nestl sa in hot drinks (world)

NESTL SA IN HOT DRINKS (WORLD)

September 2014

Euromonitor International PASSPORT 2 HOT DRINKS: NESTL SA

Disclaimer

Much of the information in this

briefing is of a statistical nature and,

while every attempt has been made

to ensure accuracy and reliability,

Euromonitor International cannot be

held responsible for omissions or

errors.

Figures in tables and analyses are

calculated from unrounded data and

may not sum. Analyses found in the

briefings may not totally reflect the

companies opinions, reader discretion is advised.

Nestl is the global leader in

hot drinks and it is accelerating

its expansion in the US

following the formation of

Jacobs Douwe Egberts (JDE).

The companys presence in standard fresh ground coffee is

weak and it has been making

efforts to develop coffee pods,

particularly in Western Europe.

Multi-beverage Nescaf Dolce

Gusto outperformed Nespresso

but both are facing competition

from compatible products and

private label. The companys initiatives in tea pods are bold

and encouraging.

Scope

SCOPE OF THE REPORT

All values expressed in this report are in US dollar terms, using a fixed exchange rate (2013).

2013 figures are based on part-year estimates.

All forecast data are expressed in constant terms; inflationary effects are discounted. Conversely, all historical data are expressed in current terms; inflationary effects are taken into account.

Jewellery Confectionary

US$185,477 mn

Refrigeration

Appliances

144,010

Microwaves

60,669 Home

Laundry

121,107 Large Cooking

Appliances

132,745

Home Laundry

Appliances

121,107

Microwaves

60,669

Small

Appliances

1,724,022

Hot Drinks

US$138.1 billion

Coffee

US$80.8 billion

Tea

US$40.2 billion

Other Hot Drinks

US$17.0 billion

STRATEGIC EVALUATION

COMPETITIVE POSITIONING

MARKET ASSESSMENT

COFFEE OPPORTUNITIES

TEA AND OTHER HOT DRINKS

OPPORTUNITIES

BRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


Nestl has seven core business segments: Powder and Liquid Beverages (hot drinks included

here); Water; Milk Powder and Ice Cream; Nutrition

and HealthCare; Prepared Dishes and Cooking

Aids; Confectionery; and PetCare. According to the

company, Water accounted for 7.3% of the groups

CHF sales in 2013, and 5% of trading operating

profit.

Within its beverages business, the Nespresso platform is a high-growth revenue generator and

receives plentiful attention in terms of media

attention and R&D. Nestls 2013 annual report

combined instant coffee, the Nespresso business

and other powder and liquid beverages together,

showing no split between them.

Nestl sits at the top spot of global hot drinks by value, ranking number one in both coffee and other

hot drinks in 2013. Its Nespresso business

continues to grow globally although it showed a

marked slowdown in Western Europe amid

growing competition. The company is expanding in

the US by introducing new machines to take on

Kuerigs dominance.

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Nestl SA: Global Hot Drinks Value Sales 2008-2013

Nestl SA

Headquarters: Vevey, Switzerland

Regional involvement: Global

Category involvement: Coffee, other hot drinks

World hot drinks off-trade value share (2013):

16.0%

World hot drinks off-trade value growth (2012-2013):

8.6%

Nestl presence in hot drinks focused on coffee



Nestls more moderate but more profitable growth for FY2013 STRATEGIC EVALUATION

For the fiscal year 2013, Nestl posted growth slightly below the 5% long-term target for organic growth, but its

trading operating profit margin rose slightly for the year.

Zone Europe delivers positive growth

Nestls FY2013 results offer unusual reading. In contrast to the patterns of recent years, 2013 saw

minimal reported revenue growth in Zone Europe and

levels of growth in the reporting segments

encompassing emerging markets well below recent

levels.

Although the groups organic growth was broad based, Europe posted 0.8% growth, Americas 5.1% and the

AOA region 7.4% year on year.

Nestl Nutrition remains the high-growth/high-profit

division

The infant nutrition business, enhanced by the Wyeth Nutrition acquisition, had a very positive year in

FY2013, particularly in infant formula and infant cereals.

The business delivered double-digit growth in Brazil and

Russia. The US benefited from the continued rollout of

innovations to help prevent colic and allergies, and

strengthening of the Gerber brand franchise.

Nestl SA: Reported Results (CHF million)

FY2012-FY2013

2012 2013 Y-o-y

growth

Zone Europe 15,388 15,568 1.2%

Zone Americas 28,613 28,375 -0.8%

Zone Asia,

Oceania and Africa

(AOA)

18,875 18,859 -0.1%

Nestl Waters 7,174 7,231 0.8%

Nestl Nutrition 7,859 9,826 25.0%

Other 11,813 12,299 4.1%

Group Total 89,722 92,158 2.7%

Operating trading

profit 13,464 14,012 4.3%

Profit for the year 10,677 11,060 3.6%

Profit margin (%) 11.9 12.0

Source: Nestl Annual Report 2013


In the first half of 2014, Nestl delivered organic growth of 4.7%, with total sales reaching CHF43

billion. In Q1, the extension of the Grand Cru

coffee range, innovative services and new

machines ensured that demand for Nespresso in

established markets remained solid despite

significantly increased competition. Geographic

expansion was accelerated with 14 new boutiques

opened across the world. In North America there

has been a good response to the launch of the

VertuoLine system delivering the long-cup coffees

preferred by US consumers.

In zone Asia, Oceania and Africa, the premium businesses continued to be a growth driver for the

Zone. The continuing rollout of Nescaf Dolce

Gusto delivered double-digit growth. Innovation

also contributed with new launches including Yinlu

Walnut Milk in China (included in soft drinks) and

new portioned packs of Milo in Australia. There

was solid growth for Milo in cocoa and malt

beverages and Maggi in ambient culinary. Russia

saw good growth for Nescaf Dolce Gusto.

