nescafe plan in china - · pdf filenescafe plan in china ... how does nestle create shared...

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: EVOLUTION OF SUSTAINABILITY


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


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



• 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


Cultivation Harvesting Bean treatment Transportation Storing,

Cleaning, Weighing

Roasting Cooling Blending, Grinding Transportation Distribution

Consumption Waste Management



Coffee Farming

Small farms

Labour intensive

Living in poverty

Women do 70% of work

Average age: 62



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



Retail Sales of Coffee in China

Coffee Beans - 0.89%

Fresh Ground Coffee - 0.40%

Instant Coffee - 99.60%



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


•  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


Advantages Disadvantages

Core Strength

Exploitation

Damage Market

Process Control

Profit

ALTERNATIVE 2 – PREMIUM PRICING



Over Supply

No CSV

Environment

Local Prosperity

ALTERNATIVE 3 – SUSTAINABLE GROWING



Long Term

Shared Value

Prosperity

Profitability

Time

Risky

CRITERIA


Long Term Supply

Sustainable Practices


Producer Prosperity

Revenue Growth

CRITERIA MATRIX


Long Term Supply

Sustainable Practice


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


Promote prosperity with sustainable

growing, roasting and community investment

IMPLEMENTATION


Sustainable Supply •  Education and contracts

Community Investment • Coffee co-op and roasting facilities

Customize to Chinese market •  Instant coffee

SUSTAINABLE SUPPLY


•  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


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


•  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


•  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


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


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


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


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


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


•  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


Create shared value

from bean to cup

APPENDIX


Production Levels2012 2013 2014 2015 2016 2017

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

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