maggi controversy

1. PUTTU GURU PRASAD
M.Com. M.B.A., L.L.B., M.Phil. PGDFTM, APSET. ICFAI TMF, (PhD) at
JNTU K,
Asst.Professor
S&H Department
MaggieMaggie
controversy affects NestleNestle

2. ways in which MaggiMaggi
controversy affects NestleNestle5

3. Nestle India, the Swiss-based consumer goods company’s India arm,
is making headlines these days. Its famous two-minute noodle brand,
Maggi, is in the eye of a controversy.
Introduction

4. It all began when the UP Food and Drug Administration found some
samples to be unsafe for consumption. The samples were found to
have more lead and Monosodium glutamate (MSG) than the
prescribed limits.
How it all began

5. The controversy snowballed since then with 11 states across India
imposing an indefinite ban on the popular instant noodles. Goa
became the latest state to ban Maggi.
How it spread

6. Not surprisingly, investors panicked and sold the stock. Its share price
fell nearly 13.5% or by Rs. 941 in the fifteen days to June 10, 2015.
Here are five ways the controversy affects Nestle India, the
multinational company, which owns this brand:
Panic in the market

7. As states across the country banned the product, many retailers took
Maggi off the shelves. Future Group, which owns the supermarket
chain Big Bazaar, was one of the first to stop selling the noodles
packs. Some states such as Punjab, Karnataka and Uttarakhand
also ordered Nestle to stop production until further orders. As a result,
Maggi sales fell 60% across India since the controversy began in
the last week of May, according to a Kotak Securities report.
#1 Fall in Sales

8. The fall in sales directly affects the revenues of the consumer
company since Maggi is a big revenue generator for Nestle India. It is
the single largest brand under Nestle India, which usually contributes
about 22-25% to its total revenue of the company, the Kotak report
said. The fiasco has forced Nestle to cut production by one-third. It
also began recalling Maggi from markets across India. Consequently,
many analysts feel that Nestle may lose about Rs 160 crore in
revenue in the quarter to June 2015. This is also expected to affect
Nestle’s overall profits. Maggi contributed 30% of Nestle India’s Rs
1,185 crore-worth profits in 2014-15, as per the media reports.
#2 Nestle Revenue Dented

9. Trust plays a major factor when a consumer buys a particular
product. With harmful chemicals like lead and MSG found in samples
across the country, consumers may feel their health is at stake. This
has shaken consumers’ confidence. Nestlé’s public relations
strategy also failed to take consumers into confidence, points out
Kotak Securities.
#3 Consumer Confidence Slumps

10. Even consumer grievances on social media were managed only with
a standard automated response, which did not impress its loyal
consumers. The company voluntarily recalled Maggi after calling its
consumers ‘confused’, according to media reports. This further
damaged the reputation of the company, the Kotak report said.
Ironically, Maggi was adjudged the most powerful brand in India
in 2014.
#3 Consumer Confidence Slumps
(Contd.)

11. Ultimately, the controversy over Maggi’s safety is likely to impact
Nestle’s financial prospects as the demand has grown at a slow
pace in the past quarters. Most consumer goods companies have
seen single-digit growth in the recent past. Keeping this in mind, the
current controversy is only expected to add to Nestle’s woes.
Revenue growth may weaken in this financial year in the aftermath
of the controversy, Kotak said.
#4 Financials to take a beat

12. The Nestle India stock currently trades at 33 times the company’s
future Earnings per Share (EPS), according to Kotak. This means,
investors pay 33 times more than the company’s expected profit in
FY16 to purchase the stock. Importantly, the future EPS was
calculated by considering 55% growth in profit per share between
2014 and 2016. This is not valid any more. Experts forsee EPS to be
hit by 10-20% by the fall in Maggi sales, the Kotak report states. This
means, the stock is even more costly – trading at 37-40 times
Nestle’s FY16 EPS.
#5 What does it mean for investors?