Consumers Have Turned More Value-Conscious Amid Slowdown, Says Parle
Slowdown in demand is due to higher slabs in GST and a lack of adequate government stimulus, says Parle’s Mayank Shah.
After Britannia Industries Ltd., Parle Products Pvt. Ltd. now said demand for its products waned in the past two quarters as consumers rationed spends amid a slowdown.
“Consumers have become more value-conscious during the times of slowdown in the last six months,” Mayank Shah, category heads at the maker Parle-G biscuits, said. “Consumers are not buying enough. Offtake from the shops is getting affected. The number of shops stocking these products is the same, but the number of products being sold from these shops is going down due to weakening consumer demand,” he told BloombergQuint during an interaction.
Shah’s remarks came after Britannia Industries in a post-earnings conference call said consumers are thinking twice before buying even a Rs 5 product, indicating a “serious issue in the economy”. “We’ve only grown 6 percent and the market is growing slower than that,” Varun Berry, managing director at the maker of Good Day and Tiger biscuits, said in the call.
Shares of Britannia Industries have fallen more than 3 percent since it announced its first-quarter results on Aug. 9.
Packaged Food Makers Play Robin Hood
Parle’s Shah attributed the slowdown in demand to higher slabs in the goods and services tax and a lack of adequate government stimulus. “Imposing higher taxes on biscuits bought typically by lower-income consumers will definitely impact sales,” he said. “The government needs to spruce up demand. There has also been a long pending demand to reduce GST on biscuits priced at Rs 100 per kg or below. These biscuits were taxed at only 12-14 percent under the previous excise and value added tax regime. Under GST, they are priced at 18 percent. This forces companies to increase prices, impacting sales.”
Watch the full interview here:
Edited excerpts of the interview:
Have the last 3-6 months been starkly different from previous episodes, wherein there would’ve been a slowing trend but consumption might have been relatively unscaled?
It has been a sluggish demand in the last two quarters compared to previous periods. The last two quarters have been really difficult for the industry in growth terms.
I would say companies are trying to do their best, in terms of offering great value to consumers, in terms of higher promos, in terms of price and in terms of discounting, etc.
Growth, it seems, is coming at the cost of the bottomline. Consumers are a little value-conscious—in fact, they have grown more value-conscious during the times of slowdown, and that’s what we’ve been seeing in the last six months.
The statement that came in from Britannia, which sparked this discussion, said that consumers are thinking twice before buying even a five-rupee packet.
Now, in your mind, do you find such cautiousness among consumers as well? Because throughout our lives, tea and Parle-G has been the staple snack. Are you seeing issues or cracks in that story as well?
No, maybe not so much with Parle-G because to my mind it is a staple.
See, the way we treat Parle-G and the way consumers, more importantly, treat Parle-G is very different. Parle-G is a staple, so come what may, you might not want to reduce your food intake. I’ll put it this way: if you normally consume three chapatis for lunch every day, you will continue to eat three chapatis. Parle-G is a stable like that.
So, while Parle-G may not be affected, products which are relatively premium, relatively discretionary may be affected. In those varieties, the consumer would definitely think twice before spending that five-rupee—seeing whether he is getting the best value out of that or not.
Most trends are suggesting that companies with a higher exposure to rural category are witnessing a bigger dent. Even though the government is trying to put more cash into the hands of the consumer, no meaningful change is happening. Do you see that continuing for some time before the cycle changes?
Yes, it would. A slowdown makes consumers conscious and that’s more pronounced in rural areas, as you rightly said. While urban definitely is feeling the brunt (of slowdown), the rural impact would be more pronounced due to value-consciousness.
Rural consumers are far more value-conscious than urban consumers and, as a result of that, you will see the slowdown more pronounced in rural compared to urban India.
Do you see distribution causing the dent at this point? That distribution is a problem?
No, I wouldn’t say distribution because this is more a function of demand. If you talk about distribution, either Parle or Britannia, they are fairly distributed. So, distribution to my mind is not really a concern right now. You are anyway distributed, you are very well-penetrated.
