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MarketScreener Homepage  >  Equities  >  Swiss Exchange  >  Nestlé S.A.    NESN   CH0038863350

NESTLÉ S.A.

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The death of Maggi noodles

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01/13/2020 | 06:56am EST

It is an iconic brand. At least two generations of Pakistanis have grown up with it. But Maggi noodles - the brand that introduced many Pakistanis to the concept of convenience food - has been shut down in Pakistan, with sources inside Nestle, the company that owns the brand and manufactured the product, confirming to Profit that they will no longer be marketing the instant noodles in the country.

'Yes, we discontinued Maggi by the end of 2018. The divestment is part of Nestle's strategy to manage its multi-product portfolio,' said one official at Nestle who declined to be identified because he was not authorised to speak on the matter.

Nestle Pakistan has made no public announcements about the matter, and Maggi noodles remain listed as a product on the company's website. However, the product is conspicuously absent from the 2018 annual financial statements of the company. There was no explicit mention of a discontinuation: it was just listed as a product offering on the 2017 report, and not listed on the 2018 report.

When it was first launched in Pakistan in 1992, Maggi was the only brand of noodles in the country and had a complete monopoly for the first year of its production. And while Unilever quickly launched its Knorr brand of instant noodles in 1993, Maggi was the market leader and, for the most part, remained so for the next two decades.

Over the past four years, however, Maggi went from being the market leader in its category to being almost completely wiped out from the country. Sources inside the company confirmed to Profit that the current stock of Maggi in stores is all that is left. Once it is gone, there will be no more.

Needless to say, there are some consumers who are bound to be distraught.

'Maggi was my childhood romance,' said Ahmed Abbas, an ardent foodie, who works as an accountant at Royal Swiss, a newly constructed luxury hotel in Lahore. 'I grew up eating Maggi two minutes instant noodles and I badly miss them. It used to be the part of our afternoon snacks and occasionally for school lunch break.'

How did this happen? How could such a beloved brand just die? The company's management likes to use meaningless corporate drivel to explain it, but there is no denying a simple fact: a collapse like this does not happen without a shock event. Unfortunately for the management of Nestle Pakistan, that event took place across the Wagah.

South Asia's love affair with Maggi

The story of Maggi in our region begins in India. Maggi was originally an independent food company started in Switzerland in 1884 by Swiss entrepreneur Julius Maggi, an immigrant from Italy. Maggi started off by selling bouillon cubes - what are known in the Pakistani market as those 'chicken cubes'.

In 1947, Maggi GmBH was bought out by Nestle, the then-rapidly growing Swiss food company that had global ambitions and already had a sizeable footprint around the world, including in South Asia. Nestle started its presence in the region in 1912, as the Nestle Anglo-Swiss Condensed Milk Company.

Nestle introduced Maggi in India in 1983, almost a full decade before it was introduced in Pakistan. Even in India, Nestle faced competition in this category from Unilever's Knorr, but was able to build up a commanding lead in market share, typically with an 80% share, and occasionally even reaching a 90% share of the instant noodles market in India.

The product came to Pakistan in 1992, and was the dominant brand of instant noodles (though less dominant in Pakistan than in India) for much of the next three decades. For most of this time, Knorr was Maggi's only real competitor. Then, in 2012, Shaan Foods decided to enter the fray with Shoop, its own brand of instant noodles.

But while the two competitors gained some market share, Maggi remained the number one instant noodles brand in both countries. Contrary to what management might say, while their competitors certainly benefited from Maggi's misfortunes, the cause of the hit to the brand - which proved fatal to its presence in Pakistan - did not originate with its competitors.

The food safety scare in India

The cause of Maggi's demise in Pakistan starts with a man named Sanja Sindh, a food inspector with the Uttar Pradesh Food Safety and Drug Administration in India. According to reporting in Mint, a leading financial newspaper in India, it was in March 2014 that Singh decided to test the claim by Nestle that Maggi contains 'no added MSG' (monosodium glutamate).