Nestl SA: Sales Overview by Business Segment

H1 2014

Business segment Jan-June 2014

(CHF million)

Jan-June 2014

% organic

growth

Powdered and

Liquid Beverages 9,835 5.3

Water 3,410 5.8

Milk Products and

Ice Cream 8,085 5.7

Nutrition &

Healthcare 5,659 7.6

Prepared Dishes

and Cooking Aids 6,394 0.0

Confectionery 4,184 3.4

PetCare 5,414 5.3

Total Group 42,981 4.7

H1 results in 2014



Nestls Four Operational Pillars Innovation and

portfolio development

Efficiency - highest quality - lowest cost

Consumer communication

Product availability across all

distribution channels

Nestl continuously reformulates products

to enhance their

nutritional profile, by

reducing unhealthy

elements and/or

increasing their nutrient

content. Central to the

groups innovation strategy is the

development of

branded active ingredients, through which Nestl aims to

highlight its science-

driven approach and its

R&D capabilities.

Nestl's cost-saving strategies have been

implemented as per the

Nestl Continuous

Excellence programme.

The group has

improved operating

margins over the years.

In 2013, both the cost of goods and

distribution expenses

rose, but the

companys trading operating profit grew by

4% and its trading

operating margin

increased by 20 basis

points on 2012.

Intense innovation in line with ongoing trends

and efficient

communication of

added-value benefits

will be key to the

success of the groups portfolio improvement

and to enable strong

pricing positions to

recover significant R&D

investment.

Investment in advertising will also be

key to increasing the

groups competitive edge and differentiating

itself from its rivals.

One of Nestls strategic pillars is the

broadening of

distribution to increase

consumption

opportunities. Its

multiple channel

strategy, ranging from

traditional retailers to

modern grocery and

online, especially

targets impulse

opportunities, such as

street vendors, kiosks

and vending machines,

which are vital to, for

example, ice cream

and confectionery

sales.

Nestls strategic directions STRATEGIC EVALUATION


STRENGTHS

OPPORTUNITIES

WEAKNESSES

THREATS

With Nespresso and Nescaf Dolce Gusto

expanding globally,

Nestl continues to lead

the global coffee pods

market, despite its share

being eroded by Keurig.

Strength of pod coffee

With a strong global footprint, Nestl's global

value share of instant

coffee stood at 48% in

2013. Its dominance

here is and will remain

secure for some time to

come.

Instant coffee North America

North America has traditionally been a

weakness for Nestl in

hot drinks. It is now

addressing this by

introducing Nespresso to

foodservice and

launching a new

machine.

Standard fresh coffee

Nestls bold move with Special.T is interesting

and the premium tea

segment is certainly

worth exploring further

especially in developed

markets.

Special.T

The category is growing and Nestl needs to

continue to sustain its

presence in Western

Europe and penetrate

key coffee-drinking

markets.

Coffee pods

Nespresso-compatible products and private

label are cannibalising

Nespressos share of

coffee pods.

Threat to Nespresso

The competition is changing, with Keurigs

partnership with multiple

brands and the formation

of major rival JDE.

Keurig and JDE

SWOT: Nestl SA


While Nestl leads instant coffee and coffee

pod sales, it has virtually

no presence in standard

fresh ground coffee and

it is weak in coffee

beans.


The emergence of Nespresso-compatible products is a huge

threat to Nespresso. The fact that

these brands are available in both

multiple grocers and online

makes them more accessible to

consumers. DE Master Blenders

(DEMB)s LOr Espresso is

emerging as a key challenger to

Nespresso in Western Europe.

In Western Europe, Nespresso continues to hold 41% of the

coffee pods market and private

label accounts for around 11%.

Nestl has been fighting for

patent protection but it seems

likely that it will not keep the

technology to itself. While a

devastating blow to the company,

it also highlights Nestls

leadership in innovation.

Nespresso compatibles

Nestls bold move in single-serve tea-specific machines, Special. T is

still at the experimental stage.

Premium teas and making tea

drinking a long-lasting premium

experience are being explored by

various manufacturers including

DEMB and Unilever. This is a

manufacturer-led movement and

manufacturers are trying to

convince consumers of the

premium nature of their teas and

the method of tea preparation.

Therefore, marketing expenditure is

likely to be high in this space.

Following Nestls launch in tea machines, Unilever responded with

Tea Fusion endorsed by Lipton.

Tea machines is a niche segment

but competition is growing.

Premium tea

Although Nestls innovation is copied and used by other players,

this has not stopped the company

innovating further. Its launch of

new machines in the US and the

Nespresso boutique retail concept

are encouraging moves.

Nevertheless, technology creates opportunities for Nestl, opens up

possible new sales routes, but,

also invites new competition.

Technological innovation does not

guarantee success.

The formation of JDE is also a threat to Nestl, as the combined

resources for coffee are enormous

and the economies of scale

derived from optimising

technological innovation and

marketing for its widened portfolio

of brands considerable.

Innovation

Challenges in hot drinks




MARKET ASSESSMENT



OPPORTUNITIES

BRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


Nestl continued to outperform the global hot drinks market in 2013, thanks to healthy growth in instant coffee in major emerging markets and expansion in pods in developed markets. Its strong growth continued

to be supported by Nespresso, Nescaf Dolce Gusto and Nescaf. Nestl will face a greater challenge

following the merger between Mondelezs coffee unit and DEMB.

Mondelez marginally outpaced the market thanks to the strong performance of the beverage system brand Tassimo. Its multi-beverage capability and relative affordability compared to Nespresso helped it appeal to

the mass market and secure healthy volume sales. The availability of Tassimo in grocery stores has also

proved an advantage in targeting mass-market consumers.

DEMBs overall performance was hampered to some extent by its limited geographic presence and slow sales of Senseo, which has been one of the losers in the global single-serve coffee boom in recent years.

Going forward, DEMBs acquisition of Norways Kaffehuset Friele may help its development of single-origin coffee beans in European markets. However, Keurigs expanded collaboration with established brands and

its potential interests in international markets are likely to see it emerge as an international player in the

medium term.

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Nestl Mondelez Unilever Total Hot DrinksMarket

DEMB Strauss/So Miguel Strauss Group Ltd

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Global Hot Drinks: Selected Companies % Y-o-Y Growth 2012-2013

Nestl slightly outperforms the global hot drinks market in 2013



Compared to soft drinks, hot drinks is a very fragmented industry, with the top 10 hot drinks players making up only 38% of the global

market in 2013. Nestl continues to occupy the top spot in the global

hot drinks market. Its leadership is underpinned by its consistent

growth in both instant coffee in emerging markets and fresh coffee in

developed markets, while its presence in tea is limited. Its strong

presence in other hot drinks also helps to support its overall hot drinks

position.

