To regain lost ground due to a ban on its best-selling Maggi noodles, Nestlé India Ltd has significantly ramped up its spending on advertising and promotions (A&P).
It has spent Rs.400 crore on A&P between January and September, more than 7% of the company’s domestic sales during the period, according to an investor presentation. The firm typically spends less than 5% of sales in such activities.
This is about 90% of its annual A&P spent in 2014 and about 22% more than what it had shelled out between January and September 2014.
There’s more. In absolute terms, Nestlé India has already pumped in more money during the first nine months of the current year in A&P than it has done in any accounting year between 2001 and 2013. Going by the trend, Nestlé India’s total A&P spending in absolute terms in 2015 will cross that of 2014 as well. The company follows calendar year for accounting.
The sudden increase in A&P spending is part of Nestlé India’s strategy to minimize the impact on its sales and company image after the country’s food regulator Food Safety and Standards Authority (FSSAI) declared a nationwide ban on its largest revenue earner Maggi noodles. Maggi accounted for about 30% of sales in 2014.
On 5 June, FSSAI had asked Nestlé India to immediately withdraw all nine variants of its Maggi noodles, calling them “unsafe and hazardous” for human consumption.
Nestlé India’s managing director Suresh Narayanan, who has been sent to India to be the company’s face in its efforts to tackle the Maggi controversy, had, in August, indicated that the local arm of the Swiss packaged food company would “spend more on advertising, marketing and promotions across categories to counter impact on sales caused by the Maggi ban”. However, he did not give a figure.
This is a big change for a company that has traditionally been conservative about advertising. In 2014, the company spent just 4.48% of sales on A&P, according to its annual report. Between 2010 and 2014, Nestlé India’s spending on advertising and sales promotions was between 4.2% and 4.8% of total income.
Nestlé India did not respond to e-mailed queries.
Analysts expect Nestlé will continue to spend more on advertising.
The company is trying to gain consumer confidence through ads, according to Abneesh Roy, associate director, institutional equities research, Edelweiss Securities, a brokerage.
“A&P spends are likely to pick up to support the Maggi launch, which will put pressure on margins… Though Nestlé has already started advertising and there’s a comeback of Maggi on social media (#missingyou), it will not be an easy task, particularly when other players have already started aggressive advertising,” Roy said in a 23 November note.
Nestlé’s own spending could go up to around 7% of sales and “the volume leverage should more than make up for this upswing in spend”, said Sunita Sachdev, an analyst with UBS Securities India, another brokerage.
Incidentally, several other consumer packaged goods companies have increased spending on advertising and promotions this fiscal year. In the first two quarters, Hindustan Unilever Ltd (HUL) increased A&P spending by 23%, Emami Ltd increased it by 31.4% and Dabur India Ltd by 12.9%. However, all these companies traditionally spend more on A&P compared with Nestlé India. HUL’s A&P spending was more than 14% of sales in the first half of the current fiscal year, while it was 19.9% of sales for Emami and more than 14% for Dabur.
Meanwhile, in the absence of Maggi noodles, Nestlé focused on milk and nutrition products. During the January-September period, milk products and nutrition as a category contributed 58.1% of total revenue, up from 47.1% in 2014, according to the investor presentation. Prepared dishes and cooking aids (the category is dominated by Maggi noodles) fell to 17% from 31.5% in 2014.
Analyst reports on the investor presentation indicate that Nestlé India is keen on driving up volume growth where possible and not stick to high margins. According to a report by Nomura Research, infant nutrition, margins, and not volume growth, are a priority. But it will drive volume growth in categories such as instant noodles, coffee and chocolates.
Roy, in his note, said that Nestlé India management proposed to ramp up new launches and innovations both in existing (especially chocolates and confectionaries, coffee and beverages) and new segments (health food drinks, water, breakfast cereals, adult nutrition and pet food).
“Nestlé will evaluate new categories on the basis of size, sustainable growth and margins and also has the possibility of differentiation by Nestlé. Nestlé is globally present in various other categories and Nestlé India might evaluate entering categories like health food drinks (Milo), water, breakfast cereals, pet foods, etc,” Roy said.