Nestlé Milkpak Strategic Management


The Nestle History

Nestlé S.A., the present Switzerland based international food group, originally consisted of companies and two products: Henri Nestle and his baby food in Vevey, and the Anglo-Swiss Condensed Milk Company and its condensed milk in Cham, both in Switzerland.

In 1866 the Page Brothers from the United States set up a new industry in Cham, making condensed milk from a raw material that was available in abundance in the region. In 1867 Henri Nestle, a chemist in Vevey, created a milk and cereal based food which promptly saved the life of a baby which its mother could not feed. The companies competed vigorously until 1905, when they merged and became the starting point of the present food group.

Nestle is now the world's largest food company. It is present on all five continents, has an annual turn-over of 70 billion Swiss francs, runs 522 factories in 81 countries, 200 operating companies, 1 basic research center and 20 technological development groups and more than 231,000 employees the world over.

The Company owes its current status to the pioneering spirit inherited from its founders which continues to inspire it, to its concern with quality and to its constant search for new ways of satisfying man's nutritional needs.

The core raw material of Nestle Milkpak is milk. Over the last eleven years, the company's prime concern has been to improve the quality and volume of milk for UHT processing and for other milk based products. Driven by its commitment to quality and having realized that only self collection could eliminate its dependence on poor quality milk available from outside sources, the company successfully established its own collection system and expanded its operations over a very large milk shed area in Punjab. Owing to this tremendous growth in the volume of an extremely high quality raw milk. Nestle Milkpak now produces a superior quality and better tasting UHT milk, with longer shelf life.

Today, Nestle Milkpak can boast of the largest milk collection network in the country, unmatched in size, productivity and efficiency. Milk is collected through a vast network of village milk centers (VMCs), sub-centers and centers. At these centers, chillers have been installed to lower milk temperature to 4°C for preventing bacteria development during long hauls to the factories, which are undertaken by a large fleet of specially insulated tankers.

In terms of quality, the milk collected Nestle Milkpak is low in sodium, high in fat and solid non fats (SNF) and very low in Total Plate Count (TPC) which, stated simply, means the bacteria count. This was achieved through a comprehensive strategy and sustained efforts to overhaul the milk collection process, intensive education program for the farmers and the milk collection staff, upgradation of milk loading and transportation system, increase in the chilling capacity and above all, adherence to the highest acceptance standards at all milk collection points, including the factories.

As a service to farmers. Nestle Milkpak has established an Extension Service, staffed by qualified veterinary doctors, who assist them in vaccination and treatment of livestock, improved breeding, good animal husbandry practices, provision of high yield fodder seed etc. By taking professional help and guidance to their doorsteps, which they otherwise find difficult to access, coupled with incentives and a good and prompt return for their milk. Nestle Milkpak has created a mutually beneficial relationship with the farmers, which translates into opportunities of economic uplift for the rural population.

To promote milk production. Nestle Milkpak is successfully promoting the use of molasses to enrich the fodder and has arranged its distribution to farmers at cost. In another revolutionary step the company has arranged loans of Rs. 25,000 to selected small farmers to help them buy more animals and increase their herd size. This micro credit scheme has been made possible by IGI, a Lahore based bank.. Rupees twenty five million have so far been disbursed, with more in the pipeline.

As a consequence of joint venture arrangement between Nestle S.A. of Switzerland and Milkpak Ltd. in 1988, the existing production facility of Milkpak in Sheikhupura became a part of Nestle Milkpak.

Production at Sheikhupura Factory

The Milkpak Sheikhupura factory had commenced operations in 1981 as a producer of UHT milk. By 1988, it had expanded its operation and was also producing butter, cream, desi ghee - all under the brand name of MILKPAK and juice drinks under the brand name FROST.

Conscious of the large food market that Pakistan offered. Nestle Milkpak drew up ambitious expansion plans. While re-organizing and re-inforcing the production of existing brands, it lost no time in giving shape to new production lines. The first to come was a milk powder plant, which not only began producing NIDO in 1990 but was also critical to the production of several milk-based products in the future. With the installation of the roller dryer in 1990, the first such product to come was CERELAC - an internationally recognized brand of infant cereal, followed by LACTOGEN 1 & 2 in 1991.

The year 1992 saw the introduction of tea whitener EVERYDAY and milk powder in bulk packing named GLORIA. MILO and NESLAC came under production in 1994 and MILO RTD. in 1995. Local packing of coffee mixes under the name of NESCAFE 3 in 1 commenced the same year. In 1996, Nestle Milkpak's first confectionery plant of POLO Mint was installed and the line of NESTLE PURE ORANGE JUICE was also added. Packaging of coffee under the brand name NESCAFE CLASSIC was undertaken the same year. In 1997 NESTLE WHEAT and two variants of POLO viz. Strawberry and Orange were introduced.

1998 has been, by far, the most outstanding year for Nestle Milkpak. As a result of the timely implementation of major expansion plans, involving a substantial capital outlay, no less than 17 products were launched during the year. Significantly, the factory now houses three new state-of-the-art technologies.

