For Nestlé, a brand established 156 years ago, controversies such as substandard labels and short weights are minor ripples on a calm sea for a giant ship, but "losing young people" could be an iceberg ahead.

In China's coffee market today, instant coffee, though shrinking, still holds a dominant 70% share. Nestlé's instant coffee maintains a 40% share of that market, yet it continually faces the narrative that "Nestlé coffee no longer attracts young people" and "Nestlé coffee can't compete with niche coffee brands." Online, some even use the bad taste of Nestlé coffee to joke about life's hardships, comparing its flavor to medicine.

Nestlé's financial reports in recent years also show that growth has slowed since 2009.

So, what has Nestlé experienced over the years? Can Nestlé hold its "giant" status?

Growth Slows for 12 Consecutive Years: Nestlé Faces a "Midlife Crisis"

On April 26, Nestlé reported its Q1 2022 results: total sales grew 5.4% to CHF 22.2 billion, with a 0.8% negative currency impact. Since January 2022, Nestlé has reported Greater China as a separate segment, which achieved revenue of CHF 1.316 billion in Q1, up 7.6% year-on-year, accounting for 6% of total revenue.

The report shows that Nestlé's instant coffee growth has slowed since 2009. From 2015 to 2021, Nestlé's revenue growth rates were 4.2%, 3.2%, 0.4%, 2.1%, 1.23%, -8.9%, and 3.3%.

Internet industry analyst Zhang Shule told Sina Finance that the low growth is due not only to slowing growth in developed markets that have been operating for over a century but also to changing consumer preferences in China.

Although Nestlé's coffee product line is broad—covering instant coffee, ready-to-drink coffee, freshly ground coffee beans, coffee capsules, and coffee machines, spanning high, mid, and low-end brands—in the eyes of Chinese consumers, Nestlé coffee is almost synonymous with instant coffee and is positioned toward the mid-to-low end.

Zhang Shule told Sina Finance that Nestlé's current situation is like "a big ship is hard to turn," similar to Head & Shoulders or P&G in their heyday. In the 1980s and 1990s, Chinese consumers had little opportunity to experience coffee and other consumer goods. Coffee was seen as a "high-end" product that required time, effort, and special equipment to enjoy, but Nestlé offered a convenient alternative.

Similarly, Head & Shoulders and P&G launched 2-in-1 shampoos that only met the need for dandruff removal, packaging a series of steps into one product.

However, as the economy developed, Chinese consumers' needs became more diverse, no longer as homogeneous as decades ago, and they no longer choose generic products. Today, young consumers' demands are differentiated. Instant coffee is inherently for convenience, and its quality is inferior to freshly ground coffee. No matter how instant coffee is developed, it can hardly compete with ordinary freshly ground coffee beans. Moreover, with the rise of Starbucks, Luckin Coffee, and various milk tea shops, the entire instant coffee sector is under pressure.

Additionally, Nestlé faces the challenge of "moving forward with a heavy load" when innovating. Furthermore, Gen Z consumers seek individuality, enjoy trying various flavors, and favor the "guochao" (national trend) style, which also impacts Nestlé.

Zhang Shule said that Nestlé's brand is too large; if it continuously launches new products to test the market, it might bring more negative consequences, like when Coca-Cola changed its formula. Currently, Nestlé's instant coffee comes in only two flavors: black coffee with milk and pure black coffee, but Chinese consumers are not accustomed to or fond of these tastes.

According to official statistics, in 2020, Nestlé Greater China launched over 50 new products, and in 2021, the number doubled to 102 new products. However, these were still variations within the two flavors, such as adjusting the proportion of Arabica beans, changing the milk-sugar-coffee ratio, or adding different flavorings.

In other words, the changes are too mild.

"In contrast, other emerging niche brands like Satuday can be seen as challengers; they can use any tactic, no matter how quirky, and if it doesn't work, they switch. For example, Luckin can collaborate with Coconut Palm to launch a co-branded product, but Nestlé wouldn't easily try that," Zhang Shule told Sina Finance.

More seriously, tea drink shops are also trying to grab a share of the coffee market. An industry research report shows that in 2021, 56 new coffee products were launched, with Heytea launching 12, CoCo Fresh Tea & Juice 6, and Naixue Tea and Mixue Bingcheng each 5. Additionally, on May 26, Heytea's trademark application for "Heytea Coffee" was rejected. Despite the rejection, it proves that these tea shops, which better suit Chinese tastes, are frequently entering the market, giving coffee consumers more choices.

Niche Brands Abound, but the Giant's Position Remains Hard to Shake

Although there is little information about instant coffee, and a high volume of information about niche specialty coffee and hand-ground coffee, real data still proves instant coffee's position in China's coffee market.

According to data from China Business Industry Research Institute, in 2022, instant coffee accounted for 71.8% of China's coffee market; freshly ground coffee followed with 18.1%, and ready-to-drink coffee with 10.1%.