Despite the split from Kraft, Mondelez maintained its second position and kept a solid distance between itself and Unilever. Unilevers third

position is due to its strong leadership in tea, with wide geographical

coverage. However, tea is an industry lacking a coffee pod moment,

meaning there is no single tea category or type driving large-scale

consumer trading up across developed markets. Unilevers potential

expansion of the newly-acquired Australian T2 premium tea retail

brand will help Unilevers ambition to expand into premium tea.

Mondelez and DEMBs future partnership - JDE - will move to the top of global coffee by retail volume, but it will stay in second place

behind Nestl in retail value terms. The combined strength of

Mondelez and DEMB will be a compelling force in the global hot

drinks market and a real threat to Nestl.

Global top 10 hot drinks companies by value in 2013


Top 10 Hot Drinks Companies

2013

Company % value

Nestl SA 16.0

Mondelez International

Inc 6.9

Unilever Group 3.6

DE Master Blenders

1753 NV 3.4

Green Mountain Coffee

Roasters Inc 2.0

Tchibo GmbH 1.5

JM Smucker Co, The 1.3

Associated British

Foods Plc 1.3

Tata Global Beverages

Ltd 1.2

Lavazza SpA, Luigi 1.1



MARKET ASSESSMENT



OPPORTUNITIES

BRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


Asia Pacific and Latin America are set to be the growth engines for hot drinks over 2013-2018, with the two regions contributing over half of global growth over the forecast period. Strong growth in both Brazils coffee

and Chinas instant tea markets is set to be key to this growth. Nestl has invested in Chinas Yinlu local

beverages but it is unlikely that Nestl will be interested in expanding into instant tea. In Western Europe

and Australasia, hot drinks growth will be more subdued, with CAGRs of 1-2%. North America appears to

show a more positive picture. In the US, Nestl introduced the VertuoLine system especially designed for

the local long-cup market, a bold move given Keurigs dominance.

Nestl SA: North America remains a weak spot

MARKET ASSESSMENT

Asia Pacific

Australasia Eastern Europe

Latin America

North America

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Market size 2013 (US$ million rsp)

Nestl SA: Hot Drinks Presence 2013 and Growth Prospects 2013-2018 by Region

Note: Bubble size shows company share of region in 2013. Range displayed 3.8-43.2%

Middle East and Africa

Western Europe


Instant coffee is Nestls primary interest in hot drinks, a category it dominates with a 48% retail value share in 2013. Instant coffee sales are expected to post a CAGR of 3% in off-trade value terms over 2013-

2018, with emerging markets Asia Pacific, Eastern Europe and Middle East and Africa key growth

contributors. Nestl, as the global leader in the category, stands to benefit disproportionately and it has

dominant positions in key growth markets such as China (75% share), Mexico (74%) and the UK (42%).

While Nestl was late to standard fresh ground coffee, it has focused on growing its presence in premium fresh coffee pods with Nespresso and Nescaf Dolce Gusto. Mid-ranged Nescaf Dolce Gusto is being

rolled out globally and achieved higher growth than super premium Nespresso. Nescaf Dolce Gusto is

now present in 73 countries, according to the companys annual report.

Nestl leads global other hot drinks sales through its Milo and Nesquik brands based largely on its emerging market presence. It also has an emerging presence in premium tea with the Special.T system (a

pod-based system similar to Nespresso), although its sales here remain modest.

Nestl SA: Dominant in instant and focusing on growing pod coffee

MARKET ASSESSMENT

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Market size 2013 (US$ million rsp)

Nestl SA: Hot Drinks Presence 2013 and Growth Prospects 2013-2018 by Category

Note: Bubble size shows company share of category in 2013. Range displayed 0.8-47.7%

Standard Fresh

Ground Coffee

Fresh Coffee Beans

Fresh Ground Coffee Pods

Instant Coffee



MARKET ASSESSMENT



OPPORTUNITIES

BRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


Global opportunities will remain biased in favour of fresh coffee


Within the major coffee growth markets, fresh coffee will generate much higher value growth over 2013-2018 than instant coffee. Globally, growth in instant coffee will be driven by emerging markets, primarily in

Asia Pacific, headed by China. Some developed markets, such as Canada and Germany, are likely to see

sluggishness or even decline in instant coffee.

Brazil, the US, Canada and Spain are major forces for growth in fresh coffee. In Brazil, Nestls weakness in standard fresh ground coffee affects its pace of share gain in overall coffee. Its key competitors are

Strauss/So Miguel, DE Master Blenders and potentially the entity, JDE, formed by the merger between

DEMB and Mondelezs coffee unit. Currently, there is little competition in coffee pods and Nespresso

dominates the category.

In the US and Canada, Nespresso is expanding and taking on Keurigs strong position there. It is crucial for Nestl to grow the new beverage machine VertuoLine by scale and its beverages should be designed to fit

local consumers palates and lifestyles.

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Fresh vs Instant Coffee: Strongest Absolute Value Growth Markets 2013/2018

Fresh Coffee Instant Coffee


Nestl leads the global coffee market, with a retail value share of almost 23% in 2013. Nestls strong position is underpinned by

its successful expansion via instant coffee in emerging markets

and coffee pods in developed markets.

Jacobs Douwe Egberts (JDE) will be a strong second player by retail value sales, with a potential 16% share, thanks to

Mondelezs good international coverage and DEMBs wide

presence in Europe. At the time of writing, DEMB is in the

process of acquiring a premium coffee bean company,

Kaffehuset Friele (owner of House of Coffee), based in Norway.

DEMBs target market for its bean business is mainly Western

Europe.

Keurig (GMCR) currently operates in the US only; however, international expansion cannot be ruled out. The Coca-Cola Co

recently acquired a 10% stake in Keurig, and the partnership will

allow Coca-Cola in a capsule format to be dispensed in Keurigs

cold beverage machine. The partnership may give Keurig further

confidence to expand beyond its domestic comfort zone.

