Nestea Iced Tea in China The cost of being a follower in an emerging market PDF

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MarketLine Case Study

Nestea Iced Tea in China The cost of being a "follower" in an emerging market Reference Code: ML00022-004

Publication Date: March 2016

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OVERVIEW Catalyst This case study analyzes Nestea Iced Tea's failure to break into the Chinese RTD tea market with any kind of lasting success. It assesses why the brand failed, ultimately leading to its withdrawal from the market, and also examines how other companies looking to enter China with similar products can avoid a similar fate.

Summary 

Nestea iced tea was extended into China in the early 2000s by Nestea in conjunction with Coca-Cola, intended to capitalize on the country's growing ready-to-drink (RTD) tea market.

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After 13 years, the line had to be withdrawn from the Chinese market, having lost brand value for four consecutive years.

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The RTD tea line was too similar to other products on the market, and therefore it failed to differentiate itself due to the lack of distinct flavor appeal and an unclear brand identity.

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An inability to predict and respond to new emerging trends in soft drinks contributed to the brand losing the chance to win back market share.

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Innovative product offerings and marketing are what help brands to resist strong competition and achieve clear differentiation.

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Companies should capitalize on the changing Chinese market with more niche products to target new consumer segments.

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TABLE OF CONTENTS Overview ............................................................................................................................................................................. 2 Catalyst............................................................................................................................................................................ 2 Summary ......................................................................................................................................................................... 2 Partnership fails to secure sustainable market share .......................................................................................................... 5 Initiative aimed at capitalizing on growth market ends in withdrawal ............................................................................... 5 Nestea targeted its iced tea at young adults .................................................................................................................... 6 Uninspiring flavors, lack of differentiation & functional drinks contribute to failure .............................................................. 8 Risk-averse flavor profile unable to leave strong impression ........................................................................................... 8 Undifferentiated positioning weakens competitiveness.................................................................................................... 8 Failure to respond to the rise of functional beverages ..................................................................................................... 9 Conclusions....................................................................................................................................................................... 12 Lack of innovation is brand suicide in a Chinese market full of opportunities for niche products ................................... 12 Appendix ........................................................................................................................................................................... 13 Sources ......................................................................................................................................................................... 13 Further Reading............................................................................................................................................................. 13 Ask the analyst .............................................................................................................................................................. 14 About MarketLine .......................................................................................................................................................... 14 Disclaimer ...................................................................................................................................................................... 14

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TABLE OF FIGURES Figure 1: Nestea's "rise and fall" in China, 2002–13 ........................................................................................................... 5 Figure 2: RTD tea brand share in China, 2014.................................................................................................................... 6 Figure 3: Nestea Iced Tea Promotional Material ................................................................................................................. 7 Figure 4: Responses of "I often experiment with buying new tea (including RTD) products," among Chinese consumers, 2014 .................................................................................................................................................................................... 8 Figure 5: Master Kong and Uni-President marketing material ............................................................................................. 9 Figure 6: China: five-year CAGR (%) for RTD tea, 2005–15............................................................................................. 10 Figure 7: China: the number of new functional drink SKUs launched, 2000 –13................................................................ 10 Figure 8: China: volume sales in soft drink (million units) by motivation ........................................................................... 11

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PARTNERSHIP FAILS TO SECURE SUSTAINABLE MARKET SHARE Nestea Iced Tea represented a partnership between two of the world's leading consumer packaged goods companies, Nestle and Coca-Cola. Given their respective resources and expertise, as well as China's RTD tea market, the venture was expected to be a success. However, despite specifically targeting the young adult market, Nestea failed to build any lasting market share, suffering at the hands of more established, better-known brans.

Initiative aimed at capitalizing on growth market ends in withdrawal Nestle and Coca-Cola's partnership to launch Nestea in China was an initiative intended to take advantage of the booming RTD tea market in the country. China has been one of the largest RTD tea markets in value globally since 2000, and had shown double-digit growth between 2005 and 2013. It later overtook Japan to become the second largest market in 2013. However, the two consumer packaged goods giants were not the only ones that foresaw the fruitful opportunity. Before Nestea entered China, Uni-President and Master Kong (a.k.a. Kangshifu) had already launched their RTD tea lines in the country in 1995 and 1996 respectively. After more than a decade, the two brands remained the market leaders, while Nestea could not survive the competition. In May 2014, Nestle announced the exit of its Nestea iced tea line from the Chinese RTD tea market. Launched in 2002, the joint venture between Nestle and Coca-Cola experienced loss in brand value for four consecutive years from 2008 onwards, and eventually had to give up on a market worth more than $10bn annually. The exit highlights the highly competitive nature of the Chinese food and drink market, with intense rivalry between foreign and local players.