A consumer sector analyst, Yang Yan (pseudonym), told Sina Finance that before 2017, instant coffee accounted for up to 95% of China's coffee market. After 2019, the growth rate of China's instant coffee market slowed to about 4%. In this shrinking market, Nestlé has consistently held 40% of the instant coffee market for years. In other words, nearly half of instant coffee consumers still choose Nestlé.

Yang Yan told Sina Finance that channel competition is crucial. Over 30 years in China, Nestlé has built a solid distribution network, with an absolute advantage in non-e-commerce channels. Even small shops at the entrances of third- and fourth-tier cities sell Nestlé coffee. "So until now, at least 50% of people who don't drink coffee but want to try it think of Nestlé first," Yang Yan said.

"Compared to niche brands that young people favor, Nestlé focuses more on building a solid foundation," Yang Yan said. Emerging coffee brands start with e-commerce channels, which select their users—young people are naturally e-commerce users—but these brands are rarely seen in offline stores. This is because entering supermarkets like Carrefour, Wumart, or even third- and fourth-tier city stores requires listing fees, and small coffee brands lack the capacity to distribute offline. This explains why Nestlé still firmly holds 40% of China's instant coffee market.

Zhang Shule agreed, saying that in first-tier cities like Shanghai, Nestlé has indeed been impacted, but in some small towns with limited choices, Nestlé still has a market.

Yang Yan further explained that looking only at e-commerce, some "competitive" brands may surpass Nestlé, but from an overall perspective, Nestlé's annual sales far exceed these brands. In many offline channels, in third- and fourth-tier cities and even county towns, consumers can buy Nestlé but not these internet-famous coffee brands. Many county residents won't choose these coffees, and these newly established brands lack the ability to extend their products to county towns.

As a consumer complained on Weibo, "The small shop downstairs only sells Nestlé coffee."

Selling Instant Coffee in China: Is Nestlé Choosing to "Lie Flat"?

China's coffee consumption is not high. According to Deloitte data, in 2020, the per capita annual coffee consumption in mainland China was 9 cups, which is 3.21% of Japan's, 2.74% of the US's, and 2.45% of South Korea's.

In Zhang Shule's view, Nestlé has chosen to "lie flat" in China's instant coffee sector. "For Nestlé, the Chinese market is just a 'nice-to-have' because the coffee market is not fully developed; only first-tier cities have cultivated coffee-drinking habits, while other regions primarily consume tea and beverages," Zhang Shule said. He believes Nestlé doesn't need to invest too much effort in incubating the Chinese market; it may wait until China develops coffee consumption habits and the market matures, then "re-enter the battlefield" and use low prices and other methods to outmatch competitors.

However, Zhu Danpeng, a Chinese food industry analyst, holds the opposite view. He said that Nestlé is the "enlightenment teacher" in cultivating China's coffee consumption. As a Fortune 500 company, Nestlé spent 30 years cultivating China's initial consumer base and still plays a key role in the "explosive growth" (a surge in consumption after a period of accumulation and cultivation) of China's coffee market.

"Large enterprises like Nestlé follow a mass-production, industrialized route with huge scale, while small enterprises are positioned for differentiation and small scale. Therefore, Nestlé's approach inevitably differs from that of emerging instant coffee brands," Zhu Danpeng told Sina Finance.

Yang Yan, however, believes Nestlé's approach is not "lying flat" but "each has its own offense and defense." "Nestlé coffee has completely different product lines, not just instant coffee, but also high-end lines like Nespresso and Dolce Gusto.

The positioning of instant coffee is not 'enjoyment' but a functional beverage. Trains, planes, hotels, and students preparing for the college entrance exam are the main channels for instant coffee, so this audience is not the same as ordinary consumers. On Weibo, someone said, 'During the 2014 college entrance exam, I spent nights drinking cup after cup of Nestlé coffee.'"

"Courting" Young People Doesn't Pay Off

Experts have different views on whether Nestlé can still be called a "coffee giant," but all agree that Nestlé needs to "work hard." Zhang Shule said that at this stage, Nestlé has lost its dominant position in instant coffee. In the past, when there were no coffee shops, mentioning coffee brought Nestlé to mind. But now, with more coffee options and richer flavors, fewer cities associate coffee with Nestlé.

Zhu Danpeng and Yang Yan, however, believe that even with many niche brands, the foundation Nestlé has built in China over the years is hard to shake. Still, to maintain this position, Nestlé must continue to work hard.

In recent years, Nestlé has indeed been "courting" young people. Its brand ambassadors have ranged from Mayday to Han Han, from Dilraba to Yi Yangqianxi, covering almost all top-tier celebrities in the Chinese entertainment industry. To tap into students' limited budgets, the "Ran Hun" instant black coffee with 1.5 times caffeine even featured Pikachu on its packaging.

Since April 22 this year, to cater to students preparing for the college entrance exam, Nestlé launched a 7×24-hour "Red Cup Study Room" on WeChat, Bilibili, and other platforms, encouraging young people through fun methods like accumulating study time for gifts. Over 5 million people have participated, with Bilibili live streams attracting over 3.5 million participants, daily average online viewers exceeding 10,000, and the official mini-program accumulating over 1 million online users. During the exam season, Nestlé also created the "Red Cup Study Room" IP and launched exam-limited packaging that fits Gen Z's trendy style.

