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Fortunes Hinge On Cookies

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Suresh Warji runs a grocery shop in a Mumbai suburb. For a few weeks now, he has been visiting the city’s malls every alternate day. Reason: he is on the lookout for discounts offered by hypermarkets on the fast moving consumer goods (FMCG) segment, particularly biscuits.

It was something he discovered by accident. Sometime ago, Warji walked into a hypermarket run by Aditya Birla Group’s More in a neighbouring suburb. He ended up buying Parle’s Hide and Seek brand of biscuits for Rs 15 a pack; the printed price on the package was Rs 20 (the packet weighs 82.5 grams). He made a neat profit of Rs 5 on each packet by selling it to his customers at the marked price.

The hypermarket was also offering a discount of Rs 6 on a pack of Britannia’s Good Day cookies (marked at Rs 22, but sold to him for Rs 16). Then, for every four packs of ITC’s Bourbon Cream biscuits, it was giving one free. Other hypermarkets are doing the same.

For instance, Hypercity is selling three packets of NutriChoice Digestive biscuits for Rs 44, a discount of Rs 10 on the marked price for all the three, which is Rs 54. A couple of months ago, they were offering a discount of Rs 20 on Britannia Oats and Ragi biscuits, which are priced at Rs 50.

The discounts on biscuits seem odd, given that they are the fastest selling products on store shelves. But Warji has a different take: “Margins on biscuits for retailers like me are wafer thin. They don’t cover costs — electricity, shelf space and employees.”

Warji stores around Rs 20,000 worth of biscuits every month, and makes a profit of 7-10 per cent. Profits have got squeezed further as, since September, biscuit companies have cut retailer margins due to rising commodity prices. In an industry that has over 500 brands, Warji mainly stocks just the top three national players — Parle, Britannia and ITC — on his shelves; Nielsen India, a market survey firm, says that the three have a combined market share of 73-75 per cent. The only other brand with any significant volume that he stocks is Oreo, from Cadbury (See graph: The Leaders).

Why are companies giving hypermarkets and big players huge discounts? Granted that it is a volume-driven (but low-margin) business, these discounts could be competitive behaviour, and that is good for consumers. But the resultant low margins for manufacturers could become unsustainable. The big three manufacturers may be able to do it, but there are several dozen smaller companies that make up the remaining 25 per cent of the Rs 15,000-crore industry — a few multinational companies such as United Biscuits and Kraft are also entering the industry. Which begs another big question: is the economics of the biscuit business changing? If so, how?

Counting On Discounts
“These discounts are promotional offers run by biscuit companies,” says an official from Reliance Retail, who spoke to us on condition of anonymity. “We are paid in full by the companies for selling goods at a discount. Otherwise, hypermarkets sell biscuits at a discount (of around 5 to 10 per cent) only when the expiry date on the products comes close.”

Discounts are also a way of acquiring customers and building customer loyalty. United Biscuits, for instance, has been offering  a discount of 37.5 per cent on its McVitie’s Digestive biscuits. Packets marked at Rs 40 are being sold for Rs 25.

“Freebies are an impactful way of creating short-term distortions in buying behaviour,” says Jayant Kapre, president of United Biscuits. “Over the long term, however, taste, quality and offering and delivering relevant benefits to modern consumers is what one needs to do best to win.” Which, he adds, is what his company is looking to do.

On deeper inquiry, it appears that these discounts are offered across almost all product categories; for example, in summer, packaged drinks offer similar discounts. Sometimes, it is also about meeting sales targets or other temporary pressures.

“It is something that the companies can do for short periods, say a month, perhaps two,” says Amitabh Mall, partner and director at Boston Consulting Group, a global management consultancy. “But over longer periods, that can be unsustainable; two channels within the company — modern trade and distributors or stockists — will end up competing with each other, and that cannot be good.”

Yet, a few analysts believe that some retailers use these discounts systematically over long periods of time. “The idea is to show volumes and same-store sales, which have an impact on valuation,” says United Biscuits’ Kapre, adding that differentiation is at the heart of the solution. So is innovation. “Consumers are ready for new sensory experiences as well as new benefits,” he says. “Identifying and launching unique products that meet these two spaces is at the centre of our game plan. This could include bringing products from our large product range overseas, or adapting some products to make something unique for India.”