Figure 1: Nestea's "rise and fall" in China, 2002–13

SOURCE: Canadean Consumer

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Figure 2: RTD tea brand share in China, 2014

SOURCE: Canadean Consumer

MARKETLINE

Nestea targeted its iced tea at young adults Aimed at younger consumers and white-collar workers aged 20–29, the brand's initial debut in RTD tea in 2002 consisted of two flavors: Western-style lemon, and peach, combining "icy coolness" and "Western style" in its marketing message to emphasize its "deliciousness, healthiness, and thirst-relief." In 2004, Nestea extended its iced tea line to include the Ice Rush range in summer, with the claim of providing an icy cooling sensation as the unique selling point. This formula claimed to be the first of its kind in RTD tea. It was available in original, lemon green tea, and Western-style lemon flavors. After that point, Nestea did little to update its iced tea portfolio, apart from the introduction of an aluminum can version of "Ice Rush" in 2011 and the addition of a honey and pear flavor. Figure 3 below shows examples of how the products were promoted to the target demographic of young professionals.

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Figure 3: Nestea Iced Tea Promotional Material

SOURCE: Canadean Consumer

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UNINSPIRING FLAVORS, LACK OF DIFFERENTIATION & FUNCTIONAL DRINKS CONTRIBUTE TO FAILURE Nestea used traditional flavors in both of its major launches, failing to tap into Chinese consumers' experimental tendencies when it comes to RTD tea purchases. Furthermore, the flavors chosen and marketing messages failed to set the brand apart from its more established competitors. These factors, together with the slower growth of the RTD tea market precipitated in part by the increasing popularity of functional beverages, contributed to the Nestea brand's ultimate failure in China.

Risk-averse flavor profile unable to leave strong impression The initial growth of the brand means that Nestea chose the right time to tap into the Chinese market as it successfully capitalized on the rise in popularity of RTD tea in the country. However, despite facing strong competition from two key players that had already entered the market, Nestea failed to take action by innovating to stand out, which could have helped to sustain growth. This is partly reflected by the choice of flavors: the lemon/fruity-theme was adopted in the two major launches from Nestea. Chinese consumers appear to be more experimental when it comes to RTD tea purchases: 56% of Chinese consumers say they occasionally or often experiment with new tea products (including RTD), compared to the global average of 45%. Such an experimental mindset is more common among Nestea's target age group of 25–34 year olds. Nestea's lack of a wide range of flavor options or progressive approach to brand extension left the brand unable to hold the interest of experimental consumers in the long term. Moreover, its major competitors Master Kong and Uni-President also sell lemon-flavored ice tea, which had been on the market for a few years before Nestea was launched. As a result, Nestea's lack of first-mover advantage and inability to create sensory excitement to differentiate itself as a latecomer planted a seed of failure early in its conception.

Figure 4: Responses of "I often experiment with buying new tea (including RTD) products," among Chinese consumers, 2014

SOURCE: Canadean Consumer

MARKETLINE

Undifferentiated positioning weakens competitiveness Nestea's lack of a point of differentiation is also evident in the way the brand was positioned. As mentioned above, one of Nestea's selling points was "icy coolness," which would be appealing to dehydrated consumers who need a convenient refreshment during summer. However, this is comparable to how Master Kong's ice tea range is advertised, with its widely known slogan "Full of Icy Strength." Nestea Iced Tea in China: The cost of being a "follower" in an emerging market © MARKETLINE THIS PROFILE IS A LICENSED PRODUCT AND IS NOT TO BE PHOTOCOPIED

