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NESCAFE PLAN IN CHINA

Caffeinated Consultants Eric Postma | Tom Epp Jesse Perry | Amanda Macdonald Asper School of Business

AGENDA

Analysis of Opportunity

Evaluation of Alternatives

Recommendation

Financial Analysis

Risks & Risk Mitigation

KEY ISSUE

 How does Nestle create shared value for the NESCAFE supply chain?

Analysis Alternatives Recommendation Financials Risks

ANALYSIS OF OPPORTUNITY

Nestle Value Proposition

Nutrition Health Wellness

Analysis Alternatives Recommendation Financials Risks

ANALYSIS: EVOLUTION OF SUSTAINABILITY

Analysis Alternatives Recommendation Financials Risks

Creating Shared Value

Nutrition Water Rural Development

Sustainability

Preserve natural resources for future generations

Corporate Social Responsibility

Compliance

Philanthropy

Giving back

ANALYSIS OF OPPORTUNITY: CERTIFICATIONS

Analysis Alternatives Recommendation Financials Risks

International Federation of Organic Agriculture Movements • Standards • Certification

Rainforest Alliance • Preservation of

biodiversity • Environment,

social, economic audits

Bird Friendly • Promotes

growth in shade of trees

UTZ • Farming

methods • Working

conditions

Common Code for the Coffee Community • Green coffee

supply chain

Fairtrade • Safeguard

interests of farmers and their families

ANALYSIS OF OPPORTUNITY

Analysis Alternatives Recommendation Financials Risks

• Green coffee beans Product •  Sold as a commodity •  Volatile; influenced by speculators Price •  Sourced worldwide; requires roasting and processing •  Dependent on farmers Place •  NESCAFE Plan Promotion

ANALYSIS OF OPPORTUNITY: SUPPLY CHAIN

Analysis Alternatives Recommendation Financials Risks

Cultivation Harvesting Bean treatment Transportation Storing,

Cleaning, Weighing

Roasting Cooling Blending, Grinding Transportation Distribution

Consumption Waste Management

ANALYSIS OF OPPORTUNITY

Analysis Alternatives Recommendation Financials Risks

Coffee Farming

Small farms

Labour intensive

Living in poverty

Women do 70% of work

Average age: 62

ANALYSIS OF OPPORTUNITY

Analysis Alternatives Recommendation Financials Risks

2011 2012 2013 2014 2015Sales  (in  billions  USD) $68.60 $74.70 $79.18 $83.93 $87.70

Global  Sales  of  Coffee

90% sold through

grocery stores

Nestle holds 22.4% market

share

ANALYSIS OF OPPORTUNITY

Analysis Alternatives Recommendation Financials Risks

Retail Sales of Coffee in China

Coffee Beans - 0.89%

Fresh Ground Coffee - 0.40%

Instant Coffee - 99.60%

ANALYSIS OF OPPORTUNITY

Analysis Alternatives Recommendation Financials Risks

Strengths •  Nescafe size •  Commitment to CSV •  Brand succes

Concerns •  Relationships with

farmers •  Complex supply chain •  Livelihood of farmers

Threats •  Volatility of prices •  Public perception

Opportunities •  Chinese coffee

market •  Consumer desire for

certified coffee

ALTERNATIVES

Analysis Alternatives Recommendation Financials Risks

•  Take control of entire supply chain •  Lease land and grow coffee

Backward Integration

•  Offer premium prices annually •  Farmers incentivized to produce more

Premium Pricing

•  Certify farmer to sustainable farming techniques •  Provide price quota’s for production levels

Sustainable Growing

ALTERNATIVE 1 – BACKWARD INTEGRATION

Analysis Alternatives Recommendation Financials Risks

Advantages Disadvantages

Core Strength

Exploitation

Damage Market

Process Control

Profit

ALTERNATIVE 2 – PREMIUM PRICING

Analysis Alternatives Recommendation Financials Risks

Advantages Disadvantages

Over Supply

No CSV

Environment

Local Prosperity

ALTERNATIVE 3 – SUSTAINABLE GROWING

Analysis Alternatives Recommendation Financials Risks

Advantages Disadvantages

Long Term

Shared Value

Prosperity

Profitability

Time

Risky

CRITERIA

Analysis Alternatives Recommendation Financials Risks

Long Term Supply

Sustainable Practices

Creating Shared Value

Producer Prosperity

Revenue Growth

CRITERIA MATRIX

Analysis Alternatives Recommendation Financials Risks

Long Term Supply

Sustainable Practice

Creating Shared Value

Producer Prosperity

Revenue Growth

Backward Integration Y Y X X Y Premium Pricing Y X X X X Sustainable Growing Y Y Y Y Y

RECOMMENDATION

Analysis Alternatives Recommendation Financials Risks

Promote prosperity with sustainable

growing, roasting and community investment

IMPLEMENTATION

Analysis Alternatives Recommendation Financials Risks

Sustainable Supply •  Education and contracts

Community Investment • Coffee co-op and roasting facilities

Customize to Chinese market •  Instant coffee

SUSTAINABLE SUPPLY

Analysis Alternatives Recommendation Financials Risks

•  Teach sustainable practices •  Utilize existing farmers as teachers •  Build education and capacity

Sustainable Farming Academy

•  Nescafe Sustainable Certification •  Safe working conditions •  Contract price – Quality SOL

Sustainable Certification

•  Long term predictable supply •  Incent sustainable practices •  Share profits above contract price

Guaranteed Contract

CONTRACT PRICING

Analysis Alternatives Recommendation Financials Risks

Standard  Contract  Pricing Price  per  ton  USDMinimum  Value 2,500$              Standard  Premium 100$                      

