DISRUPTION SERIES (VOL 2)

November 2019

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 Ambit Asset Management

Disruption is inevitable: We are prepared

We at Ambit are constantly trying to stay ahead of the curve by drowning out the
noise and looking ahead. In keeping with our long term investment thesis, we like to
stay adept with not just the present impediments faced by your portfolio companies
but also long term disruptions which can hit these companies. Hence we will regularly
come out with our thoughts on disruptions in your portfolio companies/ sectors and
for the second write up of this series we have chosen Britannia and the biscuit
industry.
A disruptive technology/ innovation is one that helps create a new market and
value network, and eventually goes on to disrupt an existing market and value
network (over a few years or decades), displacing conventional wisdom or
technology.
This note takes a closer look at Britannia with a focus on (1) Evolution and
importance of the brand (2) Entry into adjacent categories as it transitions to a
total foods company and (3) Progressions and disruptions we foresee for
tomorrow for Britannia (& Industry).

Britannia: Multi-decadal Disruptor continues its march

It is interesting to study the growth story and inspiring journey of some companies. “Britannia is one of India’s leading
Britannia, biscuits maker turned ‘total foods business’, is one such company that food companies in the packaged
makes us feel this way. Established way back in 1892, from the earliest of times, food segment and is among the
Britannia has been an innovator and pioneer in its field. The company, throughout its most trusted food brands.
history, has stayed nimble and continuously adapted to the opportunity that has come Britannia’s product portfolio spans
its way. As early as 1921, the company gained popularity for being the first company Biscuits, Bread, Cakes, Rusk, Dairy
east of the Suez to use gas ovens to make biscuits. Later, during World War 2, it was and Adjacencies.”
the chief supplier of biscuits to soldiers of British India (A deal that made up 95% of
the company revenue). In 1954 and 1955 the company introduced sliced bread and - Britannia AR19
bourbon biscuits for the first time in India.
In its IPO in 1978, the company firmly established itself to be an Indian owned
organization. Innovations and new launches continued year after year as the company
grew in popularity. In 1986 and 1993, the now famous ‘Good day’ and ‘Little hearts’
biscuits were introduced. It was also in this year (1993); the company was acquired by
Mr. Nusli Wadia of Bombay Dyeing fame.
Today Britannia products are available across the country in close to 5mn retail outlets
and reach over 50% of Indian homes. The company’s Dairy business contributes close
to 5% of revenue and its dairy products directly reach 100,000 outlets. Britannia
Bread is the largest brand in the organized bread market with an annual turnover of
over 1 lac tons in volume and Rs.4.5bn in value. The business operates with 13
factories and 4 franchisees selling close to 1 mn loaves daily across more than 100
cities and towns of India.
In the next 2-3 years management
Britannia Now: Aiming to be a total foods company expects biscuit share to contribute
approximately 70% as other
India is considered as the third largest producer of Biscuits after USA and China with a
products offering start gaining
huge addressable market. Per capita consumption of biscuits in our country is 2.1 kg
scale.
and as the economy prospers, the per capita consumption is likely to increase. While
Britannia has been a 100% biscuit manufacturer in the past, over the years and ahead
-Britannia 2QFY20 conference
of time it has evolved to become a total foods company.
call for Investors
 Ambit Asset Management

Exhibit 1: Biscuit category already has a high penetration in India (>90%

households) however per capita consumption (Kg) has potential for growth

> 10 kgs
7.5 kgs

> 4.25 kgs

2.1 kgs

India US/UK South east Asia Japan

Source: Ambit Asset Management

While as recently as FY14, 84% of Britannia’s sales were from biscuits. The Britannia
of today derives 75% of its revenue from biscuits. Further in the next 2-3 years,
management expects the share from biscuits to contribute approximately 70% as other
products offering start gaining scale. This shift is important to address as biscuit
penetration in India is ~90% and so the major growth for a biscuit company would
essentially need to come through: (a) Increase in per capita spends/consumption/
Premiumisation (b) Existing portfolio strengthening (c) New product
categories/diversification.

