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Worm’s world view #36: Conversations with Britannia distributors

Biscuits (demand) did benefit in the second-wave of lockdown but the uptick normalised as mobility improved – that's the insight from our conversations with Britannia’s distributors. They told us, (1) lockdown did benefit demand in the second wave as well, (2) we (ISEC) could not gather any sufficient evidence of channel loading (strong performance in Q1FY22 may raise these doubts in investors' minds), (3) there is some rationalization of trade incentives/schemes but margins are maintained, (4) large packs seeing small price increase but the price-point pack architecture is maintained, (5) BRIT continues to benefit from its wide assortment with Good Day and Marie Gold enjoying good popularity.

Nevertheless, even as the category growth would have seen lockdown-led tailwinds, we still find BRIT’s performance quite strong. Besides commentary on demand in the post-result call other key things to watch out for: (1) Plans for adjacent categories – a strong core should provide room to invest in new products, (2) Plans to take price hikes – very tricky in price-point products. The press release focuses more on driving efficiencies which according to us, Mr. Varun Berry, has delivered quite well in the past.

* Lockdown did benefit demand; normalized as mobility improved: The biscuit category did benefit from the tailwind of increased in-home consumption during the second-wave. The response was simple “during lockdown, biscuit consumption has to increase”. However, some normalization in demand was seen from June as mobility improved.

* No inventory ‘push’ in Q1FY22: While a strong quarter (Q1FY22 volume growth of 1% versus consensus expectation of 8-10% decline) is likely to raise questions on channel-loading etc., we could not gather any sufficient evidence on it.

* Small price hikes in large packs: The channel did indicate price increases in select large packs. Prices of the price-point packs is maintained. The channel expects some grammage cuts to offset the inflation impact.

* Trade schemes rationalized while margins intact: BRIT has trimmed some schemes/incentives to offset the impact of RM inflation. However, channel margins are unchanged. We note that other consumer companies have also highlighted rationalization of trade incentives.

* Wide portfolio continues to benefit: BRIT’s wide product assortment gives it an advantage over ITC and Parle. Parle G continues to do well while we picked up that ITC’s Bounce (cream biscuit) does quite well in tier-2 markets.

* Good Day and Marie Gold continue to do well: While we do have an understanding of the popular brands, we wanted to check the same with the distributors. Good Day and Marie Gold are quite popular offerings of Britannia. The Rs5 pack of Good Day has increased the popularity of the brand (given it is perceived as premium). Tiger Krunch (Rs 5 pack) is also seeing good offtake.

* Rusk pickup not seen yet: Even as the core (biscuits) continue to do well, distributors did not highlight a strong pickup in rusks as such. We believe that success in new products is essential to drive a ‘re-rating’ in the stock.

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