Nescafe and Its Enterprise Type

Topics: Investment, Barriers to entry, Brand Pages: 5 (1782 words) Published: January 18, 2012
Nescafe, one of the top ten most valuable brands in the world, has over 50% instant coffee market share of the world, followed by General Food, Maxwell House and Brooke Bond. It’s so successful that some people in some of the Asian country such as China think that instant coffee is the whole world of coffee in 1990s. Such impressive influences come from Nescafe’s insight on the market situation and its own capability, fast response and feasible strategies. On this analysis, we will try to define instant coffee’s market as a standard cycle market. Giving its characteristic, we will see what strategy Nescafe created to maintain the sustainable growth and continue generating rents. We will give example on what Nescafe did in China to analyze the entry barrier, convergence, oligopolistic scale orchestration, etc. We consider instant coffee market as the standard cycle based on the following concerns: 1. Convergence:

Both Nescafe and Maxwell were the earliest two instant coffee providers in China. They entered the market in late 1970s. For a decade from 1980 to 1990, coffee could be only found in Hotel and high-end restaurants, but not in stores or supermarkets. Those 10 years seems a conflict with the convergence of standard cycle which normally took around 4 years. However, because the demand on coffee was so low at that moment, I would not consider those 10 years as part of the convergence of standard cycle. Instead, I would say the convergence of instant coffee market started from 1990. At that moment, Chinese people was getting rich thanks to the reform and opening-up policy. Nevertheless, the price of a cup of Nescafe coffee is around 30 times of that of apples. In 1992, Nescafe started its production in China and making Nescafe cheaper and more accessible. Nescafe did exceptionally well in 1990s when it made “Nestle” a symbol of coffee. However, it didn’t take much long that the price of Nescafe dropped rapidly to the same as several apples. This time line fitted the standard cycle convergence. And today, we can see that a small bag of Nescafe costs less than an apple in the super markets.

2. Alignment
As I said above, Nescafe played really well in the China market. It knew the market and its own capability, and adopted the right strategies. We will see how it did such a nice job in those 3 points separately: 3.1 Markets:

China’s instant coffee was a brand new market back to 1990. There were no more than 5 companies providing instant coffee there. All of them were foreign companies and no one had its own factories in China. Foreign companies required approval from Chinese government to build factories there. In 1990s, Chinese instant coffee market was booming regarding to people’s acceptance on coffee and large population base. As TV got more and more popular, brand loyalty were easier to build through advertisement and people tend to be sticky to the brand with the first taste. 3.2 Capabilities:

As the biggest instant coffee provider, Nescafe has the capital and reputation advantage to set up a factory in China. Its over 100 year management and marketing experience should help them to open emerging market easily. Its exceptionally and traditionally well-arranged and warm advertisement would touch the soul of the Chinese people. The entry barrier to set up an instant coffee factory was quite high. It not only required huge investment but also a minimum production which may exceed the market demand in the early stage of the market. 3.3 Strategies:

Nescafe set up its production line in 1992, and made effort to build up a strong sales network, management team which were not easy to duplicated by competitors. Meanwhile, they differentiate themselves as the high quality coffee provider at the very beginning, focusing on quality control and manufacturing process, keeping promoting that core value, so that they set up an reputation line that is hardly exceeded by its competitors. For a standard...
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