Maggi noodles cleared: What’s next for Nestle?

The labs may have found its noodles kosher, but consumers will be the final judges in this matter

There is no evidence to suggest that Nestle’s lost sales have gone to its competitors—the market for instant noodles has declined in this period. Photo: Bloomberg

The Maggi noodles controversy is nearing conclusion, barring further legal challenges, and the financial impact, if any, from the government’s ongoing class action suit.

Investors marked up Nestle India Ltd’s share by 6.1% on Friday, on news that lab tests mandated by the Bombay high court had cleared the noodles. The share has already gained significant ground from the fall since end-May, when this controversy erupted, and is now just 7% short of its 28 May price.

So, what’s next for Nestle?

Regaining lost sales will be the first objective.

A clear legal victory gives it the moral high ground, but there is a battle of perception left to be fought.

This battle is not just for consumers but also the trade, which plays a crucial part in the sales process. So, expect a sustained marketing campaign to precede and accompany the re-launch.

Next will be the re-launch itself.

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Initially, there will be a surge in sales as the company refills shelves. But repeat consumption is what matters, and noodles don’t just sit on the shelves. Sales need to go back to earlier levels, even after the promotions end.

And, then, there is the financial impact. Noodles contributed to about one-fifth of Nestle’s sales, but are zero at present. Initially, the re-launch will see a significant initial jump in sales growth. There will be a sharp jump in costs as well as the company is likely to spend much more on advertising and promotions, than earlier.

The key point to watch is if this sustains through subsequent quarters, especially once the marketing push comes back to a steady state. The litmus test will be when Nestle declares that noodles consumption is back to earlier levels, and the controversy has done no permanent damage to sales.

Note that the competition has stepped up in this period. The existing competitors are attempting to capitalize on Maggi’s loss and Baba Ramdev’s Patanjali Ayurved Ltd is planning to launch its own brand of instant noodles.

But Nestle is no stranger to competition. It had a giant first-mover advantage in instant noodles, where it became synonymous with the product. And, there is no evidence to suggest that Nestlé’s lost sales have gone to its competitors. The market for instant noodles has declined in this period.

The next six months to one year should give a clear picture of whether that loss is a temporary one. The labs may have found its noodles kosher, but consumers will be the final judges in this matter. Investors may do well to wait for that decision, before they take the celebrations to the next level.