FY-2015: Nestle ups marketing spends to Rs 525 crore

BENGALURU: That the Maggi fiasco was going to cost Nestle India Limited (Nestle India) dear was a given. Post the relaunch of one of the most staple dishes of modern India, the company had to follow up with a massive damage control and marketing push. Not only has the company had to pay more towards marketing, for the first timein this century, it has reported a drop in revenues. Also for the first time in this century, profit margin in terms of profit after tax (PAT) as percentage of total revenue from operations (TIO) has slipped down to a single digit. Further, in September 2015, the company completed 100 years in India. In its corporate campaign, the Swiss major conspicuously avoided mention of its biggest brand Maggi noodles while mentioning features of its other brands such as Nescafe and KitKat .

Nestle India hired McCann World Group for the Maggi Noodles relaunch, with the agency's India unit chief executive Prasoon Joshi in charge of the creatives for the campaign. Reportedly the largest food company in the world, Nestle India kicked off there launch campaign in October 2015 with a print advertisement that said: 'Your Maggi is safe, has always been.' The ad went on to explain that around 3,500 samples of the noodle brand were put to rigorous test in India and in places such as the USA, Canada, UK, Australia, New Zealand and Singapore.During the Maggi noodles recall and ban, the brand's past and present endorsers, including actors Madhuri Dixit, Amitabh Bachchan and Priety Zinta, were served notices by the Uttarakhand Food and Drug Administration for making false claims.Further, since a court case had been filed against the brand’s ambassadors in Uttar Pradesh for their endorsement of Maggi, the relaunch communications did not carry any brand ambassadors.

As is known, Maggi noodles were banned by the Food Safety and Standards Authority of India (FSSAI) and the commissioner of Food Safety, Maharashtra (FDA) in June 2015, mainly due to the allegation that they contained higher than the permissible limits of the metal lead. The company had to stop production of Maggi noodles, recall existing stocks of the noodles from the market and destroy them.The company says that it conducted extensive tests of over 3,500 samples representing over 200 million (20 crore) packets of Maggi Noodles in both national and international accredited laboratories. It said that all the results showed that the levels of lead were below permissible limits The companyalso claimed that several other countries also found Maggi noodles safe after testing samples of the product exported from India.

Court orders directing fresh testing of samples from three national laboratories, while revoking the ban on Maggi noodles, were issued. Nestle India says that all the results from three National Accreditation Board for Testing and Calibration Laboratories (NABL) said that 100 per cent of samples were clear, with lead within the permissible limits. Manufacture of Maggi noodles was recommenced from November 2015 onwards. FSSAI has challenged the judgement that lifted the ban on Maggi noodles and the matter is still in court.

Brand and trust had to be re-built, and is still an on-going process. Nestle India is one of the biggest spenders on advertising in the country. Nestle India's new chairman and managing director Suresh Narayanan said in a financial release, “I am happy to report that despite the exceptional toll the Maggi noodles crisis took on our financials, our optimism about the future helps us with a healthy dividend payout. The high point of the last quarter has been the return of Maggi noodles to the market and the consumers to whom it rightfully belongs. The sales evolution and reception in the marketplace gives us satisfaction, but we have ambitions ahead to strengthen the brand. Following the reintroduction of the Maggi Masala variant, we have launched another favourite Maggi Chicken noodles. As a team we are committed to serving our consumers with more offerings from Maggi and our other brands by accelerating the pace of innovation and renovation.”

Ad spends and other numbers

Nestle India increased its advertisement and sales promotion (ASP, marketing) spends by 18.9 per cent for the year ended 31 December 2015 (FY-2015, current year) to Rs 525.21 crore (6.42 per cent of TIO) as compared to the Rs 445.47 crore (4.52 per cent of TIO) in the previous year (year ended 31 December 2014, FY-2014).

Note:(1) Nestle India financial year is the calendar year. It reports annual results for the period 1 January to 31 December. Hence FY-2015 represents the period between 1 January 2015 and 31 December 2015.

(2) The unit of currency in this report is the Indian rupee - Rs (also conventionally represented by INR or ).The Indian numbering system or the Vedic numbering system has been used to denote money values in this report. The basic conversion to the international norm would be:

(a) 100,00,000 = 10,000,000 = 100 lakh = 10 million = 1 crore.

(b) 10,000 lakh = 100 crore = 1 billion = 1 arab.

Over a 12 year period starting FY-2004 until FY-2015, Nestle India’s year on year ASP spends had been dropping in terms of percentage of TIO from a high of 5.5 per cent in 2005 to a low of 4.3 per cent in FY-2011, FY-2012 and FY-2013. The previous year saw a slight percentage increase of 20 basis points in ASP to 4.5 per cent, and this year saw a massive 190 basis points increase in ASP as percentage of TIO to the above mentioned 6.4 per cent as compared to FY-2014.

During the 12 year period under consideration, ASP has seen a CAGR of 14.3 per cent from the Rs 251.92 crore (5.4 per cent of TIO) to the above mentioned Rs 525.21 crore in the current year. Until the previous year, ASP at Rs 445.47 crore (4.5 per cent of TIO) had seen CAGR of 13.9 per cent since FY-2004.

The FMCG major’s TIO declined 17 per cent to Rs 8,175.31 crore in FY-2015 as compared to Rs 9,854.84 crore in FY-2014. Please refer to figures 1 and 2 below.

During the same twelve year period under consideration, Nestle India’s TIO has shown a CAGR of 12.5 per cent from Rs2,227.57 crore in FY-2004 to the above mentioned Rs 8,175.31 crore in FY-2015. Last year, the company’s TIO had a CAGR of 16 per cent since FY-2004 with TIO of Rs 9,854.84 crore in FY-2014. CAGR at 16.9 per cent since FY-2004 was even higher in FY-2013, when Nestle India had reported TIO of Rs9,101.05 crore.

Nestle India’sPAT had crossed the Rs 1,000 crore mark in FY-2013, when the company had reported PAT of Rs 1,067.93 crore (12.8 per cent margin) on TIO of Rs 8,334.53 crore.

PAT in the current year declined to less than half – declined by a massive 52.5 per cent to Rs 563.27 crore (6.9 per cent of TIO) as compared to the Rs 1,184.69 crore (12 per cent of TIO) in FY-2014. Please refer to figure 3 below.

In terms of percentage of TIO, Nestle India’s simple avarage PAT between FY-2004 and FY-2014 was 12.3 per cent. This has dropped to 11.8 per cent of TIO between FY-2004 and FY-2015.

Between FY-2004 and FY-2014, Nestle India’s PAT had shown a CAGR of 16.7 per cent growth from Rs 251.92 crore (11.3 per cent of TIO) to the above mentioned Rs 1,184.69 crore (12 per cent of TIO). Between FY-2004 and FY-2015, PAT CAGR declined to less than half at just 7.6 per cent.

Report background: Being a part of a multi-national group, the company is generally quite tight lipped about sharing financials unless it has to legally do so. Details about the company’s advertisement spends are not indicated even in the company's annual reports - what you have is a combination of the Advertisement and Sales Promotion spends declared as a single entry in the notes forming the part of the company’s annual financials. There is really no way that one could pin an exact number for these spends unless one has an inside track on the company’s marketing budgets. The projections and numbers in this report are pure conjecture based on the author's statistical tools used on the historical annual numbers revealed by the company in its annual reports. The author has no knowledge about Nestle or Nestle India’s strategy, past or present.

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