Strauss and its Brazilian joint venture Strauss/So Miguel both appeared in the top 10 in 2013. However, Strauss Group has

seen its global share decline as a direct result of its slow entry

into pods.

Nestls position still strong in overall coffee in 2013 COFFEE OPPORTUNITIES

World Top 10 Coffee Players by Retail

Value Share 2013

Company %

value

Nestl SA 22.7

Mondelez International Inc 10.9

DE Master Blenders 1753 NV 5.4

Green Mountain Coffee Roasters

Inc 3.4

Tchibo GmbH 2.5

JM Smucker Co, The 2.3


Strauss/So Miguel 1.5

Strauss Group Ltd 1.5

Kraft Foods Group Inc 1.5


Nestls global position in coffee may be challenged by the arrival of Jacobs Douwe Egberts. In May 2014, Mondelez and DE Master Blenders 1753 (DEMB) jointly announced the decision to combine their

respective coffee businesses to create the worlds leading coffee company, with annual revenues of over

US$7 billion. The new company, called Jacobs Douwe Egberts (JDE), will be based in the Netherlands.

This deal will be one of the most significant in the global coffee market in many years, and is likely to

reshape the competitive landscape.

The parties have entered into an agreement to combine Mondelezs wholly-owned coffee portfolio (outside France) with DEMB. In conjunction with this transaction, Acorn Holdings BV (AHBV), owner of DEMB, has

made a binding offer to take over Mondelez's coffee business in France. The parties have also invited

Mondelez's partners in certain joint ventures to join the new company. The transactions remain subject to

regulatory approvals and the completion of employee information and consultation requirements. In 2013,

Mondelez's wholly-owned coffee business generated revenues of around US$3.9 billion, and DEMB

generated some US$3.4 billion. Upon completion of all proposed transactions, Mondelez will receive cash

of approximately US$5 billion and a 49% equity interest in JDE. AHBV will hold a majority share in the

proposed combined company and will have a majority of the seats on the board, which will be chaired by

current DEMB chairman Bart Becht. AHBV is owned by an investor group led by JAB Holding Company

Sarl. Mondelez will have certain minority rights. The transactions are expected to be completed during the

course of 2015, subject to limited closing conditions, including regulatory approvals.

The proposal includes DEMBs tea business, which is highly complementary as Mondelez has little presence in tea. However, Mondelezs chocolate drinks are excluded from the deal. JDE will be the global

brand owner of all the coffee and tea brands of both companies. As this is only at the proposal stage, the

details regarding how these brands will cross leverage each others networks have not yet been disclosed

or discussed in public.

New rival: Mondelez/DEMBs partnership proposal for JDE COFFEE OPPORTUNITIES


If the deal is approved, JDE will assume the number one position in the worlds coffee market by retail volume, with a 15% share, overtaking market leader Nestl (12%). However, in value terms, JDE will be

placed second, with a 16% share, overshadowed by Nestl (23%). Nestls high value positioning is

underpinned by its strong presence in coffee pods, and its wide coverage in instant coffee, particularly in

emerging markets.

The deal is a strategic fit and highly complementary for both Mondelez and DEMB, particularly in terms of coffee brands and geographic profile. JDE would have a much wider brand portfolio than the two

companies have at present, encompassing Jacobs, Carte Noire, Tassimo, Kenco, Douwe Egberts, LOr,

Pilo and Senseo, and these brands will potentially have immediate access to an established network in

key markets. For example, Mondelez is absent from Brazils coffee market and can leverage DE Master

Blenderss strong leadership in Brazil to make a relatively smooth entry. DE Master Blenders can also use

Mondelezs strength in China to expand.

From a competitors point of view, the deal is a threat to Nestl, as it must face not only JDE globally but also Keurig in the US. The Coca-Cola Cos acquisition of a 10% stake in Keurig has made the situation

even more challenging, as Keurig has strengthened its financial position. The emergence of copycat

Nespresso-compatible products, private label and generic single-serve products has already put pressure

on Nespressos share. Nestl may have to expand aggressively into the US coffee pods category and

strengthen its position in major emerging markets. Nespressos recent launch of VertuoLine in the US,

which allows the machine to produce a large cup of espresso, is a good experiment.

The potential impact of JDE



JDE

(15.3%)

Nestl (11.8%)

JM Smucker (4.1%),

Strauss/So Miguel (4.0%),

Tchibo (2.3%), Kraft (2.2%),

Melitta (1.9%), Lavazza (1.8%)

Others

JDE will lead the global

coffee market

by volume with

a good margin

between itself

and Nestl.

Nestl is

unlikely to be

challenged by

those

companies

below. Over

2013-2018,

Nestls key

battle will be in

the US and with

new rival JDE.

New order in competition pyramid by off-trade volume with JDE



Nespresso saw its growth slow down upon the

emergence of Nespresso-compatible products

and rival brands such as LOr Espresso. The

potential formation of JDE and its wide brand

portfolio will represent a threat to Nespresso.

Case study: Challenging landscape in single-serve coffee



Globally, most major coffee players are engaged in the pods business to varying degrees. While

Nespresso has global coverage, Green Mountain

Coffee Roasters is strong in the booming US market.

In March 2014, GMCR changed its name to Keurig

Green Mountain, to reflect its business of selling

Keurig coffee makers. GMCRs Keurig pod system

overtook Nespresso for the first time in 2013 to

become the number one brand by value in pods

globally, thanks to its strategy of allowing established

beverage brands to be made compatible with its

system.

Nestls strong rival will be JDE, which will have four major single-serve beverage system/pod brands in

the top 10: Tassimo, Senseo, LOr Espresso and

Jacobs, covering a spectrum of price points. The fact

that these pods are available in the grocery channel

helps them attract more consumers doing their

weekly shopping. Mondelez recently launched

Nespresso-compatible pods for the Jacobs and Carte

Noire brands in Switzerland, Germany and France to

target Nespressos core markets, and JDE may have

a chance to steal some share from Nespresso.

