Nestle Maggi Crisis: Critical Analysis

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Nestle Maggi Crisis: Critical Analysis

Abstract

Whenever we think about Nestle, we think about a story about organizational success. Since its inception in 1866, the company has seen rapid growth, profit, and earned reputations all around the world. Even its company in India is doing exceptionally well. Since 1959 Nestle has been operating in India. It is selling noodles to a rice/wheat-eating country. Sells chocolates to people who are famous for their sweets. Sells powder milk to a country obsessed with fresh milk. Unfortunately, the company lost its reputation in India in 2015 and faced a never before seen crisis. The 104-year-old reputation was inked when a lab found high amount of lead in its most famous brand of noodles, Maggi. This finding lead to a subsequent nationwide ban of India’s most beloved product. Nestle India faced its worst nightmare. However, the company managed to jump back from the situation and regained its once-held reputation. What’s more impressive about Nestle is how they reacted in the face of its worst crisis. The way they solved their problem, remained in business, and now growing faster than ever before is a case for study and research. This paper delves deep into how the crisis began and how the company efficiently and effectively came out of it.

Nestle Maggi Crisis

A Brief History

It all started in 1867 in Vevey, Switzerland. The founder of Nestle is Henri Nestle. It’s first product was created as an alternative for mothers who could not breastfeed their babies. It was called Farine Lactée Henri Nestlé. Within a few years it gained popularity in the Europe.

At that time their main competitor was Anglo-Swiss Condensed Milk Company. The companies merged in 1905, on that year Nestle also added Chocolates on their product of foods. Initially they had factories in the United States, Britain, Spain and Germany. And soon they started manufacturing in Australia, Singapore, Hong Kong and Bombay. They faced some complications during the World War 1 but their production boosted back after the World War.

By the 1920s Nestle was Creating chocolate and powdered beverage products. The developed their one of the successful Product in 1930s Nescafe along with Nestea and it became an instant hit. Nescafe became a main Beverage for the American Soldiers in Europe and Asia. Their total sales increase by $125 million from 1938-1945 during the World War 2. After the World war they expanded their product line. And within a matter of time Nescafe became one of the largest stock holders in the market.

The First logo of Nestle in 1868.

Current operations around the world

Nestle and Starbucks will work closely together on the existing Starbucks range of roast and ground coffee, whole beans as well as instant and portioned coffee. The companies are working on a new innovation with the goal of enhancing its product offerings for Coffee lovers globally. The agreement significantly strengthens Nestle’s portfolio in The North American premium roast and ground and portioned coffee business.

Nestle launches free online chef’s academy with WORLDCHEFS. It will be a great help for the aspiring chefs to take the first step. This academy is a partnership between the World Association of Chefs Societies (WORLDCHEFS) and Nestle Professional Academy is free of cost and accessible for anyone, no matter what their background is or what skills they have.

Introduction in India

Nestle’s relationship with India dates back to 1912.After India’s independence in 1947, the economic policies of the Indian Government emphasized the need for local production.

Nestle responded to India’s aspirations by forming a company in India and set up its first factory in 1961 at Mega, Punjab, where the Government wanted NESTLÉ to develop the milk economy. Nestle has been a partner in India’s growth for over a century now and has built a very special relationship of trust and commitment with the people of India. The Company’s activities in India have facilitated direct and indirect employment and provides livelihood to about one million people including farmers, suppliers of packaging materials, services and other goods.

Operations in India

The main operation of Nestle is to serve Good quality food. Nestle India manufactures products of truly international quality under internationally famous brand names such as Nescafe, Maggi, Milky bar, Kit Kat, Bar-One, Milkmaid and Nestea and in recent years the Company has also introduced products of daily consumption and use such as Nestle Milk, Nestle Slim Milk, Nestle Dahi and Nestle Jeera Raita.

Nestlé India Head Office, Gurgaon, Haryana

Nestle Contribution to India’s Economy

Nestle’s contribution to India’s economy till now is quite good. Their first factory was created in 1961 in Moga. Their total sales are Rs. 7,546 crores as of September 2017 and their net profit after tax is Rs. 913 crores as of September 2017. Nestle has given a major push to the dairy sector of the country and has developed the Milk economy. Nestle is the market leader in various categories such as Infant Cereals (96.5%), Instant Pasta (65.2%), Instant Noodles (59.5%), White Chocolates and wafers (62.6%).

The Beginning of the crisis

Before Maggi was launched in India in 1983, nobody imagined that a snack can be prepared in just 2 minutes. Within a short period of time it gained popularity all over the sub-continent. It was mainly targeted for the middle-class families of the country.

Everything was going smoothly for three decades but then a storm struck in 2014. On a laboratory in Gorakhpur proved that the samples of Maggi contained lead and monosodium glutamate 1 (MSG) much beyond the permissible limit. Then several state governments tested the samples and banned the product. Within a matter of time Maggie was off the Market.

