For this final project the goal over the course was to examine several topics in regards to the economic analysis of Nestle Global and its working environment. Quantitative and qualitative analysis’s are use to evaluate Nestle Global success. The past and present history of Nestle Global was analyzed. The nature and cost structure of Nestle Global as well as the market structure in which Nestle competes is examined. Recommendations are given regarding decision making on international trade and comparative advantage.
Risk measurements are advised while examining and discussing Nestle’s long-term decision making. Nestle Global In 1867 Henri Nestle launched Farine lactee, a mixture of sugar, flour, and milk from a cow in Vevy, Switzerland. The ultimate birth of Nestle Global began in 1905, when brothers Charles and George Page owners of Anglo-Swiss Condensed Milk Co. in America merged business with Henri Nestle. Existing now for over 107 years Nestle Global is one of the largest companies worldwide, with approximately 32% percent of sales coming out of Europe, 26 % from the United States, 16 % from Asia.
Nestle Global is one of the biggest food producing companies remaining around the world. Following both World Wars a high demand for dairy led to the creation of a larger market. Nestle has an A-Z market list in approximately eighty six countries and over four hundred factories. To name a few: Africa, Asia, Europe, the Americas, and the Oceania. Nestle Global is known for over 8,000 brands with approximately 29 of which bring in annual sales over 1 billon CFH (Swiss Francs).
In 1977, Nestle Global made their second venture outside the food industry by acquiring Alcon Laboratories Inc. a U. S. manufacturer of pharmaceutical and ophthalmic products but by 2011, Nestle Global would be known more for being a part of the food processing industry and topping the fortune 500 lists as the highest in profits (Nestle Global, 2012, para. 6). Nestle Global features a wide range of company products which covers almost every food and beverage category. Some of Nestle’s major product lines include; Nesquik, a chocolate instant drink, bottled water, pet care food, and weight management products for Jenny Craig (Nestle Global, 2012, para. 2).
Opportunities arise during international opportunities as Nestle uses its global knowledge as an insight on the information of worldwide markets. While other corporations face risk and failure unknowingly, Nestle has access to secrets, potential products, and strategies to diversify their portfolio. International trading has its consequences, but access to financial markets allows them to borrow, collect, and, forecast economic conditions. Comparative advantages led to a huge alliance that granted Nestle the chances to expand their corporation towards a healthier lifestyle.
American and European markets see Nestle Global as a threat so Nestle is forced to pursue growth within new business. Strategic partnerships enable Nestle to stay on top of international trade. A great alliance in 1990 with American made carbonated soft drinks and beverage company, Coca Cola enabled Nestle to release there bottle water. As one of the largest most successful corporations with a lengthy list of brands and products Nestle Global has a competitive market structure in which they consider unmatched due to their global presence.
With many brands and products Nestle faces rivalry among competitors for some of those same products. Being a large corporation Nestle Global has both international and local market competitors. Because of products offered by Nestle Global closely relating specific brands in the international and local markets, Nestle Global has competitors in these markets due to their increased amount of shares which poses a threat. Some of those competitors which pose threat to Nestle Global are Sara Lee on the local corporation’s side and Kraft’s Foods on the international side.
Appendix C shows a long list of competitors’. Nestle Global is currently one of the top international and domestic competitors in its market. Hirschey states that “a market structure measurement is data gathered by federal government, market research firms, and trade associations that are useful for describing competitive conditions”(2008, p. 524). As a suggested strategy Nestle needs to continue to focus on continued growth within expanded markets, while continuing to break through markets of the world that have been seen as high risk because their tactics seem to work in the corporations favor.
When entering markets that may already be mature. This could be a large threat to Nestle by giving other markets a comparative advantage over them. The text defines comparative advantage as, “the nation’s superior efficiency on a relative basis” (Hirschey p. 561). The comparative advantage theory allows companies to lower marginal as well as opportunity cost of the production of a good or service. For example, Nestle has a comparative advantage in less-efficient countries than to produce because with trade the opportunity cost is lower.
