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Business News/ Market / Mark-to-market/  In a soup over Maggi noodles, what’s the worst for Nestle?
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In a soup over Maggi noodles, what’s the worst for Nestle?

If individual food tests bring up bad news for Maggi, a much bigger problem is in store for Nestle

For Nestle India, the financial impact in the near term can be damaging. Photo: Dhiraj Singh/BloombergPremium
For Nestle India, the financial impact in the near term can be damaging. Photo: Dhiraj Singh/Bloomberg

A quality scare is a food brand’s worst nightmare, especially when children are involved. Nestle India Ltd’s share fell by 9.1% on Wednesday, after more states began to conduct tests on its instant noodles brand Maggi for higher-than permitted levels of lead and for the presence of monosodium glutamate. Fears that this situation is developing into a full-blown crisis have made investors bearish.

Parallels can be drawn with the Cadbury Dairy Milk incident in 2003 when worms were found in some chocolates in Maharashtra. It blew up in the company’s face and took some explaining to both consumers and the government, changes in packaging and a high-profile marketing campaign before order was restored. It still took eight months for chocolate sales to go back to pre-crisis levels, according to a case study by the Fletcher School at the Tufts University.

So far, Nestle has said that tests done in-house and in an independent laboratory show that lead content in Maggi noodles is within permissible limits. But if tests that have reportedly been ordered by individual state governments or the central government bring up bad news for Maggi, then this can develop into a much bigger problem.

What is the worst that could happen? Sales of noodles could nosedive. Nestle’s loss may be its rivals’ gain, though one could even see all instant noodles being subject to more stringent testing. Nestle may be asked to withdraw affected noodle stocks from the market. Fresh production may even be halted till the food authorities are satisfied the products are safe.

The financial impact in the near term can be damaging. Nestle’s prepared dishes and cooking aids segment contributed 31.5% of sales in the January-September 2014 period. This includes noodles, sauces and soups, and news reports say Maggi noodles contribute to 20% of total sales. A significant hit on sales and profits, not to mention the loss of reputation, can be expected in the near term.

This could either be for a quarter or for a few more quarters, depending on the extent of the problem—if it is proved there is one—and the remediation process. Once the offending cause, if any, is taken care of, a big-bang marketing campaign can be expected to restore consumer confidence in the brand. But this could be a long road to recovery.

Meanwhile, its share could see more pressure; it had gained ground in 2015, but the current controversy has seen it slip to levels last seen in end-2014.

Nestle’s performance in 2014 had suffered due to a slowdown in discretionary consumption and the cumulative effect of rising input costs. But the March quarter saw sales growth improve, and a fall in main inputs such as milk and milk products contributed to better margins. Investors were looking forward to this recovery picking up pace, especially as demand in urban markets is expected to improve. But all of that may take the backseat, if Maggi’s instant noodles are found to be unsafe for consumption.

The writer does not have positions in the company mentioned above.

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Published: 03 Jun 2015, 05:06 PM IST
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