More than two years ago, Nestle relaunched the Nescafe brand in five lead markets on the West Coast with a full line of whole-bean, ground, and gourmet instant coffees, including a youth-targeted, foam-topped line, Nescafe Frothe. While it initially intended to roll national with the full lineup in early 2001 with roughly $60 million in media support, Nestle recently dismantled the costly direct-store delivery team set up to manage the whole-bean and ground business and will belatedly roll out nationally only with Frothe. In a statement, the company said, "expected profit margins had not been met."
The reason, according to an executive close to Nestle, was the influx of competitors, among them Kraft Foods' Starbucks license and Procter & Gamble Co.'s Folgers whole bean. "If consumers wanted an economy item, they'd buy private label, if they wanted premium they'd buy top-end brands like Starbucks or Seattle's Best, and then there was all this other stuff in the middle ... and Nestle wasn't making any money," the executive said.
"Nestle has a 22% global share in coffee, and almost all of it is in one brand, Nescafe," said Prudential Securities analyst John McMillin. But while worldwide, "Nescafe is not that far behind Coke as a brand," he said its strength is in emerging markets where instant is the preferred form of coffee.
Nestle sold its roast and ground business, Hills Bros., along with its Chase & Sanborn and MJB coffee brands, to Sara Lee Corp. in late 1999 to focus efforts on Nescafe. But for the 52 weeks ended Feb. 24, sales of the brand in supermarkets, drug stores and mass outlets (excluding Wal-Mart) totaled only $53 million, according to Information Resources Inc.
Nestle said it remains committed to the long-term growth of Nescafe in the U.S., and will focus its resources on a reformulated Frothe. Nestle will run TV, print and radio ads from October through March by Interpublic Group of Cos.' McCann-Erickson, Worldwide Los Angeles, for flavors such as Butterfinger and Low-Fat White Chocolate Mocha.
Nestle will reach out to younger consumers with an integrated music promotion, Nescafe Java Jam, and by opening Cafe Nescafe kiosks on college campuses. Sales of Frothe in test markets dropped double digits to $6.8 million for the year-ended Feb. 24, according to IRI.