs to use porters diamond model in order to explore opportunity in the country (Walker, 2003, p. 177) Uncertain events such as Euro zone crisis can impede the growth of business Market competition in bottled water industry is high from both regional and international players Demand for packaged drinking water is high in the UK Nestle can use both skilled and unskilled labor for their business due to abundance of human resource pool in the country Presence of supporting players such as paper suppliers and other members of the value chain is abundant Government of the country provides tax exemptions to companies investing more than  £10,000 on research development 5.0 Why the United Kingdom?   Ã‚  Ã‚   There were three countries, each in three different continents that seemed very interesting for Nestle to introduce the idea of a new packaging, Boxed Water. The idea of boxed water consists of redesigning the container into a complete new design with no damaging chemicals for human consumption, and at the same time being better for the environment. The first country taken into account in this report is Singapore.   Singapore is one of the nations in the world with a well-established and efficient free-market economy. The government of Singapore has a significant control in most corporations, which constitutes about 60% of the GDP through business entities like Sovereign Wealth Fund. The country has a free business environment with comparatively low levels of corruption, transparency in management of public affairs and constant/predictable prices changes. Compared to other developed countries Singapore has low tax rates with a very high per capita GDP globally. Singapore has a very innovative and stable economy, which is merged with efficient economic planning under the Economic Development Board that helped to establish a free market. Moreover, Singapore has a port that is strategic enough to give it an edge over the neighboring countries that carries trade. Most of its labor comes within the population, which is owed to the efficient education policy in the country that produces skilled labor for the industries in the country.   The government