Emerging market coffee sales growth perks Nescafe up

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The company, whose key brands include Nescafe, Nespresso, Nesquik and Milo generated net revenues of CHF104.6 billion in 2010, of which beverages represented 20%.

According to research firm, Euromonitor, Nestle ranked number one in hot drinks in 2010, with a 15.3% share, followed by rival Kraft Foods at 7.9% and Lipton maker Unilever claiming a 4.4% stake.

With 70% of Nestle's sales in hot drinks taking place in instant coffee, the group has benefitted from the outpacing of instant coffee sales over fresh coffee during the 2006-2010 period.

"Nestle's global value share of instant coffee stood at 51% in 2010. Its dominance here is and will remain secure for some time to come. Growing demand for instant coffee primarily in the emerging markets has helped it to grow despite a trend towards premiumisation in the mature Western Europe and North America markets, which favour fresh coffee sales," Euromonitor said.

Last month, the company said the soaring Swiss franc pushed first-half sales down by 12.9% to CHF41 billion. However, when adjusted for the currency impact, the company posted a 7.5% growth in sales, good progress in a half that was marked by natural disasters, political instability and continuing increases in raw material costs.

In its emerging markets Nestle has adopted a "Popularly Positioned Products Programme" strategy to adapt to the particular needs of its high-growth, but price-sensitive emerging markets.

The strategy involves selling Nestle brands in smaller quantities and in cheaper packaging to sustain margins, but to encourage volume growth.

The company is also adapting its distribution network through its floating Brazilian supermarket and the use of micro-distributors in markets such as Thailand, which offer 15 days credit to customers and receive a mark-up on products sold, taking a cue from direct sellers such as Herbalife and Avon Products.

Though instant coffee has traditionally been seen as the poor relation to fresh coffee, the VIA Ready Brew launch by Starbucks has helped to dispel that impression to some extent, meaning Nescafe's market share in the US, UK and China might be under threat. The Starbucks VIA Ready Brew brand relies on its extensive network of locations to build sales with the slogan "Starbucks makes great instant. We make great instant. So why does theirs cost 400% more?"

Meanwhile, in the fresh coffee market, where Kraft Foods is king with a 10.9% market share through its brands Jacobs, Carte Noir, Maxwell House, competition is expected to intensify.

Instant coffee sales are set to decline by US$41 million from 2010-2015 in the French market, as consumers favour fresh coffee, and in Russia they're already beginning to trade up, with sales expected to grow by US$278 million over 2010-2015.

"Success for Nestle in fresh coffee globally hinges to a considerable extent on breaking into the US market. Nestle should also consider further increasing its presence in Latin America fresh coffee. The Brazilian market will dominate regional growth and should therefore be a primary focus," Euromonitor advised.

Nespresso is not Nestle's only interest in fresh coffee, but it is its most significant, with sales of CHF3.2 billion in 2010.

Popularity of the coffee brewing system, which retails in France for EUR150-499, has prompted double-digit growth in the French fresh coffee category over 2005-2009.

But growth in sales slowed in 2010 to 5%, as alternative systems including Senseo from Sara Lee and Tassimo from Kraft reduced growth momentum for Nespresso.

The Sara Lee system is designed to be an open-system, which give sales of the machine a significant boost in some markets such as Germany where it has allowed private label players to launch their own coffee pods for use with the system.

Nestle on the other hand continues to defend its intellectual property, taking action against companies which have designed cheaper coffee pods which can be used in the Nespresso system.

In July, Swiss discount chain Denner, removed its Nexpod capsules from sale after losing an appeal against Nestle, who claimed the company was infringing its capsule trademark.