Nestlé Adjusts its Strategy in China for Retreat

Nestle, which is in the process of major acquisition expansion in the Chinese market, suddenly announced that it stopped the ice cream business in some areas and triggered widespread market speculation. If the overweight candy market is seeking to maximize the source of corporate profits, it would be a bit puzzling to give up the “golden” business, which looks like a huge ice cream market. What are the reasons for Nestlé's business adjustment in China?

Ice cream market business shrinks

At a time when Nestlé’s Shanghai-based ice cream factory ceased production, Nestlé sent a statement to this reporter saying that ice cream is an important part of Nestlé’s product range in China. Nestle is fully committed to building a long-term sustainable ice cream business in China and is increasing its investment in the business. However, Nestlé also admitted that while the company is further strengthening its ice cream business in South China and North China, it will suspend some ice cream retail business in East China at the end of December 2011, and stop production of ice cream in the region.

In response, Jian Yihua, a food industry researcher at CIC Advisors, believes that Nestlé's shutdown of some ice cream plants may not be as expected in the ice cream market over the years. It is therefore necessary to make adjustments and seek new developments. He said that the development of the domestic ice cream market is relatively stable. In 2010, the size of the Chinese ice cream market was approximately 30.8 billion yuan, and the top two market share was Yili and Mengniu. Although Nestlé has strengthened its position in the ice cream market through acquisitions, in recent years, the share of Nestlé has not changed much and the development situation is not satisfactory.

The report recently released by the China Ice Cream Market Research Center also pointed out that it is expected that the annual sales of domestic ice cream will reach 110 billion yuan in 2015, and domestic brands are expected to dominate the 100 billion market. The report revealed that Yili topped the market with a 17.5% market share, Mengniu ranked second with 15.3% market share, both higher than the world brands and 9.5% and 8.2% of Lu Xue and Nestle, and the other 49.3% of the market. It is divided by many small and medium-sized enterprises.

Successfully overweight the candy market

There are also gains and losses. Just on the same day that Nestle announced the closure of some ice cream factories, the Ministry of Commerce approved its transaction to acquire 60% of Xu Fuji’s equity for US$1.7 billion.

Some analysts pointed out that although Nestlé is the world's largest food manufacturer, its candy business is relatively thin, its well-known brands are only interesting and fruitful, and has been strong in recent competition. Competitors are under pressure to compete in the competition with Mars, Kraft, and Unilever in the United States. They need to expand their market share through acquisitions. Judging from the brand distribution of China's candy market in 2008, Mars ranked first in the United States with a share of 12.9%, and Xu Fuji ranked third with 3.9%, while Nestle’s market share was only 1.6%, ranking fifth.

Jane Aihua also pointed out that the candy market is one of the markets with a high rate of return on investment and has a high profit margin. Nestlé’s acquisition of Xu Fuji has made its market share in the candy market surpass its rivals such as Kraft and Unilever, which has greatly boosted its position in the candy business.

Adjust or go for profit

According to statistics, the candy industry's market growth rate is about 10%, and the global ice cream industry's average growth rate is 2.5% in 2010. Only the emerging economies represented by China can increase by 10%.

Some food industry researchers have analyzed that it is normal for companies to maximize profits and make product and business adjustments and arrangements. Judging from the development of the industry and Nestle's actions, Nestle’s share of the ice cream market in East China is far lower than that of its competitors. The profitability is not ideal, and the market is unable to obtain pricing power.

Abandoning this part of the weak market and integrating resources into the dominant market also belong to the practice of retreat.

In addition, there are also marketing experts (view marketing expert blog) that the ice cream industry is affected by the season more obvious, profitability can not be maximized, while the candy does not exist these problems. Moreover, the profit margin of the ice cream industry is much lower than that of the confectionery industry. In the same circumstances as the market size and sales situation, the confectionery business can contribute more profits. From the point of view of profit-seeking companies, Nestle's approach is also reasonable, and in addition, the demand for sweets in the Chinese wedding market has been on an upward trend. This will have a great boost to the development of the candy market, making the development prospects of the entire market more optimistic.