Introduction
In the environment of globalization, large corporations develop various strategies to permeate local markets and distribute their goods in various regions. Among such large corporations is Nestlé, which is the most prominent and most diverse food and beverage corporation in the world, having been founded more than 150 years ago (Nestlé, n.d.b). The corporation offers its products in 188 countries throughout the world, giving it a distinctive global reach (Nestlé, n.d.b). With more focus on sustainability and adaptation of goods, Nestlé can enhance its sales and reputation further, which would complement efforts in adaptation, aggregation, and arbitrage that are already successful.
AAA Analysis
When reviewing the case of Nestlé, it is crucial to consider Ghemawat’s AAA Global Strategy, and the first component of the model is adaptation. The corporation has shown that it prioritizes transformation by customizing its goods to fit regional demands and tastes. For example, in China, one manager mentioned, “Why would we ever want to scale our ‘sweet congee’ drink to other markets?” (Morris & Oldroyd, 2023, p.326). By this, the employee emphasized that few other nations would ever give congee drinks any attention.
Nestlé needs to customize many of its products for regional markets. The company discovered that its internationally renowned Kit Kat candy bar sales in China were lower than anticipated (Morris & Oldroyd, 2023). Consequently, the Chinese group created, produced and sold a novel variety of chocolate wafer bars at a significantly lower price than Kit Kat (Morris & Oldroyd, 2023). Thus, the corporation caters to diverse consumer tastes through product variations, as emphasized in successful efforts in China.
Another component of the AAA model is aggregation, which generally focuses on economies of scale. According to the corporation, it considers itself a “world-leading brand portfolio” (Nestlé, n.d.b, para.5). By leveraging its global scale and having a diversified portfolio of brands, the corporation achieves cost efficiencies. For example, in September 2023, the news was released that Kopenhagen, a Brazilian chocolate brand, would be acquired by Nestlé (Frontini et al., 2023). Another chocolate brand the company holds, Brasil Cacau, is also included in the transaction (Frontini et al., 2023). The two brands have over 800 locations in Brazil, including franchisees (Frontini et al., 2023). Therefore, Nestlé’s aggregation strategy is evident in its acquisition of other brands, which broadens its market reach and diversifies its product portfolio.
The final component of the AAA model is arbitrage, which involves obtaining resources cheaper and then selling the manufactured good with a significant markup. Nestlé has used arbitrage by profiting from variations in costs and resources between regions. To lower its exposure to foreign exchange risk, Nestle announced in June 2023 that it was increasing the procurement of local raw materials from Nigeria and other African nations (Miridzhanian, 2023). For example, instant noodles made by Maggi and Cremora coffee creamer are already produced by Nestlé, which has five plants in South Africa (Miridzhanian, 2023). Most of the raw materials used to make these products are supplied locally (Miridzhanian, 2023). By using this strategy, Nestlé can increase rational profitability and efficiency.
Performance Assessment
When considering the performance analysis, one can see a large impact of COVID-19, which led to a supply chain disruption and caused a setback in sales. At the same time, when disregarding the global pandemic, it is evident that the corporation has strong growth. As seen in Table 1, the company’s sales rebounded after COVID-19 became more under control. Prior to the pandemic, revenue growth was measured in several percentages. Meanwhile, after the drastic consequences of the epidemic, a growth of over 8% can be observed, meaning that demand and supply begin to find equilibrium and stabilize.
Another indicator worth mentioning is the gross profit margin, which illustrates the company’s financial stability. As seen in Table 2, the gross profit margin was not greatly affected by COVID-19. The company experienced a mild decline from 2020 to 2023, never dropping below 45. Such an indicator demonstrates that the costs of the corporation are not significant and cannot be considered a major burden to Nestlé. As a result, the business has an opportunity to enjoy substantial sales and profits that can later be distributed to investments, such as purchases of local brands.
At the same time, while reviewing the trends in profit margins and revenues, it is vital to pay attention to the debt-to-equity ratio, which illustrates the riskiness of operations and burdens. Table 3 illuminates the liabilities of the company and how, with years, the company becomes more burdened. For instance, while in 2018, its ratio was a little above 70%, in 2022, it is almost 130%. While this can seem disturbing, it is crucial to understand that the company is undergoing expansion. As seen above, Nestlé purchases other brands to reduce costs and improve its presence in other markets.
Table 1 – Revenue Growth.
Source. Nestlé, 2022.
Table 2 – Gross Profit Margin.
Source. Nestlé, 2022.
Table 3 – Debt/Equity Ratio.
Source. Nestlé, 2022.
Recommendations
Lastly, in order to sustain its success and improve operations and reputation, Nestlé needs to focus on several areas. First, Nestlé must focus on further adaptation of its products to local interests and needs to meet the specific demand. As seen from the portfolio of the corporation, there are products that range from animal food to beverages and chocolate bars (Nestlé, n.d.b). Additionally, it was emphasized earlier that products in some markets can have poor demand in other regions, which necessitates the introduction of alternatives, boosting sales.
Furthermore, given the current trends, more and more companies are becoming environmentally conscious, meaning that Nestlé must focus on sustainability. As reported on the official website, the company’s broad approach to sustainability is supported by its pledges to work toward net-zero emissions, supply networks free of deforestation, and large-scale advancement of regenerative agriculture (Nestlé, n.d.a).
In addition, Nestlé is dedicated to enhancing water conservation, generating more circular packaging, giving youth opportunities, and expanding its multicultural and inclusive workplace (Nestlé, n.d.a). As a result, Nestle should further prioritize environmental and social responsibility in its operations to improve its reputation and boost sales due to its better brand image.
References
Frontini, P., Romani, A. & Araujo, G. (2023). Nestle buys Brazil chocolate maker Kopenhagen, local media report. Reuters. Web.
Miridzhanian, A. (2023). Nestle increases local sourcing in South Africa with new processing plant. Reuters. Web.
Morris, S., Oldroyd, J. (2023). International business, international adaptation (3rd ed.). John Wiley & Sons, Limited.
Nestlé. (2022). Corporate governance report 2022. Web.
Nestlé. (n.d.a). Sustainability. Web.
Nestlé. (n.d.b). Understanding Nestlé. Web.