The addition of two flavors of POLO, namely Blackcurrent and Strong Mint brought the number of POLO variants to five. A new variant Lemony was added to the range of popular FROST fruit drink flavors and a new 1-liter packing of FROST was introduced. Three flavored milks - Vanilla, Strawberry and Mango, under the brand FRESH & FRUITY, came under production on the new Tetra Filling Machine equipped with the modern "slim" format. MILO RTD and UHT Cream were also shifted over to this new format. A flexible confectionery line for the manufacture of a wide range of high and low boiled sweets and toffees was commissioned, with TOFFO and two variants of SOOTHERS - Menthol Eucalyptus and Honey Lemon, being the maiden products. Nestle Milkpak also contracted to supply dairy mixes to McDonald's, for its popular soft serves and milk shakes. And to top it all, the most prestigious project, NESTLE PURE LIFE was also commissioned in December 1998. Based on the latest water treatment and bottling technology, this marked the entry of Nestle Milkpak in the Pakistan water market.

In 1986 Milkpak Ltd. acquired the services of Kabirwala Dairy Ltd. for co-packing of UHT milk under the brand name MILKPAK. Nestle Milkpak acquired KDL in 1990 as a subsidiary and began installation work on a MAGGI NOODLES plant in 1991. This production line became operational in 1992 with two flavors: Chicken and Masala. The second milk powder plant was commissioned in September 1996. The plant produces NIDO, GLORIA and skim milk powder. The UHT line was discontinued in June 1996 and the same year witnessed the launching of the MAGGI YAKHNI line with 3 flavors: Chicken, Masala and Chatpata.

With the merger of this factory with Nestle Milkpak in April 1997, Kabirwala Factory, as it is now called, is a fully owned unit of Nestle Milkpak Ltd.

In February 1999 the newly installed evaporator came on stream in Kabirwala Factory, doubling the output of the spray dryer. Alongside, the warehouse capacity at Kabirwala to handle the increased volumes of finished products was proportionately increased. 1999 also saw the installation of a pouch-filling machine, making Kabirwala Factory independent from Sheikhupura for the filling of full cream milk powder.

Indus Fruit Products Ltd.

In the past, Indus Fruit Products Ltd. has been co-processing fruit pulping for Nestle Milkpak. In view of the growing needs of fruit pulp for its Nestle Milkpak entered into a 5-year lease agreement with the management of this factory in 1998. This arrangement enables Nestle Milkpak to put in place its own systems to ensure better product quality and capacity utilization. The new cold sauces production line has been established at this plant.

Product Mix

Following is the products launches according to different categories.

Milk Products

Nestle Milkpak Uht Milk

Launched in 1981, it has become synonymous with quality milk. Backed by a very strong brand name, aggressive marketing and distribution plans, consistent quality and availability through out the year, MILKPAK UHT has been extremely successful. In September 1999, MILKPAK UHT milk was launched as NESTLE MILKPAK UHT MILK. NESTLE MILKPAK UHT MILK is available in three pack sizes of 1000, 500 and 250 ml.

Milkpak Butter

The second product introduced under the MILKPAK brand in 1985 was MILKPAK BUTTER. It has been recently re-packaged in a crisp white laminate, the design of which bears close resemblance to that of MILKPAK UHT MILK. While the new pack design allows MILKPAK BUTTER to gain from the strength of NESTLE MILK PACK UHT MILK, the white laminate improves its shop visibility. It is available in pack sizes of 200 and 100 gm.

Milkpak Uht Cream

MILKPAK UHT CREAM was introduced under the MILKPAK brand in 1986. It is available in 200 ml. pack size in an attractive slim packing. The consumer trust in the brand name and their preference for the product has ensured its dominant share in the cream category.

Milkpak DESI GHEE

MILKPAK DESI GHEE, launched in 1986. It is available in 1000 ml. pack is the leading brand ghee in the country.

Nestle Everyday

To meet the requirements of the tea whitening segment, NESTLE EVERYDAY tea whitener was launched in 1992. On account of aggressive marketing, focused distribution, excellent consumer acceptance and product quality, the brand has shown strong growth and holds good promise for the future.

Nestle Nido

Soon after it was introduced in the early 70’s as an imported product, NIDO full cream milk powder became the market leader, a position it maintains today, with a considerable growth in volume. Local manufacturing of NIDO began in 1990, which has reinforced its position as the dominant player in the full cream milk powder category. Backed by a strong innovative marketing campaign and improved distribution, NIDO has shown very strong results and has become a mega brand.

Milo Powder

MILO, the leading Chocolate Energy Food Drink was launched in 1994. It is available in three pack sizes of 14, 100 and 200 grams. It is strongly associated with a healthy life style and is an ideal drink for growing children who need strength and energy.

Chocolate Drinks

Milo Rtd

To cater for consumer convenience, MILO RTD (ready to drink) was launched in 1995 and is now available in an attractive 180ml slim pack. Popular with all age groups, especially among the growing segment of nutrition conscious consumers, it is an excellent substitute for cold drinks.

Nescafe Classic

Nestle is the world market leader in coffee, NESCAFE being its most popular brand the world over. Nestle Milkpak locally packs imported coffee and markets it in sizes of 2, 25 and 500 gm. BIB and a new 75 gm. NESCAFE’s global campaign “Open Up” was launched in Pakistan in October 1999, introducing a new brand framework and increased emphasis behind coffee sales in Pakistan.

