The 2-minute lessons

What the Maggi fiasco of bans and stock withdrawal reveals about Nestle’s strengths and weaknesses

By Mohan Sule

Every crisis teaches a lesson to the stakeholders, and the Maggi storm is no different. The first is makers of consumer products have to be prepared for a far severe backlash than business-to-business enterprises. Larger the size of the market, more does the echo reverberates. Many top-notch pharmaceutical companies have had their shipments from sub-standard production facilities suspended by the US regulator. Apart from a short-term reaction in the stock market, their domestic image hardly took a knock. Nestle had to face consumers’ as well as shareholders’ ire. This leads to the second lesson. Companies spend a lot on building brands, particularly in markets where entry barriers are low and competition is on the basis of price. Therefore, a breach of trust is hard to bridge: You, too? Investors who had propelled a north-based developer into the largest market cap player in the segment, leading to its inclusion in benchmark indices, felt let down on learning of material non-disclosures in its red herring prospectus. The third lesson is positioning. As long as Maggi remained a convenience food to be cooked quickly, it was looked at indulgently despite the widespread knowledge, at least among adults, that its basic contents contributed nearly nil nutrition. No sooner did it shift the focus to being a healthy alternative for children, it attracted scrutiny, leading to its downfall. Real estate players who forayed into the 2G telecom space have still to recover from the debacle.

Can Maggi win back users’ confidence? Going by the experience of Cadbury, which too faced quality issues, the exercise should not be difficult. A company with an established brand finds it easier to get up after a fall is the fourth lesson. At the same time, there is a danger for a brand operating in a buyer’s market sliding as consumers have other choices. The FMCG sector is a classic example of fierce loyalty to brands and fleeting from one brand to another in many segments of the personal-care category. The fifth lesson is that a track record determines how fast a company can emerge out of a blowout. Nestle has been in India for many years. It has had no run-ins with regulators till the recent episode. The result is that though the Maggi brand has taken a knock, the company has not suffered irreparable damage. The sixth lesson is that even low beta stocks can turn volatile. Nestle lost more than 9% in a single trading session and shed 11% in the fortnight since the snowballing of the content controversy early June. Yet, the stock is more than 25% away from its 52-week low and is still expensive. The market is optimistic of a bounce-back in earnings after a few quarters as the other brands in the basket are holding on. Despite sticking to the basics, the company did not allow any single food item to dominate, which has proved to be a bulwark against the Maggi backlash. Too much reliance on blockbusters can be counterproductive when they face a downturn is the seventh lesson. Core competency can boost as well as drag down bottom lines. Following the 2008 global financial crisis, the tech sector is expanding into Europe. L&T has forayed into the residential segment of the construction market after the slump in the infrastructure space due to the pre-2014 policy paralysis. To de-risk from its bread-and-butter business of cigarettes, ITC is now into food products and hospitality.

The eighth lesson is that tangible assets help a company to fall back during a storm. From small savings, Sahara has diversified into hotels and real estate, which will help its boss to post bail to get out of jail. Nestle has visible presence. There is no danger of the company vanishing like many others after the bust of the IPO boom late 1990s. The reaction of the capital market watchdog was to delist erring companies. Banning a product from the market or a company from the stock exchange should not be a kneejerk reaction is the ninth lesson. Here, the Securities and Exchange Board of India’s insistence on full disclosures by companies raising capital should be the template. Cigarettes are sold with a warning about health hazards. Similarly, consumables should display the ingredients and their nutritional values. Deviation from the stated composition should be the trigger for crackdown. Automobile companies are known to recall models after discovery of faulty mechanism. The return is the reinforcement of consumer bonding. Nestle, too, has recalled Maggi from the shelves. Where it slipped was in its sluggish response. Though the company kept the communication channels with the stock exchanges open, filing regular updates, it was slow in addressing the concerns of the consumers. The tenth lesson is that MNCs, as a rule, are transparent but are not necessarily sensitive to the sensibilities of the local markets in which they operate.