FMCG major Nestle, owner of brands like Cerelac and Maggi, has been struggling with slowing volume growth and loss of market share in the last two years.
Even in the April-June quarter, volumes are believed to have remained largely flat. Most analysts believe that a recovery is nowhere in sight.
On Tuesday, the company management told analysts that “underestimation of competition” and “high focus on margins over the past two years” were key factors that affected Nestle’s performance, wrote Rakshit Ranjan and Shariq Merchant of Ambit Capital in a report.
“The company underestimated competition because it was too proud of its leadership position in categories like dairy whitener and chocolates. Also, the company pushed its focus on profitability too far through price increases and increased focus on margin,” the Ambit duo wrote.
Another analyst with a foreign brokerage pointed out that the company is believed to have lost market share in categories like prepared dishes (competition form ITC and HUL), baby food (competition form Danone) and coffee (competition form HUL).
As corrective steps, Nestle has planned to relaunch its Munch chocolate. It will increase advertising and media spends on it. In the chocolate category, another brand called Alpino has been rolled out. The company is also expected to repackage and launch premium variants in its coffee category.
The management has also accepted that competitive intensity has increased in the past two years. However, unlike other consumer companies, Nestle has not been spending heavily on advertising and promotions. And this, analysts say, can cause company more pain.
Going ahead, most analysts believe that the company will continue to struggle with volume growth and may end up losing more market share as competition increases.
A Tata Capital report by Sameer Deshmukh points out that Nestle reported a volume growth of only 0.8% in the last calendar year compared to an average volume growth of 14% in the last five years. In the first half of this calendar year, volume growth is believed to be 1.6%.
Several brokerage houses have stamped a ‘sell’ or ‘underperform’ rating on the stock.
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