Nestlé’s Overreliance on Instant Coffee and Failed Acquisitions

In February 2015, nearly 400 tons of unexpired Nestlé instant coffee were destroyed in Dongguan, Guangdong — products worth nearly $1 million. While the company stated it was for freshness, the move marked the largest product destruction since Nestlé China opened in 1992.

Yes, Nestlé was overly optimistic about instant coffee demand in China. Market growth had slowed since 2009, but Nestlé continued high production, leading to a supply glut. Its 2014 performance was further hurt by sluggish sales in Asia and poorly performing acquisitions like Hsu Fu Chi and Wyeth.

Nestlé’s Misjudgment of the Instant Coffee Market

Nestlé’s 2014 global sales hit CHF 91.6 billion, with just 4.5% organic growth — the lowest in five years. In Asia, Oceania, and Africa, growth was only 2.6%, with actual internal growth at -0.3%. The company’s CFO, Wan Ling Martello, pointed to slower performance in China and reliance on ready-to-drink products like Nescafé Dolce Gusto as bright spots.

According to Mintel analyst Qiu Hao, China’s instant coffee growth began slowing after 2009. By then, Nestlé no longer dominated the market. Hundreds of domestic brands had emerged, and global instant coffee consumption was declining. Though Nestlé’s market share fell slightly from 71.2% in 2012 to 70.8% in 2013, the lost share went to rivals such as Kraft’s Maxwell House. In 2017, China’s coffee market was projected to double from 2012’s ¥700 billion to over ¥1500 billion.

Still, in 2013, China’s coffee sales grew from ¥5.55 billion in 2009 to ¥10.34 billion, averaging 16.2% annual growth — one of the fastest-rising non-alcoholic drink segments. Yet, Mintel forecast that by 2019, instant coffee’s market share would drop from 71.8% to below 66%, while fresh and RTD coffee would grow.

The Competitive Threat to Nestlé’s Coffee Portfolio

Nestlé sells a full range: instant coffee, RTD, roast beans, capsules, and machines, covering all price tiers. But it faced pressure from all sides. Coffee shops — from Starbucks to Costa — expanded rapidly after entering China in 1999 and 2007 respectively. Between 2012 and 2013, Starbucks added 45% more stores, Costa 29%. The total retail value of China’s coffee shop market hit ¥5.07 billion in 2014 and was expected to reach ¥8.68 billion by 2019.

Mintel noted that although coffee shops target a different segment, their rise impacts other categories. Then came another challenge: in March 2015, Starbucks partnered with Tingyi (Master Kong) to produce and distribute RTD coffee in mainland China, aiming for premium pricing above ¥15 per bottle. Even China Resources’ low-interest water brand considered adding Magic Vitamin Water and Fire Café coffee lines.

“Starbucks’ and China Resources’ push into RTD coffee — especially with a premium angle — will affect Nestlé,” said Mintel’s Qiu Hao. “As consumers seek variety, 28% actively try new or imported coffees and pay more. They might start with Nestlé, but won’t stay loyal.”

Acquisition Strategy Backfires

Nestlé’s weak 2014 performance was widely blamed on its aggressive M&A strategy. In 2011, then-China chief Roland Decorvet acquired 60% stakes in Yili’s competitor Yinlu and snack maker Hsu Fu Chi. In 2012, he oversaw the $11.8 billion purchase of Wyeth from Pfizer. Decorvet’s chosen successor, Zhang Guohua, came from the Wyeth deal.

By 2013, Nestlé China’s ¥7 billion in sales split three ways: one-third from Nestlé brands, two-thirds from acquired firms. That year, China became Nestlé’s second-largest market after the U.S., but growth plunged from 91.4% in 2012 to 27.6%. Yinlu, which grew 52.54% in 2010, saw only 15% growth under Nestlé, yet was highlighted as a key performer in 2013. Wyeth became China’s No. 2 infant formula brand.

But by 2014, Yinlu struggled with weakening sales amid competition from brands like Wahaha and new drinks like walnut milk. Hsu Fu Chi fared worse, losing market share and sliding from third place in candies. “When massive investment doesn’t yield returns, companies cut losses,” said food strategist Xu Xiongjun. Even PepsiCo dropped its once-$1 billion “Pringles” brand after sales dropped.

Even Nestlé’s joint venture with Coca-Cola, Nestea iced tea, exited China in 2014 after 13 years, as its market share fell steadily since 2008.

“We focus on long-term growth despite short-term pressures,” said Nestlé CEO Paul Bulcke in mid-2015. “Our goal is around 5% organic growth, with better margins, earnings, and efficiency.”

Frequently Asked Questions

Why did Nestlé destroy so much instant coffee in 2015?

In February 2015, Nestlé destroyed nearly 400 tons of unsold but unexpired instant coffee in Dongguan, Guangdong, worth almost $1 million. The company stated it was to maintain product freshness, but industry observers cited overproduction and slowing demand as the real reasons behind the largest such action since Nestlé China’s founding in 1992.

Was Nestlé’s decline in China caused by market factors or management?

Both contributed. China’s instant coffee market growth slowed after 2009, but Nestlé continued high-output strategies. At the same time, its aggressive acquisitions — like Yinlu and Wyeth — underperformed or faced fierce competition, dragging overall growth. By 2014, Asia and Africa saw just 2.6% growth and negative internal growth.

How was Nestlé’s market share in instant coffee affected?

Nestlé’s instant coffee market share in China fell slightly from 71.2% in 2012 to 70.8% in 2013. Though still dominant, the loss went to competitors like Maxwell House. Overall, China’s instant coffee share was expected to decline from 71.8% in 2013 to under 66% by 2019, with RTD and fresh coffee gaining ground.

What impact did Starbucks and Tingyi have on Nestlé?

In 2015, Starbucks partnered with Tingyi to produce premium RTD coffee in China, targeting prices over ¥15 per bottle. This move, along with Starbucks’ store expansion and consumer demand for variety, intensified competition in the RTD coffee segment where Nestlé had long been a leader.

What were Nestlé’s biggest acquisitions in China during this period?

Between 2011 and 2012, Nestlé acquired 60% stakes in Yinlu and Hsu Fu Chi, and in 2012 purchased Wyeth from Pfizer for $11.8 billion. These deals made up two-thirds of Nestlé China’s 2013 sales, but many struggled post-acquisition with slowing growth or market shifts.