Foreign Direct Investment Decision – Case of Nestle S.A Company

Analysis of the Foreign Direct Investment Decision; the Case of Nestle S.A Company Investing in Egypt

Introduction

Nestle S.A. is a multinational food and drink company that specialises in manufacturing and marketing different beverage and food products.  The firm is considered to be amongst the largest manufacturers of food and beverage products globally (MarketLine 2015). The company was established in 1866 in Vevey, Vaud, Switzerland. Nestlé’s mission is to provide consumers with a variety of food and beverage products.  The firm has developed an extensive product portfolio that is comprised of over 2,000 brands (MarketLine 2012). Some of Nestlé’s product categories include baby foods, cereals, bottled water, coffee, culinary, cereals, pet care, sports nutrition, chocolate and confectionery, chilled and frozen foods, and healthcare nutrition. The extensive product portfolio has enabled Nestle to develop an extensive customer base.  Nestle is committed to achieving sustainability in the contemporary global food and beverage industry. Thus, the firm has integrated internationalisation strategy as one of the strategies in achieving this end. By the end of 2015, the firm had established business operations in 197 countries.  In spite of its strong market position, Nestle faces intense competition from different companies such as Walgreen Company, Kraft Foods Incorporation, Safeway, Danone, and Uniliver (MarketLine 2015).

One of the strategies that the company has integrated into entering the international market entails Foreign Direct Investment. The firm has ventured into the Egyptian food and beverage market through foreign direct investment.  This paper presents an analysis of the foreign direct investment decision by Nestle S.A. into the Egyptian country.

Analysis of FDI decision

The highly globalised and competitive business environment has motivated businesses to expand into the international market in search of growth opportunities (Julian, Ahmed & Xu 2014). Thus, businesses are progressively becoming internationally oriented through the integration of foreign direct investment strategy (Sousa & Tan 2015). Raff, Ryan, and Stahler (2012) emphasise that ‘foreign direct investment has replaced international trade as the main driving force behind the global integration of product markets’ (p. 850). The high market and growth opportunities in the international market have significantly increased the intensity of competition that firms entering the industry face (Raff, Ryan & Stahler 2012).  Thus, to succeed in the international market, firms intending to enter the international market must ensure that the foreign market entry decision is based on an effective decision (Djarova 2004).

Purpose of entering the Egyptian market

Nestlé’s decision to enter the Egyptian market was motivated by the company’s need to maximise sales revenue and to grow its market presence (Chaudhri & Mukhpadhyay 2014). Thus, Nestlé’s FDI decision was motivated by the need to seek a new market. Nestle intended to exploit new possibilities inherent in the Egyptian market. The firm’s decision to enter the Egyptian market was supported by findings from market research on the Egyptian food and beverage industry. From the research, the firm identified the existence of a strong market potential. Egypt accounts for 16% of the total dairy market in the Middle East and Africa. A study conducted in 2010 showed that the Egyptian dairy market grew by 4.8% (MarketLine 2012).

In addition to the above aspect, Nestlé’s decision to undertake foreign direct investment in Egypt was supported by the identification of the fragmented nature of the Egyptian food and beverage market. According to a Gain Report released in 2015, the Egyptian food and beverage market is highly fragmented which makes it easy for firms to enter and tap the market opportunities inherent in different levels of a market (Gain Report 2015).  Nestlé’s entry into Egypt was also motivated by the low barriers to entry that characterise the food and processing industry. According to Gain Report (2015), a firm intending to enter the Egyptian food and processing industry is only required to register its special dietary food product.  The Egyptian fast-moving consumer goods (FMCG) market segment, in which Nestle S.A. operates, is characterised by a high degree of resilience (Oxford Business Group 2017).

The high market potential in the Egyptian food and beverage market has significantly enhanced the industry’s attractiveness to foreign investors.  According to Oxford Business Group (2017), global players are targeting the Egyptian market in an effort to expand their market presence. Conversely, the industry players are improving their production facilities in an effort to strengthen their competitiveness and satisfy the prevailing market demand.

Market entry strategy

In its quest to enter the Egyptian market, the firm has integrated the green field market entry strategy. The Greenfield market entry strategy entails the establishment of a new facility in the foreign market.  According to Wang (2005), the decision to adopt a green field market strategy is determined by the prevailing market potential in the identified market. The relevance of Nestlé’s expansion into the Egyptian market by employing a green field market entry strategy is appropriate due to the high market potential in Egypt. The firm projects that investing in Egypt will play a fundamental role in exploiting the host country’s market potential (Wang 2005).   In an effort to maintain its competitiveness in the Egyptian food and beverage market, Nestle Incorporation invested $8.9 million which was aimed at improving the firm’s market footprint in Egypt. Therefore, through its green field market entry strategy, Nestle Incorporation will be able to maximise its profitability and market dominance (Franco, Rentocchini & Marzetti 2008). Nestles S.A.’s decision to adopt the green field market entry strategy will play a fundamental role in enhancing its capacity, effectiveness, and efficiency in distributing its products in Egypt (Oxford Business Group 2017).

