Executive Summary
Nestle S.A. is a Swiss multinational company dealing with health-related consumer and nutritional goods. In the food processing industry, the company is presently the largest in the whole world in terms of revenues and employs approximately 328,000 workers (Hill and Jones, 2012, p. 13)). This paper will focus on its subsidiary, Nestle Italy, a Milan based company that has failed to register impressive results in terms of market penetration despite the company spending millions of dollars in advertising campaigns. At one point, the subsidiary even lowered the price by 14 % to experiment if it would capture loyal customers. However, the minimal increase in short-term sales recorded at 25%was not adequate as it weakened users perception of nestle products, and did not achieve a sustained impact on market share. These poor results necessitated an urgent meeting between the top management team to discuss the company’s remaining strategic options to implement to help the subsidiary match its performance with those found in the United Kingdom, Spain, Germany, Netherlands, France and the United States of America. This paper demonstrates the marketing mix implications of adopting different strategic marketing tactics through answering six different strategic questions that may guide the top management to adopt the appropriate strategic objective (Epstein, 2006, pp. 72 – 77). Therefore, primarily this paper analyzes the structure of the Italian coffee market, the current market positioning of Nestle Italy, the Italian consumers coffee buying habits and their reason for buying coffee. In addition, the paper also analyzes the strategic options that could help the company register growth in Italy, the implications of marketing the company’s Nescafe as an international beverage to capture the youthful market and finally the economics of the proposed program. Through answering these, we will illustrate the opportunities and challenges of marketing a brand through retail channels and institutional food service.
Company’s Mission statement
The company’s mission statement simply states ‘Good Food, Good Life.’ The management has inculcated a culture in the organization where each worker is driven by the motto ‘good food is the primary source of leading a healthy life.’ The company strives to ensure that its products are of high quality, safe and provide consumers with the optimal nutrition to satisfy their psychological needs (Schwarz, 2002, p. 17). In addition, Nestle uses its products to give its consumers the vital ingredients of pleasure and taste. To achieve all this, the company recognizes that research is a key component of their heritage. The management believes there is still much to be discovered about the role of food in our lives, health and wellness.
Goals and objectives
a. To manufacture and market the company’s products using techniques that create value to sustain the company’s shareholders, consumers, employees and suppliers
b. The company favors long-term success over short-term profit
c. The company is aware consumers hold legitimate interests in the company’s undertakings and actions behind brands they consume. If it were not for this consumers the company would not exist
d. Nestle recognizes that legislation in countries where its subsidiaries operate are the most effective way of safeguarding responsible business conduct
e. The company believe success is attained through professional conduct and responsible attitude of the management and workers
f. The company is committed to follow regulations and policies instilled by governments in different regions where its subsidiaries operate (Schwarz, 2002, pp. 198 – 220).
Analysis
What is the structure of the Italian coffee market?
In comparison with other European subsidiaries, the Italian branch serves a fragmented market consisting over 750 roasters, majority family owner small companies that serve long-established local tastes. The concentration of the four major producers is only 41% and the industry projected annual growth is 2 % yearly. This is evidence that the market is very competitive and there is excess production capacity. The three strategic groups involved in the competition are as listed below:
The small local firms that serve the institutional segment of the market. These compete on service, personal relationships and flexibility.
Companies operating nationwide and market national brands to coffee houses and retailers. For instance Lavazza which is family owned, and Illy which operates in the CHR segment
The multinational companies that include nestle and other competitors such as Gamble and Procter
At-home coffee consumption (family segment) accounts for 69% of total coffee volume sold yearly in Italy, while the away-from-home consumption (CHR segment) represents 31% volume.
Nescafe instant coffee is the core product that Nestle Italy seeks to market in this competitive market segment. The following is an analysis of the product:
Strengths
The product is the leading brand of instant coffee commanding a 75% volume in addition to 79% share of the market. In addition, the product delivers a profitable margin of 38% compared to 25% for competitors. This margin generates enough profit that finances advertising of the product (Nestle, 2007, p. 419). The product accounts for only 3% of Nestle Italy’s sales but delivers 7% of the subsidiary profits. Lastly, the product has a good distribution channel for its three different flavors.