The company has taken some decisive steps in FY2019 to achieve its stated ambition
of becoming a ‘total foods company’. The company has entered into four new
categories and launched new variants and extensions in the existing categories too.
Recent product launches of the company are gross margin accretive, according to the
management.
New Adjacent categories:
 Salted snacks: This is a Rs 250bn category growing at >20% pa. The company
launched its snack brand ‘Time Pass’, three variants of groovy chips (Minty Pudina,
Pickled Mango, and Spicy Tomato) and two variants of funsticks (Tomato Twist and
Masala Munch). Pricing was in line with the current market leaders and launches
were carried out in select market. This is a category that requires substantial
investments to achieve critical scale.
 Cream filled croissant: Britannia had launched two variants (vanilla and cocoa)
of packaged croissant under the brand ‘Treat’ with a compelling price point of
MRP Rs 20 and an introductory price Rs 15. This is a nascent category, which has
potential given the rise in the younger population as part of the demographic.
 Cream wafers: Another category (Rs 5bn, >25% growth) that the company is
quite positive on. The company entered the segment with the launch of Treat
cream wafers in four variants – Choco, strawberry, orange and vanilla. The
company would be the first branded player with a large national presence in this
category. For Wafers, the company has achieved 10%+ market share and is now
No.3 brand in the country.
 Dairy beverages: Britannia entered this category (Rs28 bn, 27% growth pa) with
the launch of brand Winkin’ Cow in four variants – vanilla, mango, chocolate and
strawberry. AR commentary suggests that this has been one of the most successful
launches for Britannia in its history. The imminent opportunity lies in the shift of
organized share from 20% (presently) to 30% by 2023 and the value added dairy
products segments. In milk shakes as well, the company has achieved 20%+
market share and is now the No.2 brand in less than a year of launch.
 Ambit Asset Management

Exhibit 2: New adjacent category launches: salted snacks, Exhibit 3: There is a constant focus to launch new test
wafers, croissants and dairy products and rebrand as may be required by the
company or business environment

Source: Ambit Asset Management, Company presentation

Source: Ambit Asset Management, Company presentation

Exhibit 4: In recent times Britannia has consistently grown Exhibit 5: …notably margins improved as the company
through an innovation led approach… ditched price competition to focus on innovations, and
new launches

Rs
120bn
19
100bn 17
80bn 15
60bn 13
11
40bn
9
20bn 7
0 5
FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19
Source: Ambit Asset Management, Company presentation
Net Sales EBITDA %(RHS)

Source: Ambit Asset Management, Company

Potential progressions to disruptions at Britannia

1. Who comes next? What will he/she bring? Since 1993 the company has seen
3 distinct phases under the stewardship of Sunil Alagh (1993-2003), Vinita Bali (2004-
2014) and Varun Berry (2014-present). Each has brought along with them a unique
brand of management and drive that has fueled the growth at the company. Currently
Varun Berry who has been with the company since 2013 has recently been
reappointed as managing director of the company for a period of 5 years from 1 st
April 2019.

Exhibit 6: As it becomes immediately apparent that the Exhibit 7: …and so the importance of innovations, new
business growth can vary greatly year to year… launches and timing is pivotal and comes from the top
management team/thought leader
35% 200% Sunil Alagh Vinita Bali Varun berry
Average for periods
1995-2003 2004-2014 2015-2019
30%
150% Gross Margins 42.5% 38.5% 39.0%
25%
EBITDA 7.1% 8.4% 14.2%
20% 100%
PAT 3.9% 5.8% 9.4%
15%
50% ROCE 30.2% 34.5% 58.6%
10%
RONW 31.0% 36.5% 43.4%
5% 0% Source: Ambit Asset Management, Company, Note: Datafor 1993/4 not
0% available , data from 1995-2006 is depicted as standalone
-50%
FY2018
FY1998

FY2000

FY2002

FY2004

FY2006

FY2008

FY2010

FY2012

FY2014

FY2016

-5%
-10% -100%
Sales Growth PAT Growth (RHS)

