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Nestle Pakistan Limited Case Study

Mission Statement of Nestle - Pakistan To positively enhance the quality of life of the people of Pakistan by all that we do through our people, our brands and products and our CSR activities.

(End of Mission Statement)

Nestl Pakistan Ltd is a subsidiary of Nestl S.A. - a company of Swiss origin headquartered in Vevey, Switzerland. It is a food processing company, listed on the Karachi and Lahore stock exchanges and operating in Pakistan since 1988 started as a joint venture with Milk Pak Ltd. Nestle took over the management in 1992. For ten years in a row, the company has won a place among the top 25 companies of the Karachi Stock Exchange. Nestle Pakistan Limited has its head office in Lahore, the Company operates four production facilities. Two of its factories in Sheikhupura and Kabirwala are multi product factories. Factories in Islamabad and Karachi are only producing bottled water. The main products of multi product plants include processed milk, yogurt, juices, infant formula cereals and bottled water. The company has a vast sales and distribution network throughout the country to ensure that its products are made available to consumers throughout the country. Distribution is spread in 600 cities and small towns. Nestle Pakistan has dirtibution force of 6000 people and 1500 vehicles to meet the demand. Nestl Pakistan brands are the main flag bearers of the companys image. Nestl Pakistan now operates the biggest milk collection operation in Pakistan, Currently; Nestl Pakistan collects milk from an estimated 190,000 farmers spread over 146,000 sq Kms in the province of Punjab and Sindh. Milk Pak and Every Day are the leading brands of Nestle in processed milk category Nestl Pure Life, was initially launched for the first time by Nestle in Pakistan in 1998 after market research. This product was immediate success and made Nestle the most dominant and strong player in Pakistani bottled water market. It was decided by Nestle top management (SBU) that Nestle pure life brand developed in Pakistan should be introduced in other countries using the Pakistani successful experience to their advantage. Nestle pure life (bottled water brand) is now sold in 21 countries from North America, Asia and the Middle East to Africa and Latin America. Nestl Pure Life is now number 1 brand in the world in bottled water brand category. Nestl Pakistan today is the leading Food & Beverage Company in Pakistan with a key focus on Nutrition, Health and Wellness and reaching the remotest of locations throughout Pakistan to serve the consumers. Despite energy crises, very tense security situation, devastating floods and high inflation in the country, Nestle Pakistan achieved a strong growth of 25% in the previous year 2010 and net profit increased by 37%. Market is expecting even better results in 2011 as the indicators are all very positive About 60 per cent ingredients in beverages and cereals are acquired from local sources while dairy products are processed from 100 per cent locally available raw milk. There are 190,000 small farmers associated with Nestle Pakistan across the Punjab and Sindh, providing quality milk through an integrated network. The biggest challenge for the company is the increase in prices of commodities and how to absorb the Case Study Nestle Pakistan Page 1

price increases and not to pass the end consumers. Supply constraints and tough competition with Engro Foods has resulted in price increase for fresh milk by 25%. Nestle Pakistan believes in maintaining very high gross profit margins for all products but in the current year the increase in input cost of sugar, energy , fresh milk has resulted in 3% decline in gross margins. The Company continued to expand its development infrastructure aimed at accelerating procurement of good quality fresh milk. Nestl Pakistan is committed to enhancing its product base by diversifying into low cost high quality products with good financial returns that is called by company as Popularly Positioned Products (PPP), which focuses on creating products that are both highly nutritious and affordable on a daily basis for lower income consumers. Innovation & renovation remained an integral part of the Nestle Pakistan Limited operational strategies and vision for growth. Nestle Pakistan is also exporting their products and in the current year the company has experienced 25% growth in exports to Afghanistan The major new product launches during 2010 and 2011 included: MAGGI Umda Maza, MAGGI Noodles (Bar-B-Q, Masala & Karara), NESTL Peach Nectar, LACTOGEN low lactose, & NESTL Pure Life5 liters. Nestle Pakistan has announced that the company is introducing their juices brand Fruita Vitals in prisma packaging format of Tetra Pack which will enable them to distribute their juices in distant markets without refrigerator and without preservatives. Nestle Pakistan has realized that by keeping their profits margins high over a long period of time they have allowed lot of companies to become their strong competitors and no one is more threatening than Engro foods and their brands in the processed milk category. Nestle Pakistan has announced in the current year that they will by spending 300 million Swiss francs ($413 million) over the next three to four years in Pakistan as it looks to fend off local rival Engro Foods Ltd. The investment will be used to build new milk factories, Ian Donald, managing director at Nestle Pakistan Ltd. (NESTLE), said in an interview in Lahore. The money will also help boost the juice, yogurt and noodle businesses of Nestle Pakistan, whose market value has doubled in the past year. A lot of companies are coming up to tap Pakistans food market where 95 percent of the products are sold unpackaged, said Misbah Iqbal, an analyst at AKD Securities Ltd. in Karachi. That is certainly creating some challenges for established names. But I dont see a big threat for Nestle in the next two years as the size of the cake is still big enough. He further added that now we have so may brands in the bottled water category. Coco- Cola with Kinley brand and Pepsi with Aquafina will create lot of problems for Nestle leading brand Pure Life in couple of years time as the price of Nestle is almost 40 to 50% higher than the other brands in 19 Litre category. The biggest weakness of Nestle Pakistan is that they have allowed their competitors to settle and become strong as they do not decrease their margins according to one chief executive of a leading company. Nestle which makes Kit Kat chocolate and Nido powdered milk is facing growing competition from Karachi-based Engro Foods in the dairy segment and Coca-Cola Co. (KO) and PepsiCo Inc. in the bottled water and fruit juices businesses, according to data provided by London-based Euromonitor International. Engro Foods just established in 2005, was the second-largest seller of drinking-milk products in Pakistan in 2010, according to Euromonitor. Case Study Nestle Pakistan Page 2