FRUIT DRINKS

Frost

A well-known brand, FROST was introduced in 1986 and has the largest share of the countrywide market. Positioned as a cold drink and alternate to cola drinks, its strength lies in the convenience attached to its usage.

Nestle Orange Juice

The product was launched in July 1996. In a market that is becoming increasingly conscious about nutrition and is displaying preference for healthy drinks. NESTLE ORANGE JUICE has made very good inroads and has a strong potential for future growth. It is available in 180 ml. and 1 litre packs.

Dietetic 8 Infant Products

Lactogen

LACTOGEN 1 and LACTOGEN 2 are infant and follow-up formulae launched in 1991 and are available in two sizes. The brands provide both affordibality and quality.

Cerelac

Launched in 1989, CERELAC is the dominant player in the growing infant cereal market. Available in 5 flavours, the brand provides balanced nutrition to infants from 4 months onwards.

Nestle Rice

An affordable starter weaning cereal, NESTLE RICE offers the flexibility of preparation with a variety of meals. Gluten-free, the brand is available in 125 grams packs and is specially suited to the needs of infants from 4 months onwards. It was launched in 1994.

Nestle Wheat

NESTLE WHEAT is a wheat-based infant cereal without milk, for infants of 4 months and above. It is available in packs of 125 and 250 grams.

Neslac

NESLAC is a growing-up milk, formulated specially for 1 to 4 year olds. It contains just the right balance of proteins, calcium, iron, vitamins and essential minerals in order to cater to the nutritional needs of a growing child during this special age. The product was launched in 1994.

Culinary Products

Maggi 2-Minute Noodles

Fast to cook, good to eat – MAGGI 2-MINUTE NOODLES were launched with local production in 1992 and in doing so Nestle pioneered the category of instant noodles in Pakistan.

MAGGI 2-MINUTE NOODLES have special appeal for children, are fun to eat and offer a range of interesting flavours, namely: Chicken, Masala, Chilli and Chatkhara. Affordably priced and backed by focused marketing activities, MAGGI NOODLES have shown good progress in 1999.

Maggi Cold Sauces

CONFECTIONERY

In view of the impressive potential for confectionery sales in the country, Nestle Milkpak established an independent sales and distribution network for confectionery that has expanded swiftly. From three main cities in 1996, it has grown into a nation-wide network,

The initial product range included locally produced POLO Mint and imported KITKAT, SMARTIES, LION BAR and fox's. ALLEN's TOFFO and ALLEN's SOOTHERS (2 variants, Honey Lemon and Menthol Eucalyptus) were launched during the last quarter of 1998.

Both TOFFO and SOOTHERS are line based on a new state-of-the-art technology that provides an extremely flexible process for production of a wide range of high and low boiled candies. This will enable the company to introduce several new varieties of sweets and toffees in different flavours over the next few years.

Water

Nestle Pure Life

The launch of NESTLE PURE LIFE in December 1998 was a truly historic event. This marks Nestle Milkpak’s entry into the country fast growing water market. At the same time Pakistan became the first country where Nestle launched this new, worldwide brand.

NESTLE PURE LIFE is a premium drinking water. Producing to the highest standards of safety and purity. It is available in two convenient sizes of 1.5 liters and 0.5 liters.

Capitalizing on its strong brand recognition, aggressive pricing and supported by a strong marketing campaign, NESTLE PURE LIFE has made very strong inroads into the water in Pakistan.

Vision, Mission & Objectives

Vision

Our vision is to be the Very Best food company all over the world.

Nestle is the world food company dedicated to providing people and their pets with the best food and beverages throughout their lives. We will not rest until our employees, our consumers, our customers, our suppliers, and our shareholders judge our company to be the very best. Our commitment to achieving our vision is the source of Nestle pride.

Mission Statement

“Nestle is dedicated to providing the best foods to people through out their day, through out their lives, through out the world.

With our unique experience of anticipating consumers needs and creating solutions, Nestle contribute to your well being and enhance your quality of life”

Nestle Corporate Business Objectives

Nestle is committed to the following business principles in all countries, taking into account local legislation, cultural and religious practice:

· Nestle's business objective and that of management and employees at all levels, is to manufacture and market the company's products in such a way as to create value that can be sustained over the long term for consumers, shareholders, employees, business partners and the large number of national economies in which Nestlé operates.

· Nestle does not favor short-term profit and at the expense of successful long term business development, but recognizes the need to generate profit each year in order to maintain the support of the financial markets, and to finance investments.

· Nestle believes that, as a general rule, legislation is the most effective safeguard of ethical conduct, although in certain areas, additional guidance to management and employees in the form of voluntary business principles, is beneficial in order to ensure that the highest standards are met throughout the organization.

· Nestle is conscious of the fact that the success of a corporation is a reflection of the professionalism, conduct and ethical values of its management and employees, therefore recruitment of the right people, and ongoing training and development are crucial.

· Nestle recognizes that consumers have a legitimate interest in the company behind the Nestle brands, and the way in which the Nestle Company operates.

Human Resources and the Workplace

Nestle regards its management and employees as its most valuable assets. Involvement at all levels starts with open communication, whether on specific aspects of the business, or about the activities of the Company in general. Suggestions for changes and proposals for improvements of Nestle practices are encouraged.