Singh sent a sample to a state government laboratory in Gorakhpur, which tested positive for the presence of MSG in the noodles. He then sent additional samples to the Central Food Laboratory in Kolkata. And then waited. For one year. (This is a government bureaucracy, after all. These things take time. We are told.)

In April 2015, the report came back from Kolkata: 'MSG present and Lead: 17.2 ppm' (parts per million). The United States Food and Drug Administration (FDA) sets the permissible amount of lead in food products at 50 parts per billion (ppb). Nestle's sample had just come back testing positive for 17,200 ppb, or more than 340 times the limit considered safe, and over 1,000 times the limit that Nestle India claimed it followed.

The UP food safety commissioner asked Nestle to respond to the tests and Nestle submitted its response on May 5, 2015. Two days later, the first stories about possible safety hazards started appearing in the local press in Uttar Pradesh. Nestle, however, chose not to say anything publicly.

Over the next week, national newspapers started picking up the story and writing about how Maggi might be unsafe, but Nestle still did not respond. Finally, on May 21, two weeks after the first public story about the food safety tests, Nestle responded with a statement that seemed to downplay the allegations, stating that Maggi noodles were 'safe to eat'.

'But recent developments and unfounded concerns about the product have led to an environment of confusion for the consumers,' the statement said.

In hindsight, maybe they should have reacted more forcefully. Because what happened next would have been predictable had Nestle remembered the first rule of being a multinational corporation from a rich country operating in a poorer one: you are held to a higher standard than local competitors, both by the government and by consumers. It may not feel fair, but it is just the way it is. Deal with it and move on.

But that is not what Nestle did. They felt that the tests run by the labs in Uttar Pradesh and Kolkata were flawed and that the Maggi production process was being mischaracterised. They were trying to win the argument, not solve the problem.

And Nestle brought out the big guns to try to win the argument. Nestle's global CEO Paul Bulcke flew to India to meet with regulators and address a press conference in New Delhi. 'This is a matter of clarification and we need to sit down together and clear the air… We will look into the safety concerns. We do not add MSG in Maggi noodles… We apply the same quality standards everywhere. Everything we do is keeping consumers in mind. We will do everything it takes, and are fully engaged with the authorities,' he is quoted by Mint as having said during that press conference.

It did not work. On June 5, 2015, the Food Safety and Standards Authority of India (FSSAI) ordered Nestle to recall Maggi from the Indian market. Over the next three months, the company recalled over 38,000 tons of Maggi noodles and burned them.

Yet despite being ordered to do so, Nestle India did not want to admit defeat. They portrayed their decision as voluntary, releasing a statement that misconceptions had developed about their product to such an extent 'that we have decided to withdraw the product off the shelves, despite the product being safe,' the statement reads. They also promised Maggi consumers that the noodles would return to the market as soon as the company was able to resolve the issue.

Stubborn management

One can almost sympathise with the Nestle management. They were right about Maggi noodles and were proven right within a few months. Nestle India exports Maggi noodles to cater to the Indian expatriate population in North America and Europe. In the United States, the FDA conducted tests in August 2015 that showed that Nestle was right: Maggi noodles did not contain unsafe levels of lead.

'Following news reports about alleged lead levels in Maggi noodles made by Nestle and sold in the US, FDA tested a limited number of samples for lead contamination. FDA testing did not find any levels that present a public health concern for US consumers,' wrote an FDA spokesperson in an e-mail to The Times of India, published on August 12, 2015.

And soon, even the authorities in India recognised that there had been a mistake. The very next day, August 13, the Bombay High Court struck down the FSSAI's nationwide ban on sales of Maggi. In its decision, the court stated that the tests conducted by the Uttar Pradesh authorities and FSSAI were in unauthorised laboratories that were not accredited by India'sNational Accreditation Board for Testing and Calibration Laboratories (NABL).

But Nestle management completely misread the situation. Their problem was not that their product was unsafe. It was not, and they knew it. Their problem was that the Uttar Pradesh government - and subsequently other government authorities in India - perceived their product to be unsafe and the public was increasingly concerned.

The problem was not going to go away by telling everyone in India that they were wrong. It was going to go away by being seen to be taking action to address their concerns, unfounded though they were.