Source: Ambit Asset Management, Company

 Ambit Asset Management

2. Change in industry composition: Unorganised players/regional organised

Although a shift from organised to unorganised may seem counter intuitive it is a
potential risk and disruptor. It can include:
 Unorganised players showing a united front in biscuits: The organized
biscuit industry in India produces around 60% of the total production, the balance
40% being contributed by unorganized bakeries. In the biscuit industry,the coming
together of unorganised local bakeries to a common platform to provide pan
India delivery service for freshly baked biscuits or cookies in line with demand for
fresh foods can create a disruption.
 Regional organized: A large and growing chunk of the market (27%) is
dominated by local, regional players with North and East being the regions where
they dominate. Regional preferences can interfere in the growth of a pan India
player who has uniform nationwide strategies.
 Preference amongst unorganised players to deal with non-profit
cooperatives: On the other hand the dairy Industry is more fragmented with the
organised sector accounting for just 20%. In the drinking milk industry
unorganised players are prevalent. Amul is not only the market leader but also
one established by years of trustworthy dealing with rural participants/farmers.
Amul is set up as a non-profit cooperative and so farmers might be reluctant to
deal with ‘for profit’ commercial enterprises like Britannia while options like Amul
exist.
3. Change in consumer preferences (Gradual/Sudden)
A) Transition to healthier/instant meal options (gradual)
 Traditionally healthy snacks are seen as boring, tasteless and tedious to have on a
regular basis. However there has been a massive shift towards healthier eating
options over the recent years. This is in line with what has already taken place in
developed economies where there is a clear preference for fresh foods, diet
options and non-processed foods (everything that biscuits are not).
 Going ahead the preference for health, matched with affordability and
innovations, designed to overcome taste barriers, can play a role in how the shift
takes place. For instance, Britannia has launched chocolate oat cookies to cater to
the “Tasty & Healthy” tagline, however, a lot more companies can come with new
and innovative products to cater to the trend and see a sudden shift in popularity.

Exhibit 8: Healthier biscuits could replace high calorie Exhibit 9: Ready to cook food substitutes can also replace
biscuits in the mid premium to premium segment the need to eat biscuits to address between meal
hunger/craving

Source: Ambit Asset Management, Company Source: Ambit Asset Management, Company
 Ambit Asset Management

Exhibit 10: Change in preferences towards healthier options-not boring ones

Particulars Overview

 Launch of nutrition based healthier options would need to go hand

Biscuits in hand with innovative and widespread marketing and information
campaigns to make people aware on the launch of biscuits which
can also be healthier.

 When we look at biscuits as a snacking item in between meals it

can also be replaced by other competing food items.
 Reduction in consumption of products considered ‘less healthy’ will
Easy to prepare
hot food options
effectively limit the demand significantly given penetration for
rather than biscuits in India are as high as 90% already.
biscuits
 Instant noodles (Maggi), ready to eat porridge, upma, Indian
snacks (Haldirams) and other easy to prepare snacks can be looked
upon as more favorable options than flour and sugar based
biscuits.

 Increasing awareness of nutrition and health benefits of various

Dairy categories like Cheese and Yoghurt.

Dairy Products  Changing lifestyles, leading to a shift from home- made traditional
Dairy products (like Ghee and Curd) to packaged forms.
 Demand for niche product offerings like homogenized cow milk
(Sarda farms, Pride of cows) and Greek yoghurt (Epigamia)

Rusk  Double baked bread or Rusk is a traditional category. Launch of

healthier offerings like Multigrain Rusk (currently done by Britannia)

 The category has been undergoing significant transformation to

healthier variants.
Bread
 Britannia has been at the forefront of this health revolution so far
but preference for local and artisanal loafs of bread can disrupt the
industry.

