Dramatic scenes emerged from India today (5 June) as television cameras showed rowdy consumers burning Nestle's Maggi branded noodles in a bonfire. Nestle has witnessed the rapid deterioration of consumer trust in the country as a food safety scare that started in the state of Uttar Pradesh spread throughout India.
The Food Safety and Drug Administration (FDA) in Uttar Pradesh claimed high lead levels were found during "routine tests" in two dozen packets of instant noodles. The state authorities also said they found the flavouring MSG, which must be labelled if it is used in production.
State governments throughout the country then began carrying out tests of their own. According to the Food Safety and Standards Authority of India, a further two states have also confirmed the presence of lead and MSG in samples collected.
While Nestle has repeatedly insisted Maggi is safe – and apparently questioned the validity of the state's tests behind closed doors in discussions with the FSSAI – the immediate impact on Nestle's reputation in India has been startling.
"Detection of lead in a food product as a heavy metal contaminant beyond permissible levels renders the food product unsafe and hazardous," the FSSAI insisted today. The body required Nestle to pull all nine varieties of Maggi noodles from the shelves. In fact, Nestle had already initiated a voluntary recall. The company conceded consumer trust has been dented and said it is pulling products from the shelves until the "confusion" surrounding Maggi's safety can be clarified.
"The trust of our consumers and the safety of our products is our first priority. Unfortunately, recent developments and unfounded concerns about the product have led to an environment of confusion for the consumer, to such an extent that we have decided to withdraw the product off the shelves, despite the product being safe," the company said in a statement. "We promise that the trusted Maggi noodles will be back in the market as soon as the current situation is clarified."
Speaking during a press conference in India, CEO Paul Bulcke – who has flown in to try to contain the situation – reiterated his belief Maggi noodles are safe. The issue, he suggested, was one of communication – with both the authorities and consumers.
The fact Bulcke has swept in to contain the damage speaks to how seriously Nestle is taking the situation. He insisted Nestle remains committed to India, highlighting how the company has operated in the market for a considerable period of time. "Nestle has been in India for 100 years. Nestle is part of India," he told reporters.
Nestle said it was "too early" to comment on what impact the scandal and recall will have on sales in the market. According to MainFirst analyst Alain Oberhuber, Maggi sales comprise around 29% of Nestle sales in India. The loss of this revenue stream would represent a "significant hit" to Nestle in the country.
Kepler Cheuvreux analyst Jon Cox believes the issue could affect Nestle's total organic growth in the current quarter. "India is a small part of group sales... [but] India is a major growth driver (particularly given weakness elsewhere in BRICs and emerging markets) and we presume the issue could knock ten to 20 basis points from Nestle’s organic sales growth in Q2, which we already expected to be a somewhat soft quarter," he wrote in an investor note.
The issue could also prove detrimental to Nestle's broader strategy in the Indian market. According to Euromonitor International analyst Lianne van den Bos, India is an important country for Nestle's Maggi brand, representing its second-largest market with retail revenue of US$623m.
"Nestle’s strategy in India has been to provide affordable products that cater to a wide consumer base (including tier three and four cities). By building a strong image in an affordable product such as noodles, Nestle has been able to broaden the Maggi brand’s remit, and extend into products with higher margins such as cooking sauces and meal solutions for the more affluent consumers. This strategy has, however, been dependent on the trust that consumers have in Maggi and this is what is at risk," van den Bos noted.
Another risk factor for Nestle is the scandal could spill over into other international markets. Singapore has already moved to block the sale of noodles imported to the market from India while the UK has confirmed it is testing Maggi noodles for lead and MSG.
Nevertheless, commentators by and large believe the issue will be a short-term bump in the road for Nestle. Pundits have highlighted Nestle's strong food safety and compliance record, on the one hand, and the short memories of consumers, on the other.
As van den Bos summed up: "This scandal is very damaging for Nestle in the short run as it affects its whole business strategy in India. It should be pointed out, however, that Maggi has been around for a very long time in India and food scandals are frequent in the Indian market. It will not be long until another comes along and distracts consumers (and the media) from the Maggi food scandal of 2015."
