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ITC Levers Foods FMCG Business to Pole Position
The Economic Times - 22 May 2013

ITC has overtaken Hindustan Unilever in branded foods and beverages sales for the first time in the year ended March, marking a significant breakthrough in the cigarettes-to-hospitality conglomerate’s ambition to become the country’s largest non-cigarette FMCG company. ITC, which entered the packaged foods business over a decade ago, will report a 24% sales growth in branded foods at over Rs 4,600 crore for 2012-13, a person with direct knowledge of the development said.

In comparison, HUL, which owns Bru, Knorr and Lipton brands, reported Rs 4,480 crore in total sales from its food and beverages business while declaring annual results a fortnight ago.

ITC will disclose the number officially in its annual report to be released next month.
When contacted, an ITC spokesperson refused to comment on revenues from the packaged food business.

In the previous year, HUL, the country’s biggest consumer goods company, had notched Rs 3,977 crore in the F&B segment against ITC’s Rs 3,712 crore.

Experts feel that ITC has an upper hand due to its commodity sourcing platform under e-Choupal launch of high-margin products and strongest network of cigarette and paanwallahs who push its snacks and biscuit brands, especially smaller packs. ITC competes with HUL only in two segments within the foods space – atta and noodles – where ITC has a higher share.

But overall, the tobacco maker is already the leader in two large categories– atta and cream biscuits – with 70% and 27% share from brands such as Aashirvaad and Sunfeast despite established players such as Britannia and Parle dominating the biscuits segment for over two decades.

In the noodles segment where over half the market is controlled by Nestle’s Maggi, ITC’s Yippie at 12% share has overtaken HUL’s Knorr despite being a late entrant.

“The biggest advantage that ITC has is that it has been able to plough back profits from cigarette business where it enjoys monopoly to fund growth of its foods segment. HUL can’t really shift its earnings derived from personal products or home care to fuel its foods portfolio as each business is competitive and needs investment,” Nitin Mathur, consumer research analyst at Espírito Santo Securities, said.

HUL Controls 15% of FMCG Pie

In 2012-13, ITC’s non-cigarette FMCG business consisting of packaged food, personal care, lifestyle retail, safety matches and agarbatti more than halved its losses to Rs 81.26 crore with sales growing by 26% to Rs 6,982 crore. This was not even a third of HUL's total revenues of Rs 25,810 crore during FY13. HUL controls nearly 15% of the total fast moving consumer goods market worth Rs2 lakh crore, with its sales topping the combined sales of rivals - Procter & Gamble, Nestle, Colgate and Reckitt Benckiser.

Separately, ITC’s foods business is into profits since the last two years and is driving both the revenue and earnings of ITC’s non-cigarette FMCG business which raked its maiden profit last quarter and expected to breakeven in 2013-14.

Retailers say ITC has been one of the most aggressive consumer company offering higher margins than competitors in premium products and new launches which helps them to create a retail push.
Future Group president (Food Bazaar) Devendra Chawla says ITC has been investing a lot on in-store merchandising and has been jointly working with the retailer for new launches which has worked extremely well.

“ITC’s packaged food portfolio leverages understanding of local Indian taste and palate, exploiting back-end synergies which have served consumers well. Led by differentiated products, the sales mix is working in favour of premiumisation with sales of premium products growing at a faster rate,” says Chawla.

For HUL, the food and beverages business has remained its weak spot for several years, the only significant market where its products aren't leaders in several categories.

For instance, dairy giant Amul is the market leader, followed by HUL’s Kwality Walls in the Rs 2000 crore ice-cream market while HUL’s brand Kissan trails Nestle in the ketchup segment.

Even in the tea and coffee segment with brands such as Brooke Bond, Lipton and Bru, HUL’s market share has not been in a consistent leadership position with players such as Tata Global Beverages and Nestle overtaking HUL once in a while.

This is in sharp contrast to HUL’s core home and personal care segment where it is by far the market leader controlling almost half the market in shampoo, body wash and skin care and more than a third in laundry.

A few years ago, HUL had made consistent efforts in packaged foods by launching wheat flour, soups and sauces. However, it later scaled back its presence in flour and withdrew from the biscuits segment as it found the business highly commoditized with low profit margins.

Over the last two years, HUL’s food business too is seeing good sales traction. Last fiscal ended March 2013, F&B contributed 17% to HUL’s overall sales growing by 13%. But, they still have a long way to go compares to their Anglo-Dutch parent Unilever, which derives nearly 45% of its revenues globally from foods.

An HUL spokesperson said that the processed foods market is at an inflexion point and will continue to grow strongly for the company.

“Considering our positions in various categories, global experience and knowledge; we are confident that we are well placed to leverage this opportunity. We play in both established and new age categories where we are investing ahead of the curve to develop the market and are seeing strong results,” said the spokesperson.

ITC, on the other hand, has set a target to take its non-cigarette FMCG business to Rs 15,000 crore sales in another four years. Both Sunfeast biscuits and Aashirvaad atta are more than Rs 1,000 crore plus brands as per sales.

ITC has plans to further augment its packaged food business by entering into the high-volume diary business and also venturing into high-margin functional foods which can improve health conditions and nutritional deficiencies.

“The stickiness to focus on foods is higher in ITC in terms of operations and management. HUL seems to be gravitating more towards personal products which earns higher profits,” says Amin Babwani, an independent consultant who has spent three decades with HUL.

Since last year, ITC has been upping its premium focus too - launching newer variants such as kajubadam cookies, coffee choco fill and butterscotch biscuits, sugar-free mint under the ‘Mint-o’ brand, Bingo Tangles apart from revamping its instant pasta range.

In fact, the company has recently revamped its entire FMCG portfolio by launching a richer and premium variant at each level.

In packaged food, ITC has managed to reduce the share of mass market glucose biscuits from over half of biscuit sales five years back to less than a fourth now with premium launches.
 
Similarly, in staples, ITC has consolidated its leadership position aided by the strong performance of Aashirvaad multi grain atta and select variant.

ITC has been maintaining its food business profit margins despite stiff input cost pressure due to its strong internal commodity sourcing platform under e-Choupal and launch of high-margin products.

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