Weaknesses
Nescafe represents only 0.8% of the Italian Coffee market in terms of volume and only 1.02% by value. This means the product penetration of the Italian market is very low compared to other European subsidiaries. Interestingly, the product commands 83% of brand awareness but only 39% of the consumers have tried it. The factors behind this poor penetration are:
The granulated nature of the product makes it not to be perceived as real coffee
The product is viewed as one that is emerging which explains the hesitation among consumers to use the product
Frequent changing of advertising tact confuses the consumers
Poor campaigning which has seen Nescafe’s advertising-to-sales ratio drop from 9.1% during the year 1987 to 5.8% in 1988
Competitors are not advertising aggressively to legitimize and build the demand of instant coffee
How Nescafe’s positioning has changed
The company has tried to change tact severally to identify a winning formula that could help the product appeal to a larger number of consumers. For instance, at its launch the product emphasized its ease of use. This did not resonate well with the elderly who enjoy preparing a pot of traditional Moka coffee, which they consider a ritual. Secondly, the product stressed it was real coffee. This message was viewed as an assault on Italian traditional coffee, therefore lacked credibility. The use of celebrities’ testimonials on the product’s real flavor also did little to improve market penetration. Lastly, the company adopted an indirect approach as from the year 1985 to target younger adults who are known to be open-minded and are likely to try the product, which has an international appeal.
How Italian consumers buy and why they buy Nescafe?
Coffee consumption incidences and frequency varies by age group in Italy. The older generations are the heaviest consumers. Unfortunately, majority of them have adopted the Italian coffee culture and are more likely to resist adopting Nescafe in their shelves. Youths aged between 25 – 34 years are the most attractive prospect group that consumes coffee and are likely to be open minded about trying out Nescafe, which is marketed as an international product.
Consumers consider functional attributes such as Caffeine content, Aroma and flavor, body and consistency. They also take into consideration the complexity of preparation, urgency of need, ability to vary caffeine content and the number of cups being prepared. Little evidence points towards lifestyle-driven brand imagery as an influencing factor when it comes to selection of the product in Italy.
What strategic options could grow the Nescafe brand in Italy?
According to the Ansoff’s product-market matrix, three principal options can be used to determine the right growth strategy that Nescafe should adopt in Italy (Lamb and Hair, 2009. P. 24). We are going to discuss in details below:
First option is to increase sales to older consumers
Factors that favor this choice include the fact that the older generation aged above 55 years prefer consuming Nescafe because it is considered light and can be modified according to a person’s preference. This group so far represents 80% of Nescafe’s sales. The size of the group is also increasing, as more middle-aged persons are growing older. Majority of them, about 65% have formed a habit of drinking coffee regularly.
On the other hand, factors against increasing sales among older consumers include the tendency of persistence cultural resistance shown by this group and their low per capita consumption yearly that stands at 20% of total coffee consumption.
Second option is to pursue Institutional Sales
Factors that favor this strategic move include the fact that Nestle already has channels for distributing its products in the CHR channel. There is also a growing trend in favor of away-from-home coffee consumption as indicated by Coffee houses that account for 80% of sales by value. Presence of these coffee houses provides legitimacy and promotes trial of the product. This strategic move may also be convenient in places where flavor are limited as installation of vending machines and automatic dispensers becomes cost effective.
However, the factors against this strategic move include the fact that drinkers of the traditional espresso coffee currently dominate the CHR segment. This market segment is also expensive to penetrate and requires generous promotions such as free dispensing machines.