2,600$              IncentivesWaste  water  management 50$                          Lower  energy  usage 50$                          Soil  conservation 50$                          

2,750$              

COMMUNITY INVESTMENT

Analysis Alternatives Recommendation Financials Risks

•  Invest in local communities •  Infrastructure for the long term •  Combined market power

Coffee Co-op

•  Efficient tech/sustainable processing •  Reduce supply chain tiers •  More profit to share with growers

Responsible Roasting

CUSTOMIZE TO CHINESE MARKET

Analysis Alternatives Recommendation Financials Risks

•  Generations of tea drinkers •  Can’t change cultural habits •  Product must match consumption

Local Customs

•  Prepare and drink at home •  Utilize existing means/practices •  Possible innovation – coffee bags

Instant Coffee

IMPLEMENTATION TIMELINE

Analysis Alternatives Recommendation Financials Risks

            2013   2014   2015   2016   2017  

Sustainable  Supply                                      

    Farming  Academy                                  

    Enrollment                      

    Sustainable  Cer8fica8on                          

    Contracts                              

Backward  Integra8on                                      

    Coffee  Co-­‐op                      

    Roas8ng  Facili8es                          

Marke8ng                                          

    Farming  Academy                          

    Instant  Coffee                              

FINANCIAL ANALYSIS

Analysis Alternatives Recommendation Financials Risks

Projected  Income  USD  Millions  -­‐  China2012 2013 2014 2015 2016 2017

Total  Revenues 1,140,000,000$     1,425,000,000$     1,781,250,000$     2,226,562,500$     2,783,203,125$     3,479,003,906$    

Cost  of  Goods  Sold 608,640,000                 760,800,000                 951,000,000                 1,188,750,000         1,485,937,500         1,857,421,875        

Gross  Margin 531,360,000$           664,200,000$           830,250,000$           1,037,812,500$     1,297,265,625$     1,621,582,031$    

Overhead  Expenses 398,520,000$           498,150,000$           622,687,500$           778,359,375$           972,949,219$           1,216,186,523$    

Operating  Margin 132,840,000$           166,050,000$           207,562,500$           259,453,125$           324,316,406$           405,395,508$          Interest 5,405,555$                     5,459,611$                     5,514,207$                     5,569,349$                     5,625,042$                     5,681,293$                    Taxes 46,494,000$                 58,117,500$                 72,646,875$                 90,808,594$                 113,510,742$           141,888,428$          

Net  Income   80,940,445$                 102,472,889$           129,401,418$           163,075,183$           205,180,622$           257,825,787$          

FINANCIAL ANALYSIS

Analysis Alternatives Recommendation Financials Risks

Sensitivity  Analysis

Revenue Profit Growth  RatesWorst  Case 2,261,352,539$                 193,369,341$                 0.12Normal  Case 3,479,003,906$                 257,825,787$                 0.25Best  Case 4,348,754,883$                 322,282,234$                 0.35

2017

FINANCIAL ANALYSIS

Analysis Alternatives Recommendation Financials Risks

Beginning  Cash  Balance 50,000,000$                 43,000,000$                 39,949,700$                 22,883,044$                 4,304,232$                    

Implementation  Plan  Costs  (USD  Million)2012 2013 2014 2015 2016 2017 Total

Broaden  Academy 5,000,000$                     -­‐$                                               6,500,000$                     7,000,000$                     -­‐$                                               18,500,000$                Training  Implementation 500,000$                             525,000$                             551,250$                             578,813$                             607,753$                             2,762,816$                    Develop  Sustainable  Certification 1,000,000$                     1,020,000$                     -­‐$                                               -­‐$                                               -­‐$                                               2,020,000$                    Coffee  Co-­‐ops 500,000$                             1,000,000$                     1,500,000$                     2,000,000$                     -­‐$                                               5,000,000$                    Roasting  Facilities -­‐$                                               -­‐$                                               8,000,000$                     8,000,000$                     -­‐$                                               16,000,000$                Marketing  for  Academy -­‐$                                               505,300$                             515,406$                             -­‐$                                               -­‐$                                               1,020,706$                    Marketing  for  Instant  Coffee -­‐$                                               -­‐$                                               -­‐$                                               1,000,000$                     1,020,000$                     2,020,000$                    

7,000,000$                     3,050,300$                     17,066,656$                 18,578,813$                 1,627,753$                     47,323,522$                

Ending  Cash 43,000,000$                 39,949,700$                 22,883,044$                 4,304,232$                     2,676,478$                    

FINANCIAL ANALYSIS

Analysis Alternatives Recommendation Financials Risks

Key  Performance  Indicators2013 2014 2015 2016 2017

Individuals  Trained  &  Certified 500 1000 1500 2000 2500Number  of  Coffee  Co-­‐ops 10 20 30 40 50Number  of  Roasting  facilities 0 0 1 1 0Revenue  Growth >20% >25% >25% >25% >25%

RISKS & RISK MITIGATION

Analysis Alternatives Recommendation Financials Risks

•  Sustainability incentives promote training •  Local shared knowledge leverages relationships and expertise

1. Training does not attract farmers

•  Market research determines demand, contracts and production match demand

•  Long shelf-life of instant coffee 2. Over/under production

•  Farmers incentivized to use sustainability practices •  Audits ensure practices are followed

3. Coffee growers don’t follow sustainability

practices

Impact

Prob

abili

ty

1

2

3

CONCLUSION

Analysis Alternatives Recommendation Financials Risks

Create shared value

from bean to cup

APPENDIX

Analysis Alternatives Recommendation Financials Risks

Production  Levels2012 2013 2014 2015 2016 2017

Total  Production 40,576                                                                                                               50,720                                     63,400                                     79,250                                     99,063                                     123,828