Evaluate the situation in the article below and identify current or potential problems

EXTERNAL ISSUES

Flavor Enhancers

There is a growing awareness of sugars harmful effects on people in particular high-fructose corn

syrup and salt. Hershey is a high-profile example of the move away from high-fructose corn syrup that has may fuel weight gain and diabetes, using sugar in some of its products as a replacement for high-fructose corn syrup. However, the American Medical Association stated that restricting the use of syrup is not supported with enough evidence. The Corn Refiners Association, through research by firms like Mintel and Nielsen, analyzed perceptions of sweeteners and observed that 67 percent of consumers felt specific sweetener types were less important than moderation. In the food and bever-age industry, soda constitutes a large portion of the high-fructose corn syrup market. Hunts ketchup is one product to have reverted to using corn syrup after having tried more sugar because there was no change in the sales. The U.S. Food and Drug Administration (FDA) had denied requests made by some companies to have their sweetening agent renamed corn sugar on nutrition labels. In addition to this, in July 2015 the FDA proposed forcing food producing companies to add the percent daily value of added sugar on all nutrition labels like the percent daily allowance of salt, fat, and other ingredients, which are listed on the product labels. Any added sugar, just as in the case of corn syrup, can have dramatic effects on the body. Added sugars are linked to diabetes, tooth decay, heart problems, weight gain, and many other health problems.

In response to sugar being harmful, there is a growing global demand for artificial sweeteners as a

means to reduce calories, stabilize blood sugar levels, and just an overall healthier choice rather than raw sugar. However, to date, research in this area is not conclusive as some studies reveal artificial sweeteners are similar to raw sugar once ingested. Europe has banned several artificial sweetener products such as Stevia and aspartame from lack on conclusive research, but other nations such as Japan and the United States have been using the same sweeteners for decades. Never the less, there is a growing public awareness toward both raw and artificial sugars.

Another common flavor enhancer found in food is salt. Table salt has been linked to water reten-tion, high blood pressure, stomach cancer, osteoporosis, and killing of beneficial bacterial in the body. Many medical researches recommend limiting salt consumption to 6 grams a day, however the World Health Organization suggests the average person consumes between 9 and 12 grams of salt daily. Many food companies are attempting to reduce the amount of sodium in their products as global awareness increases on the harmful effects of a high salt diet. Nestl, for example is experimenting with reducing both salt and sugar from its foods and replacing them with natural flavorings.

Cocoa Prices

Over 100 years ago, chocolate was generally considered a luxury for the rich and out of the grasp

of lower income customers. However, today consumers in emerging markets worldwide are able to afford increasingly higher quality chocolates that require better and higher percentages of cocoa. Unlike other crops such as corn or soybeans, cocoa is more difficult to produce and cocoa prices are expected to rise substantially moving forward, according to the International Cocoa Organiza-tion (ICO).

Typically cocoa trees take upwards of 10 years to mature and many trees now are old, not yielding

the same number or quality of beans. Farmers are also switching to more profitable crops, even as the price per ton of cocoa approaches $3,000 per ton. Analysts estimate the cocoa price would need to be $3,500 per ton to maintain current production rates from farmers. In fact the ICO expects the demand to production ratio to be the highest ever by 2018, since it started keeping records in 1960. In 2013 alone, worldwide consumption of cocoa beans was up 32 percent from 2012 and Chinese demand is projected to rise 5 percent annually through 2018. To help combat the new demand, Mars and Nestl have spent millions to educate farmers in West Africa on proper techniques and in developing new types of cocoa trees. The Ebola virus outbreak in West Africa threatened hundreds of cocoa farms.

North American based Blommer Chocolate Company is a top cocoa processor and one of the main suppliers to rival Hershey and other chocolate producing companies. Blommer is expanding its processing capacity to meet strong chocolate demand in the United States. Nevertheless, chocolate companies are facing tough choices that include raising prices, reducing portion sizes, or even using less cocoa in its products. As early as 2006, Hershey started using substitutes for cocoa butter in the production of Krackel and Mr. Goodbar which resulted in the firm having to change the label milk chocolate to made with chocolate or chocolate candy to comply with the FDA protocols for labe-ling of chocolate food items. Hershey however is now switching both Krackel and Mr. Goodbar back to solid milk chocolate, meaning the bars will contain at least 10 percent cocoa per FDA regulations to be called milk chocolate.

Potential Taxes and Health-Minded Public

There is a growing awareness worldwide to unhealthy eating, especially when it comes to sugars,

processed foods, and animal fats. Many different governments (local, regional and national) have (or plan to) increased taxes or flat out banned unhealthy items. Taxes are viewed by governments much like tobacco taxes as a way not only to curb citizens consumption but also as an additional means of revenues. For example, Connecticut recently proposed a 2 percent additional tax on all soda, suggest-ing it would provide $144 million in annual revenues and reduce soda consumption in the state. New York City has banned most sugary drinks 16oz and larger from being served. The Navajos Nation, the largest American Indian Reservation in the United States with 300,000 members, is proposing a tax of up to 7 percent on fatty snacks and soda, up from the current level of 5 percent, while healthy food items are excluded from taxation. Former NBA star Yao Ming is campaigning in his home country of China to promote healthier eating and exercise habits. Mexico recently passed legislation to signifi-cantly tax both sugary drinks and high calorie items such as candy. Peru, Uruguay, and Costa Rica banned all junk food from public schools, including candy bars, back in 2012. Many other nations in Latin America require red or yellow circles around sugar content on items depending on their sugar content. All of these actions and trends are a threat to Nestl.

