Coffee-obsessed Koreans say nay to Nestlé's Nescafé

Nestlé's failure to adapt to the Korean market has resulted in a decline in market share for its instant coffee products.

Nestle's boxes of Nespresso coffee pods at the company's headquarters in Vevey, Switzerland [REUTERS/YONHAP]

[NEWS IN FOCUS]

As the world's largest food maker with brands like Nescafé and Nespresso, Nestlé conquers many parts of the world in instant coffee, but its presence remains weak in Korea.

Lotte Nestlé, a Korean affiliate of Nestlé, logged an annual net loss of 10.1 billion won ($7.3 million) last year with a shrinking market share in the instant coffee segment, squeezed by domestic competitors like Dongsuh Foods and Namyang Dairy.

Even before the money-bleeding year of 2023, the joint venture between Lotte and Nestlé was hemorrhaging with net losses between 2013 and 2018.

In the instant coffee mix market, it had a 2.1 percent market share last year, down 0.5 percentage points a year ago, according to market tracker Nielsen. Dongsuh Foods' share reached at 90.1 percent, up 0.1 percent from 2022, while Namyang came in second at 5.9 percent in 2023.

Dongsuh has steadily been the top provider of instant coffee with its Maxim product lineup, but its dominance accelerated in recent years. In 2012, for instance, Namyang Dairy held a 12.5 percent market share, while Nestlé's share stood at 5.1 percent.

The Swiss food maker entered the coffee mix market in 1989 with the brand "Taster's Choice," a freeze-dried coffee. In 1998, it also established the brick-and-mortar cafe chain Nescafé and ran over 100 stores, but shuttered the shops in 2018 due to dwindling sales.

As Nestlé Korea, a wholly-owned Korean subsidiary, kept on struggling, Lotte and Nestlé established a 50:50 joint venture named Lotte-Nestlé Korea back in 2014, aiming to rejuvenate their standings.

Market watchers pointed to multiple factors behind the decline of Nestlé's Korean operation.

Until Namyang Dairy entered the coffee mix business, Nestlé, despite a significant gap with the top-ranked Dongsuh, did not engage in significant marketing activities, an industry insider said. This lack of proactivity in the Korean market contributed to its current decline in market share.

"Dongsuh and Namyang have conducted independent sales and marketing activities tailored to the Korean market, but multinational companies like Nestlé Korea have not pursued marketing strategies specific to the country's consumers,” the industry insider added.

One other critical oversight by Nestlé Korea was its failure to grasp the evolving taste preferences of Korean consumers in the coffee market.

Starting in the early 2000s, Koreans' love of premium coffee offered by the likes of Starbucks began to grow, leading instant coffee producers to struggle to keep up with consumer preferences.

Criticism had also been directed at Nestlé Korea for its failure to adapt to the domestic distribution network.

After Nestlé fully acquired Nestlé Korea, it is noted that the company did not prioritize efforts to secure a strong distribution network, partly due to the relatively small size of the domestic market compared to other regions, the industry insider said.

The domestic food distribution network underwent significant changes at the turn of the century, with a decline in traditional retail outlets and the rapid growth of large-scale franchises focused on discounts.

Nestlé Korea’s slow adaptation to these changes ultimately resulted in Nongshim taking control of its small retail sales staring in 2008, the insider added.

Still, not all of Nestlé coffee businesses flopped in Korea. With the Nespresso and Dolce Gusto brands, Nestlé holds around 80 percent market share in the local coffee pod market.

BY CHOI HAE-JIN [choi.haejin@joongang.co.kr]