The Crisis

Maggi instant noodles came under the scanner for three main reasons. The first was the aforementioned violation of the regulations for adding lead and MSG into the product. As against the maximum limit of 2.50 parts per million (ppm), the amount of lead detected in the Maggi samples was perilously high at 17.2 ppm. The second offence was mentioning ‘No added MSG’ on the packaging, which is an act of mislabeling. Also, it launched ‘Maggi Oats Masala Noodles’ without meeting the appropriate norms of standardization. Maggi owned 80% of The market share in the instant noodles segment. After the ban it dropped to 0%. The crisis was very serious and it was state of emergency for Nestle India. Maggi’s all hard work of 30 years was at stake. So, Nestle India had to take some necessary steps.

The Financial Downturn

As a result, Nestlé India slipped into a loss for its second quarter after being battered by a national ban on its popular Maggi noodles due to safety concerns.

The Maggi meltdown would prove costly. Nestlé lost at least $277 million in missed sales. Another $70 million was spent to execute one of the largest food recalls in history. Add the damage to its brand value—which one consultancy pegged at $200 million—and the total price tag for the debacle could easily be more than half a billion dollars. And the fallout continues. [image: https://fortunedotcom.files.wordpress.com/2016/04/nestle-maggi-stock.png]

In a statement to the Bombay Stock Exchange, Nestlé India reported a net loss of Rs 644m ($10m) in the three months ending in June 2015, compared with a Rs 2.8bn profit during the same period in 2014.

The loss of Reputation

With Indian Food Inspectors ordering Nestle India to recall a batch of Maggi instant noodles identifying dangerous levels of lead and MSG (click for entire report), Maggi (Nestle India) was caught into a vicious circle of bad reputation.

Maggi till date has been enjoying a brand that could connect people to not only a product but to the whole concept. Maggi has become the other name for “Instant Noodles”. Even if someone purchases Top Ramen Noodles or Sunfeast Yippe Noodles, it would still be assumed as another type of noodles but not instant noodles. At times Maggi is been sought for as a quick alternative to the staple food. However, what problems the present crisis would create to Maggi is to be watched.

Due to the scandal, the internet had started talking more and more about the ill effects of Maggi which is considered as itself a brand. This gave an opportunity to rumor-mongers and gossipers to start talking more and more about the ill effects of Maggi. Social media sites such as Facebook, twitter , and google+ were abundantly supplied with information of what is good and what is bad and how Maggi (Nestle India) is cheating its customers. Hashtags like #Maggi, #Maggi ban is being voiced over in the internet. Famous mobile messaging apps like WhatsApp, WeChat, etc., will now spit the venom against Maggi.

The loss of Market Share

Nestlé India said its sales plunged by 20% in the second quarter, as a food-safety scandal and a large-scale product recall weighed on its earnings.
[image: https://fortunedotcom.files.wordpress.com/2016/04/nes-05-01-16-print-charts.png]
Nestlé Noodle’s market share in India also took a nosedive from 63% in 2014 to 23% in 2015 due to the Maggi noodle scandal.
The Indian arm of Nestlé SA said its revenue declined to 19.34 billion rupees ($302 million) in the three months ended June 30th 2015, compared with 24.19 billion in the same period a year earlier.

The loss of Public Trust

Due to the reports of the lead contamination in Maggi noodles, consumers lost their trust on Nestle. Trust metric for Maggi noodles dropped to as low as 3% in 2015. On top of all that, enraged consumers wasted no time venting their anger. In some cities protesters in the street smashed and set fire to packs of noodles and photos of Bollywood stars who were paid Maggi endorsers. One prominent newscaster compared the situation to Bhopal, the worst industrial accident of all time, in which a toxic gas leak at a Union Carbide pesticide plant in central India killed thousands of people. From commanding 80% share of India’s noodles market, (as estimated by Nomura Securities in May 2015) Maggi went down to zero in just a month.

Legal Ramifications

The Maggi sample which was tested contained more than seven times the permissible level of lead—over 1,000 times more than the company claimed was in the product. Due to this debacle, Nestle had to face several legal ramifications such as the ban imposed on Maggi noodles for an indefinite period and it had to take all Maggi packs — or 35,000 tones — off the shelves of about four million retailers.

Other nations such as Nepal indefinitely banned Maggi over concerns about the lead levels in the product. Maggi noodles were subsequently withdrawn from the market of five African nations: Kenya, Uganda, Tanzania, Zimbabwe and South Sudan.

Dealing with the crisis

The Uttar Pradesh food safety commissioner sent a formal notice to Nestle seeking clarification on presence of MSG and lead in Maggi samples. The company did mail its response along with its internal monitoring documents on 5 May 2015, but did not take any proactive step to counter any possible aftershock. On 7 May, there was a small news item on the episode in one of the Hindi newspapers in Uttar Pradesh.

