Bangalore: India’s top biscuit makers Britannia Industries Ltd and Parle Products Pvt. Ltd say sales have slowed dramatically in the countryside as price hikes deter shoppers even before the impact of a deficient monsoon takes its full toll on rural spending power.
The development raises fears that India may not be able to count on a resilient rural economy to offset the effects of the current slowdown, experts said. Biscuits are everyday products that are popular in both rural and urban markets and a slowing in their sales could well indicate a slowing of consumption in rural India.
Britannia, maker of Good Day and Tiger biscuits, and Parle, which sells Parle-G, Hide & Seek and Krackjack biscuits, get at least half their sales from rural areas. These two companies and ITC Foods, maker of Sunfeast biscuits, together control some three-fourths of India’s Rs.12,000 crore biscuits market.
“Last year, rural grew faster than urban. But not in the current fiscal,” said Anuradha Narasimhan, category director (health and wellness) at Britannia. “A lot of people are attributing (the slowing growth) to the monsoon, but I am not sure. I am hoping that is not the case, otherwise we are in for a bad year.”
Biscuit makers have been passing on higher costs of inputs such as wheat, sugar and edible oil to shoppers by hiking their product prices at a time when consumers in Asia’s third largest economy are struggling with inflation and slowing economic growth. Inflation measured by the Wholesale Price Index was 6.87% in July; economic growth in the quarter ended 31 March was 5.3%, the slowest pace in nine years.
Biscuit makers have increased prices by more than 15% since late last year, either through direct increases or by reducing pack weights.
To be sure, evidence of the slowdown in rural demand at this time is anecdotal and no figures are available to illustrate slowing biscuit sales. Britannia does not disclose rural and urban numbers separately, and Parle, being an unlisted company, does not report results.
Consumer demand in rural markets has slowed “drastically”, said Praveen Kulkarni, general manager (marketing) at Parle Products.
“The last two-three years, rural demand was driving biscuit industry growth,” he said. “Rural is now growing slower than urban. We didn’t see much slowdown in April, but June onward it has been bad.”
Kulkarni added: “There has been an overall slowdown in the industry. Industry used to grow at 14-15%; now it’s growing 9-10%.”
Weak rural biscuit sales contrast with strong results posted by some other consumer goods companies such as Hindustan Unilever Ltd (HUL), Godrej Consumer Products Ltd and Wipro Consumer Care and Lighting—which get a significant portion of their business from rural areas.
“HUL, Godrej, Marico— these companies have said that rural demand has held up well so far this year,” said Nitin Mathur, an analyst at Espirito Santo Investment Bank.
Mathur cut his rating on the packaged consumer goods sector this week, saying slowing economic growth, a decline in real wages, and a lack of jobs is hurting spending power in the country. The analyst, who is bullish on the long-term prospects of the sector, said beverages and “rich foods”, which include milk-based products, will likely take the biggest hit if consumer spending slows in rural areas.
“For us, rural contributes 55% of our revenue in consumer products, and we are not seeing any major difference between urban and rural growth rates,” said Anil Chugh, senior vice-president at Wipro Consumer, which makes Santoor soaps.
A report by credit rating agency Crisil Ltd this week said rural consumption in the past two years outpaced that of cities and towns for the first time in two decades. Additional spending in rural India was Rs.3.75 trillion between 2009-10 and 2011-12, compared with Rs.2.99 trillion in the urban parts, the report said.
Still, rural spending is likely to take a significant hit if monsoon rains do not pick up soon, according to analysts and economists. In such economic conditions, demand for more discretionary or non-essential products such as biscuits falls faster than for essentials.
“The marginal consumer whose income growth does not keep pace with inflation will cut back on (consumption of) biscuits during tough times, especially with the price increases,” said Gaurang Kakkad, an analyst at brokerage firm Religare Capital Markets Ltd.
Biscuit volumes in India increased 12-15% over the past few years, but this year that number is expected to fall to single digits, analysts said. Britannia’s volume growth in the April-June quarter dropped to about 4%, the fifth straight sequential decline.
“I think the slowdown is because of multiple factors. Apart from inflation, price hikes definitely hurt demand,” said Harminder Sahni, managing director of consultancy Wazir Advisors. “The rural market is still predominantly a glucose (biscuit) market. And price hikes especially put off potential new customers—people who have not already tried biscuits. This section is much more reluctant to try an expensive product.”
The slowdown in rural demand comes at an unfortunate time for the biscuit industry, characterized by low margins and intense competition. Costs of wheat and sugar have risen again recently, and both Britannia and Parle are planning more price increases across their products.
“Going forward, there will definitely be a slowdown in topline and margins for Britannia and the industry,” Religare’s Kakkad said.
He expects volume growth to be around 5%, while the overall increase in sales will likely be 10-15%, for the industry. “I don’t think the volumes will be in the negative, but it is difficult to see the industry getting back to double-digit growth any time soon,” Kakkad added.