Granola  Granola based bars and protein bars serve as a healthier option to
bars/protein meet hunger pangs felt between meals essentially replacing the
bars
desire to snack on biscuits in between meals.
Source: Ambit Asset Management, Company

B) Brand is about trust with food companies (possibility of sudden change)

Britannia, India’s Most Trusted Food Brand: In the reputed ‘Most Trusted Brands’ “Brands provide your Company a
survey conducted every year by The Economic Times Brand Equity, Britannia won competitive edge and hence
the coveted position of Most Trusted Food brand in the country in 2019. keeping them vibrant, relevant
Exhibit 11: Given the importance of branding and importance top of the mind and the preferred choice of
recall for the consumer: Companies like Britannia spend heavily here consumers is paramount.”
- Britannia AR17
% Rs bn
9 7 “Brands are the pillars of your
8 6 Company’s current business and
7 5 its future.”
6 4 - Britannia AR14
5 3
4 2
3 1
FY07

FY18
FY04

FY05

FY06

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY19

Ad spends (% of Sales) Ad spends RHS

Source: Ambit Asset Management, Britannia Company

 Ambit Asset Management

Mc Donald’s USA mini case study on beef oil controversy: breach of trust!
(Sudden change):
 Mc Donald’s is undoubtedly one of the most well known and loved brands in the
world however it too got caught in the beef oil scandal, which led many to boycott
their products specially in Hindu dominant countries like ours (India).
 In the US, Mc Donald’s used beef tallow in its fries but replaced it with vegetable
oil in the 1990s. In 2001, the company was presented with legal action by a
group of Hindus who were protesting against the use of beef in what they
assumed was a vegetarian product. At the time, a McDonald's company
spokesman said that, "The natural flavoring consists of a minuscule amount of
beef extract".
4. Regulatory disruptions in eatables: Regulations are quite stringent in the food
and beverages space and have a huge potential for disruption.
 Disruption at Nestle: Regulatory disruption in food immediately reminds one of
the grave troubles that Nestle’s Maggi faced few years back when India’s food
regulator banned Maggi in 2015 after tests showed it contained excessive lead
and for alleged mislabelling over flavour enhancer MSG the product returned to
shelves only after the restriction was lifted.(Source)
 100% hike in excise duty in 2001: Biscuit is a comparatively low margin food
product in the PMCG (Packaged Mass Consumption Goods) sector. The
commodity is also price sensitive, as a consequence of which when the Excise Duty
was doubled in 2001, biscuit manufacturers, including the major brands could not
extend the steep increase in the Duty to the customer. The annual growth of the
biscuit industry showed a decline of 3.5% in 2000-01, mainly due to 100% hike in
Central Excise Duty (from 9% to 16%).(Source)
 GST impact led to benefit flowing to unorganised players who fail to meet
stringent compliance requirements. Given the inability to raise prices and the
consumer slowdown-Parle’s Mayank Shah attributed the slowdown to higher rates
in GST and lack of adequate government stimulus.(August 2019)
Exhibit 12: Disruptive influence of regulation in food industry was recently
noted in Nestle’s Maggi noodles, required recall/ban by food regulator

Rs
115bn
17% Decline in Revenue
110bn based on restrictions
105bn imposed on Maggi in
2015
100bn

95bn

90bn

85bn

80bn
CY13 CY14 CY15 CY16 CY17 CY18

Source: Ambit Asset Management, Nestle Company

5. Buying process gets altered: There are a wide variety of ways in which the
buying process can be altered. One big noticeable change towards online
shopping, use of social media marketing and social influencers is a well-known
trend. Use of delivery apps, shift to veganism and the like can be potential
disruptors.
Exhibit 13: The Buying process gets significantly altered
Particulars Overview

Hyper local  Given the plethora of richly funded food delivery apps in India with high rate of cash to
food delivery burn to grow their business through discounts and low/nil delivery charges (earlier was
apps free delivery too). This can encouragespend our money towards, warmer, tastier and
healthier options delivered to your doorstep. (eg. Swiggy, Zomato)
 Ambit Asset Management

