Nestle: The Nestle Boycott

Addressing a Wicked Problem - Strategic Solutions Through Financial Analysis

Authored by Ibukun Anani, Xiaoping Liu, and Lucas Blaustein

i | P a g e

Executive Summary

The Strategy

For over twenty years the worlds largest agribusiness firm has fought against the wicked

problem of the Nestle Boycott. Since the early 2000s 152 nations worldwide have enacted strict

laws and regulations outright banning or greatly restricting the marketing of breast milk

substitutes. In the markets of Nigeria and China, Nestle has an opportunity, garner greater value

through new product ideation and rebranding via three strategic solutions.

In examining the business environment through models such as SWOT, Porters Five Forces,

VRIO, and SCP, it became evident that consumer perceptions and company products were

sometimes misaligned, thus fueling the Nestle Boycott. Industry analysis revealed threats from

emerging baby food health brands like Happy Family, owned by Danone, and Plum Organics,

owned by Campbell Soup (two of the fastest growing brands in the U.S. food market). Firm

analysis showed growth opportunities in developing countries. Environmental analysis reflected

that in lower income developing nations, unclean water played a much more important role in the

boycott campaign, whereas in higher income developing nations, issues related to food safety

and traceability where of much greater importance.

It was decided to thus restrict solutions to the lower income developing nation of Nigeria, and

the higher income developing nation of China. In year 2013, the Chinese baby food market was

worth approximately 14 billion dollars. The Chinese market is expected to grow by a compound

annual growth rate (CAGR) of 10.47% to a total size of 28 billion dollars by the year 2020. And

in the nation of Nigeria, Nestle has worked hard to establish a 54% market share in an estimated

193 million dollar industry; an industry growing at a CAGR of 5.7%, expected to reach a total

value of 266 million within the next decade.

In year 2013, China announced an initiative directed at increasing the number of exclusively

breast-fed children from 22% to over 50% by 2020 in economic terms this means the market

ii | P a g e

for Nestls products will decrease by 6.2 billion dollars over the next seven years. Nigeria took

even more drastic measures, and recently introduced a bill to mandate exclusive breastfeeding

for all infants below 6 months of age. The bill was defeated, but the message was clear

governments are concerned, and they are not afraid of limiting Nestls market access.

To help confront these serious issues,

three strategies are proposed: 1) the

introduction of Nestle premixed or

mixable formulas, which would

reduce the alleged risks of unsafe drinking water in the lower-income developing market of

Nigeria; 2) rebranding Gerber Organic Baby Food as Nestle Organic Baby Food for introduction

into the higher-income developing nation of China; and 3) entering partnerships with key not-

for-profit stakeholders like the International Baby Food Action Network (IBFAN), the World

Health Organization (WHO), and the United Nations Children Fund (UNICEF). Due to the

limits of quantifiable data, applicable research was restricted to only the first two proposed

strategies.

By rebranding Gerber organic products as Nestle organic baby food in China, Nestle would

capitalize on growing market demand, while avoiding the government regulation that is likely to

harm long-term growth in the breast milk substitute market. Organic baby food meets the

Peoples Republic of Chinas strict guidelines with respect to the marketing of food items, while

also increasing the consumer lifetime value of infants and toddlers by reaching beyond the six

month to one year purchasing window for baby milk powder. Rebranding also minimizes the

risks associated with lack of product recognition, as Nestle is far better known in the Chinese

market than its Gerber subsidiary. Nestls logo also meets Chinas new regulations, which ban

displaying images of infants on products, thus restricting usage of the current Gerber logo.

