Packaged foods major Nestle India has cut the size of the Rs 5 pack of its popular Maggi noodles by 5 grams to 35 grams and also reduced retail margins by a percent, according to a report by Karvy Stock Broking.
"Nestle India has recently reduced retail margin on Rs 5 pack Maggi noodles to 8 percent versus 9 percent earlier, however, it retained 9 percent retail margin on other Maggi noodles SKUs (stock keeping units). Besides, Nestle has reduced grammage of Rs 5 pack to 35g versus 40g earlier," Karvy analyst Naveen Trivedi, said, citing researched data and information from distributors.
In the last few years, fast moving consumer goods companies in India have launched small packs of food as well as personal care products priced at Rs 5, Rs 10 etc, targetting mainly the lower income groups and the rural population, in a bid to expand and grow faster, as competition has heightened.
In Noodles, for instance, while Nestle remains the market leader, it now faces stiff competition from players like ITC (Sunfeast Yippee), Nissin (Top Ramen) and HIndustan Unilever (Knoor Soupy Noodles) among others.
Nestle too had launched the Rs 5 priced Noodles to tap rural demand. Its strategy to cut retail margins even as competition has become more fearce, is therefore contradictory, feels Trivedi. ITC, for instance, gives 10 percent retail margin on its noodles.
Nestle India has already been facing pressure on volumes due to consistent price hikes over last several quarters. Its third quarter (July-September) domestic revenue grew just 8 percent, especially as volume growth remain muted. Many analysts say volume growth in the fourth quarter (Oct-Dec) will also be sluggish, although margins are expected to get a boost as prices of some raw materials like coffee, skimmed milk powder and edible oil have come down in recent months.
"Volume growth will likely remain weak as there have been no price corrections or major launches. Margins should see some expansion as milk, coffee and edible oil prices have come off in the past six months," said Arnab Mitra of Credit Suisse.
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"Nestle has focused more towards high-value segments, which resulted into higher profitability in the past few quarters. However, the company lost the momentum in the low-value segment. Therefore, it expanded the EBITDA margin even in the high inflationary scenario but could not maintain the volume growth momentum," said Karvy's Trivedi.
He, however, feels that there is limited scope for further price hikes, given the significant increases in past few quarters and Nestle will now focus on driving volumes going ahead.
The brokerage has a "sell" rating on the stock with a target price of Rs 4,692.
Nestle India shares were down 0.1 percent at Rs 4,893.10 on NSE in noon trade on Friday.