Course: International Business Strategy (IB BA)
Professor Lewis
University of Applied Sciences Dresden
Project Members: Katerina Schneiderova
Sandra Merkel
Nicole Klötzer
Carolin Wiese
Samuel Weimer
Nicole Schröder
Date: 11
th
June 2010
Strategic Analysis of Nestlé and its
Competitor Kraft Foods
2
Executive Summary
In the following, two companies and their strategic positions within the coffee consumer
goods industry will be described. The focus lies on Nestlé and its competitor Kraft Foods.
As coffee is one of the most popular products worldwide, this is a very demanding business.
It is necessary to provide high quality products, especially when working in the more affluent
segments like Nestlé and Kraft Food do. Several political, economic, social, technical,
environmental and legal aspects have an impact on the industry branch they are operating
in.
In addition, there is not only a differentiation in Robusta and Arabica coffee, but also in filter
coffee, portioned and non-portioned soluble coffee. To satisfy the diverging needs of all
customers, different strategies are applied to gain more market share.
In this report it is examined how those companies operate in the specific business context,
what they have in common and where they differ. Furthermore, an analysis of the industry
attractiveness, of the market segmentation and value chain and an overview of resources
and capabilities are part of this paper. After intense research we were able to draw
conclusions about their strategic positions and what Nestlé could do to improve its strategic
position.
3
Table of Content
Executive Summary 2
1 Introduction 4
2 Nestlé S.A. versus Kraft Foods, Inc. 4
3 Context 5
3.1 Environmental Analysis as a Basis for Competitive
Advantage
5
3.2 Industry Analysis 14
3.2.1 Drivers and Depressors 15
3.2.2 Industry Attractiveness 16
3.3 Market Segmentation 21
4 Strategy 22
4.1 Statement of Purpose 22
4.2 Marketing Strategy 23
5 Resources and Capabilities 30
5.1 Tangible Resources 30
5.2 Intangible Resources 31
5.3 Financial Resources 35
5.4 Human Resources 37
6 Value Chain Analysis 38
7 Summary of Strategy 41
8 Recommendations 42
Conclusion 44
Appendix
Sources
4
1. Introduction
As we all attend the course “International Business Strategy “, we have the opportunity to
work on a project dealing with a strategic analysis of two corporations. In this context we are
a fictive business unit of Nestlé.
We decided to focus on companies from the consumer goods industry, particularly from the
coffee industry (industry group: “2095 Roasted Coffee”
1
).
We chose the Swiss company Nestlé as our main corporation and the US American
company Kraft Foods as its major competitor.
In order to compare and contrast their strategic positions, we applied several analytical tools,
for example the Environmental Analysis as a Basis for Competitive Advantage or Porter’s
Five Forces Model. Researching on the companies’ backgrounds, their strategies, resources
and capabilities and the general conditions of the coffee industry, we could get an insight into
the current situation. Finally, we also figured out some suggestions for future strategic
actions of Nestlé.
2. Nestlé SA versus Kraft Foods, Inc.
Nestlé is a Nutrition, Health and Wellness company and the biggest food corporation in the
world with its largest market in Europe. The headquarters is based in Switzerland, the
company´s home country
2
. The turnover in 2009 was approximately $95 billion
3
, from which
17.5% were generated by beverage sales
4
. Nestlé has 29 billionaire brands altogether,
including Nespresso and Nescafé.
5
1
“United States Department of Labor” Retrieved 6
th
June 2010.
<http://www.osha.gov/pls/imis/sic_manual.display?id=475&tab=description>
2
“About Nestlé” Retrieved 5
th
June 2010 <http://www.nestle.com/AllAbout/AllAboutNestle.htm>.
3
“Nestlé mit weniger Gewinn und Umsatz” Published 19
th
February 2010. Retrieved 21
st
April 2010.
<http://derstandard.at/1266540953917/Nestle-mit-weniger-Gewinn-und-Umsatz>
4
“Nestlé Annual Report” Retrieved 7
th
June 2010. Pages 22 and 23.
<http://www.nestle.com/InvestorRelations/Reports/ManagementReports/2009.htm>
5
“Report on Nestle Research: Vision, Action, Value Creation ”Retrieved 5
th
May 2010. Page 26.
