GATT and Nestle in the Philippines Essay

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Nestle Case

Nestle (Philippines) had capitalized on the instant coffee boom in the Philippines and by 1996 the company saw its market share climb from 52% to 66%. Instant coffee consumption had more than doubled in the country and while this was good news for Mascenon (Vice-President of Nestle's Instant Drinks Department) the problem he now faced was this: how to maintain market share in the face of rising stiff competition (created by a number of variables) without cutting into profits by lowering prices in order to stay competitive with off-brands and other multinationals coming into the Philippines on the back of relaxed tariffs.

Nestle had grown from a baby formula company in the 19th century to a producer of a wide range of food products in the 20th century (largely a result of war-time acquisitions). By the end of the 20th century it was bringing in more than $6 billion in profits from factories and products sold around the world. The 1990s had been a period of expansion into emerging markets.

Supermarkets however had not yet come to the Philippines. Mascenon knew they soon would as legislation was in the works to permit greater foreign investment in the country. Nestle's market share was high because of its individual packets of Nescafe being sold in small shops. Even though the product was viewed as a premium and its prices were high at the small shops, which were frequented by poorer people, this is still where it did its most business. Nestle's brand was its biggest seller: coffee was actually called "Nescafe" by Filipinos. The drink therefore was known by a brand rather than by what it actually was -- instant coffee.

Nestle had been able to secure such a high percentage of the market in the Philippines because of the rapid decrease in the cost of coffee beans in the global market (including the Philippines). This, coupled with the reduced cost of packaging in foil, helped Nestle pass savings on to consumers which in turn helped the company sell more product. Meanwhile, in the 1990s, sugar prices rose and the price of soft drinks increased. Consumers turned to the less expensive Nescafe.

Nescafe's competition was Great Taste, Blend 45 and Cafe Filipino. New entrees into the market also appeared and on average they priced their product 10% below the price of Nescafe. The company's market share dropped from 75% in the mid-1960s to 55% in the mid-1980s. When coffee bean prices fell, Nestle passed savings on to consumers and its Nescafe brand began to sell more -- along with its Carnation non-dairy creamers which were becoming popular in the Philippines.

Mascenon believed that Nestle should not compete in terms of price. He viewed the brand's selling point as its quality, brand identity and reputation. Mascenon did not like the idea of "price wars." Moreover, Nestle was the largest buyer of coffee beans in the Philippines and had good working relationships with growers. Nestle spent 5% of sales promoting Nescafe, including standalone shelves in stores and various promotional, which typically included adding bonus coffee to packages to attract consumers. In short, Nestle controlled much of the market, from growing to selling. All of that was set to change with the approaching government deregulation. The door to the Philippines' market was about to swing wide thanks to GATT.

Indocafe and Supermix were big players looking to export to and invest in Asia, including the Philippines market. Novelty/specialty shops were being established -- places were whole beans were ground on the spot for an upscale coffee consuming experience. The Supermix concept offered a package deal of coffee, sugar and creamer in one sale. Nescafe offered a similar option but it was not yet well cemented in this market. Supermix was a threat.

Nestle's position as the only buyer of Philippine beans would also be threatened with foreign investment coming into the country. Kraft and Maxwell House and Proctor and Gamble (Folgers coffee) were all looking to grow in the Philippines.

Filipinos were becoming more enamored of imported brands -- another threat to Nescafe. Because so many Filipino's worked as contract workers abroad for parts of the year, they came into contact with foreign products and wanted these products at home.

Nestle's plan to retain market share in the face of all of this competition was to change the way it packaged Nescafe -- offering it now in a variety of shapes, packaging and sizes. It introduced a new roast in an attempt to appear more premium. Yet Mascenon felt that more needed to be done to prepare for the changing market conditions. A few questions needed answers: What would Nestle do if competitors lowered prices? What would Nestle do if more foreign brands entered the market? What kind of bean should Nestle use in the future? What needed to be done to support its Nescafe facilities, already strained to the utmost?

These questions had no easy answers and yet in some way they could all be answered by returning to the concept that made Nestle and Nescafe succeed in the Philippines in the first place: a great product that was popular among the peasant class. The changing demographic in the Philippines now brought in a new class of consumers who were more cosmopolitan. Did Nescafe want to pursue this type of clientele or continue to market to the peasant class?

Nestle's strength was its history with Filipinos: they recognized Nescafe as the coffee drink. Its weakness was its lack of a real novel, premium experience. Threats were the incoming invasion of investors. Opportunities were there however: they include growing new relationships with stakeholders and acquiring new firms.

Mascenon's options could be summarized thus: Nestle could sit out the new wave of upscale, premium coffee shops and let the trend pass (if it was just a trend) -- or it could attempt to get in on the barista craze and promote a new product and service that was oriented towards the upscale clientele. In the past, Nestle had grown by acquiring companies and selling products that few people ever associated with Nestle. It could do the same now -- acquire a company offering a unique upscale coffee experience to the new trendy consumer and secure a share in the market.

Nestle also had the option of cultivating relationships with legislators and role players in the government -- just as it had done in the past with Filipino growers. Building relationships with stakeholders in the Philippines was something it had successfully achieved in the past and something it should continue to do. Nestle's success in the market did not depend solely upon product placement or branding but also on being able to foster relationships. Nestle needed to tackle the marketplace on these two fronts -- the fascist front and the acquisitions front.

Nestle's business model was not in bad shape by any means. Its competitors were still in investment mode and still in the process of building and developing brands. As Masceno monitored the situation regarding the specialty coffee shops, Nestle could also be cultivating and developing a new product that could be circulated into the country via the young cosmopolitan consumer. By introducing a product outside of the Philippines first and allowing the country's contract workers to come into contact with it while abroad, it could develop in these consumers a desire to have the product once they returned home. Once this desire was cultivated, Nestle could then introduce the product as though it was a premium import. Thus, Nestle could offer some competition to the incoming companies seeking to provide a new experience for Filipinos.

Another option for Nestle would be to increase brand loyalty by updating its Nescafe product through promotional activities that would target the upcoming generation. The trick here was to investigate the Filipino culture and see what the mindset was among young people, the upcoming generation, their spending habits, outlook, tastes, etc. If Nestle wanted to maintain its….....

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