Global Top 10 Fresh Ground Coffee Pods

Brands by Value Ranking 2008/2012/2013

Brand 2008 2012 2013

Keurig 5 2 1

Nespresso 1 1 2

Nescaf Dolce

Gusto 4 3 3

Tassimo 3 5 4

Senseo 2 4 5

L'Or Espresso - 6 6

Cafissimo 8 7 7

Lavazza Systems 7 9 8

Jacobs 6 8 9

Delta 13 10 10

Global pods: Nespresso overtaken by Keurig amid US growth



Global prospects for coffee pods by market


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Forecast Value Growth in Coffee Pods by Country 2013-2018

Absolute Growth US$ million CAGR % 2013/18


Developed markets the driver

Growth to be found mainly in developed markets due to high initial cost of purchasing the machine and low affordability in most developing markets. It is important for Nespresso to strengthen its position in developed markets in terms of both the machines and the drinks. In Western Europe, Nestl will need to fight hard against Nespresso-compatible products and make a considerable effort to retain consumer loyalty.

In the long term, pod machines will filter through to major coffee growth developing markets, such as China. Nestls strong position in instant coffee in these markets will thus help it to expand in fresh coffee.

Beverage machines or beverage

Beverage machine operators and beverage brand owners have to be clear how to develop their systems and technology in association with their coffee brands.

As patents for machines will expire, the machine owners have to maximise the value of innovation before this occurs. The emergence of Nespresso-compatible pods has alerted both machine and beverage brand owners regarding consumer loyalty to the drinks.

Patents on technology can be vulnerable. Investment in R&D is not a guarantee financial success.

Collaborations

For pod marketers, the investment in machines can be huge and it is a complex issue to market, distribute and maintain the machines. A number of alliances and collaborations have been formed: Starbucks and Keurig, Keurig and The Coca-Cola Co (for cold beverages), Keurig with Lavazza etc.

The direction of development of machines is tending towards user-friendly, interactive and digital formats. However, consumers are increasingly sophisticated and they are looking for good value for money in innovation rather than superfluous modifications.

The future of pods



Brazil has a concentrated coffee market, with the top three players making up over half of total retail value sales. Nestls rivals include

newly-created JDE, the Strauss/So Miguel joint venture, Melitta and

other smaller companies.

Nestl Brasil has a strong position within instant coffee as its brand is well known among consumers. Nestl has 14 exclusive stores and an

online portal to sell Nespresso coffee pods to consumers. At the

same time, its Nescaf Dolce Gusto brand has more widespread

distribution due to its more accessible price.

Nestls key current rival is DEMB, which is long established in Brazil in both the off-trade and on-trade. DEMBs strength lies in fresh

ground coffee, where it has been leader for many years. Standard

fresh ground coffee dominates coffee sales in Brazil and will continue

to do so over the forecast period. However, the pods category is

advancing rapidly and has attracted growing interest from both

consumers and industry players. Nestl dominates the pods category

and Melitta has introduced pods; however, sales and distribution

remain limited. Strauss/So Miguel has not registered category

shares in pods yet. In view of the categorys anticipated rapid growth,

DEMB may build a solid platform for L'Or Espresso and Senseo to

grab share from Nespresso, as consumers are already aware of its

corporate offering and are familiar with its brands in fresh ground

coffee.

Brazil: Coffee by % Company Value Share

2013

DE Master Blenders 1753 NV

Strauss/So Miguel

Nestl SA

Melitta Unternehmensgruppe Bentz KG

Indstrias Alimentcias Marat Ltda

Cacique de Caf Solvel, Cia

Others

Nestls big challenge in Brazil COFFEE OPPORTUNITIES


Nestl to see JDE as formidable rival in pods in Western Europe


Post JDE Competition Landscape in Western Europes Pod Market 2013

Category Major company % value share

2013

JDE % value

share 2013 JDE rank 2013

Fresh Coffee Beans Mondelez International Inc 11.8 16.2 1


Tchibo GmbH 8.2

Alois Dallmayr oHG 6.6


Fresh Ground

Coffee Pods Nestl SA 41.0

DE Master Blenders 1753 NV 15.2 24.6 2

Mondelez International Inc 9.4

Standard Fresh

Ground Coffee Mondelez International Inc 18.1 26.5 1



Instant Coffee Nestl SA 47.5

Mondelez International Inc 16.2 18.2 2



Nespresso is facing tremendous challenges in

the US coffee market: Keurig and chain coffee

shops are solid barriers. However, pockets of

opportunity exist in foodservice.

Case study: US - Pod battle



Nespressos business model will continue to have a tough time in the US. Consumers there are very loyal to

their favourite hot drinks brands and will pay a premium

for a Keurig coffee machine because it brews all their

favourite branded drinks at the touch of a button and at a

price that is still perceived as reasonable. To succeed, it

will not be enough for Nespresso to focus on coffee size.

The right pricing and brand awareness and availability in

retail outlets such as grocery are also important.

The North American fresh coffee market is very concentrated, with the top two companies, Kraft and JM

Smucker, jointly commanding over one third of off-trade

fresh coffee volumes. Despite volume sales just one fifth

of JM Smucker, Green Mountain is North Americas most

valuable coffee company as almost all of its sales derive

from its Keurig pods which are premium priced.

In the US, specialist coffee shops are by far the most popular places for consumers to enjoy a cup of coffee

outside the home. In 2013, specialist coffee shops

generated sales of around US$18 billion and this is

expected to rise by a further 13% over 2013-2018.

Starbucks is the major player in this field, accounting for

around 60% of specialist coffee shops sales in 2013.

US Coffee Pods: Competitive Landscape % Company Value Share

2013

Green Mountain Coffee Roasters Inc

Nestl SA

Mondelez International Inc

Others

Nestl faces big challenges on all fronts



In North America, there are only a few coffee brands that consumers brew at home, with one also being the main specialist coffee chain where the same consumers enjoy their coffee when out.

In this context, Green Mountain has been able to thrive. The company has been able to find success by combining its pod technology with stable partnerships with several popular licensed regional coffee brands.

Green Mountain has agreements with 25 different coffee brands to produce K-Cups, including four of the

top five brands by value in the US fresh coffee market - Keurig itself, Folgers, Dunkin Donuts and

Starbucks.