 There are a wide variety of ways in which the buying process can be altered. One big
noticeable change has been towards online shopping. It is given the increased ability to
interact with target audiences online that gives companies good reason to launch digital
E-commerce only brands at times (eg. Britannia Little hearts was reinvented as a digital only brand)
 Good Day Chunkies premium gourmet cookie partnered with YouTube to launch a first-
of-its-kind Dessert Carnival with ‘Do It Yourself’ recipe videos from the country’s top
pastry chefs and YouTube creators that got an organic reach of 15mn views.
Preference for
 According to the International Food Information Council’s 2017 Food and Health
convenience
Survey, 55%of millennials say convenience is a top driver when buying food, while baby
shopping by
boomers say taste matters more.
millennials
An Innovative  Biscuits are popular in nature due low unit pricing. However it is possible that other
company with non-biscuit food companies can supply low price point food/drink at on demand too. In
potential to the US one such example can be a company (‘Too Good To Go’)that helps food stores
price low sell their surplus food (lower price) instead of throwing it away.
competing  This can lead to cheaper competing options which can be delivered to customers home
food items and can meet hunger pangs more effectively than biscuits/snacks.
 An emerging trend for some time now has been veganism which might lead to lower
reliance and use of processed foods or milk. This would lead to destruction of demand
for a company.
Trending
Veganism  The trend has been so popular that Netflix even released a popularly watched
documentary on the benefits of veganism called ‘Game changers’ which is now become
the new rage. A mass switchover can lead to massive corrections in sales for
dairy/biscuit companies.
Source: Ambit Asset Management
6. Competitive intensity: Any weakness can lead to disruption/attack by peers
“The other interesting thing about
 The major Brands of biscuits in India are Britannia, Parle Bakeman, Priya Gold, our journey was our realization
Elite, Cremica, Dukes, Anupam, Horlicks, Craze, Nezone, besides various that we could not talk to today’s
regional/State brands. A large and growing chunk of the market (27%) is tweens through traditional media
dominated by local, regional players with North and East being the regions where vehicles. So we decided to be
they dominate. present on platforms most
 A lot of well-established and organized brands are also strong in their frequented by today’s tweens and
categories/segments/geographies and so once they have gained supremacy/recall make Little Hearts a digital-only
become hard to compete with. For instance ITC is popular in cream biscuits and brand.”
Parle agro in Glucose biscuits.
-Ali Harris Shere
HUL acquisition of GSK consumer business
VP Marketing, Britannia
 HUL recently bought GSK consumer for a consideration of little over Euro 3bn. The Industries
company is now trying to make it stand for various breakfast products & biscuits
under the brand name Horlicks.
 Threat of a large organized player like HUL (with a reach of upto 6mn
touchpoints) with strong balance sheet and earning power swooping in to target
and capture market share within a particular segment is always a possible
disruptor. A large player like HUL once it establishes itself in a category over few
years would be hard to dislodge.
 Intense competition requires companies like Britannia to plan carefully and in
many cases requires test launches and limited regional launch of products before
national rollout. One such example is croissant sales by Britannia which began in
1QFY20 and has been confined to only West Bengal and Tamil Nadu as a test
market for next 3-4 months before PAN India expansion.
 A big failure of 1-2 new category products with heavy investments can lead to
catastrophic destruction and so companies need to exercise caution or risk being
disrupted and obsolete by competitors waiting to claw any weakness of its peer
group.
At Ambit we believe in wealth creation by long term equity investment and through
the power of compounding. We constantly try and stay ahead of the curve on what
may possibly impede the growth our portfolio companies. While Britannia has
been a leader in the Biscuits industry, we do a long term scenario analysis on what
could be the possible disruptions and if our portfolio companies are prepared for
it. In our view, rising competition, change in consumer preference, health
awareness and regulation are things to watch out for in the case of Britannia.
 Ambit Asset Management

For any queries, please contact:

Ashu Tomar - Phone: +91 98673 03861, Email - [email protected]

Ambit Asset Management

Ambit House, 449, Senapati Bapat Marg,
Lower Parel, Mumbai - 400 013

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