Yet that stubborn decision to continue trying to argue with the government influenced the company's decision not just in India, but appears to have had at least some impact in Pakistan.

Following the safety concerns in India, Nestle Pakistan issued a statement on their website stating 'Nestlé Pakistan does not import any Maggi product from India. Maggi products sold in Pakistan are locally manufactured in our Kabirwala factory near Multan. Maggi products produced in Pakistan are safe and Halal. Nestlé Pakistan proactively conducts tests on all their products regularly, and consumers can be assured that our products are safe to consume.'

That is it. That is all the company did for nearly a full year.

Tremors felt in Pakistan

Meanwhile, consumers in Pakistan - who received relatively little communication from the company about the safety of Maggi noodles - were being influenced in their purchasing decisions by the news from across the border.

Fareeha Najam, a housewife in Lahore, told Profit that although the brand has claimed that the product is completely safe and not hazardous, 'I wasn't ready to take the risk after it is about the health of my children and we moved to Knorr noodles despite the fact that my son Irtiza and daughter Kashaf were huge Maggi instant noodles fans,' she added.

This is despite the fact that most consumers preferred Maggi noodles to most of its rivals.

'The quality of Maggi was better than that of Knorr. Price wise both the products were the same,' said Haania Ali, a senior marketing manager at Punjab Group of Colleges. Maggi noodles, especially the ones with the small chunks of vegetables, was her personal favourite. However, she said that her daughter Insiya loves Knorr's Chatpata flavour the most.

Agreeing with her, one of her colleagues, Amina Hassan, also shared her childhood memories of how she always preferred Maggi instant noodles over Knorr noodles. 'We miss Maggi noodles. It was an essential part of my life during my teens,' she said.

Yet even now, the company is reluctant to admit that the crisis across the border had anything to do with the brand's demise in Pakistan. 'No, the two aren't connected. Maggi noodles were being produced in Pakistan in our Kabirwala factory and there is no linkage between the Maggi products manufactured in India,' said Muhammad Rahat Hussain, spokesperson for Nestle Pakistan.

He added that all of Nestlé Pakistan's products, including Maggi noodles, have always been safe for consumption. 'We would also like to point out that in India too, Maggi Noodles have always been safe for consumption,' Rahat said.

However, one person who previously worked as part of the sales team for Maggi at Nestle Pakistan said that the impact of the news from India on the product's sales in Pakistan was unmistakable. He said that, after the news started coming in from India about the alleged lead levels, he saw many consumers switching over from Maggi to Unilever's Knorr.

'The Indian debacle ruined the three decades goodwill of the Maggi brand and badly affected the brand loyalty of our product,' he said.

Attempts to save the brand

It is not as though Nestle did not try to save the brand at all. In 2016, for instance, the company launched a major advertising campaign that sought to highlight the recent changes made to the recipe to make it healthier by reducing the sodium content in the noodles. They also introduced 'Maggi Chotoo', a smaller package with a lower price point of Rs15.

In hindsight, perhaps changing the recipe at a time of safety concerns was not the best strategy, at least not without making it look like a tacit admission that there was something wrong with the old recipe. Of course, Nestle was doing so in line with an unrelated global strategy to reduce the sodium content in food to make it healthier. But that was likely a point lost on most consumers.

Especially when one considers that reducing sodium means, in effect, reducing salt in food. And that usually makes food taste worse. People like salt in their food, especially foods such as noodles.

And in April 2018, the company engaged acclaimed singer, songwriter, and actor Asim Azhar - who is also referred to by some commentators as the 'Justin Bieber of Pakistan' - and another promising singer and scriptwriter Aima Baig to promote the brand in an ad with the new and catchy tagline 'Uljha Maggi Sab Suljhaye' but even that could not help the brand much.

Within months of that ad campaign, the brand was discontinued in Pakistan.

An alternative explanation for the fall

Not everyone is convinced that Maggi died in Pakistan because of the scare in India, or at least that while the news from India did not help, it was not the biggest reason for the death of Maggi. According to one senior executive at a competing food company, Maggi had been losing market share to Knorr even before 2015, and the lead scare from India simply accelerated what was already an inevitable demise.