Location

The firm has established a new confectionary plant in Cairo. The choice of Cairo has been informed by the high market potential.  According to Masr (2016), the food and beverage industry in Cairo is characterised by a substantially high rate of dynamism. Masr (2016) affirms that the market has experienced the highest rate of new market entry and exit by local and international players. This indicates that the market is characterised by a high degree of unpredictability. Irrespective of the market’s dynamism, it is possible for firms in the industry to establish a market niche by entrenching effective business practices and strategies.  In the quest to improve market presence in Egypt through its FDI strategy, the firm has established different distribution centers across Egypt. Therefore, the likelihood of the firm developing sustainable competitiveness arising from improvement in operational efficiency will be improved significantly (Kabue & Kilika 2016).

Risks and challenges of the FDI

Nestle S.A.’s decision to employ a foreign direct investment in entering the Egyptian market will play a fundamental role in enhancing the firm’s capacity to develop a sustainable competitive advantage in the Egyptian food and beverage market.  However, the firm will incur a high cost in setting up new enterprises in Egypt (Helfat 2007). The high cost might affect the firm’s ability to develop competitiveness in the short term.

Nevertheless, the adoption of a green field market entry strategy in Egypt will enable the firm’s management to develop a comprehensive understanding of the prevailing market dynamics. Subsequently. The firm will be able to design market strategies that effectively counter the prevailing market forces. For example, through the Foreign Direct Investment strategy, the firm will be in a position to design operational strategies that enable the firm to be effective in countering the prevailing industry forces (MarketLine 2012).

The FDI strategy will enable Nestle to counter the high buyer bargaining power that characterise the Egyptian market. A report by MarketLine (2012) affirms that buyers in the Egyptian food and beverage market are highly price-sensitive.  The high price sensitivity arises from a large number of industry players. Subsequently, consumers have a large number of products to choose from. The consumers’ price sensitivity reduces the industry player’s ability to influence the consumers’ purchase decisions.  The switching cost is also substantially low (MarketLine 2012). Moreover, the industry player’s capacity to influence the consumers’ decision-making process is influenced by the fact that it is substantially difficult to differentiate food and beverage products (MarketLine 2012). Considering these aspects, Nestlé’s Incorporation decision to enter the Egyptian market by employing a green field market entry strategy will improve its capacity to develop competitiveness. Through the FDI strategy, Nestle will be able to counter the consumers’ price sensitivity by setting a competitive price for its products and services. Despite the fact that the initial cost of entry into the Egyptian market through FDI will be substantially high because of the cost of establishing its plant from scratch, the firm will experience a considerably low cost of operation in the long run. This arises from the fact that the firm will eliminate the cost of renting business premises. Subsequently, the firm will be able to set the price of its products at a relatively low point.  This approach will significantly improve the firm’s capacity to attract new customers hence maximising its sales revenue.

The appropriateness of the FDI decision in enhancing Nestlé’s competitiveness in the Egyptian food and beverage industry is further underlined by the fact that the market does not have a large number of suppliers. This aspect presents a major challenge to firms operating in the industry. For example, firms in the industry are forced to integrate the futures’ market in the quest to ensure that the sustainability of their products and services is maintained. The rationale for adopting the futures market by firms in the food and beverage industry is underlined by the need to caution the firm against fluctuation in the price of major raw materials such as milk. By establishing operations in Egypt through FDI, Nestle Incorporation will be able to achieve operational efficiency. For example, the firm will be able to source raw materials from the market at a relatively low cost.

The foreign direct investment strategy will also contribute to improvement in the firm’s competitiveness by enhancing Nestlé’s capability to counter competition from the new firm’s intending to enter the market (Wood et al. 2014).  Entering the Egyptian food and beverage market does not require a high capital outlay (MarketLine 2015).  By developing distributional capacity in Egypt through the establishment of outlets across Egypt, Nestle will be able to deal with the threat of new entrants.  In addition to the above elements, Nestles’ presence in Egypt through FDI will also contribute to improvement in the firm’s effectiveness in dealing with the growing competition in the market. This arises from the fact that the firm will be able to understand the prevailing market dynamics. For example, the firm will be able to adjust its product portfolio through product localisation hence addressing the prevailing market demand.

Conclusion

The above analysis indicates that Nestle S.A.’s decision to enter the Egyptian food and beverage market through foreign direct investment can significantly contribute to improvement in the firm’s competitive position in the Egyptian market.  For example, by employing a green field market expansion strategy, Nestle Incorporation will be able to develop a sustainable competitive advantage. This arises from the fact that the firm will be able to align its operational and marketing strategy in accordance with the prevailing market demand.  In summary, the implementation of the FDI strategy will enable Nestle to develop a sustainable competitive advantage.

References

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