Multidisciplinary analysis:- Maggi fiasco

Value pickr has been source of good information for business analysis for last 1/2 years.Thanks Valuepickr Team and all their members for your time.I always liked contrasting views being posted which helps to look at your thesis of investing in closer detail. Since, I have been passive reader for so long, I thought I should give back. I mostly like picking stocks which kind of fits multidisciplinary analysis and have many forces working for that.So, I will share analysis brief of current Maggi fiasco and hope you have fun reading it.


Mental Models, Maggi?

History:-

Cadbury
Cadbury faced similar situation in Oct 2003, where consumers found worms in the chocolate causing major uproar in media. The sales plummeted by 30% for the quater considering the festive season where it used to witness a 15% increase. Cadbury upgraded manufacturing facility and put stricter rules for food packaging. The Brand name again revamped using project “Vishwas” and sales bounced back.

Intel
The Division bug in Intel chips caused loss of ~0.5B. Intel used new branding strategy.The famous Intel song, Intel inside logo and charisma of Andy Groove rebounded the trust in the Intel products.

Pepsi
Wide protest for high content of pesticide in Pepsi. The sales fall but it came back with ads which rebounded the trust in Pepsi.

Learnings:- Major brands facing uncertain situation bounced back.

Psychology:-

Social Proof :- Many State government banned the product even though their test was negative in contents of lead and MSG.

Hind sight bias:- People forgot the incident of Cadbury and Pepsi and they will as well forgot the incident of Maggi.

Denial Syndrome:- Maggi taste will cause strong denial syndrome in consumers and they will come back to buy it once trust is restored.

Philosophy:-

1.The company which is doing good for 40 - 50 years and due to uncertain circumstances faces a problem does not mean the company is bad.

2.Nestle as a whole derives only 25% sales from Maggi so the worst case scenario, it will lose 25% sales due to lose of brand.

3.Nestle as a whole faced some situation like this in other countries and where able to deal with it.

Finance:-

1.The Cash balance will help to deal with this uncertain situation.

2.The debt levels are low to cause any bankruptcy.

Competitive advantage:-

Demand side advantage
1.Habit/Search cost:- Maggi is synonymous for noddles.

2.Economics of Scale:- Due to high market share it is able to lower the fixed cost per product.

3.Switching Cost:- The Pavlovian effect will cause people to come back for same product.

Supply side advantage
1.Patent/Process:- The Masala for noodles is trade mark secret .

Price/Value:-
1.The stock price fall by 20% after the incident came to light which corresponded to 14K Cr decrease in market cap.But, Nestle derives only 2000Cr so in worst case the market cap should fall by 2000 Cr if we think in sales terms which clearly indicates market overreaction to the situation under the assumption if the market is efficient at the price what nestle was selling before the incident.


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Pyschology
Pavlovian and denial effect has caused the sales of 5-6 crores in last 2 months which is normally it used to sell before crisis.

Please find the article in times of india.Refer to last 4 paragraphs.
http://economictimes.indiatimes.com/industry/cons-products/food/nestle-india-gears-up-to-launch-more-maggi-variants/articleshow/50267318.cms

Problem:- I expected more sales as normally the loss aversion, denial and pavlovian will cause people to come back more and sales to be more (1.5x- 2x).I think either sample size is small and will wait for one year after crisis to recheck the theory.

This is to add to how the thesis of Nestle is coming up which was published nearly a year back.

  1. Market share did come back to more than 57% but it doesn’t agree with main fact I thought it should bounce even faster due to psychological factor of denial/scarcity.

We started seeing new forces which was not discussed in previous discussion:

Philosophy:-

  1. Only in the precipice human/company./society change which was quite evident in Nestle.

Ecology/Genetics:-
1.The company as a organism has responded pretty well to changing environment factors for its survival:
a.The organism is now more responsive than before launching 25-30 products in time frame of 3 months. Getting the idea of genetics, few products will fail and few will succed but that is the nature of better organism to be born and company to be nimble in our case.

Military:-
1.Taking Sun Tzu priciple, never underestimate the enemy ( competition), it is infact the weakness or arrogance, It is evident from Head of Nestle, India is embracing the competition and it is upto us to see who wins/ how it pans out.

Finance (Price and value):-
a. Value with what is known, in five years time frame with target of multiple product launches and achieving topline being highest priority of management in coming years whether it is attractively valued is question I cannot answer very well now but it was very easy to answer 9 months back when maggi fiasco happened.

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