Nestle’s Brand damage Could be Temporary

nestle By Kiran Somvanshi

NEW DELHI : The odds are stacked against Nestle BSE 0.46 % India with the firm facing poor volume growth, intense competition and a largely bearish view of the D-Street. Given this, it may seem that a punitive action by Uttar Pradesh Food and Drug Administration on its flagship product Maggi noodles couldn’t have come in at a more inopportune time for the company.

The Maggi brand of products — which includes noodles, sauces, soups and cooking aids — accounts for nearly one-third of the company’s total revenues. It’s Nestle’s only segment where volumes grew for the year 2014.

While the recent event could hurt the brand, Nestle India would tide over the challenge — if past experience and industry track record are any indication. Product recalls — voluntary or mandated — are fairly common in industries like auto or pharmaceuticals, with little or no ramifications on their brand equity.

Companies recall products, undertake corrective measures, and are back in business selling the same brand. The situation is similar in case of food products. In India, multinationals such as Cadbury, Coke and Pepsi have faced situations where the quality of their products has come under scrutiny. However, swift damage control exercise initiated by these companies has ensured that the equity of their brands and sales of products are not dented. It would be similar for Nestle India.

Besides, high quality of earnings gives Nestle enough leeway to reinforce and reposition its brands. Also, it would be simplistic to believe that Nestle’s loss will be its competitors’ gain. The regulators may well be prompted to undertake similar checks on all competing brands in the category.

The issue of high content of lead found in Maggi noodles is indeed a matter of concern for consumers. However, for the company’s investors, the point of concern will still be the elusive growth in volumes. Little wonder then that the company’s stock has hardly reacted to the entire development. For now, Nestle management has quality control added to the list of its key responsibility areas.

(This Post of Kiran Somavanshi First appeared with Economic Times)

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