<http://www.nestle.com/NestleResearch/NestleResearchHome.htm>
5
Kraft Foods is the world´s second-largest food company. The corporation is based in the
USA, its biggest market. The turnover in 2009 was about $50 billion
6
, whereas 13% of its net
revenue was generated by coffee production
7
. Kraft Foods has 11 billionaire brands, two of
them being coffee brands Jacobs and Maxwell House
8
.
Nestlé only has two coffee brands, whereas Kraft´s coffee business consists of nine different
brands. To make our further analysis more understandable we created a list of Nestlé´s and
Kraft´s brands (Figure 1). At Nestlé we also differentiate between the Nescafé product
variations. Nestlé´s two coffee brands are Nescafé and Nespresso. Nescafé, the non-
portioned soluble coffee, can be further divided into product groups: Nescafé Cappuccino,
Nescafé Classic and Decaff, Nescafé Gold and Nescafé Green Blend. Nescafé Dolce Gusto
and Nespresso are the coffee capsule systems from Nestlé and Krups
9
.
Kraft´s non-portioned coffee brands are Carte Noir, Gevalia, Grand Mère, Jacobs, Kenco,
Onko and Maxwell House. Furthermore, Kraft has a brand of single-served coffee pads
called General Foods International and a coffee capsule system in cooperation with Bosch,
called Tassimo
10
.
3. Context
3.1 Environmental Analysis as a Basis for Competitive Advantage
This analysis gives a short overview of the different factors that have an impact on the work
of coffee companies within that particular industry. In the following, political, economic,
social, technical, environmental and legal aspects will be described.
6
“Investoren. Kraft Foods” Retrieved 2
nd
May 2010.
<http://www.kraftfoods.de/kraft/page?Mid=418&PagecRef=418&locale=dede1&siteid=kraft-prd>
7
“Annual Report 2009” Kraft Foods. Retrieved 11
th
May 2010. Page 3. <http://annualreports.com/company/1050>
8
“Fact sheet” Kraft Foods. 2008. Retrieved 7
th
May 2010.
<http://www.kraftfoodscompany.com/assets/pdf/2008_kraft_fact_sheet.pdf>
9
“Coffee Brands” Nestlé. Retrieved 27
th
April 2010. <http://www.nestle.com/Brands/Coffee/CoffeeListing.htm>
10
“Our Brands” Kraft Foods Retrieved 27
th
April <http://www.kraftfoodscompany.com/Brands/index.aspx>
6
Political Aspects
Coffee is grown in about 70 countries all over the world. As the plants need an appropriate
amount of sun and rain, most coffee producing regions are around the equator with it´s
subtropical and tropical climate: South/ Central America (Brazil, with a contribution of 28%
the world’s biggest coffee producer
11
, Columbia and Mexico), the Indonesia region (India,
Vietnam and Indonesia) and the Arabia/ African region (Uganda, Ethiopia and the Ivory
Coast)
12
. Those countries satisfy most of the world’s coffee consumption.
In general, the coffee flavour depends on soil, climate, altitude and the method of
harvesting
13
. Higher locations of the cultivable land lead to an improved coffee quality.
As coffee is a major export commodity
14
, its worldwide trade is interesting for governments-
hence political aspects play an essential role.
Coffee producing countries profit from income taxes, export duties and business taxes. Thus,
approximately 50% of the foreign exchange earnings of many of the less developed
countries come from the coffee trade
15
. Coffee organisations, which will be described later,
try to achieve price stability on the market and moreover try to protect coffee farmers from
exploitation.
The deficient infrastructure is, especially in Africa, another problem. Most governments
cannot spend sufficient money on infrastructure in rural areas. As a consequence, quality
and delivery times are affected negatively
16
.
11
Walberg, Ray L. “Learn more about all of the coffee procedures” Ezine @rticles®. Retrieved 22
nd
May 2010.