The issue is of depth, or the offtake from stores. I think the concern right now is that consumers are not going to the shops or aren’t buying enough. So, it is offtake from shops that is getting affected rather than the number of shops that are stocking. The number of shops stocking these products might still remain the same but product sold from these shops is going down. That is directly a function of demand, which is going down primarily because of the slowdown.
There are a few other factors as well, something we’ve been talking to the government about. Ideally, in a situation like this, the government needs to spruce up the demand, which can be primarily done by facilitating the industry.
There has been a long-standing demand from the biscuit industry about Goods And Services Tax. The biscuit industry is taxed at 18 percent GST, which is honestly very surprising. Biscuits, which are priced Rs 100/kg and less, are primarily consumed by lower and middle income consumers. These were under the previous tax regime taxed at about 12-15 percent and were excise exempted. Now, in the GST regime, they are taxed at 18 percent.
Now, if you increase the taxes, companies are forced to increase the prices. That has an impact on sales of these varieties, and that is what we are seeing. This is something we told the government long back.
There has been a long-pending demand from the industry on reducing GST on biscuits priced below Rs 100/kg, which is only fair if you look at what was happening earlier. in the excise regime, these biscuits were excise exempted and only subject to Value Added Tax. Now, in the GST regime, you are taxing them at 18 percent.
How different is this offtake trend compared to what you have seen in the past—in 2008 and in part in 2013? Do you think a GST rate cut on smaller price pockets will revive the offtake?
Yes, definitely, it is no different than what it was.
I think the government need to take measures to revive the industry. We have been talking to the government on this particular thing and requesting them to at least reduce GST on biscuits meant for the middle-income and lower-income consumers. I am sure the government will look at it favourably.
This (GST cut) would go a long way in terms of pushing the demand and addressing the issues that we are seeing. The issues that Britannia pointed out—that consumers are thinking twice before buying a five-rupee pack—why is it happening? The issue is with the biscuits that are priced at Rs 100/kg and below, and ideally, government should be looking at it and should be doing something if they really want to revive the demand.
Currently, the issue is more at the middle-income and lower-income consumers. They are the ones who are reducing their consumption, and the demand is getting affected. I think the government should take steps to revive the demand by reducing the GST.
Is the volume growth number looking better in this quarter—from July and whatever little August we have seen so far?
It would definitely look better because this is the onset of the festive season. Quarter-on-quarter, you will see better numbers, but if you look year-on-year, then I think the growth numbers would be sluggish. They would be far lower than what you grew at in the corresponding quarter last year.
So, my concern is not so much about quarter-on-quarter. The real acid test would be to grow significantly or maintain growth rates compared to similar quarters last year. So, CPLY (Corresponding Period Last Year) is a concern, not so much Q-o-Q.
What are you doing to try and offset the slowdown in demand?
We are working on two fronts: One, we are trying to ensure value to the consumers—right from probably giving something extra, and thereby bringing down the price of the product; maybe give something free or some kind of a discount. This is typically done by most companies.
Secondly, we are talking to the government on reviving demand in order to make it feasible for companies... We have taken quite a few price hikes post GST to primarily ensure that we are not affected by the tax increase.
Now, that has also somewhere affected the demand because biscuit is an extremely price-sensitive category. If you read between the lines of what Britannia said or what (CEO) Varun Berry said that the five-rupee segment is getting affected, imagine the kind of concerns that consumers are having on that five-rupee price point level.
So, unless you show value to consumers, they are not going to buy enough, and you will see softening of demand. If you really want to ensure demand revival, you have to show them value. And that’s where we are talking to the government to ensure that biscuits as a category are not subject to high GST, especially biscuits which are made for middle-income and lower-income groups. Biscuits below Rs 100/kg or up to Rs 100/kg should ideally be at the lowest slab of GST. I think it (a high GST rate) is Injustice to biscuits made for middle-income and lower-income consumers.