Nestle (M) Bhd managing director Jose Lopez is unperturbed by analysts’ downgrades on his company against concerns over rising commodity prices and the current uncertain economic conditions.
On the contrary, he has big plans for Nestle to weather the situation and steer the company through tough times.
Analysts polled by StarBiz concurred that on average, the general trend was for commodity prices, transportation and insurance costs to be higher year-on-year. Among the commodities that will experience higher costs are coffee beans, cocoa powder, wheat and milk solids.
Coffee bean prices have risen 20% year-on-year to RM2,270 per tonne in the fourth quarter of 2002 while cocoa powder prices have doubled over the last year to US$1,759 per tonne.
A head of research from a local research house said prices of milk solids had been going up again due to the drought in Australia.
Analysts had earlier downgraded Nestle's earnings projections ranging from “retain” to “sell.” Many reckoned Nestle's profit growth would not be great this year. Some considered the year to be a testing ground for some of Nestle's new product strategies. However, Lopez is calm amidst all this.
“I feel optimistic about this year and I always go back to the same conclusions. My people are better than my competitors, my systems are better than theirs and I belong to the number one food company. I can tap into many resources. The beauty of it all is that during bad times, I do rather well. If I compare with my competitors, they don't have the Nestle number one food company to call up (and check on future directions and strategies). Only I have the privilege,” he told StarBiz in Petaling Jaya.
Basically, his plan is to:
By doing so, he aims to close gaps in profit margins caused by the increase in raw material prices and go after new niche markets. “This is how we will respond to the challenge for growth,” Lopez said.
Consumer spending will increase over time, along with the increase in consumers' knowledge. Nestle's value-added and nutritional products would be a good base for the company to grow its market share, he said.
Lopez has decided to do a number of things to Nestle's coffee, milk and nutritional products range this year.
He said the re-launch of Nescafe 3 in 1 was ongoing and Nescafe, which would see Arabica coffee beans imported from Columbia as major ingredients, would be re-launched in a couple of months.
Among some of the value-added nutritional products launched last year include Milo with antigen and La Cremeria ice-cream that comes with chocolate swirls and nuts.
“Instead of just a tub of pure vanilla ice-cream, we came out with attractive packaging and more quality ingredients and priced it slightly higher than normal. These value-added products have been well accepted and contributed to our profits since the first year of launch. We expect the re-launch of some products this year to contribute instantly to our margins,” Lopez said.
Plans are underway to create different tastes and nutritional values for products under the same category to cater to differing taste buds among consumers.
“As we speak, tests are being done and things being produced. This is adding value to our products and once the value is there, the pricing and strategies would go in tune. For instance, under our coffee category for the 3 in 1 product, we can make it creamier for the Malays.
‘We also propose a coffee product for the Chinese that will be stronger and richer. That will allow us to increase prices if commodity prices go up further,” Lopez said.
He said this kind of segmentation came under Nestle’s global research and development where costs came up to US$1bil annually.
Lopez also plans to introduce new products and that will involve large investments.
On the suitability of this strategy in view of the current economic conditions, Lopez said: “The bad times present challenges to us and companies which are able to continue to drive the interest and give value propositions to consumers will do well in the long run.
“When things are bad, this is the right time to attack your competitors who are mostly at their weakest. This is the right thing to do – bring in new products to the market. By doing so, you actually make inroads to capture market share, attention, develop new brands and when the good times come, you will have a fantastic base to go on.”
Exports to Asean countries will also increase.
Lopez said: “When there is so much unknown, it is better to focus on areas we are familiar with. It has become quite obvious that the best allies will be among the countries in this region. Generally speaking, we adapt our marketing strategies to ensure our products are always relevant to the consumer. The basic equation is value for money.
“But instead of having a one-size-fits-all or one product that everyone must like, we are going to increase segmentation for our products.”
Lopez said he would consider a number of factors before passing costs to consumers. However, that would only happen if Nestle could create value from its products.
“What I cannot and will not do is to simply take the burden and pass it to the consumer. If that is unjustified, my competitors will then get my market share through pricing strategies. This is a continuation process and we don’t have a simple equation that says commodity prices go up, so we have to increase our prices,” he said.
Lopez added that the rise in commodity prices was dependent on the duration of the war, the impact of war on oil prices and conflicts in the Ivory Coast in relation to cocoa prices.
Nestle reported a turnover of RM2.48bil last year compared with RM2.59bil in 2001, and profit before tax of RM234mil last year compared with RM265mil in 2001.
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