Third option is to target younger consumers
Numerous factors support this strategic move. The youth consumers are open minded and willing to try out Nescafe. Perhaps they view the product as widely accepted around the world. They also find Nescafe convenient, as it is easy to prepare. The educated youth are usually conscious about their health and are more likely to shun traditional espresso coffee in favor of Nescafe, which is considered lighter. A cup of Nescafe coffee is convenient for the young people during social recreational hangouts. A cup can last long as the youths continue to socialize with their friend over a single serving of the beverage (Helstosky, 2004, p. 57). Therefore, they find it affordable. There is also a need to build a franchise early enough among the youths so that they carry on with the habit of consuming the product throughout their lives. The statistics are also encouraging as it was noted that 33% of Italian coffee consumption was by the youths aged 15 – 34 years. To break the current image of Nescafe as a drink for the old miserable people, the youths are the most appropriate target group to help change the image of the product.
However, the following factors are against this strategic move. First, the notion that young people can state their independence through consuming Nescafe is misleading (lamb and hair, 2009, p. 233). The youths would prefer to express their independence through fashion and music. In addition, the culture of consuming traditional coffee among the Italians is deep rooted and this even includes the youths. Advertisements that target the youths are likely to make the older generations feel like they have been left out. Lastly, a shift from older generation to the youths is a radical move that may require substantial investment for it to succeed.
What are the marketing Implications of positioning Nescafe as a new international beverage targeting young people?
Major implications or changes will have to be implemented in the following:
a. Product – The marketing team will have to paint a picture of Nescafe as a lightly caffeinated product, smoothly favored compared to traditional Italian coffee that requires roasting of Arabica beans for longer periods. In addition, the product will have to be packaged in transparent containers to appeal to the younger health conscious generation.
b. Communications – The marketing team will have to communicate clearly that the product has an international appeal because of its smooth preparation unlike traditional coffee that is usually crashed. These adverts will have to be carried out through the entertainment media in metropolitan areas such as cinema and television. Television promotion may show the smooth preparation process of the product in order to gain confidence of the youths. In addition, the advert should show Nescafe consumed from a mug or glass but not a small cup if it is to appeal to the youths.
c. Price – The current premium pricing should be maintained as it helps to reinforce a perception of quality when Nescafe is compared with rival products. Furthermore, previous price sensitivity test demonstrated that when the price was cut by 14%, the short-term increase in sales by 25% was not adequate to compensate the lost contribution.
d. Distribution – The sales team should focus to supply the product in metropolitan areas, precisely the cities located in northern Italy. These areas are likely to register impressive penetration rates, and this is because the consumption patterns are more international. For instance, statistics show that Milan residents represent 4% of the population but they consume 30% of Nescafe volume. The team involved in marketing should distribute the product in coffeehouses frequented by the younger generation. A point-of-sale promotion such as giving away free mugs to newer consumers is an appropriate strategy for locking them to use the product frequently.
What are the economics of the proposed program?
This section approximates the cost if radical repositioning. This is from targeting the older to targeting the youthful segment is implemented. For the management to attain a favorable result, the annual sales have to be increased to around 45 billion lire (Oggier, Fragnière and stuby, 2005, p. 67). If this were achieved, the contribution margin would be approximately 9 billion lire. The company’s communications budget during the year 1988 stood at 4 billion lire. This figure will have to be doubled to reflect the new positioning that focuses promoting the product in metropolitan cities. For instance, in the northern cities, increasing the communications budget by 4/.38 = 10.5 billion lire in sales would be the minimum increase in sales that will be required to achieved for the set target. Interestingly, this represents a market share increase of just 0.3%. When compared to Illy, a rival muti-national company in the same industry with Nestle, their communication budget is 6 billion lire but they command a market share of 4.9%.
Recommendations
Though the company is likely to achieve the targeted sales and register profits; the size of market share will only increase slightly. This is because the product is a favorite among the few urban dwellers whose consumption per capita is very high explaining the impressive sales figure. The plan is feasible but the management team should consider older market segment before implementing the radical repositioning (Onkvisit and Shaw, 2008). This is because if the intended results are a significant increase in the market share, then this is unlikely to be achieved under the current plan. Unless the company adopts an all-inclusive marketing plan that segregates the different market segments accordingly, that is the market for the older generation and the youthful. This way, the company will capture and maintain both segment and hence increase its market share significantly.
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