The Company's business practices are designed to:

· Promote a sense of identification among all employees all over the world, and apply a number of common rules while at the same time adapting the expression of these rules to local customs and traditions;

· Encourage training, and the improvement of professional skills;

· Offer opportunities for promotion based upon merit, irrespective of race, religion, sex or nationality. Professional skills, experience, and the capacity and willingness to apply nestle management principles are the criteria for promotion.

· Offer competitive salaries and social benefits. Working hours, wages and overtime pay comply with applicable local laws and are in line with conditions offered by similar companies.

· Limit factory overtime to a reasonable level;

· Create a safe working environment for each employee;

· Respect the right of employees to join legally recognised labor unions;

· Treat every employee with respect and dignity, and not tolerate any form of physical or sexual harassment or abuse;

· Preclude the use of forced labor or involuntary prison labor.

Child Labor

It is generally acknowledged that the causes of child labor are complex and include poverty, differing stages of economic development, social values and cultural circumstances.

Nestle believes policy development must take into account the social and legal situation of individual countries.

Action to eliminate child labor must be guided by the best interests of the child, as ill-considered policies and commercial measures can make the situation worse for children.

Therefore:

· Nestle is against all forms of exploitation of children. The Company does not provide employment to children before they have completed their compulsory education and expects its business partners and industry suppliers to apply the same standards.

· Nestle abides by national laws in all countries in which the Company has operations and complies with the principles of Clause 138 of the International Labor Organization (ILO) Convention concerning the minimum age for employment. The ILO recommendations are based on the United Nations Convention on the Rights of the Child (Article 32).

· Nestle offers its co-operation with the relevant United Nations agencies, governments and the business community in their efforts to deal with the problem of child labor, which include the encouragement of universal primary education, and all aspects of economic development world-wide.

Nestle Core Values

Nestle core values are the principles we want to characterize our culture.

People

People are our most important asset and the source of our competitive advantage. We operate in teams where we expect and reward responsible risk-taking.

Quality

We are dedicated to continuous improvement in the quality of every product we make and in every activity we perform.

Brands

Our strong brands ensure the continuity of our growth and profitability. Their support is every employee’s responsibility.

Consumers

Our reason for being is to understand, anticipate, and best fulfill our consumers’ needs.

Customers

We appreciate and support the critical role our customers play in getting our brands to the consumer while working closely together to achieve mutual value.

Performance

We are all committed to achieving our financial and strategic objectives while adhering to our core values.

Environmental Analysis

Environment forces are very important for any organization. In order to analyze these forces, various types of analysis are done which are:

Ø Pest analysis

Ø Porter analysis

Ø Porter diamond

Ø Use of scenario

Ø Five forces analysis

In order to analysis the environment in which, Nestle Milk pack Ltd. is operating, we have done

Pest analysis

Pest analysis includes the study of four factors, influential to any firm which are:

§ Political

§ Economic

§ Social

§ Cultural

Political / Legal Factors

So far as, political environment is concerned, here in Pakistan, it is not stable one. Almost every government is changing biannually, due to which the policies are unsteady and inconsistent.

However, for food industry, government is planing to support it, and trying to develop the dairy industry on proper lines for this purpose, the establishment of National Dairy and done live stock Development Board has been done and federal government is considering establishment of Milk Board at district level to introduce modern commercial dairy farming in the country (according to a new “Milk Boards Proposed” published on Dec. 14, 2000 in DAWN) government is also planning of establishment of National Veterinary Lab at Islamabad GOP also provides a number of incentives to the food processing industry including tax and customs duty exemption on the import of plant and machinery not manufacturing locally. Financing projects is available from local banks and institutions at a debt/equity ratio of 70:30.

Duties and taxes are classified into two categories, namely import duties and sales tax. Import duties on food processing machinery and equipment vary from 10% to 45%. The sales tax on both categories is 12.5%. At the moment, the only institute for the imposition of technical/safety standards is Pakistan Standards Institute, which has developed certain standards for the quality control of processing, equipment and machinery. Having the political scenario and as the direction of the Nestle Milk Pak Ltd. have good relation with certain political influential the firm has a good opportunity for the expansion of existing facilities and diversifying their business in related and unrelated business as well.

Economic Factors

At the moment, there is overall economic slump here in Pakistan. Overall business cycle is in recessionary period. Most of the business are adopting the divestment strategy, because of rising interest rates, inflation rate, unemployment rate and energy costs.

As far as, growth rate of GDP and disposable income is concerned that is decreasing, as the GDP growth rate in 1997 –1998 was 4.3% that decreased to 3.1% in 1998 –1999. Despite this gloomy pictures of economy of Pakistan, Nestle Milk Pack Ltd. being in the food industry has posted a good growth rate of 21% in FY –1999 and its trading profits and profit after taxes are increasing due to the good acceptance of its new as well as existing products by the consumers.

Socio –Cultural Factors

The population of Pakistan is almost 140 million people with growth rate of 2.7% p.a.