In Nigeria, introduction of premixed formula would all but eliminate the threat posed to infants

by unsafe drinking water (water being a required ingredient in the preparation of baby milk

To help confront these serious issues, three

strategies are proposed.

iii | P a g e

formula). Such product introduction would lessen the criticisms against Nestle by organizations

like UNICEF and the WHO, as well as further position Nestle as a leading corporate citizen.

iv | P a g e

Contents

Executive Summary (pg. i-iii)

The Nestle Boycott

Qualitative Analysis of Nestle (pg. 1-9)

History to Present Day (pg. 1-3)

Environmental Analysis Strategic Models (pg. 3-9)

Quantitative Analysis of Market (pg. 10-13)

Quantifying the Problem (pg. 10)

Stratification of Problem by Amount of Disposable Income (pg. 10)

Financial Impact of Problem on Target Markets (pg. 11-13)

Solutions (pg. 13-26)

Strategy One (pg. 13-14)

Current Financial Position of Nestle Nigeria (pg. 14)

Strategy Two (pg. 14-15)

Current Financial Position of Nestle SA (pg. 15)

Strategy Three (pg. 15-16)

Conclusion (pg. 16)

References (pg. 17-18)

Graphical Addendum (pg. 19-22)

Authored By:

Ibukun Anani

Xiaoping Liu

Lucas Blaustein

1 | P a g e

Nestle: The Nestle Boycott

Qualitative Analysis of Nestle

History to Present Day

The Nestle Boycott is an international campaign directed against multinational conglomerate

Nestle S.A. It began on the 7th of July, 1977 in the United States, and has since spread globally to

Europe, Asia, and Africa. The boycott accuses Nestle of using highly aggressive and sometimes

unethical marketing campaigns to increase the use of breast milk substitutes (baby milk formula)

in less economically developed countries (LEDCs). The campaign further supposes that intensive

use of infant formula has resulted in an increase in infant mortality, malnutrition, and other

negative health-related conditions for a variety of reasons from reliance on unsafe water supplies

to unnatural products.

In recent years the boycott has gained significant momentum. The current movement is

organized by the International Baby Food Action Network (IBFAM), who have successfully

lobbied international organizations, receiving recognition from distinguished and well-known

not-for-profits like the United Nations Childrens Fund (UNICEF). With the advent of social

media, the Nestle Boycott has

increased its visibility, establishing

presences on major social media

networks such as Facebook.

What began as a small movement in

the late 1970s has since transformed

into a wicked problem for Nestle.

Addressing a Wicked Problem - Strategic Solutions Through Financial Analysis

UNICEF Documentary: Formula for Disaster

2 | P a g e

3 | P a g e

Recent news reflects that the Nestle Boycott is growing in other ways, and has begun to

implicate not only Nestle, but also joint venture partners such as Google (Worstall). Negative

press is harming the Nestle brand, and causing confusion, as well as fear among consumers and

world citizens.

Increased press has caused governments to take notice. Pressured by non-for-profits like the

World Health Organization (WHO), over 152 nations have partially implemented the

International Code of Marketing of Breast-milk Substitutes (WHO), which severely limits and

curtails the marketing and sale of many types of baby

food.

Without decisive action, Nestle faces severely

curtailed, if not completely restricted access in many

of the most important markets for baby food around

the world.

Environmental Analysis Strategic Models

Understanding the Nestle Boycott first required a thorough grasp of the environment surrounding

Nestle, the largest agribusiness firm in the world. First, two models were used to examine the

nature of the industry in which Nestle participates. Application of Porters Five Forces

demonstrated that the bargaining power of suppliers was low, the threat of new entry was also

low, yet both the bargaining power of consumers and the threat of substitutes was high leading

to an overall industry that displays medium rivalry among firms (REFER TO TABLE A).

Application of Structure, Conduct, Performance (SCP) showed that Nestle is operating in a

stable grow-the-pie industry, with industry average return on equity (ROE) of around 16.65%,

return on assets (ROA) around 9.08%, and high average growth rates of around 13.44%

(Reuters) (REFER TO TABLE B).

4 | P a g e

Once industry analysis was completed, Strengths, Opportunities, Weaknesses, and Threats

(SWOT), in addition to Value, Rarity, Imitability, and Organization (VRIO) were applied to

determine strategic implications

for Nestle at the firm level. VRIO

revealed that Nestls only

sustainable competitive advantage

was its brand recognition (REFER

TO TABLE C). SWOT showed

significant opportunities in developing nations, as well as the market for organic and natural

food, but an imminent threat from small growing organic and natural baby food companies like

Happy Family and Plum Organics (REFER TO TABLE D). Firm analysis demonstrated that

strong awareness of Nestle brands was potentially increasing the virulence of the campaign

against breast-milk substitutes. Strategic modeling also

revealed that consumer perceptions and company products

were sometimes misaligned, thus fueling the Nestle

Boycott.

