At a time of high inflation, the growth in sales of biscuits, the cheapest form of snacks, has turned out to be a boon for Britannia Industries, allowing the Nusli Wadia-owned company to gain shares from other foods. Also, the expansion in rural distribution has helped the company beat the slowdown being witnessed by other FMCG companies in rural markets.
While most FMCG players in staples to discretionary items witnessed a hit on their margins in Q2, dragged down by high inflation and lower volumes due to increase in prices of products, Britannia surprised the Street with an expansion in margins.
While the company reported a mid-single-digit volume growth of 4-5%, which appears modest, it came on the back of around 18% product price hike taken on a year-on-year basis. There has been a cumulative 32% rise in raw material inflation in commodities relevant to bakery in the past seven quarters, while Britannia has taken a 22% price hike during the period.
“We were the first ones to action price increases and we took it much ahead of the market,” Varun Berry, vice chairman and managing director, recently told analysts over an earnings call.
While raw material basket inflated 3% sequentially, this was offset by a 7% quarter-on-quarter increase in product prices. “This allowed Britannia to partly recoup gross margin, which was up 230 basis points q-o-q to 38.3%, sharply above. This, along with cost-saving measures, drove a 270-bps q-o-q increase in EBITDA margin to 16.3%, beating estimates,” said analysts at Jefferies.
The company has also been expanding its rural distribution and widening its reach, which has led to market share gains, while its peers are losing share. From 8,000 distributors in rural markets in March 2016, Britannia’s rural distributors count has surged 3.5x in the last six years and was at 28,000 in September 2022.
“This has helped us gain more share in rural. The share gains in rural are approximately one-and-a-half times what they are in urban. So, that has helped us, while a lot of companies have called out a slowdown in rural,” said Berry.
The number of outlets where the company distributes directly has gone up to 26 lakh, an increase of around four lakh compared with March 2022.
According to analysts, this has also been contributed by share gains in the Hindi belt. Share gains remain a consistent story with the 38th quarter of market share increase. The scope for further share gains remain, as the market share in UP is at 18% currently, versus 11% seven years ago. Share gains are higher in rural India by 50% versus urban.
Also Read: GST on more crypto deals off the table for now
“Britannia has gained further market share in Q2, while Parle appears to be losing share,” said analysts at Jefferies.
Innovation, too, seems to be paying off. According to Berry, the company’s Biscafe, launched in the June 2022 quarter, has seen a nearly three times revenue shift sequentially. New launches in biscuits in the June quarter ―Nutri Choice Seeds, Herbs & Protein – have done about 2.5x the revenue from Q1FY23 to Q2FY23. Similarly, a launch done only in the east market called Golmaal has also done well with 85% sequential increase in revenue. The company also expanded its Treat Croissant on a national level, which has seen a 70% growth q-o-q.
Additionally, while biscuits as a category continue to grow, the company also reported profitable growth in bread and said the growth is back in rusk and cakes as well.
“On cake, we have done a lot of new products like Marble Cake, which has actually given us very good revenue growth as well for the cake business, which has turned the corner and has started to do extremely well not just from top line perspective, but even from a profitability perspective,” Berry said.
Cost efficiencies also seem to be playing out well for the company. Britannia has got almost 1.5 times the cost efficiency that it used to get till last year. From 1x to 8x from 2013 to 2022-2023 financial year, and in the last one year, it has been from 5x to 8x, Berry said.
“Process automation, reduction of distance to market, optimal power sourcing, renewable energy, sourcing strategy, vendor development, packaging initiatives, not just from sustainability view point, but we have also been able to bring cost down, and vendors’ cost optimisation ― we have looked at various ways of optimising,” Berry told analysts.