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Britannia: New competitors, sleepless nights? - Views on News from Equitymaster
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Britannia: New competitors, sleepless nights?
Dec 9, 2009

Britannia, the market leader in biscuits, has been facing intense competition since the last few years. The company has been steadily losing market share to smaller players. Moreover, due to competition, the operating margins of the company fell from a high of 12.4% in FY05 to a low of 5.8% in FY07. This loss was almost entirely due to ITC which had entered the Indian market in a big way with its Sunfeast biscuits. While margins have moved up in recent times, they are not close to the peak achieved in FY05. Biscuits are a difficult business to manage. It involves constant innovation to keep the portfolio fresh. Furthermore, the companies are exposed to commodity prices. This means that in case of a rising commodity cycle, it is difficult to pass on the cost increase to the consumer due to competition. In this difficult landscape, we are soon going to have a new entrant. UK based United Biscuits, which is the world’s 3rd largest biscuit maker is buying Himachal Pradesh based SS food industries (SSFI). The flagship brand of United Biscuits is Mcvities. The company proposes to manufacture the same at the plants of SSFI. This product is made of wheat and high fibre and is expected to compete against Britannia’s Marie Gold and Nutrichoice and ITC’s Marie Lite.

While the situation does not seem good for the remaining players, we feel otherwise. This is because we believe that it is not very easy today to create a distribution chain in India. It can be argued that when ITC had launched its Sunfeast biscuits, Britannia went through challenging times. However, it should be noted that ITC has had a presence in the Indian market for a very long time and had a distribution chain in place through paan walas. In spite of this, ITC had to make huge investments to make a dent in the market. It can also be argued that a new entrant can take the modern retail route to launch new products. This is logical given the growth of modern retail. However, a modern retailer is likely to stock products which have a pull in the market. This means that the new entrant must spend heavily on brand building. The modern retailer also demands a high margin and credit days from the supplier. While most FMCG players derive between 5 - 15% of their revenue from retail, a company hoping to solely use the retail platform will end up operating on wafer thin margins making operations unviable. Hence, a new company will have to set up a distribution chain to challenge the might of Britannia, Parle and ITC and this will take a few years.

We believe that while we will not see the great performance of FY05 from Britannia, we may also not witness the dismal numbers of FY07. In our view, the greatest risk faced by biscuit makers today is the increasing commodities prices.

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