Combined firm level and industry level strategic modeling

aligned well with Nestls internal estimation of strategy

(REFER TO TABLE E).

Strategic modeling also revealed that consumer

perceptions and company products were

sometimes misaligned, thus fueling the nestle

boycott.

Emerging Organic Baby Food Market

5 | P a g e

Porters Five Forces

Table A

Bargaining Power of Suppliers

Low, commodity suppliers,

homogenous product

Rivalry Among Firms

Medium rivalry among firms,

good brand recognition, but

large competition to keep

customers and to differentiate

products

Threat of Substitutes

High threat of substitutes, lots of

similar products in the

marketplace

Threat of New Entry

Low threat, large capital

requirements for new firms

Bargaining Power of Consumers

High, lots of substitutes, and low

switching costs

6 | P a g e

Table B

SCP

Structure Conduct Performance

1. Few firms 2. Many customers 3. Nature of sales? 4. Large vertical

integration 5. Moderate barriers to

entry 6. Large exist barriers

1. Moderate realization of potential

2. Price fixing 3. Tacit collusion 4. Pressure on suppliers 5. Competition on

advertising and innovation

6. Stable, grow-the-pie industry

1. 1. 16.65 Industry ROE 2. 9.08 Industry ROA 3. Large profits

7 | P a g e

VRIO

Table C

Variable Valuable Rare Costly to Imitate Exploited by the

Organization Competitive Implication

Economies of Scale Yes No

Competitive Parity

Good Brand Recognition Yes Yes Yes Yes

Sustained Competitive Advantage

Economies of Scope Yes No Competitive Parity

Integrated Supply Chain Yes No Competitive Parity

Good R&D Yes No Competitive Parity

8 | P a g e

Table D

SWOT

Strength Weakness

Threat Opportunity

Economies of Scale

Good Brand Recognition

Economies of Scope

Integrated Supply Chain

Strong R&D

Bad Company Reputation o Poor CSR

Inconsistent Production Quality

Market Growth Opportunities in Developing Countries

Growing Demand for Organic and Natural Goods

Increase Need for Healthier Products

Lack of Infrastructure in Developed Countries

Government Regulation

Boycott Campaigns

Growth of Smaller Organic/Natural Companies (Puppy Dog Strategy)

9 | P a g e

Table E

Nestle Strategy

Source: Nestle.com

10 | P a g e

Quantitative Analysis of the Market

Quantifying the Problem

Putting values behind the immense problem that Nestle faces is one of the most important

quantitative aspects of addressing the Nestle Boycott. Due to the size and scope of the boycott, it

was decided that the most effective method of addressing the problem would be to begin by

examining the economic impact of the boycott campaign in two of Nestls most important

developing markets the markets of Nigeria and China.

Stratification of Problem by Amount of Disposable Income

The markets of China and Nigeria were chosen not only for their importance to Nestle, but also

because research on the Nestle

Boycott revealed that the nature of

the boycott campaign changes

depending upon the disposable

income of the country. Regression

analysis showed that while disposable income has less of an impact on market growth in Nigeria,

disposable income has had a significant impact on shaping the market for breast-milk substitutes

in China. By stratifying the problem into lower and higher income developing nations, the Nestle

Boycott becomes easier to address.

For example, environmental analysis revealed that in lower income developing nations, unclean

water played a much more important role in the Boycott campaign (UNICEF), whereas in higher

income developing nations, issues related to food safety and traceability where of much greater

importance (Tang).

By stratifying the problem into lower and higher

income developing nations, the Nestle Boycott

becomes easier to address.

11 | P a g e

Financial Impact of Problem on Target Markets

With respect to China, a regression model was constructed using the historic Chinese live births

and disposable income. This model was used to forecast the annual growth of the Chinese market

Regression Functions

Initial assumptions following economic theory were that market growth in baby food with respect to China and

Nigeria would have some relation to the following variables:

1) Live birth rate

2) Disposable Income in USD

3) Population

4) Time

5) Market Size in USD

Live birth rate, market size, and disposable income were collected from the Euromonitor International database.