In Pakistan urbanization is increasing as it is gives in table under:

Due to this growth rate of urbanization life style is the people of Pakistan is changing and quality consciousness is increasing in minds of people. So, it is therefore, they are switching toward processed milk and other dairy product. But that switching rate is very low. However, these changing treads are increasing the potential customers and consumers for the dairy industry and Nestle Milk Pak Ltd. and also due to the increased literacy rate, the hygiene and health conscious among people is increasing and they are searching from adulterated fresh milk to processed / UHT milk.

Technological Factors

So far as, Pakistani Dairy Industry has no technological break through. However, key players in the dairy industry are used to import the technology from foreign countries. Recently CDL foods Ltd. introduced a low price UHT milk brand name Dairy Queen. That was a major improvement in price sensitive market of UHT milk. However, the shelf life of this milk is less than that of brick packaged UHT milk. So, it has imposed a major threat to the sales of Milkpak offered by Nestle Milkpak Ltd.

Five Forces Analysis

The five forces analysis or structural analysis helps in analyzing the competitive processes as well as competitive pressures. Following are the five forces which effect the competitive position of a firm in an industry:

1. Threat of Entry

2. Buyers’ Power

3. Suppliers’ Power

4. Threat of substitutes

5. Competitive Rivalry

Threat of Entry

In an industry, where threat of new entrants is low, is considered to be secure in terms of market share.

In food industry particularly dairy industry the threat of new entrants is low because of high cost of installation of machinery & equipment and operations. However, in Lahore, a dairy plant named “Lahore Milk Plant” having the capacity of 200 liters per day is to be rehabilitated in near future. But it is not a new entrant.

So, it is therefore, considered that the market share of Nestle Milkpak Ltd. is secure and with an optimistic view it will increase, if proper marketing strategies are to be adopted and if any new brand name would be launched for the price sensitive market of UHT milk.

So far as, market for mineral water is concerned Nestle Milkpak Ltd. has got very large share in this market. Recently it has acquired the production facility of AVA. Same is the case with cereals and infant powdered milk, no one is to enter in this very segment.

Same is the case with the markets of other products, like Every Day (Tea Whitener), NIDO, Gloria, because of difficult of access to distribution channel.

Power of Buyers & Suppliers

As far as, the power of buyers is concerned, they have an easy access to loose / fresh milk at cheaper prices as compared to prices of bricked packaged UHT milk. However, the hygiene and health conscious people have developed the taste for UHT milk and it is therefore, the buyers has the derived demand for consumers and they have to purchase the product in bulk.

Suppliers’ power is also very important. In case of Nestle Milkpak Ltd., suppliers of raw material specially milk has the power to sell milk to its major competitors like CDL Foods Ltd. and open market. Therefore, in order to tackle this power the company has developed strong relationship with the farmers not only on the basis of competitive purchase price of milk but the company is also providing consultancy in regard of better feed and breed of high yielding animals. The company is also providing financial assistance from Rs. 15,000 to Rs. 25,000 to the farmers through its own Lahore based bank. In case of suppliers of processing machinery, it has strong relations with these suppliers, being a world known organization.

Threat of Substitutes

Nestle Milkpak Ltd. has a great threat from its close substitute i.e. Fresh Milk and Pasteurized milk available at cheap prices due to which the growth rate of UHT milk market is almost stagnant and also the market share of Nestle Milkpak Ltd. is not increasing.

Competitive Rivalry

Competitive rivalry is very crucial to any firm. If the entry is likely; substitute are more in number and greater in extent as well; and buyers & suppliers exercise control then there will be more and more competitive rivalry.

In case of Nestle Milkpak Ltd. the only threat of substitutes is more. Therefore, Nestle Milkpak Ltd. is enjoying a competitive position in the market.

Industry Analysis

According to State Bank of Pakistan, the classification of food includes milk and cream, chilled or frozen fish, vegetables and fruit, sugar and honey, tea and coffee whiteners, spices, beverages and other miscellaneous food items. Their collective import in FY-96 was reportedly worth US$ 438.1 million, and their export US$ 315 million. For FY-97, imports were US$ 611.30 million, and their export US$ 329.40 million. The growth rate of industry was between 7 to 10 percent per annum. The market is expected to grow at approximately 5-6 percent annually over the next two years.

As Nestle Milkpak Ltd. is offering cereals, UHT milk, confectionery products and other products in the food market of Pakistan so further analysis is done according to the categories in which the products are being offered.

Dairy Products

Dairy Industry of Pakistan produces UHT, pasteurized, powdered and condensed milk, butter, yogurt, cheese, cream and some butter oil.

In Pakistan milk processing on modern lines was started in early 1960s. Between 1960s and mid-1970s, 23 modern milk pasteurization and sterilization plants were established, largely by private investors. These were located around Karachi, Lahore and Islamabad. Besides fresh milk, these plants recombined skim milk powder and butter oil, received under the FAO World Food Programme.

These dairy plants known as 'first generation plants' could not prove successful and had to be closed down except the one in Lahore. Their failure was primarily due to poor acceptance of the recombined milk and the short shelf-life of pasteurized milk. Other factors responsible for their failure were a number of operating problems, including lack of qualified technologists, inadequate supply of fresh milk and poor management.

