That’s how NESTLE (M) BHD CEO Juan Aranols sees it when asked about the company’s strategy in facing off against its rivals in a highly-competitive market.
Interestingly, the food and beverage (F&B) manufacturer that owns a variety of household brands such as Milo, Maggi and Nescafe, has to compete with hundreds of competitors in most product categories in Malaysia.
For instance, in the domestic instant noodle market, Nestle has to compete with about 150 players, while in the coffee segment, the company has close to 400 competitors.
Despite such stiff competition, Nestle has managed to maintain its lead in all the categories where it has a presence.
Undoubtedly, a lot of work has been put in to keep its leading position across all product categories.
“We innovate to stay ahead of the game we don’t fend of competition; competition keeps you smart and always on your toes,” Aranols says. He calls it a “big privilege” for the group to have established brands that have become household staples in Malaysia.
“There is a special connection between Nestle’s brands and the Malaysian consumers. Suffice to say, we have a level of presence that is unique here and that is a big privilege,” Aranols says.
With this big privilege, he stresses, comes the big responsibility, and challenge to maintain the relevance of Nestle’s brands in the hearts and minds of consumers, moving forward.
“When you have such a significant presence, the focus would be on continuously driving and generating consumers’ interests. This will require us to continue investing in our own brands to develop the innovation that our increasingly sophisticated consumers seek,” Aranols says.
Nestle is cognisant that consumer behaviour in Malaysia is changing, driven especially by young consumers aged between 20 and 40, who have different sets of expectations than those of the older generation.“The way they engage and what they expect from our brands is different from the preferences of their parents. Understanding this is very important for us to frame our strategy,” Aranols explains.
“So, the No. 1 challenge (and opportunity) for us is building a love for our brands, so that we can continue to have an active presence in Malaysian households,” he notes.
Driving sustainable growth
Aranols took over the helm of Nestle Malaysia on Dec 31, 2018. He is also the region head, overlooking the group’s operations in Malaysia, Singapore and Brunei.
Considered his first major career after graduation, Aranols has been with the Nestle Group for almost 30 years with exposure to the group’s global business from his key roles across a number of different markets, including the global headquarters in Switzerland as well as countries in other regions such as Asia, Europe, Latin America, Oceania and sub-Saharan Africa.
Before assuming the role of Malaysia CEO, Aranols’ years with the group had mostly been in finance roles.
In his new role, Aranols says his top priority is to drive sustainable growth for the company.
“Coming from a financial background, I understand the beauty of growth,” Aranols says.
“Our top priority is to drive growth. This means not missing out on any pockets of opportunity, as maximising opportunities is fundamental to continue driving growth for the group,” he explains.
In this aspect, Aranols says innovation plays an important role.
“We need to be able to continually introduce new and relevant products so that we can continuously capture consumers’ interests,” he notes.
“Consumers have so many
choices and even though we have great products, the competition is high. So, we need to be prepared well to beat the competition,” he explains.
Future-proofing the business
Essentially, Aranols says, Nestle’s strategy is focused on creating a virtuous circle to drive efficiencies and identify sustainable savings to generate resources that can be re-invested in building its brands, and hence, supporting the group’s growth.
“Growth will not only make our shareholders happy, but it will also keep generating resources for us to continue investing back into the company to generate further growth,” he explains.
“For us, we are mindful of building the business in a very sustainable way. And this will require us to also keep up with technology evolution such as the adoption of Industry 4.0 at our factories,” he adds.
The long-term focus is on making the company future-proof.
“This requires us to maintain a strong bond with consumers. This involves making sure that our brands are not only about great products, but also about playing a role in their lives,” Aranols says.
For instance, under Milo, there’s a campaign to encourage a healthy lifestyle with sports, while Maggi has incorporated a social dimension into the brand by promoting women’s empowerment.
“Nurturing the love for our brands is important,” Aranols reckons.
The group regards the ability to develop its product portfolio and adapt its ways of working to the evolving reality of the country as keys to its success over the more than 100 years of its operations in Malaysia.
This is because consumers’ expectations change, as the country goes through different stages of development.
“Some of the basic products that consumers preferred 20 years ago may no longer what they want today.
“So, we make an effort to understand the changing consumer needs, and work towards meeting their evolving expectations,” Aranols says.
At the end of the day, for the company, it is about investing its resources to be prepared ahead of time, and not wait for competition to kick in.
Wide product portfolio
With consumers across different socio-demographics, from the affluent to the mass segment, Aranols points out, there is no such thing as an “average customer” for Nestle.
“The beauty of our portfolio is that it is broad enough to cater to all categories of consumers in Malaysia,” he says.
The group continues to see great opportunities to extend its product offering within all of its core brands such as Milo, Maggi and Nescafe.
For instance, among the new products that the group has introduced are Milo Protein Up, Maggi Pedas Giler 2X Ayam Bakar, Maggi Pedas Giler Seafood, Nescafe Gold Jar relaunch, La Cremeria Summer Berries Yogurt Ice Cream, Drumstick Pika Pika Ice Cream and Kit Kat popcorn flavour.
These new launches have in part contributed to Nestle’s robust domestic sales in recent quarters.
“We need to continuously find new elements that could add value to consumers’ everyday life through our products. This is an area that opens up a lot of new opportunities for us,” Aranols says.
“But these opportunities are becoming increasingly fragmented because consumers are increasingly expecting customised, ‘made for me’, products,” he adds.
On that note, data analytics and consumer engagement are essential for the company to customise its products to better meet the specific requirements of different consumers.
“As we advance, we need to evolve our manufacturing approach from producing ‘one-size-fits-all’ products to more specialised and differentiated products,” Aranols says.
As TA Research puts it, timely innovation and (consumer) engagements are the most effective manner to build brand equity and moat around Nestle.