Population metrics were taken from the World Bank. Historic data was used beginning in year 1999, the first

available year for each metric. The following regression function was then constructed:

= + + +

With respect to Nigeria live birth had a correlation with the other three variables (time, population, and, income). As

a result, a regression function only using live birth was constructed:

= . + . +

The regression function for Nigeria displayed soundness of fit, (summary statistics can be found in Addendum:

Table 1). With respect to China live birth also had a correlation with the other three variables (time, population, and

income). As a result, a regression function only using live birth was constructed:

= . . +

The reason for the negative coefficient is suspected to be because of Chinas policy of One family, one child.

Verified against Chinas data, live birth has a decreasing trend and the baby food market has an increasing trend,

thus causing a negative coefficient. Testing for soundness of fit failed (summary statistics can be found in

Addendum: Table 2). As live birth and income are not correlated at 90% confident level, (p value = 0.0233),

correlation was ignored, resulting in the following new regression:

== . + . + . +

The new regression function for China displayed soundness of fit, (summary statistics can be found in Addendum:

Table 3).

12 | P a g e

for baby food in USD. According

to the model the Chinese market

for baby food is expected to grow

by a compound annual growth

rate (CAGR) of 10.47% from 13

billion dollars in 2012 to around

28 billion dollars in 2020. The

consumer lifetime value (CLV) of

a baby in China is expected to

grow by a CAGR of 13.7% from

$834.00 in 2012 to $2045.00 in

2020.

Responding to the Nestle Boycott campaign, in October 2013 the Chinese government

announced that it was enacting new restriction from the UNICEF International Code of

Marketing of Breast Milk Substitutes (Stanford). These sweeping new measures include banning

the images of children on baby food products, and raising the number of women who exclusively

breast feed in the first six-months of life from 28% (UNICEF) to 50% by 2020 (Stanford). These

new measures translate into a loss of 22% of future customers for Nestls baby food products in

China, accordingly, the economic impact is a 6 billion dollars loss in market size over the next 7

years (using CLV values in 2020).

With respect to Nigeria, a regression model was constructed using historic Nigerian live births.

This model was used to forecast the annual growth of the Nigerian market for baby food in USD.

According to the model the Nigerian market for baby food is expected to grow by a compound

annual growth rate (CAGR) of 5.7% from 180 million dollars in 2012 to around 266 million

dollars in 2020.

0.0

5,000.0

10,000.0

15,000.0

20,000.0

25,000.0

30,000.0

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Chinese Baby Food Market (millions USD)

13 | P a g e

The Nigerian government, greatly concerned by the very low 19% rate of mothers that

exclusively breast feed, drafted and voted on a bill that would make exclusive breast feeding

mandatory for all children below the first year of age. The bill was defeated, but the message is

clear as Nigeria has the highest infant mortality rate in the world at 78 dead per 1,000 born, the

government is motivated to action

against the impact that unsafe water

is having on the health and well-

being of Nigerian infants fed with

breast milk substitutes. If the law

had passed, Nestle would have

immediately lost access to a 193

million dollar market, in which they

have a 51% market share.

Something has to be done to address

the Nestle Boycott.

Solutions

Strategy One

The first strategy to address the Nestle Boycott is to introduce pre-mixed liquid formulas and

mixable containers into lower income developing nations with unsafe drinking water. To test the

effectiveness of this strategy, it is proposed that Nestle embark on a pilot program, beginning

with the manufacturing of currently existing liquid formula products through existing plants and

facilities at Nestle Nigeria PLC (Nestle Nigeria). By creating a premixed formula, unsafe local

drinking water would be taken completely out of the equation, thus removing the number one

concern of the Nestle Boycott.

Nestle Nigeria had a large and stable market share in 2012 at around 54%, and has been

investing heavily in expanding local infrastructure and capacity, including the completion of a

water processing plant in June of 2005 (Manufacturing Operations in Nigeria). Strategically, the

0.0

50.0

100.0

150.0

200.0

250.0

300.0

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

Nigerian Baby Food Market (millions USD)

14 | P a g e

introduction of a premixed liquid formula would be in-line with Nestls commitment to both

nutrition, health, and wellness, as well as a strategic focus on developing markets. Liquid

formulas only require refrigeration once opened, and can stay shelf-stable for up to half-a-year.

