Rising concern over the impact of the troubles Nestle India is facing in its iconic Maggi brand sent the stock sliding sharply. At the day’s low, the Nestle stock was down 11.8 per cent, the steepest fall in at least five years.

While safety standards of the Maggi instant noodles flavouring have been under the scanner for a few weeks now, reports of recall of more batches and a possible ban on sales of the product stoked fears.

Though the company clarified that it hadn’t yet received fresh recall orders apart from the one last month, the stock ended Wednesday’s trade with a 9 per cent fall.

The outcome of the FSSAI tests and the impact of the suits filed against Nestle are unclear and can take several weeks to pan out. But at least for the June and September 2015 quarters, consumer wariness over Maggi instant noodles’ safety can squeeze sales.

If there is more negative news for Nestle over Maggi, the trouble could get worse. Here’s why.

Losing out For Nestle, Maggi is a marquee brand under which almost all its prepared foods — sauces, instant pastas, instant noodles, oats, and so on — are marketed. A dent in Maggi’s brand equity can thus impact a wide range of products apart from instant noodles.

Two, if distributors and retailers refuse to stock the products, as has been reported, Nestle’s market share can suffer. In the instant noodles category, Nestle holds 80 per cent of the market share by value currently.

Packaged and prepared foods are attracting intense competition, being an under-penetrated category. FMCG companies GSK Consumer Healthcare (Foodles), ITC (Yippee), and Hindustan Unilever (Knorr) are all battling Nestle for market share in this space.

Margin drag Three, Nestle has relied on price hikes to grow sales over the past several quarters, with volume growth slowing down. For the January-September 2014 period, volume growth in prepared dishes was just 1.8 per cent, down from the 3.8 per cent in the year-ago period.

Value growth, however, was strong at 8.1 per cent.

Doubts over quality may squeeze Nestle’s pricing power, which is already curtailed by correcting raw material prices. Besides, the overall packaged foods segment is yet to show signs of recovery with consumer discretionary spending still sluggish.

Four, Nestle’s dependency on the prepared and packaged foods segment is creeping up. From 29.5 per cent in 2012, the segment now accounts for 31.3 per cent of domestic sales. The segment also offers higher profit margins; a hit can thus drag profitability too.

Five, if Nestle has to repair the damage to its brand, advertising expenses will rise. This can impact operating profit margins, which have improved over the past two quarters to around 22 per cent from 19-20 per cent in the previous year.

The adspend-to-sales ratio at 4.6 per cent is, however, lower compared to peers. Nestle can, however, wrangle some relief on the input front, with wheat and palm oil prices benign and milk prices stabilising.

Related Topics
comment COMMENT NOW