Nestle to eliminate more low-margin products soon

In India,about 45% of Nestle revenues come from milk products and nutrition

Nestle India will continue to eliminate low-margin products from its portfolio in the coming quarters as the company rationalises its products in order to improve profitability.

Nestle India Managing Director Etienne Benet, in a statement on Tuesday, said the culling exercise would continue and low-margin products that were not in line with Nestle’s current growth strategy focussing on nutrition, health and wellness would be eliminated.

In India, about 45 per cent of Nestle’s revenues come from milk products and nutrition, another 30 per cent from prepared dishes and cooking aids, 13 per cent from chocolates and the rest from beverages. But the contribution by milk products and nutrition has declined in the past couple of quarters.

In that time, Nestle has withdrawn Nestle Eclairs, Nescafe Mild and milk sachets, as they were low-margin and low-growth products. While Maggi is also a low-margin product, the company has been increasing its offerings of instant noodles under the Maggi brand.

Analysts are unsure which products the company will eliminate. "While the tone and tenor of their statement yesterday (while announcing results) seemed to suggest that the culling exercise would continue, it is difficult to gauge what they will do next," said Amnish Aggarwal, FMCG analyst at brokerage Prabhudas Lilladher.

”My sense is that the company is moving towards the end of the culling exercise. They exited the B2B space where they were supplying coffee and milk to offices. They have also got out of milk sachets and Eclairs. They are unlikely to touch prepared dishes because that is a small and growing business. Similarly, Maggi will be kept out of the culling exercise,” said Abneesh Roy, associate director of research for institutional equities at Edelweiss Securities.  

Benet, in his statement, also said that Nestle would remain cautious as it was yet to to sense buoyancy in the external environment. Like it had done in the recent past, a Mumbai-based equity analyst said, Nestle was likely to take “tough decisions” as it moved to build a premium portfolio.

In the July-September quarter, Maggi Oat Noodles, Maggi Vegetable Atta Noodles, Maggi Masala-ae-Magic, Kit Kat chocolates, Nescafé, Milkmaid and Everyday were the products that performed well.  The company has seen a two  per cent dip in the sales volume of chocolate and confectionery products. Besides, milk and nutrition products also dropped about 1 per cent in sales volume in the quarter.

With ITC entering the instant coffee market early next year, Nestle will face stiff competition in the segment apart from Hindustan Unilever’s Bru. It is also facing competition in chocolates from Cadbury.

“Coffee and chocolates are the two segments where the company may look at rationalisation. Also, these do not fit well in Nestle’s strategy of health and wellness,” said an analyst with a global brokerage firm.

“There has been no change in the company’s strategy with a continued focus on portfolio rationalisation and margins. We do not see recent new launches such as Maggi Oats as material innovations which can move the needle,” Credit Suisse said in a note.

On the other hand, Barclays noted that Nestle needed a strong pick-up in urban consumption to revive growth in its largely city-focused product portfolio.

Product elimination or culling is not restricted to Nestle. The country's largest consumer goods company, Hindustan Unilever, is also undertaking a similar exercise. “This year, we had taken on a big exercise to cull the non-performing SKUs. And we are tracking well against the objective we had set, which is culling 25-30 per cent of the SKUs by the end of this calendar year. This exercise is across product categories,” said Sanjiv Mehta, managing director and chief executive of Hindustan Unilever, while announcing the company's second-quarter results on Monday.