Now satisfy your daily cravings without burning a hole in your pocket: Just keep in mind the calories. Thanks to cooling down inflation, major FMCG player Britannia is seeing price cuts in its commodities.
Over the last one year, consumers have been hit hard by rising prices of daily packaged goods such as biscuits, cakes, beverages etc.. But relief is on the horizon.
“The cumulative price increase in the inflationary environment was about 20 to 23%. And from there, it is reduced by one and a half to two percent,” said N Venkat Raman, the Chief Commercial Officer of India’s largest biscuit-maker Britannia said this week on a call to discuss the company’s second-quarter results.
What Raman is referring to is the relentless rise in prices of packaged consumer goods, including home care and personal care items, seen in the market over the last year.
Companies such as Britannia Industries, Hindustan Unilever Ltd and ITC were forced to jack up prices as prices of key commodities — such as flour, milk, vegetable oil, sugar and crude oil — started rising sharply from around mid-2022.
While these companies held off on price increases of their finished products for some time, eventually, they had to throw in the towel and pass on the higher prices to consumers in the form of price hikes of the finished products — to the extent of 20-30%.
Now, as Venkat Raman indicated, that cycle seems to have peaked, and commodity prices seem to have begun their march downward.
For example, the company said prices of key raw materials — palm oil, sugar, and packaging materials — continued to ease during the three months ended September. Palm oil prices, for example, fell 7% during the quarter, while sugar prices corrected 1%.
However, on the negative side, the price of flour — a key ingredient in biscuits and cakes — rose 5% compared to the preceding quarter.
Rising Competition
One of the problems faced by big companies like Britannia when raw material prices start declining is increased competition from informal players — such as local bakeries.
“On the regional players, I think, we, I would not say that for the full quarter, this has been a big issue,” said the management “But yes, for the first, let us say, month, month and a half, this was something that was an issue. So, we did take some pricing actions. And we will continue to be vigilant on that.”
At the same time, it maintained that it did not largely impact the premiumization of its commodities.
“What we have seen even in the last six months is that it is not affected, if you look at the mix, it has only moved towards the premium brands. It is not like the popular or cheap brands are jumping up in every portfolio. While the B players would have gained in certain pockets, I do not think it adds up to the base of the pyramid becoming much larger than what it was. So to that extent, I do not think there is downgradation happening in the market,” said the Britannia management.
At the same time, the company admitted that competition from local brands does limit the company’s own headroom to implement price hikes.
“You can charge a premium, obviously, you've got strong brands but the premium has to be within a band. If it goes beyond that band, then they start to hurt you in your pockets...so let's say we define the band to be 20 percent. If the premium goes to 30 percent, then you start to get hurt. So we've got to make sure that we keep that within that band of 20 per cent,” said Varun Berry, Vice-Chairman and Managing Director.
Hard lessons
Because of the price cuts, Britannia has seen a flattish revenue growth of just 1% in the last year. But, at the same time, operating profits grew by 21% in the latest quarter due to lower input costs and a slew of cost-cutting measures put in place over the last one year to protect the margins.
“We have had more than Rs 2,000 crores of cost reduction during this period and that continues to be a pillar for us even in the future,” said Berry. “Cost efficiencies have been a very strong pillar for our profit growth,” he added.
Meanwhile, the company continues to remain cautious on commodity prices as the downtrend has not been uniform across all commodities.
For example, flour and sugar which constitute a large component of its raw material have been witnessing an increase in price for a period of time. At the same time, a low palm oil price, however, is giving a little breathing place for the company.
“I think it is important that we watch out for commodities as we go forward because things could escalate. And hence, we are being very, very vigilant on making sure that we keep these costs under control,” said Berry.
“We will make sure that we take measured pricing corrections wherever necessary if the commodity situation remains positive,” he added.