With an average age of inventory of 48 days, there is little risk that the product would spoil

before reaching consumers.

Current Financial Position of Nestle Nigeria

Nestle Nigeria is currently in a sound financial position. Pro forma analysis of financial

statements revealed a gross margin of around 43%, considerably higher than the industry average

of 24.72%. Operating margins were also quite high at 22%, twice the industry average of 11%.

With 54% market share, Nigeria is not only extremely valuable to Nestle, but it also is an

excellent test market.

Strategy Two

The second strategy to address the Nestle Boycott is rebranding Gerber Organic Baby Food and

launching it in higher income developing nations as Nestle Organic Baby Food. China should be

used as a test market for the strategy for multiple reasons. First, as in much of the developed

world, Chinese consumers are far less aware of the Gerber brand, than the much more widely

recognized Nestle brand. Second, as China has recently committed to implementing aspects of

the International Code of Marketing of Breast Milk Substitutes, outright banning the usage of

images of infants on baby food, Gerbers iconic logo can no longer be prominently displayed on

any products in the Chinese market. As over 154 nations have at least partially implemented the

marketing code, it would behoove Nestle to capitalize on their strong brand awareness to help

market their acquired lines of Gerber baby food.

Why organic? As previously mentioned the chief concern of Chinese citizens is currently food

safety and traceability. The current market for organic food in China is immense, at 1.5 billion

(Organic Food in China). This is due considerably to the Chinese policy on GMO varietals, with

currently no GMO food crops approved for commercial production (Wilson Center). With the

15 | P a g e

number of exclusively breast fed babies set to increase from 22% to 50% in the next seven years,

it is critical that Nestle introduce a product that a) extends consumer lifetime value and b) helps

address the current unmet need for organic baby food in the Chinese market.

Current Financial Position of Nestl SA

As Nestls Chinese operations

are run through corporate, and

China does not have its own

company like Nestle Nigeria,

only the financial position of

Nestle SA was examined.

Like Nestle Nigeria, Nestle SAs

current financial position is quite

sound. Gross margins for 2013

were calculated to be around 47.61%, much higher than the industry average of 25.13%.

Operating margins were around 14.47%, roughly 3% higher than the reported industry average

(Reuters). There is a visible spike in operating margins in 2010 due to the sale of a one of

Nestls larger brands.

Strategy Three

The last strategy proposed in addressing the Nestle Boycott was partnering with the opposition,

engaging with the non-for-profits that manage the Nestle Boycott like UNICEF, IBFAN, and the

WHO.

Nestle is the worlds largest agribusiness company, with a strong set of values and ambitions.

The firm largely sees itself internally as the worlds premier supplier of healthy and high quality

products. This internal perception is not being effectively communicated. By partnering with the

57.99% 58.21%

47.24% 47.50% 47.61%

13.91%

35.38%

14.91% 15.11% 14.47%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

2009 2010 2011 2012 2013

Per

cen

tage

Years

Nestle SA Gross and Operating Margins

Gross Margin Operating Margin

16 | P a g e

opposition, Nestle may be able to garner additional insight into why consumer perceptions of its

brand have degraded with respect to baby food, in the hopes of rectifying misconceptions and

improving consumer knowledge of existing corporate responsibility.

For the purposes of this paper this solution was rejected due to lack of quantifiable data. While

open to qualitative analysis, research necessitated access to financial data, which is simply not

present in solution three.

Conclusion

The Nestle Boycott is a wicked problem that has plagued the worlds largest agribusiness firm

for nearly three decades. The banners of groups that could be considered fringe have since been

taken up by well-respected organizations such as the WHO and UNICEF. Actions by

governments and non-for-profits show that Nestle cannot stand idle while the market for its

products shifts. With strong financial positioning, it is strongly suggested that Nestle further

examine the possibility of introducing pre-mixed liquid formulas into Nigeria, and re-labeled

organic baby food into China. Both projects could be undertaken as test cases for later

introduction into lower income and higher income developing nations. There is an undeniable

opportunity to address the Nestle Boycott through strategic solutions and financial analysis, and

in doing so cure an age old wicked problem.