'The real problem for Maggi was that Knorr does its product as well as flavour development inside Pakistan, whereas Nestle made Maggi use the same formula they use in the Indian market,' he said. 'These European company executives think that Indians and Pakistanis have the same taste, but we do not.'

Unilever, it seems was much better at localisation than Nestle was. As a result, Unilever's product was able to continue gaining market share from Nestle, and was therefore well-positioned to become the market leader by the time Maggi met its demise.

Nonetheless, the end of Maggi still comes as a shock, even to executives who have competed against the company and developed rival products. 'It was definitely a shock. Maggi is seen as a core brand for Nestle, certainly in India and we used to think in Pakistan as well. They must be making losses towards the end. A lack of localisation and also some poor communication led to this eventual demise,' said the industry source.

The fall of Maggi… and the rise of Knorr and Shoop

Yet even as they stopped buying Maggi, Pakistani consumers did not stop having noodles. While reliable estimates of Pakistani spending on noodles are difficult to come by, a 2016 report in The News quoted officials from Nestle Pakistan as estimating the market size at around Rs6 billion in that year. Taking up share given up by Maggi, in other words, could be lucrative business.

And Unilever Pakistan Foods, the publicly listed subsidiary of the global giant, along with local food company Shan Foods appear to have stepped into the fray. According to a recent market study by Nielsen, the market research company, Unilever's Knorr now has a 55% market share and Maggi's share in its last year of operations had dwindled to just 35%. The remaining 10% of the market was taken up by Shan's Shoop.

'Consumers mostly buy Knorr Noodles now and they are high in demand,' said Ghulam Abbas, one of the workers at Savera departmental store in Shadman, Lahore.

Agreeing with him, one of the cashiers at Jalal Sons Lahore, told Profit: 'We don't have Maggi noodles in our stock anymore. Consumers usually buy Knorr noodles and in the absence of Maggi noodles from the market they are only left with the choice of Shan's Shoop.'

And while Shoop has so far been the smallest player in the market, Shan Foods and its distributors now see an opportunity to expand their market share.

Kashan Raza, one of the distributors of Shan's Shoop, told Profit: 'Shan completely understands [the opportunity]. That's why, for market penetration, the company is concentrating on the distribution and promotion of the product to increase the market share of the brand,' he added. 'You will find it at every big and small store.'

Meanwhile, it does seem that Nestle may be out of the noodles business in Pakistan altogether. When this scribe asked the company if they might launch a different noodles brand at some future date, Rahat Hussain, spokesperson for Nestle Pakistan, said: 'It's too early to comment. We will keep you posted of any launches.'

Killed in Pakistan, alive and well in India

Here is the ultimate irony, though: while Nestle gave up on trying to rescue Maggi in Pakistan, it continues to thrive in India, and - after a few years of low market share - the company is back up to a 60% market share in India, according to reporting in The Economic Times, India's largest business newspaper, in a news story dated August 2018.

Nestle India had revenues in 2018 of ?115 billion ($1,627 million), of which approximately 30% comes from the Maggi line of product, implying revenues of close to $488 million from Maggi noodles and related products in India. In other words, you can sit down to have a nice hot bowl of Maggi noodles in Gorakhpur, Uttar Pradesh, and Kolkata, West Bengal, just a few miles from the laboratories that conducted those faulty tests and created the panic against Maggi.

Meanwhile, in Lahore or Karachi or Gujranwala, which were not even served by the same factories as the ones that had that alleged lead poisoning problem, you cannot have Maggi at all. Now, how is that fair?

© Pakistan Press International, source Asianet-Pakistan

Stocks mentioned in the article
ChangeLast1st jan.
NESTLE INDIA LTD -0.48% 16374 End-of-day quote.10.12%
NESTLE PAKISTAN 0.34% 7425 End-of-day quote.-8.33%
NESTLÉ S.A. -0.57% 108.68 Delayed Quote.4.37%
UNILEVER N.V. -0.54% 53.79 Delayed Quote.5.50%
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Financials (CHF)
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