This strategy has helped Green Mountain attract customers who would normally hesitate in purchasing a pod coffee machine but are nonetheless interested in the possibility of brewing their favourite brand of

coffee at the touch of a button. Crucially, this partnership strategy has also limited the incentive for

competitors to launch rival pod systems and is in turn attracting further cooperation agreements. Even

Lavazza, the Italian coffee brewer, which in Europe partners Electrolux for its pod system, has decided to

cut out the Swedish company from its US pod expansion and has partnered with Green Mountain instead.

Lavazza purchased a 7% stake in Green Mountain and in 2012 launched its Keurig Rivo.

The Coca-Cola Co has purchased 10% stake in Keurig and started investing in the cold beverage system. TCCCs investment strengthened Keurigs confidence to expand and ensures that Keurigs innovation

pipeline will not run short.

Currently, Keurigs sales are mainly in North America. As the company grows, its international ambition may become more apparent. By then, Keurig will become Nestls global rival.

The K-Cup barrier: Open system carrying multiple coffee brands



Part of Nespressos plan to boost its share of the US market is to increase its brand exposure via

professional customers, such as restaurants. In

May 2013, Nespresso launched the Aguila, a

machine designed especially for US foodservice

outlets to help with this goal. While Nespresso may

be successful in gaining entry into US restaurants,

it is still unclear whether this will translate into a

larger presence in the US retail coffee pods

market.

Positioned as a premium product, available only through Nespresso boutiques or online retailers,

Nespresso is targeting only high-margin

restaurants to showcase its coffee. The brands

restaurant pitch echoes that of its individual

consumer: Nespresso can offer an unparalleled

combination of convenience and quality. Traditional

espresso machines used by higher-end

foodservice establishments require trained

professionals to operate, substantial maintenance,

and of course, a constant supply of fresh beans.

Exploration in foodservice


Nespresso machines, on the other hand, are simple to operate, require minimum care, while the

vacuum-sealed pods last up to 11 months.

Furthermore, though a premium product,

Nespresso machines are more economical than

standard espresso machines: not only is the initial

price of a Nespresso machine generally less

expensive, but the running costs are also much

lower. Thus far, Nespressos campaign has been

convincing. According to Nespresso sources, 30%

of the worlds Michelin-starred restaurants, many

within the US, have made the switch to Nespresso

machines.

0

25

50

75

100

125

150

2008-09 2009-10 2010-11 2011-12 2012-13

% y

-o-y

gro

wth

US Coffee Pods: GMCR vs Nestl % Y-o-Y Retail Value Growth 2008-2013

Keurig Nestl Pod Market Growth



MARKET ASSESSMENT



OPPORTUNITIES

BRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


Other hot drinks includes chocolate powder, malt drinks and local products. China represents a strong growth market, but Nestl has limited presence there. Chinas market is highly fragmented, with VV Group,

the market leader, commanding around 7% of retail value sales in 2013. Nestls strategy for China

changed upon its acquisition of Yinlu, which gave it a presence in local beverages and it does not try to

convince Chinese consumers to try Western style drinks. In Brazil, Nestl leads other hot drinks with strong

brand Nescau and Nesquik. Both PepsiCo and TCCC is present but other hot drinks are not their core

beverages in Brazil. Thus, Nestl has a good opportunity to sustain its leadership given its investments in

marketing campaigns and research and development of new products, pack sizes and flavours..

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

0

100

200

300

400

500

600

China Brazil Indonesia Nigeria India Argentina Russia Mexico Venezuela UnitedKingdom

South Africa

CA

GR

% 2

01

3-2

01

8

Ab

so

lute

Gro

wth

(U

S$

mill

ion

)

Other Hot Drinks Prospects by Country 2013-2018


Global other hot drinks outlook

TEA AND OTHER HOT DRINKS OPPORTUNITIES


Chocolate powdered drinks is likely to be the growth driver in the other hot drinks market. Emerging markets are the key growth geographies, including Brazil, Mexico, Indonesia and Venezuela.

In Brazil, Nestl (Nescau) and PepsiCo (Toddy) are the key players. The fact that the combined share of Nescau and Toddy is nearly 70% of the market makes it a real barrier for other potential entrants. Nescau

is a fortified chocolate-based flavoured powder drink with Actigen-E, a combination of vitamins and

minerals, in its formula. A marketing campaign focusing on adolescents is its key strategy to boost sales in

this category.

In Mexico, chocolate-based flavoured powder drinks registered the strongest growth in 2013, driven mainly by advertising which helps develop the perception among consumers that these are high quality products,

and in turn limits the impact of price increases on consumers purchasing decisions. Nestl Mxico

registered the strongest growth in other hot drinks in retail value share terms in 2013 due to the improved

performance of Nesquik in chocolate-based flavoured powder drinks. This was due to the recent launch of

the product containing stevia, an all-natural sweetener, which is considered healthier and potentially helpful

in curbing childhood obesity.

0.0

1.0

2.0

3.0

4.0

0

200

400

600

800

1,000

Chocolate-based FlavouredPowder Drinks

Malt-based Hot Drinks Non-Chocolate-based FlavouredPowder Drinks

Other Plant-based Hot Drinks

CA

GR

% 2

01

3-2

01

8

Ab

so

lute

gro

wth

(U

S$ m

illio

n)

World: Other Hot Drinks Prospects by Category 2013-2018


Chocolate powder to drive future growth of other hot drinks



Emerging markets are set to drive global tea growth. Asian emerging markets will continue to raise their profile, becoming attractive investment destinations, on the back of organic growth in demand for value-

added products, and consumers trading up.

China is forecast to account for over 40% of global absolute value growth over 2013-2018. The emerging middle class, changing lifestyles and urbanisation should be recognised and fully explored by

manufacturers. Missing the growth opportunities may risk weakened global status in the medium term.

The US will continue to see good expansion in tea sales, thanks to the healthy image of tea and premiumisation in the tea industry. Starbucks acquisition of Teavana and its increased interest and

activities in tea will help to create a premium tea moment.

Unilevers acquisition of T2 (premium tea specialist outlets) and further established a store in London means it has started exploring high end tea store.