There are several market structures: perfect competition, monopolistic competition, oligopoly, and monopoly. However, Nestle is known as an oligopoly. Some would suggest that Nestle Global is a hard to bargain with global organization. Many believe that it is hard to gain power over Nestle Global so they seek alliance because it is believed that Nestle is an oligopoly. Hirschey (2008) defines oligopoly as, “A market structure characterized by few sellers and interdependent price-output decisions” (p. 500).
Nestle Global is an international global organization that thrives on competitive international strategies. Nestle recognizes the advantages and disadvantages of gambling with low and high risk markets. All companies faces that point of decision making where they realize there is something to gain and to lose due to their particular choice; a trade-off. While conducting business with high risk markets Nestle face the disadvantage of currencies. While Nestle uses francs they sometimes still do business with outside currencies despite the susceptible instability of exchange rates.
Despite the disadvantages of working with high risk markets as in the Latin Americas and Africa Nestle stay involved due to the potential growth of their corporation and has almost 33. 7% of its sales from these high risk markets. These high risk markets are known for their debt crisis, but as a tradeoff Nestle provides jobs, utilities, and opportunities and in return establish international manufacturing and trade arrangements. Anticipating uncertainty, Nestle needed a method to prevent risk within the company.
With the aid of a risk group and an active risk manager Nestle could consistently manage risk within their multi-national operation. The two forms of risk when anticipating uncertainty is controllable and uncontrollable. As it sounds, controllable risk can be controlled when you can do something about it, while uncontrollable risk can be difficult to prevent from occurring. A company can incorporate risk using the risk assessment during decision-making process.
A company has to calculate their risk by multiplying the two fundamentals of quantitative risk assessment: robability of foresee ability of event, occurrence and potential loss. In Ellingsons’ article, Creating Value Trough Risk (2010, p. 1) the six basic steps for this process are: Establish context by indentifying key value drivers (how wealth is created), Identify metrics (ways to quantify, measure and monitor the key value drivers), Conduct stress tests or simulations of your key metrics, Identify and assess qualitative risks related to your value drivers, Respond to the risks (treat, transfer, terminate or tolerate), and Communicate results of key driver performance and risk management (i. e. the company’s risk appetite and risk exposure to all identified risks).
Being well established worldwide, companies like General Mills sought Nestle as an advantage to international trade and alliance just for Nestle to lend their name. Hirschey (2008) states, “Even multinational food giant Nestle sought and obtained a joint venture agreement with General Mills rather than enter the potentially lucrative European breakfast cereal market by itself” (p. 509). The advantages of Nestle exporting through foreign markets reduces inventory and increases sales of the corporation which allows an analysis on market potential.
However, exporting per unit can be costly as a disadvantage to Nestle. Competition can sometimes be mistaken as a being bad, however having competitors can be good for revenue. “Competition is a fundamentally attractive feature of the capitalistic system because it keeps costs and prices low” (Hirschey, 2008, p. 10). With rivalry streaming internationally and locally some of the biggest international competitors of Nestle Global are: Mars Incorporated, Kraft Foods, and Unilever. Products and services relate Nestle to competitors, but they draw lines with their pricing strategies.
Pricing strategies create consumer markets and a range of marketing availability. Nestle entered Africa and the Middle East knowing their condition and with the risk established a new market. Nestle Global is the founder of majority of the 8,000 plus brands. Nestle Global is known to have a huge marketing team with sub groups that focus on several brands and consumer wants. Having common products from confectionary to pet foods, Nestle competitors have these products available in the same geographic locations.
A large private American producer serves areas worldwide with operations in over 73 countries Mars Inc. and Nestle Global have several target markets to which they share: Australia, Belgium, Chile and more. Like Nestle Global a large independent and public corporation founded in America, Kraft foods Inc. has global markets in North America, Latin America, Europe, and Asia Pacific. Another large public company Unilever is a British-Dutch corporation and major competitor to Nestle. Much like other competitors Unilever targets the same global markets as Nestle in Africa, the Middle East and the Americas.