But Nestlé still doesn't seem to win young people's favor. On Weibo, many complain about the bad taste of Nestlé coffee. Some self-deprecate, saying "my hand-ground coffee is worse than Nestlé," others use "can only drink Nestlé" to express life's disappointments, and some compare Nestlé coffee to medicine: "After tasting the passion fruit-flavored Nestlé coffee, I declare I can accept Huoxiang Zhengqi water!"

Zhang Shule said that young people are the main force in coffee consumption because the post-80s in second- and third-tier cities haven't developed coffee-drinking habits, while urban white-collar workers have developed a strong need for coffee but prefer quality, so they don't choose instant coffee. Therefore, Zhang Shule believes Nestlé's coffee position is awkward: its high-end capsule coffee is too expensive for young people, and its other products are more expensive than similar ones on the market. It wants to engage with young people but can't diversify.

Admittedly, new brands have entered the market, but this already vast market is still growing at 10%-15% annually, enough to accommodate small brands. However, so far, no brand has been able to shake Nestlé's position.

Like Head & Shoulders, P&G, and even Starbucks, almost all long-established brands face consumer fatigue and the "big ship hard to turn" problem. "Nestlé discovered instant coffee in 1940, and it's been 80 years. Consumers might think, 'After drinking this for so many years, can we have something else?' Big brands all face brand fatigue, but their base is stable. You can say young people now choose more coffee brands, but that doesn't mean Nestlé's coffee giant status is shaken," Yang Yan said.

Similarly, Starbucks has 2,000 stores in China. Even if five niche coffee shops do well, they are not enough to impact Starbucks.

Take P&G again: despite German and French shampoo brands having a place in the market, they cannot change the fact that P&G is the world's largest shampoo company.

Nestlé May Simply Not Want to "Turn Around"

Facing competition in the coffee market, Yang Yan also mentioned the importance of a resilient backend supply chain. "Under the impact of COVID-19 and the world economy, transportation and cultivation can face problems, and niche coffee supply chains might break," Yang Yan said. For a company with over a century of history like Nestlé, it has its own plantations and hedges in commodity futures markets, with many self-protection measures.

Moreover, agricultural product prices are highly unstable due to weather. If Brazil experiences a cold snap with temperatures dropping below zero, half the coffee trees could die, and it would take three years to recover. During those three years, international coffee bean prices would fluctuate.

In such situations, niche coffee brands can only buy raw materials from coffee-producing countries like Yunnan, Ethiopia, Brazil, and South America. Under severe price fluctuations, they might sell at a loss, supply chains could break, or they might even disappear. "When facing turbulence, only giants have the strength to withstand risks. Small brands can capture young people's minds, but when risks come, young people can only continue drinking Nestlé, even if they don't like it."

Therefore, in her view, the proposition that "Nestlé doesn't attract some young people" may hold, but it doesn't mean its business is failing, because Nestlé can use its strong resources to compensate in other ways. The compensation method Yang Yan refers to is Nestlé's acquisition of Starbucks' retail coffee business in 2018 for $7.15 billion. Except for Starbucks coffee in cafes, all home coffee, including ready-to-drink, bottled, canned, and even Starbucks' fast-drink stores, are operated and supplied by Nestlé.

"Young people may not like Nestlé but like Starbucks, but what they buy at Starbucks is also Nestlé's. That's Nestlé's strategy," Yang Yan said.

"You can understand that many niche brands are competing at the top of the pyramid, fighting for niche markets. Although these emerging brands attract young people, no one knows how long that will last. As long as a brand with deep pockets comes along, it can beat them. But the purpose of mass consumer goods companies is never to fight for niche markets but to firmly stand at the base of the pyramid," Yang Yan told Sina Finance.

So in Yang Yan's view, Nestlé indeed faces the "big ship hard to turn" problem, but Nestlé may simply not want to "turn around." "Instead of playing tricks in niche markets to compete for its own market share, it's better to join hands with Starbucks and seize the entire other market," Yang Yan said.

Additionally, Nestlé has been plagued by negative incidents over the years. Although for a company founded in 1866 and now 156 years old, these minor negative public opinion storms are not enough to shake its giant status, they have always been a point of criticism.

In January and February 2015, three batches of German-imported Nestlé instant coffee were blacklisted by the General Administration of Quality Supervision, Inspection and Quarantine for substandard labels; nearly 400 tons of unexpired Nestlé coffee were destroyed in Dongguan, Guangdong, with a market value of nearly 10 million yuan. In 2017, Nestlé was involved in 5 negative incidents in 48 days, with most food safety issues stemming from raw materials.

From 2018 to February 2021, 40 batches of products were denied entry by Chinese customs due to excessive use of food additives, and there were multiple recalls globally.

Just half a month ago, the hashtag #900g Nestlé milk powder weighs only 512g with can# trended again on Weibo. On Black Cat Complaint platform, Nestlé has 408 complaints, mainly about product deterioration and foreign objects in products.

Source: Sina Finance (ID: sinacaijing)

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