The biscuit maker’s focus on in-house production and premium products is beginning to show results
Biscuits and dairy products maker Britannia Industries was in somewhat of a disarray when its current managing director Varun Berry was brought on board as chief operating officer in January 2013. It was losing market share in its staple biscuits business to rivals like ITC and Parle Products and this was hurting its earnings as fixed costs remained constant.
But tough calls taken by Berry such as rationalising workforce and making the company leaner and younger; moving production away from third party contractors to in-house; and focusing on high-margin premium products such as cookies are beginning to show results for the company, which appears to be back on a growth path.
On the back of these decisions, Britannia, the largest company by revenues of the Wadia Group, led by Nusli Wadia, saw its operating profit margin rise to 20.63% in the September quarter, up from 9.79% a year earlier.
The company is due to report its earnings for the December quarter on February 3.
Its net profit for the first six months of the fiscal stood at R200 crore, even after excluding the R160 crore it earned from the sale of land and building, which was another step towards monetising assets to improve cash flows. This was an 11% increase over the year earlier. The company, which was founded in 1892 in Kolkata, reported a turnover of R3,452 crore in the same period, up 12% year-on-year.
Britannia is ploughing back the profits it is making into strengthening its operations by building bigger and more energy efficient baking plants as it seeks shift more of the manufacturing process within the company.
The company, which earned a consolidated operating turnover of R6,913 crore in FY14, plans to manufacture 60% of its products in-house over the next couple of years, up from the current level of 50%. Towards this purpose, the company is building 12 new manufacturing lines at an investment of R400 crore over the next 18 months.
“We could not get the contract manufacturers to change,” Berry said. “We want to build larger and more efficient plants but they were not willing to put in so much money. We have 35 contract manufacturers across the country and it is difficult to control, so we took a tough call.”
When Berry joined the company, around 65% of Britannia’s products were made by contract manufacturers. Britannia has also pruned its staff strength by 400 people over the last two years since Berry joined the food major.
“In the first phase, Britannia unlocked value by efficiency gains, cost management, and a supply chain overhaul,” says a report by HSBC on Britannia. “In the second phase, Britannia is set to accelerate volume growth, gain market share, and launch new products.”
Britannia’s stellar performance over the last couple of years has also led investors to be bullish on the company’s stock. Its share prices have almost quadrupled from over the last two years, since Berry joined the company.
Analysts expect the company to improve its profit margin further with input costs coming down. Energy bill is among the costliest overheads for a company in the baking business, and Britannia also incurs large transportation costs as products are high in volume, but low in value. But softening crude prices, which have plummeted around 50% in the current fiscal, is expected to bring down Britannia’s operating costs further.
Softening inflation and interest rates are also reviving hopes of an upswing in urban demand for premium biscuits, which classifies as discretionary spending. “Britannia is likely to be a key beneficiary of imminent urban demand revival, which should help fuel volume growth and accelerate the pace of premiumisation,” the HSBC report said.
After putting quality and cost optimisation strategies in place, Berry’s next focus is on tapping the potential in premium biscuits segment. One of the first steps towards doing so has been to channelise Britannia’s marketing spend towards five major brands out of the 24 that the company has. These are Nutri Choice, Good Day, Tiger, Marie and Treat.
Earlier, the marketing expenditure was scattered across all 24 brands, with none getting adequate attention, Berry says.
Britannia will also look to enter some new product categories like health snacks and dairy products adjoining its current biscuits business over the next few quarters.
On the back of this strategy, in 2015 Britannia expects to recover the market share it lost to ITC and Parle Products. Though around half the sales in the biscuits industry comes from products priced under R10, a lot of the new cookie brands being launched by Britannia are priced around R50 per packet.