Packaging, size and availability can mean a lot within competition. Nestle believes that consumers appreciate the availability of the size of Pure Life water and snack size products are produced as quickly treats and party favors. Corporations like Mars, who produces some of Americas favorites: Snickers, M&Ms, and Twix have a calorie limit of 250 per bar. This requires the corporation unlike Nestle to remove king size bars from shelves as a goal to better their brand. Unilever believes in changing packaging size to provide single use products for consumers.
Competitor Kraft Foods Inc. utilizes an Eco Calculator to provide price efficient and environmental safe packaging. While competitors have common products, marketing, packaging, size, and availability can make a difference. Currently Nestle is up . 76%, Kraft Foods Inc, down . 09 %, Unlived down . 50%. All providing price guarantees, Nestle is confident that theirs are the best prices to offer consumers. Between 2006 and 2010 there was a 14% raise in the sales of confectionery and 17% on chocolate.
Being a private owned company Mars Inc. s leading the competitor game. The financial data on Mars isn’t readily available and their stock isn’t available for trade. For retailers: A 24 ct bar from Mars Inc ranges from $20-40, Nestle $30-50, and Kraft $33-40. Pricing in the confectionery world are skimming low because of readily available choices from so many competitors. The difference develops through marketing. From commercials, ads, and billboards almost all form of marketing has been used to strongly market all of the above competitors.
Nestle Global is known to have a huge marketing team with sub groups that focus on several brands and consumer wants and allocation of funds so that budget goals are met. Nestle remains on top by doing what other competitors cannot; offer a; large and very broad range of products and brands under one multicultural corporation. Results of the regression analysis Nestle Global v. GDP (Appendix A & B) depict great company revenues from good correlation results. The correlation coefficients have a 99% correlation between sales and GDP. This percentage proves a strong correlation between sales and GDP are positively related to one another.
The regression coefficients displays the constant which is the rate of change of the y value of the linear regression as the changes of x occur which is also the slope of the regression line. The adjusted R squared is used during multiple regressions to evaluate a good fit. “The square of the coefficient of multiple correlation, called the coefficient of determination, or R2, shows how well a multiple regression model explains changes in the value of the dependent Y variable” (Hirschey, 2008, p. 91). The regression models depict an adjusted R squared of 97% resulting in a good fit for Nestle Global.
Nestle Global has great company revenue from good correlation results which helps in the steadily growing firm to devote time to ensure operational performance, quality production, and high consumer relationships. The nature and cost structure for Nestle Global is centered on improving the trading operating profit margin and earnings per share. For Nestle’ Global factors which affect supply, demand, and price are just like any other company. 27% of sales activities are directed from drinks, 26% from dairy, 18% from frozen food, 12% chocolate, 11% pet care, 6% pharmaceuticals, and 2% baby milk.
For products like MilkPak a Pakistani product Nestle Global decided to use market survey’s to assist in pricing products according to customer needs. Other products are priced according to competitor prices. Hirschey (2008) explains, “The more elastic the demand for a product, the more price sensitive it is, and the smaller is the optimal margin(p. 587)”. Products with less elastic demand have higher optimal markups. 27% of drink sales are termed elastic due to high demand while 2% baby milk are less elastic due to a broader market in my opinion. Appendix D shows the affects of these common product sales for Nestle Global.
According to the text “a strategic way to enhance Nestle Global profit would be by focusing on four cost effective aspects of the company such as fixed cost, variable cost, life cycle cost and operating cost” (Hirschey, 2008). Fixed costs are the firms’ expenses that do not vary with outputs. According to the financial report of Nestle’ S. A. (2012), “the companies fixed cost is in land and buildings and these fixed costs have depreciated in the past to one franc and the office furniture and equipment which are fully depreciated on acquisition” (p. 144).
As a strategic gain, Nestle Global is the sole tenants of their principal operating companies in the market. Therefore they will continue to keep fire insurance on all buildings up to date that cost 24 million CHF’s. The income statement of Nestle Global covers strategic planning of cost related depreciation over the years, minus land that doesn’t depreciate. Those expenses which are incurred during the years are: vehicles, equipment, machines, and buildings. The variable costs of Nestle Global include all the firms’ expenses that do change with output such as raw materials, purchased finished goods which are valued at purchase cost.