Britannia Industries: Britannia needs a new recipe to attract cost-conscious city dwellers

ET Intelligence Group: Britannia Industries, one of the last major Indian FMCG companies to announce its September quarter results, reported lower-than-expected numbers. While its volumes grew 8% year-on-year, revenue grew 4.5% to ₹4,566 crore. The company’s net profit declined 9.6% YoY to ₹531 crore, impacted by high input costs as well as lower realisations.

During the quarter, the company’s raw material costs increased by 7.8% compared to last year, due to high inflation in the cost of wheat, palm oil, cocoa and sugar. Input costs as a proportion of sales increased to 59.8% of sales, up from 57.9% a year ago. This had a direct impact on profitability, as the operating profit margin fell by 280 basis points (bps) to 15.5%.

According to management, metro cities contribute 30% to the company’s total FMCG business, and they have seen the biggest slowdown. This will likely have a short-term impact on volumes.

Britannia initiated selective price increases to pass on inflation in input costs. A price increase of 4-5% is expected to be implemented over the next two quarters. It also identifies new cost optimization levers throughout the value chain. In addition to biscuits, Britannia’s other business segments of bakery (cakes, rusks and wafers), dairy and international markets are experiencing sustainable and profitable growth.

In India, the rural FMCG market continues to grow ahead of urban areas. Britannia increased its direct reach to 2.85 million outlets. Income growth in the target states of Madhya Pradesh, Rajasthan, Uttar Pradesh and Gujarat outperformed the rest of India. The company is redefining its distribution strategy to optimize distribution of the range and improve service at points of sale with pilot projects in 25 cities covering over 50,000 points of sale, showing encouraging results.

Management’s comments during the post-earnings call, however, failed to assuage the Street’s disappointment with the September quarter performance, leading Britannia shares to close down 7.3%. Tuesday. Britannia stock is part of the Nifty50 index in 2019. Over the last five years, the stock has underperformed the benchmark Sensex, as it gained 58%, compared to the 101% gain posted by the ‘hint. a function of disposable income in the hands of the consumer. With incomes of the urban middle class experiencing a nominal increase, this will likely have a negative impact on discretionary food consumption. Additionally, the emergence of healthier options in new age channels poses a growing threat to traditional food businesses. Companies like Britannia must go beyond the conventional measures of investing in brands, growing distribution networks, premiumizing their portfolio and reducing costs to create sustainable value for its customers and investors.