What are called the 'second generation' dairy plants were those which were meant for the production of ultra high temperature (UHT) treated milk, the first of which was set up in 1977. The UHT-treatment involves heating milk at 130-150 degrees centigrade for two to three seconds. This process also known as "flash pasteurization" gives a high bactericidal effect to the milk and when packed aseptically, has a shelf-life of several months sans refrigeration. The second plant of this kind was established at Shaikupura. The UHT-treated milk gained more popularity when in aseptic packages manufactured by a private company styled as Tetra Pack Pakistan Ltd. Consequently, more and more UHT plants continued to be set up whose production surpassed the effective demand.

At the moment, a total of 38 dairy plants with a total daily capacity of 2,180,000 liters are present. While, only 11 with capacity of 948,000 liters per day are in operation.

Total production of milk is 21.5 million metric tons annually, of which 2% milk is processed. Approximately half of this amount is processed into UHT milk, 40% into powdered milk and remaining 10% into pasteurized milk, yogurt, cheese and butter.

The sole upcoming venture in Pakistan's dairy sector is the expansion of the newly rehabilitateds Lahore Milk Plant to include a 200,000 liters per day milk powder plant.

Cereals

The Pakistan market for cereals for FY-98 is estimated at US$ 2.5 million annually. Domestic supply relies on one large, Pakistan Army owned and operated unit, which produces 350 metric tonnes of corn flakes and 325 metric tons of rice cereal and porridge annually. Other small producers together produce wheat, barley and corn cereals of an estimated value of US$ 460,000. There is at present no export of cereals from Pakistan. Imports supplied over US$ 550,000 worth of demand. The import market is expected to grow by 16-17 percent and the domestic market by over 13 percent.

Nestle Milkpak Limited, commenced manufacturing infant cereals in Pakistan in 1990. There is no significant upcoming project for cereals.

Confectionery

Pakistan's confectionery industry produces a variety of sweets, toffees, bubble gum and chocolates. There are approximately 23 units which together have a capacity of 30,300 metric tons of sweets, 12,000 metric tons of toffees, 7,800 metric tons of bubble gum, and 4,200 metric tons of chocolates, to reach a combined capacity of 54,300 metric tons. Actual production is estimated at over 32,000 metric tons per year. In addition, a number of small units in the informal sector which collectively have an estimated capacity of 12,000 metric tons, together produce approximately 5,000 metric tons of confectionery per annum.

The export of confectionery other than chocolates increased from US$ 6.6 million in FY-96 to US$ 7.12 million in FY-97. The export of chocolates declined from USD 1.3 million to USD 1.2 million over the same period. Imports are estimated at Rs.170 million for FY-96, Rs.200 million for FY-97, Rs.125 million for FY-98, and Rs.140 million for FY-99.

The import market is expected to grow by 17 percent for FY-99, and by 20 percent in FY-2000.

Competitors’ Analysis:

Major competitors of Nestle Milkpak Ltd., here in Pakistan, are classified according to the categories in which Nestle Milkpak Ltd. is offering its products in the food market of Pakistan.

UHT Milk

In UHT milk market, major competitor is CDL Food Ltd., which is offering “Haleeb” in brick packaging all over the UHT milk market of Pakistan. And the other brand offered by CDL Foods Ltd. is “Dairy Queen” in pouch packaging. Dairy Queen is only offered in Multan Region, covering the market from Khanewal to Sukkar. Haleeb is being offered at the same price as the Milkpak. But the price of Dairy Queen is low due to its low packaging cost and due to price sensitive market, it is getting popular.

At present both the companies claim that it has more than 595 market share in the UHT milk market.

Confectionery And Culinary Products

In the market of confectionery and culinary products Nestle Milkpak Ltd. has following major competitors:

Ø Mitchelles

Ø Shezan

Ø Candy Land

Ø CDL Food Ltd.

Ø Rafhan Best Foods Ltd.

Cereals and Powdered Milk

In the market of infant cereals and infant formula milk, there is no major producer in the food industry of Pakistan except Nestle Milkpak Ltd. In this market, Morinaga cereal is being offered. Recently “Cow & Gatte” a new infant cereal has been introduced in the market by the “Muller & Phipps” a distribution company. But due to high prices of these two brands, they are not getting the share in the market. So Nestle Milkpak Ltd. is the only key player in this market.

In powdered milk only competitor is the CDL Foods Ltd., which is offering “Skimmz” positioned for drinking against NIDO, the brand of Nestle Milkpak Ltd. The only Tea Whitener, “Every Day” is being offered by Nestle Milkpak Ltd.

Other Products

In terms of Coffee, the only competitor is Maxwell House that is being imported.

In mineral water, Nestle Milkpak Ltd. has almost 90% market share and facing no major competition in the market.

In chocolate powdered milk and chocolate milk RTD i.e. Milo no major competitor is present in the market.

Company Analysis

Resource Audit

Resource audit is helpful in understanding strategic capabilities of any firm. Resource audit of Nestle Milkpak Ltd. is as follows:

Physical Resources

The is 20 years old and has got a good public image. The location of its facilities is situated near the raw material sources. These factories are located in rural areas from where milk can be collected conveniently.

Human Resources

Employees of Nestle Milkpak Ltd. are competent and skilled. They train their employees in their respective fields.