0.0

2.0

4.0

6.0

8.0

10.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

China India Pakistan Indonesia Russia Brazil Germany US

% C

AG

R 2

01

3-2

01

8

US

$ m

illio

n r

sp

Major Tea Growth Markets 2013-2018

Absolute Growth US$ million rsp % CAGR 2013/18

Asia major driver and rising premiumisation in developed markets



The top four tea companies maintained their global rankings in 2013. The positions of these major companies are not expected to show

significant change without major acquisitions.

Unilever, TGBL and ABF are the only truly global companies in the top 10. Although TGBL has ambitions to expand, its widening interests and

corporate objective to engage in a diverse range of beverages may

mean its hot tea business is given limited resources. Consequently,

TGBL and ABF are unlikely to pose an immediate challenge to

Unilever, unless they make significant acquisitions in major tea

markets.

Orimi and Ahmad Tea have profited from the consumer boom in Eastern Europe, with consumers trading up to tea bags and a variety of

loose teas, thanks to stabilised economies. The economic downturn did

not have a significant impact on tea consumption, as tea is a staple

beverage in the two companies core Eastern European region.

Tea has never been a core category in Nestl vast fmcg basket. RTD tea Nestea is Nestls most globally recognized tea beverage brand.

Interestingly, Nestl entered the premium tea category by high profile

launch of Special.T single serve tea specialist machine in 2010 and

now the machine is distributed in Belgium, Luxemburg, Germany,

Netherlands, France, Japan and Switzerland. It is reported that the

sales of Special.T exceeded Nestls expectation and the company is

increasing its investment in the field.

Global Top 10 Tea Companies

by Retail Value Share 2013

Company %

share

Unilever Group 11.9

Tata Global Beverages

Ltd 3.3

Associated British Foods

Plc 3.0

Orimi Trade OOO 2.3

Ahmad Tea London Ltd 2.3

Teekanne GmbH & Co

KG 1.7

Zhejiang Xiangpiaopiao

Co Ltd 1.6

Guangdong Strong

(Group) Co Ltd 1.5

Ito En Ltd 1.5

Mai Kompanya OAO 1.4

Global top 10 tea companies in 2013



In Europe, Special.T has its own website in each country in which it is present and the products can be purchased

through online Special.T shops.

In March 2013, Special.T was launched in Japan, its first market outside Europe. This is a bold approach, as Japan

is a highly mature tea-drinking market and Nestl is

unknown there for offering tea. However, Nespresso

continues to see strong double-digit growth in retail value

sales in Japan, which offer some encouraging signs for tea

pods. Special.T carries green tea and other varieties, such

as black, blue, white and organic herbal teas. It claims to

offer a selection of fine teas sourced from the top 1% of the

worlds tea plantations to attract sophisticated Japanese

consumers.

Japan has sophisticated and affluent tea drinkers, hence Nestls selling Special.T as a high quality product.

Crucially, Special.T will be available in grocery stores to

help it reach critical mass. Demographically, Japan's

population of 128 million will fall by more than a third by

2060, and about 40% of the population will be over the age

of 65. People living alone will tend to prefer smaller

beverage packs. Japans ingrained tea-drinking culture and

the traditional preparation of a cup of tea is challenged.

Special.T: A bold move with encouraging signs of progress




MARKET ASSESSMENT



OPPORTUNITIES

BRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


Compared to Nestls water business, Nestls hot drinks business has a smaller brand portfolio. Nescaf, Nespresso, Nescaf Dolce Gusto, Milo and Nesquik are the key brands. Apart from the tea beverage

machines and its associated tea products, Nestl has no established tea brands. Nescaf Dolce Gusto

showed the strongest performance thanks to its multi-beverage feature and mid-priced appeal. The fact that

the Dolce Gusto is available in grocery stores makes it convenient for consumers to top up supplies for their

machines, thus, increasing consumption frequency. Nesquik is a key other hot drinks brand and it has been

relaunched in Europe with 10% less sugar and fortified with OptiStart, containing vitamins and minerals to

complement milk and optimal mix of nutrients to support growth and development. The launch started in

France and covered most of Europe by the end of 2013. The Middle East and North and Latin America are

following at the time of writing.

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Nescaf Nespresso Nescaf Dolce Gusto

% C

AG

R 2

00

8-2

01

3

US

$ m

illio

n r

sp

Nestl Major Hot Drinks Brands Value Sales 2013 and % CAGR 2008-2013

US$ million rsp CAGR % 2008/13

Nestl has narrow hot drinks portfolio and relaunches Nesquik

BRAND STRATEGY


Nescaf is Nestls number one selling brand in hot drinks based almost exclusively on its position in instant coffee. There is no single rival brand that challenges Nescaf although the combined strength of

Mondelezs instant coffee brands is considerable. Growing demand for instant coffee, primarily in emerging

markets, has helped it to grow despite growing premiumisation in mature Western European and North

American markets which favours fresh coffee sales.

In 2014, Nescaf is launching a unified, global look and feel across all products in the 180 countries where the coffee is sold. The purpose of the REDvolution campaign is to attract the attention of young consumers

and make the brand still relevant as coffee consumption trends evolve. Nescaf is also launching RTD

coffee Shakissmo in seven European markets to further capitalise on Nescafs brand equity.

Japan, China and Russia are Nescafs major markets. While Japans market is mature and Nescaf saw continuous slow growth, China was the growth driver, increasing by 15% in 2012-2013. There are still many

years of strong growth in instant coffee in China as coffee culture spreads further. The company has also

been acting as a coffee ambassador in traditional tea-drinking markets in Asia Pacific. Nestl is among

the most adept at tailoring its products to meet local requirements.

0.0

5.0

10.0

15.0

0

5,000

10,000

15,000

Nescaf Jacobs Maxwell House Maxim Carte Noire Tchibo Moccona

% y

-o-y

gro

wth

2

01

2-2

01

3

US

$ m

illio

n r

sp

Global Major Instant Coffee Brands Value Sales 2013 and % Y-o-Y Growth 2012-2013

US$ million rsp 2013 % y-o-y growth 2012-2013

Nescaf remains Nestls key brand in hot drinks

BRAND STRATEGY


Nespresso is based around a coffee club concept with retail taking place online from Nestl or through any one of its boutiques, some of which are stand-alone retail stores, but with most others operated as

shop-in-shop formats in premium-positioned department stores rather than through supermarkets.

