Sector News

Nestle Faces Wake-Up Call in India to Wean Itself Off Noodles

June 10, 2015
Food & Drink
(Bloomberg) — The nationwide recall of Nestle SA’s Maggi instant noodles at its Indian unit may serve as a wake-up call for the company: don’t put all eggs in one basket.
 
Nestle India Ltd.’s prepared foods division, which is largely composed of Maggi instant noodles, was the only business that saw sales volumes grow last year, according to its annual report. Quantity of milk products, chocolates and coffee, which accounted for the remaining 70 percent of its revenue, have all declined by an average 8 percent.
 
The Vevey, Switzerland-based company is in the midst of its biggest crisis in India after the nation’s most popular comfort food was found to contain too much lead. That prompted the government to order a nationwide recall. Rivals ITC Ltd. and Bambino Agro Industries Ltd. are filling the gaps left on store shelves by Maggi noodles.
 
Nestle may soon feel the impact of neglecting its other categories that have been losing market share, said Nitin Mathur, a consumer analyst at Societe Generale SA in Mumbai.
 
Recalling and destroying 15 days of inventory could lead to a loss of about 500 million rupees ($7.8 million), said Sanjay Manyal, an analyst at brokerage ICICI Direct. For each month the product remains off shelves, Nestle stands to lose about 1.8 billion rupees in sales, he said.
 
“If this drags on for July as well, we could be looking at nearly 3 billion rupees in lost sales,” Manyal said.
 
Singapore Respite
Nestle got some respite on Monday when Singapore’s food regulator allowed imports to resume after its tests showed that the India-made noodles complied with local standards. The U.K.’s Food Standards Agency has also requested tests on the products and is yet to release its result.
 
Nestle has maintained its Maggi noodles are safe. Himanshu Manglik, spokesman for the India unit, declined to comment.
 
Nestle dominates the noodle market in the world’s second- most populous country, with a 63 percent share in 2014, six times as much as its nearest rival ITC Ltd. and third-largest seller Bambino, which had a 5.1 percent share.
 
Revenues in all of Nestle’s divisions have risen consistently for the past four years, as the company has raised prices periodically. The only exception was in chocolates, where sales fell 3 percent last year.
 
Experiment More
While Nestle’s stock has slumped more than 10 percent since the authorities in an Indian state asked for a product recall, it is still one of the most expensive among non-alcohol consumer stocks in the country, trading at about 41 times projected earnings over the next 12 months. The eight-member MSCI India Consumer Staples Index trades at an average multiple of 32.
 
“Beverages and chocolates are under tremendous pressure in terms of competitive intensity,” said Harsh Mehta, an analyst with HDFC Securities Ltd. “If they are getting this much valuation, they should experiment more and come out with better products” while ramping up marketing and promotions, he said.
 
Based on the volume metric, the company’s chocolate and confectionery division, which includes KitKat and Alpino, has declined by an average 6 percent for four straight years from 2011, according to its annual reports.
 
As of June 10, at least 12 Indian states have banned the sale of Maggi noodles, according to the Press Trust of India. The state level bans follow India’s food regulator’s recall order last week, when it called the product “unsafe and hazardous.”
 
By Adi Narayan in Mumbai, Stephanie Wong and Sam Nagarajan
 

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