Nestle is pushing products for lower-income consumers into more rural regions of Asia as it aims to sell the items in a million stores by next year. Nestles planned investment in Pakistan will prepare the company to meet growing demand at its juice, yogurt and noodles businesses, which are likely to double in size in the next five to six years, Donald said. The opportunity to grow in Pakistan is still enormous, Donald said. Weve a very bullish view on Pakistan, and will invest quite aggressively in production capabilities in the next three to four years. Nestle yesterday said revenue growth is likely to be at the top end of its forecast range this year after reporting the biggest sales increase in 2011. The market is relatively underdeveloped, Donald said. So the fact that Engro and other names are entering the market is actually a very good thing. The fact is that they all together are stimulating growth in the packaged food segment. Engro Foods last week reported net income of 99 million rupees in the three months ended June 30, compared with a loss of 165 million rupees a year earlier. Sales climbed 46 percent to 7 billion rupees in the quarter. Nestle Pakistan has been continuously reporting high profits. Its a common perception that China and India are much bigger in terms of growth than Pakistan, Donald said. But for Nestle, the per capita consumption of our products in Pakistan is twice as much as we have in China and India. Donald further added that rural area of Pakistan is providing lot of growth to Nestle as the sales are continuously climbing and awareness of our brands is increasing every day in the villages of Punjab province . I feel that rural area of Pakistan is our greatest opportunity was stated by the Chief Executive Ian J. Donald. He further stated that productivity has suffered enormously in the current year because of Dengue fever in Punjab. Absenteeism has been on the high side in our factories in the last three months resulting in less output. The company expects future growth will come from milk, baby-food, water and noodles. It is also thinking of expanding into new categories including spices and new coffee flavors, Donald said. We see more and more dairy farms of bigger scale coming up and farmers are getting better knowledge, he said. This is slowly beginning to close that gap on demand. Nestles growth in Pakistan has been slowed by poor security in the countrys biggest cities and power blackouts of up to 12 hours each day. The company lost nine days of business in Karachi for three months in 2011 when retail trade remained virtually closed in the countrys commercial hub because of ethnic and sectarian violence, Donald said.What we are getting is a strong double-digit growth,. Imagine what it could have been if we didnt have huge unrest in Karachi, security issues in Quetta and Peshawar. Case Study Nestle Pakistan Page 3

Nestle Pakistan has been using face book and twitter to engage with their customers in a more meaningful manner which has resulted in tremendous fan following in their Fruita Vitals and Maggi noodle page. The company has the highest fan following on the internet in Pakistan and is considered to be a trend setter in this area.

Nestle Pakistan has announced to spend Rs40 million to help the flood-hit people, as well as supporting the farming community, a statement said. Head of Corporate Affairs of the company, Fakhar Ahmed, said that the relief package being extended by his Nestle include milk, other food items and beverage products. Nestle Pakistan- Financial Results
PK R Million Sales GP Margin Operating Profit Net Profit 2010 2009 Change 51,487 41, 156 + 25% 27% 13.3% 4,113 30% 13.5% 3,005 7.3% 66.27 37% + 37%

Net Profit Margin 8% Earning per share 90.69

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Case Study Nestle Pakistan

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