But the problem for regional and smaller players could get worse. “Unlike the biggies, our margin in the business is 10 per cent; with any major price movement in raw material, we end up making losses,” says Shravan Kumar Agarwal, director at Raj Agro, a Hyderabad-based mid-sized biscuits manufacturer. To mitigate risks and survive, his firm got into contract manufacturing, where margins may be only around 5-7 per cent, but he does not have to worry about raw materials, just labour and fuel. “Earlier, in a year, prices (of raw material) used to move in a range of 5-10 per cent but today, in a span of three months, wheat flour prices have surged by 35 per cent, sugar is up by 20 per cent and oil has climbed around 15-20 per cent,” says Agarwal. Margins do not matter when volumes are steady, but today, with volumes dipping, particularly in the rural market — which for the past few years has driven growth — focus has returned to cost, margins and delivering premium products.

Premium Returns
For the bigger players, going premium seems to be a good option. While the mass category grew 23 per cent last year in terms of value (14 per cent in terms of volume), the premium category — biscuits priced between Rs 12-18 a pack that weighs between 78 to 100 gram — has grown by 35 per cent (25 per cent in terms of volume). On the other hand, growth in the economy segment has declined (See graph: The Premium Thrust).

“In spite of an 8.3 per cent growth in average prices over the last year for the premium segment (highest amongst the three segments), the segment has grown faster in terms of volume than the other two,” says Roosevelt D’Souza, executive director at Nielsen India. “This indicates a strong consumer preference for premium products in the biscuits category.”

Even if — with just three companies controlling three-fourths of the market across the country — the industry looks consolidated, the ground reality is slightly at variance. “National sales numbers are just an aggregation. One has to look at shares at the regional level,” says Vinita Bali, managing director of Britannia Industries. “What is true in the north often has nothing to do with the south, east and west,” she points out. So, even big players such as Britannia do not always opt to brand every product  of theirs on a national scale.

“A brand need not be national for it to get critical mass. For example, we have got a cracker called Top that we sell in east India and south India, and do not market in Mumbai and north India. It has low traction,” says Bali. So, on the issue of competition, she is unfazed. “Competition has always been there but we have over 25 per cent of the market.”

International players like Kapre’s United Biscuits also do not believe that meaningful consolidation is a possibility anytime soon. From his perspective — as perhaps for others such as Kraft (Cadbury) — the market is still massive, and growing in both volume and value, with little pressure to consolidate.

“The large players are adequately profitable,” he says,  adding that there was nothing in their strategies to suggest any great urge towards consolidation, at least for now. “We may see it in a decade; even then, there will be more players  in the market than in any other country.”

Needed Vitamins For Growth?
So what does the future of the biscuit industry look like? Companies will continue to exploit well-established existing brands, and focus on the three Cs: creams, cookies and crackers which, in the April-June quarter, accounted for nearly 55 per cent of the market. “Profit margins are much higher — about 20-25 per cent —  in cookies,” says Pravin Kulkarnii, who heads marketing at Parle Products.

“We have taken the brand essence of our Tiger biscuits (fun and energy) and extended it to the entire portfolio of biscuits,” says Bali. “Going ahead, we will take our large brands, and pillar platform brands, and launch new variants in other segments.” Look for different forms of Marie and Good Day, to start with, and at different price points.

Not all launches have been successful though. Take the health biscuits, which have just about 5 per cent of the market. “There is a challenging trade-off between health and taste,” says Kulkarnii. And, “consumers seem to prefer taste,” he adds. Others, however differ in their reading of the market. “The health biscuits segment is growing very well, at over 40 per cent growth year on year for over 5 years,” says United Biscuits’ Kapre. “But it is not the kind of segment that you can make a big splash with in a short period. It involves changing habits. It has a longer gestation cycle. But it is a very sustainable category going forward.”

Fair enough, but for now, the health of the biscuits industry could do with a vitamin shot. Its financial health is a tad vulnerable, with higher costs that could possibly translate into higher prices for consumers, business environment changes that may force a strategic rethink for some players, and lower margins that could take a bite out of profits.


(This story was published in Businessworld Issue Dated 22-10-2012)