Financial Resources

Nestle Milkpak Ltd. has very good financial position. A major share holder of the company after Nestle i.e. Ali group has its own bank and insurance company. Company has strong relationship with its creditors and it gets very flexible credit limit from Tetrapack Limited, from which it gets the packaging material.

Intangibles

The company has a strong goodwill in market and good corporate image in the mind of suppliers, buyers and consumers as well.

Analyzing Competencies

In order to analyze the competencies following factors will contribute a lot.

Value chain Analysis

It includes the analysis of primary activities and supporting activities. Value chain analysis for Nestle Milkpak Ltd. is as follows:

Primary activities

1. Inbound logistics

Nestle Milkpak Ltd. has a very large and intigrated milk collection network. Milk collection centers, subcenters and village centres have been established for milk collection. Milk is collected according to the specifications like the milk should be high in fat and SNF and low in sodium and Total Plate Count. (Total Plate Count is term used for bacterial count). At these centers the milk is stored in chillers and then transported to the factories through containers which has the temperature of 2oC to 3oC.

2. Operations

At operations, Nestle Milkpak Ltd. has very sophisticated machinery. Quality checks practiced at every level of value addition. Packaging quality is also upto the standards, prescribed by WHO and Pakistan Standards Institute.

3. Outbound Logistics

Currently Nestle Milkpak Ltd. has 9 distribution centres all over the Pakistan. Nestle Milkpak Ltd. has well integrated distribution network and ware housing facilities.

4. Marketing and sales

Marketing programs of Nestle Milkpak Ltd. are very influential one. Whenever new products or new packaging of existing product is launched; it is properly communicated through an orchestrated promotional plan like events or sponsors, music programs are sponsored, point of purchase and point of sales materials are properly displayed at visible places of retail outlets. In this way, proper awareness about the project are created and the sales are stipulated.

Supporting Activities

In supporting activities Nestle Milkpak Ltd. is having competencies in prepcurement, technology development, human resource management and infra struture. So far as technological development is concerned, Nestle Milkpak Ltd. has the advantage of technical know how got from Nestle V.A. Switzerland.

Management of human resources at Nestle Milkpak Ltd. is very good. Newly recruited employed are trained as per requirement. Quality control and information management are contributing a lot in making the infrastructure of Nestle Milkpak Ltd. very effective and efficient.

Capacity Increase of Milk Powdeer Line at Kabirwala Factory

Kabirwala Milk Powder Plant which began production in September 1996, doubled its capacity in February 1999. A new NIRO evaporator was installed to meet increased processing requirements during the coming years.

Egron-2 which was upgraded in February 1999 is now being boosted in capacity from 3.0 ton per hour to 3.6 ton per hour by employing the latest technology. This would reduce the investment and cost of conversion. The project aims not only at increasing the production capacity of the machine but also to improve the quality of the product. This increased capacity will boost the volumes and help to grow exports of powder products

BCG Matrix

SWOT Analysis

Strengths

1. Worldwide fame of Nestle.

2. Efficient milk collection system

3. Keeping high quality standards

4. Enjoying more flexible credit limits from Tetrapak

5. Integrated distribution and warehousing facilities

6. Successful related diversification

7. Generic brand name of Milkpak

8. Large market share of Nestle Pure Life

9. Acquisition of AVA mineral water plant at Karachi

Weaknesses

1. Unable to compete in price sensitive segment of UHT milk market

2. Under-utilization of the capacity

3. Unable to fulfill the demand of local powder milk market

4. Not yet ISO certified.

Opportunities

1. Reasonable growth rate of dairy market: The growth rate of industry was between 7 to 10 percent per annum. The market is expected to grow at approximately 5-6 percent annually over the next two years.

2. Population growth rate

3. High urbanization rate

4. High literacy rate

5. Flexible government policies for food industry

Threats

1. Launch of Dairy Queen in price sensitive UHT milk market.

2. High inflation rate

3. Low purchasing power

4. Decrease in GDP growth rate

5. Increasing interest rates

6. Decreasing investment

7. Recessionary period in business cycle

Companies Financial Performance

Since its inception, the financial performance of the company is as follows:

Sales Revenue

clip_image006

Profit 1994 – 1999

clip_image008

clip_image010

Capacity

Exports

Exports during January - December1999 showed an increase as against the same period last year. During this period Nestle products worth Rs. 245 million were exported as against Rs. 221 million for the preceding period. Among others, Nestle Milkpak Ltd. exported MAGGI NOODLES, CERELAC, LACTOGEN 1 and 2, UHT Cream, FROST, NIDO, POLO, NESTLE PURE LIFE drinking water and fruit pulps. The biggest event of the year was the inclusion of NESTLE PURE LIFE drinking water in their export portfolio for Turkmenistan.

Exports of Nestle Milkpak Ltd. to Central Asian Republics were rather slow because of the non-convertibility of Soums to US Dollars. Bulk of our exports went to Uzbekistan and Turkmenistan. Other countries including Kyrgyzstan and Tajikistan have also shown good promise. Exports to Afghanistan continued to show strong growth (29%) against the same period last year.

Nestle Milkpak Ltd.

Brief Recordings

Twenty years ago, the company was incorporated in the province of Punjab. It is one of the most well organised manufacturing units, not only in the Food & Allied Industries Sector but also in the country.

