The Nescafe case study identifies a number of problems that differ in their priority but, nevertheless, need to be addressed by the company. First, it is the growing scarcity of raw resources for coffee production and, as a result, the growing price. According to Alvarez and Petty, the coffee industry has witnessed dramatic swings in prices for raw materials, which were accompanied by the lack of available sustainable high-quality resources (7). The growing scarcity of such resources is related to the changes in the micro- and macro-environment of the international coffee industry: while the emerging economies increase their consumption of coffee products, the global warming and changes in weather cycles make the development of quality coffee crops unpredictable and highly uncertain (Alvarez & Petty 7). Additionally, the price of fertilizers and various crop technologies continues to increase. Pest controls make the production of coffee materials a very costly process. Under the pressure of these natural and economic changes, growing coffee is getting less attractive to farmers; consequently, the availability and supply of sustainable raw materials for coffee continues to decrease. The younger generation is not willing to engage in farming activities, thus making it much more difficult for Nestle to absorb the growing costs of production. 80% of all coffee production is focused in small farming businesses that are often located in remote places and sensitive eco-systems; the latter make coffee production extremely susceptible to market, weather, and economic fluctuations (Alvarez & Petty 4).
Second, the global market for coffee is undergoing drastic changes in terms of consumer preferences and choices. The geographic segmentation of the international coffee markets has changed. Previously, developed countries used to be a major consumer of coffee products in the world. Coffee production was concentrated mainly in the developing world. However, by 2010, it is Asia Pacific that became the greatest generator of coffee products sales for Nestle (Alvarez & Petty 6). Currently, Eastern Europe, Russia and China represent an important market consideration for Nescafe products (Alvarez & Petty 6). The developed markets in North America and Western Europe have already reached the state of maturity, thus creating a challenge for the future growth and international expansion of Nestle. Geography remains an important criterion of market segmentation for Nestle.
Third, changes in the geographic patterns were accompanied by the rapid shifts in the ways, in which consumers create value from coffee products. This is what Alvarez and Petty call “bipolarization of consumer preferences that had impacted most food and beverage mainstream brands” (5). Those changes in consumer tastes have resulted in the development of two major tendencies. On the one hand, most consumers have switched to premium coffee products and Nestle responded by implementing a super premium range of pure coffees and specialty drinks (Alvarez & Petty 5). On the other hand, most consumers have displayed a strong desire to have convenient coffee products that will have an exclusive taste but be easy in preparation and use. However, the growing emphasis on premium products will hardly help Nestle target the emerging markets, where the prevailing majority of consumers are low- and middle-income. More importantly, with the growing scarcity of quality resources, delivering premium products to large consumer segments may appear to be particularly problematic for Nestle. Also, modern consumers create value, based on the individual perceptions of the product quality and broader considerations of the companies’ social responsibility and environmental compliance. These trends have also touched Nestle. Consequently, the company must become more thorough with its environmental and sustainability strategies to gain and retain customer confidence in the premium quality of its coffee products.
Fourth, Nestle is facing problems in the coffee pod segment. Unlike many other coffee companies, Nestle has introduced two different options for the coffee pod niche. The Dolce Gusto system was first introduced in 2006, and it proved to be a remarkable success. However, single-served coffee remains the most popular coffee product across the geographic market segments. Nestle must find the most appropriate balance of its products and create a balanced portfolio to satisfy the diversity of tastes and demands in the coffee industry.
Fifth, when considering growth prospects and opportunities, Nestle has paid particular attention to the consumers’ growing commitment to wellness and health. The international market of hot tea products is growing rapidly (Alvarez & Petty 6). Nestle has already achieved some success in the bottled iced tea market, but consumers are looking for healthier products, and hot tea could become one of them (Alvarez & Petty 6). Thus, the challenge is that of either switching to the tea market or staying focused on growing the coffee industry. Other challenges include: choosing the most feasible direction for market growth, satisfying the growing demand for premium coffee products, as well as choosing the right way to secure sustained supply of high-quality raw materials for its coffee products.
First, Nestle may focus on expanding its presence in the emerging markets. The current market situation creates favorable conditions for increasing the demand for Nescafe products in the developed world. Besides, with the prevailing majority of raw materials producers being located in the developing world, the new focus on the emerging markets could bring an ideal balance of cost-effective production and delivery of high-quality products to customers. However, too much focus on the developing countries may create a situation, when Nestle will lose the grip of the established markets and, therefore, undermine its leading position in the international coffee industry.
Second, Nestle may greatly benefit from the growing popularity of its Dolce Gusto system and focus on its popularization and expansion in the coffee market. Still, the growing investments in the coffee pods segment is likely to weaken the company’s international position, given an increase in consumer demand for single-serve coffee products and the strong position of the Starbucks coffee system in the market (Alvarez & Petty 6). Furthermore, as the consumer tastes are changing towards healthier products, even these single-serve coffee products may lose their position in favor of different tea products. Before making investments in its Dolce Gusto system, Nestle will have to perform a detailed analysis of the consumer tastes and changes in the ways consumers create value from its coffee products.
Third, Nestle may choose to work out a new method of restraining the raw commodity prices and bringing the amount of raw coffee supplies to the desired level. At present, the Nestle group fears that, in the nearest future, raw coffee supplies will become so scarce that they will hardly suffice to satisfy the growing demand for quality coffee products. It is in the company’s interests to secure a steady flow of raw commodities in a sustainable and socially responsible way. Unfortunately, it is still unclear how Nestle can increase the supply of quality raw materials to meet the changing customers’ needs.
In my opinion, Nestle must focus on developing new pathways to secure a steady and sustainable supply of premium raw commodities for its coffee products. The shortage of raw coffee supply can undermine any company’s strategy, including its striving to play in the coffee pod market. The benefits of this option are obvious: Nestle will protect itself from the risks of poor product supply, while also ensuring the highest quality of raw commodities in light of the growing demand for environmental sustainability and premium coffee products.
Nestle will have to develop new ties with the coffee farmers and, possibly, create a separate division responsible for this aspect of the coffee business. Most likely, the company will have to invest in the development of new coffee farms and stimulate the existing farmers to stay in business. These approaches will benefit the company in two major ways: first, Nestle will have a strong supply of raw coffee materials; second, it will be able to control the quality and sustainability of its products, thus satisfying the growing consumer demand for social responsibility and environmental compliance. In addition, the recommended approach will enable Nescafe to control and manage the costs of production.