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Jun 26, 2012, 08.14 AM IST
In an exclusive interview to CNBC-TV18, Vinita Bali, CEO of Britannia, says that they expect consumer demand to grow around 11-13% in FY13 as compared to 16-18% the previous year.
“The uncertainty surrounding what is likely to happen, the food inflation that we have seen in our own country, all of these are factors that will influence demand as we move forward,” she said.
Below is an edited transcript of her interview with Latha Venkatesh and Gautam Broker. Also watch the accompanying video.
Q: What is the sense you are getting of consumption volumes? One could see a bit of a fall in volumes in several quarters in your own P&L. Is volume of consumption a problem?
A: We did not see a decline in the growth in the last year. In fact if you look at each quarter, we have talked about anywhere between 17% and 19% topline growth. If I were to look at total market and not just Britannia, we did see towards the end of the year a little bit of a slowdown in the rate of growth. But we are still talking about a double-digit growth, but perhaps not 16-18% growth for the market. I am talking about but an 11-12% growth, which is still reasonably high by any standards.
I think what happens to consumer demand across a large number of categories, which are low unit price, high velocity of consumption, is that it also depends on the price of other competing goods and services that those people buy. So for example, if vegetables and grains are becoming more expensive, then I cut down not in terms of eliminating them from my category of consumption, but perhaps the frequency of consumption of other items.
So a lot of very large consumer product segments are dependent on disposable income after meeting the needs of staples of your everyday eating and so on and so forth. But we do continue to see a double-digit growth. I think a lot of how consumers behave is also determined by what they hear in the media and elsewhere. I think the uncertainty surrounding what is likely to happen, the food inflation that we have seen in our own country, all of these are factors that will influence demand as we move forward.
Q: You mentioned 11-12% for the industry. What was the growth a year ago, and is this a slight decline from a year ago levels?
A: Yes, that is what I said. We began to see a decline in the rate of growth sometime around November of last year. So we are talking about 15-16% a year ago around the same time this year compared with an 11-13% because there are a large number of categories including the ones that we operate, which are not audited for example by Nielson and there I am going by our own experience or our estimates of what the market is likely to be.
Q: Even if the monsoon were to disappoint modestly, do you think food inflation will remain in check or could it spiral up once again?
A: I think we can’t sort of treat all commodities as a homogeneous mass. We have got to disaggregate those. So let’s take the big ones; wheat has actually been pretty stable despite an increase that was announced in the Minimum Support Price (MSP) of wheat. Wheat prices in the Mandi so far have actually been very stable. Sugar on the other hand has increased by about between 7-8%. Then you have got things like refined palm oil, which because of the dollar-rupee exchange rate saw inflation upwards of about 15%
Then there are a lot of other ingredients that get used in our industry, when I say our industry I am talking about biscuits, bakery, and confectionery and so on. Things like almonds, cashews, nuts, and coco and chocolate chips and so on where again there has been some inflation.
So I think it would be right to say that compared with past years we have seen some moderation especially when we talk about things like wheat flour. On the other hand, we have been negatively impacted by anything that is imported such as refined palm oil. So I think overall we are still talking about a rate of inflation, which is anywhere in input cost about 5-6%. But when you superimpose on that the inflation in fuel prices, that takes the total input cost of the industry to still be relatively high in the region of about 9-10%.
Q: Last quarter’s results shows that despite the gross margin improvement, we saw margins dip and that was because of very high ad spends. Is that owning to competition, do you see ad spends remaining at this elevated level, what sort of guidance you can give us?
A: Let me correct two things. Yes there was a 200 bps improvement in gross margin, but there was also 70-80 bps improvement in the operating margin. You are absolutely right, our investment in advertising was significantly higher than what it has been in the previous quarters and that is because we had a number of new launches that we were supporting. We came up with a new campaign for Good Day, we launched two-three different variants of Good Day as in Chocochips, Choconuts and Fresh Bake Cookies all under the Good Day franchise. We also had several other launches in our NutriChoice range and therefore the investment on advertising was there to support the new launches that we had.
One of the things that we believe in and I have said this many times is our business is brands and we invest in brands, both at the frontend by way of advertising and at the backend by way of infrastructure and capacity creation. In the last year itself we created two new Greenfield sites, we expanded our capacity in our existing units as well. So we saw levels of capital expenditure in our business go up to almost Rs 200 crore a year from an average of about Rs 70-80 crore in the previous four-five years. So our investment behind brands both at the frontend as well as the backend will continue.
We are here for the long haul, we believe in long brands, we believe in creating propositions that will support the power brands or the pillar brands that we have. So for example, NutriChoice today supports a large number of product categories. Tiger today supports not just a glucose biscuit but also cream biscuit, a cookie as well as our differentiated bakery products. So we will continue to invest in the growth of our brands and we will continue to support our brands as necessary.
Q: Do you still have leeway to raise prices and therefore for FY13 what might be the operating margins that we can expect you to deliver?
A: First of all, I have never given any forward looking guidance and I am not about to do that. All I can say is that we manage prices as a dynamic variable. Obviously it is a function of input costs, but also it is a function of the competitive environment. By that I don’t just mean prices of other biscuits because I think it’s a fallacy to think that biscuits compete with biscuits, actually biscuits compete with a whole host of other categories. Snacking in India is a very large segment, so whether you are in namkeen or snacks or biscuits, the competitive repertoire is actually quite large.
I think what we can say definitely is that we continue to manage prices as we continue to manage our cost and the three big priorities for the company remain unchanged and those are to improve the quality of revenue we deliver through our mix and so on, to continue with the innovations that we have got both in terms of products and packs, but also other business model innovations, which may not be obvious to a consumer, but which very much add to value that we are creating. Last, but not least is the value of cost management and cost reduction. We have had a pretty aggressive programme where we look at cost slight through the value chain, we look at costs that we can remove without in any way hurting the service levels or the delivery of our business and I think we have taken pretty aggressive cost effectiveness targets as part of our thing, which is the innovation and the business model itself to figure out a way of reducing total delivered cost to the consumer.
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