17 | P a g e

References

1. Bushak, Lecia. "Breastfeeding In China: Officials Promote Practice By Tightening Rules, Citing Infant Formula

Risks." Medical Daily. Medical Daily, 29 10 2013. Web. 8 Dec 2013.

.

Chen, Te-ping, and Laurie Burkitt. "Infant Formula Scare Spurs China Breast-feeding Push."The Wall Street

Journal. The Wall Street Journal, 31 05 2013. Web. 8 Dec 2013.

.

"Country Implementation of the International Code of Marketing of Breast-Milk Substitutes ." WHO. World Health

Organization, n.d. Web. 8 Dec 2013.

.

Euromonitor International. Web. 8 Dec 2013. .

Guilford, Gwynn. "The Chinese government really, really wants babies to breastfeed. Got that, Danone?."Quartz.

Quartz, 16 9 2013. Web. 8 Dec 2013. .

"International Code of Marketing of Breast Milk Substitutes ." WHO. World Health Organization, n.d. Web. 8 Dec

2013. .

Lin, Liza. "China Pushes Breastfeeding Amid Medical Bribe Crackdown." Bloomberg News. Bloomberg News, 30

10 2013. Web. 8 Dec 2013. .

Ma, Tianjie. "Wielding the Double-Edged Sword: The Chinese Experience with Agricultural Genetically Modified

Organisms." Wilson Center. The Wilson Center. Web. 8 Dec 2013.

.

"Nestle Nigeria PLC." Reuters. Reuters, 12 8 2013. Web. 8 Dec 2013.

.

"Nestle NL." Bloomberg. Bloomberg News, 12 8 2013. Web. 8 Dec 2013.

.

"Nigeria: Why breastfeeding is becoming unpopular, by mothers." Healthy Newborn Network. The Guardian

Nigeria, 12 08 2013. Web. 8 Dec 2013. .

18 | P a g e

"Organic Food in China." Organic Food in China. N.p.. Web. 8 Dec 2013. .

Popeski, Ron, Adam Rose, and Ben Blanchard, eds. "China tightens rules again to promote breast feeding." Reuters.

Reuters, 29 10 2013. Web. 8 Dec 2013. .

Stanford, Kaitlin. "China to Boost Breast-Feeding Rates by 50 Percentin the Next 7 Years." In the Loop. Mom

and Me, 13 08 2013. Web. 8 Dec 2013. .

Tang, Didi. "How China Plans To Raise Breastfeeding Rate 50 Percent In 7 Years." Huff Post: Parents. The

Huffington Post, 09 08 2013. Web. 8 Dec 2013. .

"Top Food & Beverage Companies on the 2013 Inc. 5000." Inc.. Inc.com, n.d. Web. 8 Dec 2013.

.

WHO Database. Web. 8 Dec 2013. .

World Bank. Web. 8 Dec 2013. .

"World Health Organization." WHO. World Health Organization, 6 12 2013. Web. 8 Dec 2013.

.

UNICEF Statistics. Web. 8 Dec 2013. .

"2013 Nine Months Sales Conference." Nestle. Nestle, 17 10 2013. Web. 8 Dec 2013.

.

"2011 Nestl WHO Code Compliance Record: Annual External Report." Nestle. Nestle, n.d. Web. 8 Dec 2013.

.

Image Resources taken from Nestle.com and Google.com/images

19 | P a g e

Graphical Addendum

Addendum Table 1: Summary Statistics of Nigeria Regression

20 | P a g e

Addendum Table 2: Summary Statistics of China Regression Rejected

Summary of fit:

RSquare=0.307141

RSquare Adj=0.249403

Analysis of Variance

F ration=5.3195

Addendum Table 3: Summary Statistics of China Regression Accepted

21 | P a g e

Photo 1: Example of Product for Nigerian Market

Photo 2: Example of Product for Chinese Market

NOTE: Both Products Would Be Rebranded as Nestle; Pictures for Comparison Only

22 | P a g e

Video 1: Example of Group Work