<http://ezinearticles.com/?Learn-About-All-of-The-Coffee-Producers&id=852513>
12
“Home brewed: Making your own coffee” The Florida Times-Union, Jackonviell.com. Published 12
th
March 2009. Retrieved 22
May 2010. <http://jacksonville.com/lifestyles/food/2009-03-12/story/have_a_cup_of_coffee>
13
“Home brewed: Making your own coffee” The Florida Times-Union, Jackonviell.com. Issued 12
th
March 2009. Retrieved 22
nd
May 2010. <http://jacksonville.com/lifestyles/food/2009-03-12/story/have_a_cup_of_coffee>
14
“The story of coffee” ICO. Retrieved 22
nd
May 2010. <http://www.ico.org/coffee_story.asp>
15
“The story of coffee” ICO. Retrieved 22
nd
May 2010. <http://www.ico.org/coffee_story.asp>
16
Saeed, Ali. “Farmers need infrastructure and incentives” Yemen Times. Published 19
th
November 2009. Retrieved 22
nd
May
2010. <http://www.yementimes.com/defaultdet.aspx?SUB_ID=33102>
7
Every coffee growing country has its special laws and political regulations and consequently,
some need more external help than others. A current example is Ethiopia, which is supported
by Japan with the aim of setting standards and improving quality
17
.
Economic Aspects
Coffee is, among oil, one of the most valuable products worldwide
18
and over 25 million
19
people are employed by the coffee industry. In 2009, 100,000 tons
20
were produced.
Four big companies buy, produce and sell coffee: Nestlé, Procter&Gamble, Sara Lee and
Kraft Foods.
After being harvested, the coffee beans are delivered to the customers. Coffee beans are
mostly exported to the USA, followed by Germany, Japan and France
21
.
There, coffee beans are washed and roasted. Roasting means giving flavour to the coffee
beans and this is the most important step in creating value. After the beans are roasted, they
are ground and blended. During the blending process, Arabica and Robusta coffee beans
are mixed in order to create a certain flavour.
Coffee is sold to the consumer either as roasted beans, as powder or as soluble coffee.
Soluble coffee is created by brewing coffee and drying it to granules afterwards.
17
Ojambo, Fred. “Japan to help Ethiopia improve coffee quality to boost trade”. Published 12
th
February 2010. Retrieved 22
nd
May 2010. <http://poorfarmer.blogspot.com/2010/02/japan-to-help-ethiopia-improve-coffee.html>
18
“The History of Coffee” Frontline World. Retrieved 5
th
June 2010.
<http://www.pbs.org/frontlineworld/stories/guatemala.mexico/facts.html>
19
“Welthandel” Deutscher Kaffeeverband. Retrieved 6
th
June 2010.
<http://www.kaffeeverband.de/de/kaffeewissen/vom-roh- zum-roestkaffee/handel/welthandel>
20
“Weltweite Kaffeeproduktion 2009-2010 rückläufig” RohstoffWelt. Published 12
th
February 2010.
<http://www.rohstoff-welt.de/news/artikel.php?sid=17500>
21
“The History of Coffee” Frontline World. Retrieved 5
th
June 2010.
<http://www.pbs.org/frontlineworld/stories/guatemala.mexico/facts.html>
8
The flow chart below illustrates the process of coffee production:
Figure 2 Flow Chart of Coffee Trade
Coffee is sold via options and future trading at the commodity exchange before it is
harvested. That means that if a customer buys coffee beans today, he will pay today’s
market price for the future coffee delivery. It should be noted that coffee prices are quite low,
hence small family businesses cannot survive with the small earnings they get
22
. One of the
major problems in the coffee industry is the harsh working conditions on plantations; workers
are not paid appropriately and child labour is not uncommon.
Another important issue is the slow increase of the coffee price. In the chart below, the red
line shows the world price development of raw coffee from 1992 to 2009.
22
“Coffee companies under fire as millions face ruin” Press release of Oxfam. Published 18
th
December 2002. Retrieved 23
rd
May 2010. <http://coffeegeek.com/resources/pressreleases/oxfamsept182002>
9
23
Figure 3 Preisentwicklung Rohkaffee
The next table shows that not only prices, but also volume and value of produced coffee
bags rose.
24
Figure 4 Volume and Value of Coffee Trade
23
“Preisentwicklung für Rohkaffee” Deutsche Welle. Retrieved 23
rd
May 2010. <http://www.dw–
world.de/image/0,,5372057_1,00.jpg>
24
“Coffee Market Report 02/2010” ICO. Retrieved 31.03.2010. page 5. <http://dev.ico.org/documents/cmr-0210-e.pdf>
10
To sum it up: Coffee is grown in a so-called coffee belt and there are two main sorts: Arabica
and Robusta which is mostly of less quality and value. The biggest producers are Brazil,
Vietnam and Columbia and the biggest consumer countries are USA, Germany, Japan and
France. Furthermore, the volume of produced coffee and prices increased during the last few
years.
