IN THE NEWS

Bloomberg|Jul 18, 2016

Nestle Seeks China Turnaround Online as Competitors Abound

June 6, 2016 — 5:00 AM HKT; Updated on June 6, 2016 — 11:54 AM HKT

After a period of disappointing growth, Nestle SA is seeking a turnaround in China as the multinational food company focuses on e-commerce and product innovation.

The company’s e-commerce business in China is now more profitable on average than sales through brick-and-mortar retail channels, Reinhold Jakobi, managing director of the food and beverage business in greater China, said in an interview on Sunday. Sales growth for its products online is now expanding at triple-digit rates, he said.

Nestle’s growth had been slowing in the past few years as the company didn’t react quickly enough to trends like e-commerce and healthier eating, which led shoppers to shun some packaged-food offerings. Its Yinlu brand, which makes peanut milk and a rice porridge called congee, has declined as consumers shift to more premium products.

Nestle has learned that "we have to make sure that the needs of the consumers today are faster addressed in this market, faster than any other market. So we have been catching up in the last two years," Jakobi said.

New Products Online

China is particularly important to Nestle after the company globally has missed long-term sales targets for four years, increasing pressure on Chief Executive Officer Paul Bulcke to find new areas of growth as he enters the home stretch of his tenure. It has been seeking expansion and acquisitions in skin health and medical nutrition to reduce the company’s reliance on the grow-challenged packaged food industry.

Last year, Nestle’s e-commerce sales in China doubled, fueling a 6 percent growth to 7.1 billion francs ($7.3 billion) in sales for the company’s greater China region.

The company has also relaunched products like Nescafe and Shark wafers in China, with flavors tailored for the Chinese consumer, and is seeing "steep numbers in consumer uptake," Jakobi said, declining to offer specific figures.

The company set up a standalone e-commerce unit in China a few years ago that is independent of its traditional business. It has rolled out new strategies like Sunday’s unveiling of 67 products on Alibaba Group Holding Ltd.’s Tmall.com portal that it has never offered in China and which aren’t available in shops, including Nido milk powder and Damak chocolates.


Competitive Resellers

Many of the products Nestle says it is launching for the first time in China have already been available for years from a wide variety of resellers and distributors. Hundreds of competitors are selling Nestle products on China’s e-commerce platforms like Alibaba’s Tmall.com and Taobao.com.

It may be challenging to get buyers to even notice that Nestle now offers the products for sale, said Bloomberg Intelligence telecoms and Internet analyst Michelle Ma. “Most products that Nestle sells can already be found on there from many different sellers,” she said. “Even if the company is selling them on their flagship store, it won’t be meaningful if they show up on page 3.”

Before it tied up with Alibaba to launch the new sales campaign, a search for Nescafe saw the company’s flagship online store show up after a few other resellers.

The online experimentation is part of an e-commerce fair commemorating the company’s 150th anniversary that features deep discounts in over 150 products on Tmall.com. It will run for an initial period of six months.


E-Commerce Strategies

"If you look at many start-ups, they might be moving very fast but don’t have the stability," said Wan Ling Martello, head of Nestle’s Asian and African businesses on Sunday. "We have a stable, consistent core."

Samuel Coopersmith, an associate with consulting firm Smith Street Solutions, said that e-commerce sellers need to use a variety of strategies, like paying Alibaba for top placement spots and engaging with its search algorithm, to remain visible to buyers.

Nestle says its China unit can now keep up with the country’s fast-moving e-commerce space, due to a company-wide restructuring a few years ago that gave units within the company more flexibility.

The business now operates like "a fleet of agile ships that go to the mother ship for certain services but are allowed to sail as they do best," said Jakobi.

While the company’s business in China is growing at a "very positive" rate, there’s still a lot of work ahead to capture Chinese consumers, he said.

"When you look at the penetration of our products into Chinese households, it’s still very small," Jakobi said. "There is still a long way to go."

— With assistance by Rachel Chang

http://www.bloomberg.com/news/articles/2016-06-05/nestle-sees-turnaround-in-china-on-e-commerce-innovation


About SmithStreet

SmithStreet is a Shanghai-based, boutique consulting firm focused on China growth strategies. By understanding China and solving business challenges through a holistic and innovative approach, we provide clients with deep insight into China’s consumer, B-B and healthcare industries. Since our founding in 2007, we have served Fortune 500 companies as well as global 2000 companies in a variety industries to achieve China goals. We are your bridge into China.

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