Nespresso has seen growing competition from not only new arrivals every year and private label, but also

Nespresso-compatible brands. The potential formation of JDE will also put some pressure on the pace of

growth for Nespresso globally. To maintain growth, Nespresso, with 320 boutiques, will continue to open

stores, but insists that it will not go down the grocery route. Instead, it is developing the Nespresso

Business Solution and Automated Boutique concept to boost sales. Nespresso Cube, a digital, fully-

automated Nespresso Boutique, was launched in Western Europe in 2014. Nespresso is launching the

VertuoLine system in the US and this will prove a challenge as the pod market is dominated by Keurig.

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

0

500

1,000

1,500

2,000

2,500

3,000

Keurig Nespresso Tassimo Nescaf Dolce Gusto Senseo L'Or Espresso

% y

-o-y

gro

wth

20

12

-20

13

US

$ m

illio

n r

sp

Global Major Coffee Pods Brands Value Sales 2013 and % Y-o-Y Growth 2012-2013

US$ million rsp 2013 % y-o-y growth 2012-2013

Luxury Nespresso faces challenge from compatible products

BRAND STRATEGY


The Nespresso Cube is the latest innovation, offering a unique retail

concept and an automated boutique,

providing consumers with easy and

convenient access to the brands 22

permanent Grands Crus as well as

Limited Editions. The system aims to

allow Nespresso to expand into new

premium locations. Specifically, the

cube contains 25,000 capsules in

2,500 sleeves and the system can

process an order of 10 sleeves in 20

seconds and all visible through a

window. Club members can buy

using their club card and other

consumers can use a credit card.

Cube is now present in Switzerland, Spain and Portugal.

Only brands with economies of scale and innovation capabilities can

afford to do this.

Nespresso Cube - new automated retail vending concept

BRAND STRATEGY



MARKET ASSESSMENT



OPPORTUNITIES

BRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


In terms of financial reporting, Nestl included Nespresso, Milo and other hot drinks brands in the Powder and Liquid Beverages segment in its 2013 annual report. There is no clear split for these brands within the

segment. At corporate level, the company has around 460 factories in over 80 countries and its products

are sold in around 140 countries. The company employs some 250,000 people and has a very active

research and development programme and has around 30 R&D facilities in North America, Europe and

Asia.

In 2014, Nestl opened the System Technology Centre in Orbe, Switzerland to bring together the expertise behind the Nespresso, Nescaf Dolce Gusto and Nestl BabyNes systems. STC unites 120 experts from

25 countries to work on design, technology, packaging, engineering, electronics and robotics.

Production investments in coffee

Nestl attempts to reduce costs and make its products closer to local markets. Therefore products are normally produced regionally or locally. In hot drinks, most of the investments in terms of production are in

coffee, highlighting the strategic importance of the category to the company. The company has invested

heavily in expanding facilities for Nescaf Dolce Gusto in recent years to keep pace with demand for coffee

pods, including a new factory in Germany.

Nestl focuses on coffee investment in hot drinks

OPERATIONS


In 2014, Nestl announced a ready-to-drink beverage factory in Malaysia for brands such as Nescaf, Milo and Nestl Low Fat Milk, and opened a Nescaf factory in Vietnam.

In May 2012, Nestl announced a CHF300 million investment in a third factory for Nespresso capsule production, in Fribourg, Switzerland. This follows a CHF300 million investment in Nespressos second

production and distribution centre in Avenches, Switzerland in 2009.

In 2012, Nestl also announced a 220 million investment in a new Nescaf Dolce Gusto factory in Germany. The factory aims to produce about two billion coffee capsules a year for the German market, as

well as for export to Eastern Europe and Scandinavia.

Nestl also continues to invest in its Nescaf instant coffee, including a project in Russia designed to meet domestic demand, as well as for export to other CIS countries.

In 2013, Nescaf opened a new coffee centre of excellence in the Philippines to improve the quality and quantity of the coffee crop in a country where demand for beans far outstrips supply. The facility, in

Batangas City in the central Philippines, was set up as a one-stop shop for coffee-growers in the region to

give farmers access to the best of Nestls coffee farming technology and training.

Highlights of production activities in recent years

OPERATIONS



MARKET ASSESSMENT



OPPORTUNITIES

BRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


Nestl should continue to strengthen its position in major

instant coffee-drinking countries

by marketing campaigns or new

product development. In view of

the formation of JDE in 2015,

Nestl should design an

appropriate strategy to cope

with the new competitive

situation. For example, in JDEs

stronghold regions, Nestl

should now consider or design a

strategy to handle the future

combined force of DEMB and

Mondelez.

In China and Russia, for example, Nestl needs to think

ahead about what to do if DEMB

leverages Mondelezs presence

to launch its own instant coffee

brands.

Instant coffee

Nestl has good penetration in coffee pods in most markets except the US. Facing the

influx of Nespresso-compatible products

and private label, Nespresso is right to

widen its distribution and expand into

institutional sales. The launch of Nespresso

Cube is a positive trial to make its products

more visually and directly accessible.

The launch of the large cup VertuoLine system in the US is a good move despite

the tough situation there. The US pod

market is already concentrated and

consumers loyalty to their brands means a

long battle to win them over.

Nestls bold move in single-serve tea-specific machines is still a work in progress.

The initial launch in select Western

European markets appears encouraging

but the emergence of premium tea leafs

variants may distract consumers attention

from Special.T.

Pods: Coffee and tea

Nestl should consider increasing its presence

in fresh coffee in Latin

America. The Brazilian

market will dominate

regional growth and

should therefore be the

primary focus. The

market remains highly

fragmented, but with

JDEs formation there is

likely to be significant

leveraging between

DEMB and Mondelez

and subsequent

consolidation. Nestl will

need to move now to

avoid losing out on the

strong growth

anticipated here.

Latin American fresh

coffee

Develop counter strategy to deal with JDE formation

RECOMMENDATIONS

FOR FURTHER INSIGHT PLEASE CONTACT Hope Lee

Senior Analyst Beverages

[email protected]

Twitter@HLee_emi


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