266-Nestlé’s Cost Reduction in the Coffee Business

Nestle is the world-wide leader in the coffee business. They offer coffees at virtually all price points. They invented instant coffee in the 1930s. After the buffets of the commodity markets over the last few years, the company has created a global push to reduce its costs and to increase the quantity and quality of the coffee it buys.

We have found four generic approaches to reducing costs.  See HERE for more information.

• First, reduce the rate of cost of a cost input.
• Second, reduce the cost inputs that do not produce output.
• Third, reduce unique activities and components in processes and the product
• Fourth, spread fixed cost activities over additional product output

Nestle is using the first three of these approaches in its world-wide investment in cost management.

First, Nestle redesigned part of the process. Its scientists developed a new generation of Robusta and Arabica coffee plants for Mexico. The Robusta beans are relatively inexpensive and make up the bulk of the beans in instant coffee. The Arabica beans are more expensive, harder to grow and go to the higher end coffees. Today, Nestle has planted 100 thousand coffee trees in Mexico using its newly designed coffee trees. Once this experiment is complete, the company plans to distribute 220 million plants to coffee growers world-wide over the next ten years.

The use of these new plants will enable Nestle to reduce its rate of cost for the beans it buys. The new plant design increases yields so it eliminates some inputs that do not produce the output of coffee beans. Many long-term coffee farmers are using older trees, which yield fewer beans and lower quality beans. Many of these farmers are leaving the industry since they cannot compete. This magnifies the commodity price problem Nestle faces. Nestle’s new trees fit the region’s climate. They resist disease and allow for larger and easier harvests. These trees will make coffee beans more consistently and predictably available. Nestle will give these trees to the farmers without asking for a firm long-term contract or ownership of any part of the farm. But it should be obvious that Nestle will engender a great deal of farmer loyalty with this program.

Nestle also expects to reduce the rate of cost it pays for its beans with two other cost reduction initiatives. It will offer farming and investing advice to up to ten thousand farmers world-wide. As these farmers become more efficient, Nestle’s costs will drop. In addition, Nestle will also increase the amount of coffee it buys directly from the nearly 170 thousand growers who produce its coffees.

This kind of foresight and innovation suggests why Nestle commands its market leadership.

Date posted: 6/1/11

Update:

Nestlé describes operational efficiency as one of its core strengths. Here is a quote from one of their statements: “Growth through continuous innovation. Operational efficiency. Resource and capital allocation with discipline and clear priorities, including through acquisitions and divestitures.” In 2010, the company initiated its “Nescafé Plan” to increase its operational efficiency and global sustainability. In 2021, the company claimed 10 years of continuous improvement.  During these 10 years, Nestlé worked at training farmers, renovating coffee farms by distributing plantlets of improved coffee varieties, increasing farmer incomes, promoting water conservation and other efficiency and effectiveness improvements.

Nestlé is the worldwide leader in the global coffee business. In 2022 it held 22% of the global $108 billion market. It has long owned two major coffee brands, Nescafé and Nespresso. In 2018 the company bought the rights to sell Starbucks coffee and tea in grocery and retail stores, adding a third major brand to its product portfolio.  In 2023, it plans to add Seattle’s Best Coffee to his brands. It is in negotiations to purchase that brand from Starbucks in 2023.  It’s aggressive investments and marketing innovations in the premium coffee market has enabled it to gain share slowly through the last four years. It is clearly a successful Standard Leader competitor in the coffee industry.

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