Increasing obesity is a major problem among the worlds population. Processed sugar negatively

impacts the body by increasing your chances of tooth decay, obesity, and diabetes, and additionally can significantly increase ones chances of getting heart disease and even cancer. Scientific tests reveal that sugar is basically a food for cancer cells and people that drink 2 soft drinks a week are 87 per-cent more likely to develop pancreatic cancer. For comparison, a Nestl Butterfinger and Baby Ruth contain 29 and 33 grams of sugar respectively, and a can of cola contains around 39g of sugar. Sugar is also believed to be damaging to your skin, looks and overall mood. Moving forward, Nestl could consider increased marketing of dark chocolate, which contain good antioxidants, but is much higher in saturated fat than milk chocolate and contains high levels of sugar. Sugar free candy has also been linked to cancer and weight gain, partly because artificial sweeteners are not healthy.

By 2017, almost 150 artificial ingredients, like artificial sweeteners, preservatives and artificial flavor enhancers, will be discarded from Panera Bread Companys kitchens. Food companies are increasingly eliminating unnatural and unhealthy ingredients. For example, natural colorings made from turmeric and paprika will replace Kraft Heinz Companys artificial colorings in its macaroni and cheese product, and PepsiCos Diet Pepsi will see a switch from artificial sweetener aspartame to sucralose. After an environ-mental advocacy group said it found nanoparticles, through laboratory tests, in the Dunkin Donuts white powdered sugar, the company will do away with titanium dioxide (a whitening agent used in sunscreen) from its recipes. Nanoparticles, like titanium dioxide, may cause damage to cells and tissues.

Hair Care, Skin Care, Cosmetics

The hair care, skin care and cosmetic industry in the USA accounts for over $55 billion in annual sales and enjoyed a growth rate of nearly 6 percent from 2010 through 2014. Much like many food products, consum-ers still purchased beauty products at relatively high rates even during the recession. Growth is projected to continue through 2020 at rate of nearly 4 percent. Hair care and skin care products are the two largest revenue producing contributions to the industry as a whole with revenues each of approximately $13 billion totaling just short of 50 percent of total revenues combined. Higher marketing and R&D expenses, along with a growing concern for reduced packaging, animal safety, and product safety all negatively hurt profits. Consumers also are quick to switch from brand to brand, and are showing less brand loyalty presenting both threats and opportunities for producers. There is also a growing influx of imported products from around the world on all price points. Generally perceived higher quality products are imported from Europe, where perceived lower quality and lower priced products are imported from Mexico and China. Skin care prod-ucts continue to grow as a percent of total industry market share as more and more people are using these products, including men. In 2014, skin care products barely trailed hair care products in industry wide sales, but are expected to be the largest revenue producing product category moving forward. Firms promote anti-aging treatments and wrinkle reducing creams. Even creams promoted to remove back circles from under the eyes are available. Sunscreen is also in this category. Este Lauders CEO recently suggested that mens skin care products may outpace company-wide growth at his firm moving forward.

Activist Shareholders

Food and beverage companies have been popular targets for activist shareholders because of their

bloated lackluster growth. In August 2015, Bill Ackman disclosed a stake in Mondelz International, spurring speculation that he would seek cost cuts and potentially a sale. Similarly ConAgra Foods and

Boulder Brands have recently faced calls for shakeups. So far however, activist investors have mainly targeted U.S. food companies, but Nestls underperformance is attracting prying eyes. Nestl is grap-pling with falling demand for its biscuits and peanut-milk beverages in China and the recall in India of its popular Maggi instant noodles. Its frozen-food business is not performing well.

Given the activist shareholder environment, Nestl may want to consider divesting its frozen-food division, along with the companys 23.2 percent stake in cosmetics maker LOral S.A. Nestl could add 21 billion euros ($23 billion) of cash flow through 2018 by gradually reducing its stake in LOral, said Jeff Stent, an analyst at Exane BNP Paribas. Nestl could use that money to boost its share buyback or to make acquisitions. Additionally, an activist shareholder could require Nestl to sell is its skin-health business. Nestl acquired full control of the Galderma wrinkle treatment and acne medication business from joint-venture partner LOral in 2014, but skincare does not fit well with food and beverages.

To significantly impact Nestl, an activist investor would need at least a 1 percent stake, said Urs

Beck, a fund manager at EFG Asset Management. That would cost more than $2 billion. Jenny Craig and PowerBar are two examples of businesses that Nestl acquired, held onto for too long and got depressed prices for in later divestitures. The political environment in Switzerland also gives activ-ist investors another reason to go for Nestl. Switzerland has instituted a fat-cat referendum that gives shareholders more say over salaries and the ability to eject an entire board. Even Nestls Chair-man Peter Brabeck-Letmathe has said new Swiss laws threaten the companys long-term strategy. A new proposal that would allow investors to sue management and directors, even amid opposition by most shareholders, is also flawed, he has said.Activist shareholders and plaintiffs lawyers would be granted free reign, Brabeck-Lemathe says.

Future

Nestl has many internal and external issues to consider as the company struggles to help feed the

world and reward shareholders, employees, and customers. The company is determined to become a renowned nutrition and corporate wellness company, but many of its products still are unhealthy for consumption.