Reaching out to B40
On the Bottom 40 (B40) market, represented by the bottom 40% of Malaysian households who earn less than RM3,000 per month, Aranols says Nestle’s intent on reaching out to them is evidenced by the wide product range that touches many different price points.
“The B40 community is a very significant part of the country today, and it will continue to be for the next couple years,” he says.
“For this group, we know affordability is important, so we make sure our product prices are within their reach,” he adds.
For instance, the Nestle has rolled out many of its popular products, including some of its more premium brands, in smaller packaging and priced them below RM10.
“Some consumers in the B40 community also want to try out our premium products, and we make it possible and affordable for them through different packaging at lower prices,” Aranols explains.
Nestle has been building its online presence in recent years to capture every possible customer.
“We need to be where the consumers are,” Aranols says, noting the e-commerce channel has been adding to Nestle’s growth.
He reveals revenue from e-commerce sales has already crossed the RM100mil mark. This accounts for about 4% of the group sales.
“E-commerce is one of the building blocks of our business, and we want to grow this area,” Aranols says, adding that the platform also provides a good avenue for the company to test new products and gather consumers’ response.
According to TA Research, Nestle’s efforts in engaging consumer online is relevant to modern purchasing behaviour and would lead to immense potential for growth.
According to Aranols, there is a number of emerging global trends in consumer food preference that are influencing the F&B sector worldwide. These trends include the growing popularity of healthy snacking and the increasing interest in plant-based diet.
For Nestle, these spell new business opportunities, and the company is resolved to position itself early to capitalise on the emerging trends by rolling out products that meet consumers’ changing lifestyles, needs and expectations.
“For instance, ‘healthy snacking’ is a big opportunity for us, and we are now working on ways to deliver such products to the Malaysian market,” Aranols says.
“And as consumers become increasingly health-conscious, we look at how we can add functional benefits to our F&B products to add value to consumers’ lives. For example, our Nestle Omega Plus milk comes with a functional benefit for heart health,” he explains.
In addition, Nestle is also tapping into opportunities sparked by consumers’ increasingly busy lifestyles, which are fostering the growth of ready-to-drink and ready-to-eat products, as they look for convenience.
“Industries are changing, and the F&B industry is in the middle of this transformation from mainstream products that meet the needs of a homogenous crowd to products that cater to different segments and products that can cater the needs of different life stages and income,” Aranols explains.
“In Malaysia, consumers put a lot of emphasis on taste, and they are not willing to sacrifice the taste for other benefits. Finding the perfect match between how we evolve according to trends and deliver the taste to consumers’ expectations is something that takes a lot of effort and time,” he adds.
Nestle is currently finalising its 2020 plan for new product launches.“We have a strong pipeline of new products and that’s one reason I’m optimistic of the future. The plans I see across our business units are very strong,” Aranols says.
Stock at premium
Nestle’s shares are currently trading at a premium valuation of about 50 times forward earnings, compared with its regional peers that are trading in the 20s to 30s range of forward earnings multiples.
The counter closed at RM144.80 yesterday.
The relatively pricey valuation of Nestle’s shares is what prompted six research houses recommending a “hold” and seven calling a “sell”, with a median 12-month target price of RM127.04.
There is no “buy” call in the poll of 13 analysts by Bloomberg.
On that note, Aranols says those who like the company’s stocks invest in them because they appreciate the value of consistent delivery of financial results, as well as its consistent dividend policy of 95% of revenue every year.
“We build value by building sustainable results, and growth on the bottom line and market share, as well as driving the credibility of the company on many fronts, and being a responsible partner to the country in which we operate,” Aranols says.Nestle saw its net profit grow a marginal 1.1% to RM541.1mil for the nine months ended Sept 30, 2019, from RM535.1mil in the corresponding period last year, resulting in its earnings per share rising to RM2.31 from RM2.28 previously.
The group’s revenue improved 0.43% to RM4.19bil during the period in review from RM4.17bil in the previous corresponding period.
The improved performance was mainly sustained by robust domestic sales, while its export sales saw a decline, as demand from its affiliates in the region remained subdued.
Halal market opportunities
Nestle’s export sales typically account for about 20% to 22% of the company’s total revenue.
To grow its export sales contribution, the group has identified new markets for its products. This will ultimately support the group’s top line growth.
According to Maybank Investment Bank Research, however, if ventures into new geographical markets are delayed, and the weakness in its export sales is prolonged, Nestle’s top line growth could be dampened.
As it is, Nestle is the largest halal manufacturing hub, and exporter of halal products to the overall Nestle group worldwide.
Aranols points out that the group will continue to leverage on its halal certified products to explore new export opportunities, especially in the Middle East.
“There is a growing demand for halal products, and we are well positioned to benefit from this. The halal certification requirements in the country are among the most stringent in the world. So, if our products are halal in Malaysia, they will certainly be able to fulfil the halal requirements of many other countries in the world,” he explains.
Meanwhile, Aranols concedes the group is facing increased cost pressures, arising from rising commodity or raw material prices and ringgit weakness.
Nevertheless, he reiterates that raising product prices amid rising cost pressures remain the last resort.
“We need to be smart in how we manage our portfolio,” Aranols says, adding that the group will continue to use hedging on its commodity and foreign exchange positions to manage price fluctuations and protect its margins.
He expects some commodity prices to continue increasing going into 2020, hence the need to look into various options that can compensate for the cost pressures.
He notes Nestle will continue to look at ways to improve its operational efficiencies to protect the group’s bottom lines.
“These are difficult times to be bullish, but we remain to be cautiously optimistic; we have the plans to continue delivering good results,” Aranols says.
Overall, he points out, Malaysia’s favourable demographics will continue to offer the group good long-term growth opportunities.
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