Still, Nestle did not react. It never thought the news could lead to an estimated half a billion-dollar loss for the company (including erosion of brand value) that would shake the Swiss multinational and that the subject would be debated at length in television studios.

Nestle failed to gauge the depth of the crisis even after national newspapers started writing about it. It did not issue any statement till 21 May. And in its first official statement, it said there was “no order to recall Maggi noodles being sold” and the popular instant noodle was “safe to eat”.

On 5 June 2015, the day FSSAI asked Nestle to recall Maggi noodles, the company’s global chief executive Paul Buckle met the regulators, and addressed the media in New Delhi. Buckle said: “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.”

But by then, things had spun out of control. Buckle was left with little choice but to recall the popular noodles from the market. The company got Luca Fichera, then executive vice-president (supply chain) at Nestle India, to lead the recall process.

Between 5 June and 1 September 2015, Fichera’s team collected 38,000 tons of Maggi noodles from retail stores, and destroyed them by first crushing the noodles and then mixing them with fuel and burning in incinerators at 11 cement plants across the country.

How Nestle managed to jump back

“Clinically dead”, is how the company’s India boss loves to describe the Nestle of those days.

Swiss parent controlled Nestle India, makers of Maggi noodles, has made a strong comeback to regain its lost ground in 2017 – nearly two years after it was forced to withdraw its largest selling noodle brand from shops across the country following its failure to meet certain food safety standards.

After two years, Maggi noodles commands a market share of 60 percent, having regained most of its lost share during the ban days.

The brand equity and customer trust has been built over generations and this has helped the brand bounce back after a near ‘death’ experience, Suresh Narayanan had said in an interview to First post last year. After the five-month ban, in November 2016, Nestle India relaunched Maggi noodles in the Indian market.

The company is not just relying on Maggi brand, although it still accounts for a major portion to its overall revenue. In the last few quarters, Nestle has launched several products like Greek yoghurt, kids breakfast cereal Nestle Ceregrow, health food drink Nestle A+ Pro-Grow, Nescafe RTD chilled Latte, everyday masala, Maggi Hot Heads, and variants of Maggi noodles.

Going forwards, the company plans to launch Nespresso (a coffee machine), Dolce Gusto (a coffee capsule system), besides products in pet care, healthcare and skincare. Despite the planned launches, Nestle parent sells just 20 brands in India as against its global bouquet of around 20,000 odd brands, a Mint report said.

The company wants to tap India’s top 600 cities that will account for half of the consumption growth over the next 10 years or so.

Nestle’s current performance

Nestle is a story of organizational success. Even after its 2015 Maggie debacle, Nestle managed to turn back from the disaster, and established itself as one of the most durable companies in the world. Nestle India released the annual report for the year 2017 (the food and beverages major maintain a January-December format). It revealed, among other things, that the firm had managed to grow volumes in all four product categories for the first time since 2010 — milk products & nutrition, prepared dishes & cooking aids, beverages and chocolates & confectioneries — grew.

In the late afternoon of May 17, Nestle India’s stock was trading at Rs 9,865 a piece at the Bombay Stock Exchange. In other words, the company had bounced back from the biggest existential threat in its 104-year history in India.

In the quarter ended March 2018, domestic sales remained strong (up 10.9 per cent year on year), primarily led by higher volumes across categories. Nestle’s domestic growth was comparatively better than the growth reported by other large FMCG players this far for the quarter,” analysts from Edelweiss said in May.

So, we can see that even after such a huge crisis, Nestle has managed to recover its market share, profit and it is growing faster than ever before.

Innovating with existing products

Suresh Narayanan, chairman and managing director of Nestle India, who was brought in to handle the crisis in August of 2015 said that they were innovating with their existing products. Nestle has introduced six new variants of Maggi called HotHeads. They have high levels of spice and they come in exotic flavors. There is also Munch Nuts, a chocolate wafer with peanuts, and Nescafe Cappuccino ready-to-drink premixes.

As Suresh Narayanan said, “We have launched 25 new products or variants since the Maggi crisis. All of these are in the incubator. Some will gallop in the future; others will canter, some may die. People ask me, what has changed? How did Nestlé suddenly acquire this pace? We’ve never had so many product launches in such a short time in the history of the company”.

Change in Attitude

Often times, success or failure of an organization depends on its attitude. The same is true for Nestle.

Suresh Narayanan believes that the reason for Nestle’s recent success is its changed attitude.

In one interview Narayanan said, “Today I see an attitude and mindset of growth. There is an instinct growth opportunity among people working across verticals. Part of this is reflected in our new motto of growth through innovation and renovation,” he said. Earlier it used to take some two years to come up with a new product; now the time has been cut to less than six months”.