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Therefore, Nestea's emphasis on "coolness" is unlikely to have stood out as much as expected due to a stronger rival already having adopted similar positioning. Furthermore, another selling point, "Western-style," was similar to that of another rival: Uni-President's ice tea. UniPresident's product description ("The combination of freshly cool Sicilian lemon and richly aromatic California lemon gives a burst of the sunniest, most youthful energy, as well as the birth of Uni-President Ice Tea"), and the fact that it appointed Avril Lavigne (a Canadian singer-songwriter who has widespread popularity in China) as the brand's ambassador, shows the brand's intention to build a West-inspired image. Unlike "icy coolness," which is communicated well in the packaging, adverts, and slogan, the "Western" element was ambiguous in Nestea, apart from the word "Western" appearing in the name of some varieties. This would not have made Nestea iced tea memorable as a Western-inspired product among consumers across China, especially when another rival has used a similar strategy with the help of celebrity endorsement, attracting more media coverage. Nestea's "market follower" approach to branding seems to have been effective when RTD tea was growing especially quickly in the country. However, after the initial hype, it soon faded away in consumers' mind as there was not a clear identity for Nestea in the RTD tea marketplace capable of leaving a strong impression on the majority of consumers.

Figure 5: Master Kong and Uni-President marketing material

SOURCE: Canadean Consumer

MARKETLINE

Failure to respond to the rise of functional beverages Nestea iced tea's declining market value could also be explained by the slower growth of RTD tea in China. Canadean found that the five-year CAGR of RTD tea in China had steadily declined since 2010, despite having managed to stay double-digit until 2013. This implies that RTD tea in China had slowly become saturated despite consumer demand in the category still rising, which could explain why Nestea experienced the sharpest drop in value between 2010 and 2011.

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Figure 6: China: five-year CAGR (%) for RTD tea, 2005–15

SOURCE: Canadean Consumer

MARKETLINE

Although Nestea's conservative style towards new product development was unlikely to help the brand break ground in a slowly growing market, facing threats from two dominating players and new entrants, it could still reverse the situation if it were able to spot a change in consumer trends in RTD beverages. Between 2007 and 2009, there was a sudden jump in the number of functional drink stock-keeping units (SKUs) being launched in China. This indicates that the industry had started to combine health and RTD beverages, and therefore consumers were more exposed to the idea that RTD beverages could be more than just a solution for on-the-go hydration; they could also assist in improving and maintaining health.

Figure 7: China: the number of new functional drink SKUs launched, 2000–13

SOURCE: Canadean Consumer

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The fact that consumers have started to associate RTD beverages with health suggests that the health trend is gaining momentum in the category. This is proven in the findings from Canadean research on consumer motivations, which shows, in 2011, that health ranked as the third most important trend in influencing soft drink purchases, contributing an estimated volume sale of more than 27 billion units. This figure later increased to more than 32 billion in 2014.

Figure 8: China: volume sales in soft drink (million units) by motivation

Health

Experience Seeking

Aspiration 32776.9

35000

29871.7 30000 25000

27090.9

25635.3

24233.9 22087.9

20826.1

20000 19522.1 15000

10595.7 8646.3

9566.9

10000 7735.4

5000

0 2011

2012

2013

SOURCE: Canadean Consumer

2014

MARKETLINE

This shift of consumer trends towards healthy offerings in soft drinks posed a threat to all RTD tea brands, as this is not a category that is commonly associated with health. At the same time, however, it was an opportunity for Nestea to innovate and be the pioneer in healthy bottled tea. Most RTD tea in China had been marketed with a focus on sensory experience (e.g. emphasis on coolness in the case of Master Kong), and/or tried to convey an aspirational message (e.g. the use of a foreign celebrity to symbolize Western style in the case of Uni-President). •Therefore, Nestea would have been likely to receive a positive market response if it had rolled out a healthy/functional version of RTD tea, as the health trend seemed more prominent in influencing soft drink purchases than experienceseeking and aspiration (see graph); it could have also revitalized the brand and set it apart from its rivals. Unfortunately, Nestea did not grasp the opportunity for the brand to return to growth.

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CONCLUSIONS Lack of innovation is brand suicide in a Chinese market full of opportunities for niche products 2014 was not particularly a good year for international FMCG players in the Chinese market. Along with Nestea's exit, two foreign beauty brands, Garnier and Revlon, also up the market earlier in the year. Furthermore, multinational FMCG giant Unilever reported a 20% drop in sales in Q4 2014. The failure of Nestea iced tea may shed some light on what international brands should do to survive in China. Continual innovation and unique positioning are key to success in China. Nestea's over-conservative approach to product development and marketing was a key element in its failure. It tried to replicate the success of existing rivals by adopting similar flavors, branding, and marketing, and this "go with the flow" strategy clearly did not help the brand to hold firm in a crowded marketplace. China is among the top five countries around the world wit...