Social Aspects
Coffee originally comes from Ethiopia and made it´s way to Europe in 1615
25
. Nowadays,
coffee is consumed everywhere and is one of the world’s favourite beverages, mainly
because of its unique flavour and its stimulus effect.
Moreover, cultural differences also play an important role as consumption preferences vary
according to country and social class. Especially Italy, Germany, Austria, France and the
USA have strong and special coffee cultures.
Trends in the coffee consumption:
• Fair trade products/ sustainable coffee production
26
• Light-products (with less caffeine; low-fat milk)
27
• Bio – products
• Because of financial situation: increasing consumption of home-brewed coffee
• Coffee pad machines: easy and quick to prepare
• Many customers grind their coffee beans at home for freshness
• Coffeehouses as places for business meetings: comfortable environment, wireless
internet, cheaper than restaurants
28
25
“The story of Coffee“ ICO. Retrieved 18th May 2010. <http://www.ico.org/coffee_story.asp>
26
McGuire, Monica. “The facts about fair trade coffee” Divine Caroline™. Published June 2009. Retrieved 13
th
May 2010.
<http://www.divinecaroline.com/22355/79320-facts-fair-trade-coffee>
27
“Kaffee Trends: Zertifiziert und “light” “ Retrieved 3
rd
May 2010. <http://www.kaffee.de/kaffee-trends-zertifiziert-und-light>
28
“Social aspects of coffee” Spiritus-Temporis.com. Retrieved 18th May 2010. <http://www.spiritus-temporis.com/coffee/social-
aspects-of-coffee.html>
11
Oxfam states that there are problems in the coffee industry:
• “The global market is oversupplied by 540 million kilograms of coffee each year; 8%
more coffee is being produced than consumed
• Roasting companies more often use poorer quality coffee beans than ever before
thanks to new technologies such as steam cleaning
• Ten years ago, poor countries’ export sales were worth a third of the total coffee
market – today, it is just 10%”
29
Technical Aspects
Due to the lifestyle role coffee has taken, the coffee business is huge. The supply lines are
also very complex and require careful monitoring. The variety of people and their profession
in the coffee business is also very large. Farmers, engineers, controllers and logistics
personnel all play a significant role in bringing the coffee from the fields into the cups.
Several research and development centres conduct research on making plants and farming
more productive. As well as providing plants that bring more fruit, they also offer business
training and programs for farmers in order to help them maintain the high quality of coffee
without suffering financial damage due to low coffee prices
30
. There are also trends towards
green coffee.
Required machines:
• Various tools for the cultivation of plants
• Drying stage (either special mats to put the coffee beans on or machines that wash
the pulp off)
• Roasting machines
• Transportation: ships, trucks
29
“Coffee companies under fire as millions face ruin” Press release of Oxfam. Published 18
th
December 2002. Retrieved 23
rd
May 2010. <http://coffeegeek.com/resources/pressreleases/oxfamsept182002>
30
“Faces of coffee. The Nestlé coffee report.“ Retrieved 31st April 2010. page 57. <http://www.nestlé.com>
Environmental Aspects
The coffee production has negative effects on the environment. Trees have to be cut down
which destroys forests and, in addition, biodiversity. Moreover farmers started using chemical
fertilizers and pesticides in order to increase productivity. The coffee pulp is often dumped
into streams and pollutes the water. Farmers often drink the water they use for their
plantations, which means there is always a danger of being poisoned by pesticides. As the
farmers are the ones who can assure that the cultivation procedures are environmentally
friendly, they are the ones who have to be supported and informed about the
consequences
31
. In contrast to former sun-cultivated plants, shade-grown coffee is preferred
nowadays to decrease deforestation.
Furthermore, the WWF calculated that the production of one cup of coffee requires 140 litres
of water
32
, including irrigation and all the other processes that are involved in the coffee
production.
The media reported on various incidents of illegal grown coffee. For example in 2007,
Robusta coffee was illegally grown in southern Sumatra and bought by large coffee