“In the past we have had periods of rapid launches but could never sustain the momentum,’ he added.

With its changed attitude Nestle proved what the former American professional baseball player, Wade Boggs said, “A positive attitude causes a chain reaction of positive thoughts, events, and outcomes. It is a catalyst and it sparks extraordinary results”.

How the crisis affected the organization

In one interview the Chairman and Managing Director of Nestle India, Suresh Narayanan said, “Nestle probably required such shock treatment as the June 2015 ban on Maggi noodles to jerk it out of its ennui”.

Narayanan had spoken about how the Maggi Noodles crisis was the most challenging and dramatic situation in his entire professional career. Maggi is the worst crisis that they have faced in the 104 years of their existence in India, also the worst crisis the company has faced globally in a long time.

Narayanan also talks about the mood of the workers and employees of Nestle India. He said, “The team was shattered. Our factory workers were extremely upset…. I had an empty feeling. At that time, I realized as a leader, the weight of responsibility on my shoulders is so big during a crisis”.

Change in Organizational Structure

Due to the Maggie crisis Nestle realized that the way things had been going on needed to change. Nestle was quick to change with the changing situations. They brought about changes to the decision-making process.

To increase focus on the market, Nestle has decentralized the decision-making process by creating 15 verticals that now target specific geographies with their respective hyper-local strategies.

Crisis and Organizational Culture

An organizations culture can give an estimation as to how an organization would react if they faced any crisis. It is evident that during the face of crisis the strong and weak cultures have an important role to play. Moreover, the rigidity or flexibility of an organization’s culture will give an idea as to how soon an organization can overcome its crisis or give into it.

Various studies have revealed that a multinational corporation with over a century of presence in the country struggled to align itself to the complexities of the cultures of the host country. In the case of Nestle India, whereas environmental variables such as political economy and Westernization of urban India boosted the growth of its instant noodles, the multinational company struggled to cope with the rise of media corporatization, activist pressure.

It is evident that Nestle’s crisis response was governed more by its traditional corporate culture than by an ability to keep pace with the changing demands of its environment, leading to the amplification of an issue into a crisis.

So, we can see that multinationals that ignore culture will be forced to pay a heavy price both in terms of reputation and finance.

Lessons for Management

The omnipotent view of management shows that managers are completely responsible for the success or failure of an organization. Although that is not completely true, Management in an organization bears the most important roles for an organization to succeed. As the top-level management reap most of the profits gained by the organization it is also their responsibility to see if anything goes wrong. Besides the real competency of the managers are tested during a crisis.

Since its inception in India in 1959, Nestle India is a story of organizational success. But, the 2015 Maggie crisis put them to their test in 2015. There are multiple lessons for management here.

No matter how successful an organization is they can always face crisis
Consumers won’t remember the years or hard work and service, rather they will remember that one mistake the organization made
Public trust is easier to lose than to gain
In the cutthroat world of business no one is truly your friend
You should always be prepared for change

Nestle realized this during their 2015 Maggie crisis. Fortunately, they bounced back from their state and is now performing better than before.

Lessons for students

As business students, we are learning various theories about how business is operated. Without practical knowledge these theories are not much of help. The story of Nestle has a lot to teach to us students also.

Analyzing its 104-year history and ways of operation, we cannot but marvel at the success of an organization. In a rice country they make noodles; in a tea country they sell coffee; in a sweets country they sell chocolates; in a fresh milk country they sell powder. They must be doing something right.

However, the 2015 scandal was a shock for all. What makes this company different from others is how they solved their problems and overcame the crisis. Nestle’s crisis management should be a case study and a matter of research. We as students learned a lot as to how the role of Management, Culture, Commitment and attitude can take a company to the top.

References

Dhanesh, G. S. (2017, December 21). Culture and Crisis Communication: Nestle India’s Maggi Noodles Case. Retrieved from Journal of International Management: www.sciencedirect.com
Dubey, A. S. (2017, December 4). ‘Maggi is the worst crisis that we have faced in the 104 years of our existence in this country’. Business Today, p. 6.
Fry, E. (2016, April 26). Nestlé’s Half-Billion-Dollar Noodle Debacle in India. Retrieved from Fortune: fortune.com
Money Control. (2017, August 29). Post-Maggi Crisis: How Nestle India is stepping up its game. Retrieved from Money control: www.moneycontrol.com
Nestle. (2016, April 11). MAGGI Noodles timeline of events. Retrieved from Nestle: www.nestle.in
Rediff Business. (2018, June 8). How Nestle bounced back from the Maggie Crisis. Retrieved from Rediff Business: www.rediff.com
Robbins, S. P. (2017-18). Organizational Culture. In S. P. Robbins, Management (pp. 465-467). New York: Pearson.
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