At present the share in the company is trading at Rs 137 at more than thirteen times of its par value of Rs 10. The scrip in Nestle' Milkpak has been invariably considered by the investors as blue chip. Despite worst recession for a long time, not only the operating results, but also market value of its share has registered improvement. The 1994-1998, price band of the share remained within Rs 74 and Rs 125 so the present price is placed at much higher market value than the previous prices.

Although the price of its share is attractive but in the sector, the shares of other MNC's are placed at even much higher price, e.g. Levers (Rs 945), Rafhan Bestfood (Rs 248.10) and Rafhan Maize (Rs 220.00).

The company has excellent track record of profit distribution as since 1995 the company has never missed yearly dividends and the latest being during the half year ended June 2000 at 20% (interim cash dividend). Since 1996 the profit distribution remained between 40% to 95%, the highest rate was declared in 1998.

This is more than Rs 3 billion rupee company in terms of assets. Even its half year's (FHY 2000) sales revenue crossed Rs 3 billion threshold (Rs 3.29 billion) as compared to Rs 2.90 billion in FHY 1999. During the period under review its pre-tax profit declined by 23.6% to Rs 186.4 million (FHY 1999: Rs 244.1 million) although sales revenue registered 13.3% growth over the figure of FHY 1999. The management lamented that the business environment remained difficult as market and shops remained closed for 20 days in May and June 2000.

The company posted net profit at Rs 113.3 million which reflected 22.3% decline as compared to the corresponding period last year's.

===================================================

Performance Statistics (in Million Rupees)

Half Year December 31 2000 1999

===================================================

Share Capital - Paid-up: 452.64 452.64

Capital Reserves: 249.53 249.53

Accumulated Profit: 183.08 160.32

Shareholders Equity: 885.25 862.49

L. T. Debts: 550.00 863.01

Deferred Taxation: 179.37 156.85

Retirement & Other Benefits: 27.83 27.83

Current Liabilities: 1,487.55 1,181.43

Fixed Capital Expenditure: 1,890.94 1,795.40

L. T. Advances, Deposits &

Prepayments: 4.08 1.64

Current Assets: 1,234.99 1,294.57

Total Assets: 3,130.00 3,091.61

Profit Loss A/C for

Half Year Ended June 30, 2000 1999

Sales: 3,288.12 2,901.27

Gross Profit: 880.65 844.73

Operating Profit: 263.28 307.96

Other Income: 4.92 3.11

Financial Expenses: 69.52 57.89

Profit Before Taxation: 186.38 244.12

Profit After Taxation: 113.29 145.84

Dividend Cash 20% (1995 35%): 90.53 152.42

Earning Per Share (Rs): 2.50 3.22

Share Price (Rs)

Dated 18/10/2000: 137.00 -

Price/Earning Ratio: 54.8 -

Book Value of Share (Rs): 19.56 19.05

Price/Book Value Ratio: 7.00 -

Debt/Equity Ratio: 38:62 50.00

Current Ratio: 0.83 1.10

Gross Profit Margin (%): 26.78 29.12

===================================================

Problem Statement

Dairy Queen launched by CDL “How to cope with rapid penetration of Dairy Queen in the market?”

Action Plan

(1) Creating value & sustaining it over the long term by offering a wide variety and advertising & communicating to the consumers in an efficient manner.

(2) Does not depict discriminating or offensive attitude to religious, political, ethnic, cultural social groups.

(3) Avoid demonstrations that encourage dangerous or inappropriate use of the product.

(4) Carries out research and development aimed at the constant improvement.

(5) Provide the summary of its policy for the information employees and the public in the form of a charter.

(6) Regularly conducting training of employees to ensure complete understanding of the company’s responsibility under the international code.

(7) Promote a sense of identification among employees, offering competitive salaries and social benefits and providing a safe working environment for each employee.

(8) Nestle is against all forms of exploitation of children, the company does not provide employment to children. If they are less than 20 years of age and have not completed their compulsory education.

(9) Nestle also provides assistance to united Nation Agencies Government and the business community to deal with the problem of child labor.

(10)Nestle insists on honesty, integrity and fairness in all aspects of its business and expects the same in its relationship with all business partners.

Suggestions and Recommendations

Following are the suggestions and recommendations for Nestle Milkpak Ltd.

§ The company should introduce its UHT brand fore the price sensitive segment of uht milk market in order to counter the market of “Dairy Queen”.

§ The should also start to manufacture powder milk in order to meet the domestic demand and so that it can be helpful in saving the foreign exchange that is expensed in importing the powder milk from foreign countries.

§ The company should explore the market potential in a way, so that it can utilize its full capacity in order to gain economies of scale in the production.

§ At the moment the company is using focus marketing approach that only that segment is approached which highly attractive for the company but it should also develop the marketing program that distinguishes the characteristics of existing available substitutes to their highly quality & hygiene oriented product.

§ The company should also position its products to the middle income group like “Everyday” and “NIDO” have been positioned after their new small packaging launch.

§ The company should also develop an integrated awareness plan in order to aware the people about the quality of the UHT milk as compared to other pasteurized or loose/fresh milk.


View the original article here