The economic revival, high frequency data and also recent FMCG sales have been nothing short of stunning. How do you think things are evolving?
The trajectory of the FMCG industry has been extremely heartening. The consumer goods industry has been one of the least impacted industries in terms of the overall economy. There are others which are hurting and which have been decimated in this pandemic. To that extent it once again reinforces the inherent strength of the consumption story in India irrespective of the fact that we might have had a GDP contraction of minus 24% and irrespective of the fact that in the subsequent quarters we will only be building back towards where we were to reach the 2019 levels in the fiscal year that we are talking about. I believe that consumption would still be relatively strong and robust. It may go up and down, I mean that is more a matter of degree but the secular trend line will still remain upwards.
Are we looking at a different scenario for Nestle with the agri reforms ?
As far as the agri reforms are concerned, these are steps in the right direction. Longer term, these are the kind of policy measures that we need to take in order to ensure that there is a freedom for the farmer and for the farming community to sell to the entities that they believe will give them the best realisation.
There is still a debate on whether they need a minimum support level and that is where the entire economic and political debate is taking place. As far as Nestle is concerned, three or four major commodities impact us. One of them is milk. Milk is an item that goes through the mandis and there the model has been set largely due to the cooperatives. I think the cooperatives movement has done a tremendous job. Also, some private players like Nestle have set up a very fair, transparent, robust and time tested mechanism which I believe will carry on. At the moment, milk prices are fairly benign. The good part is that some of the demand that had vanished from the out-of-home segment and from the catering segment has started to come back. Milk prices will start to firm up a bit but nevertheless they will not be at the very highly escalated rates that they were in the past. Wheat is also one of our commodities.
There again, a lot of benefit has come by way of better crops. The government procurement has been high. The kharif crop is also looking forward to being a fairly robust crop and that means that despite the relatively high food inflation, this would also remain relatively under control.
The third one is sugar and we haven’t seen too much of a surge happening there. Others, like oil, have been relatively stable. So from an overall commodity perspective while the level of overall inflation is still higher than what we are used to, the overall basket will still be a manageable set of circumstances that we should be able to tide over as a company.
Given that margins have gone, how much of your savings at this point has been due to cost cutting efforts and how much of it is more because of pricing power, brand growth and developments on that front?
As a company, we operate on three spectrums. One is the commodity cost mitigation that we do with economies of scale, better productivity, stocking opportunities, etc. Part of it is clearly due to that. Apart from the commodity price headwinds or tailwinds, we also have a fairly robust cost containment programme and this is not just the one-off cost that we are looking at in the pandemic, lower travel, lower conferencing and stuff like that. Now, we also look at other process costs to see that we are able to have a downward trajectory over a period of time that is beneficial in terms of the overall trajectory of volumes and value that we record from time to time.
If these two are really unable to hold the commodity surge that might take place, that is where the brand and pricing related issues come to play.
I am extremely proud of the fact that in the last five years, we have tried to maintain the consistency and simplicity of the business model which is penetration-led volume growth that is hinging on innovation and renovation, both price points and the premium part of the portfolio doing its bit strong digital engagements, strong engagements as far as distribution infrastructure is concerned. A combination of all this is what has led to a sustained performance.
Apart from the last quarter, the previous quarter was probably the only quarter where we had a slightly muted performance of 2.6%. The previous 10 quarters have seen straight double digit growth. This model seems to be working for us and we do not want to disturb it too much.
Can I assume that double digit growth is here to stay the medium term that volume growth is looking robust?
Certainly penetration led volume growth will be a centre piece of whatever we will do. The second piece is that we will sell those categories and come up with those initiatives which are not margin dilutive to us either. We would not be going in for the “empty calorie initiatives” and not really having too much residual value for the company.
You are looking to invest about Rs 2,600 crore over the next three-four years. Any more updates or developments?
It is a statement of confidence in the future of Nestle in India. We compete for investment dollars with China, ASEAN and rest of the world and therefore when we get these investments, it means that the business case that we are able to exhibit from track record and from prospect in India is fairly strong, that is number one.
Number two is 99% of what I sell in India is made in India. This company has been embracing make in India from 1961 when the first factory of Nestle at Moga came up. So in the eight factories that we have today, what we produce is 99% of what I sell in this country.
Number three is that Rs 2600 crore comes after the previous surge that we had between 2009 and 2013. The factory in Sanand is coming up quite well. It had a little bit of setback during the pandemic but now it is coming back. Construction is on and we look at this as being our most digitally savvy factory, a paperless, environment-friendly factory. It is also the most diverse factory with 50% of the workforce being women and we look at it as a modern temple of manufacturing, dedicated to food processing in India.
We are looking at secular growth across categories. It is the secular nature of the brands, the resonance and the ramifications that we are looking at over a period of time.
Now Nestle’s mantra has been both premiumisation as well as penetration. Do you feel that the plans to tap into the premium segment of the market is going to take a while?
I call it the hero of the pandemic. It is really the surge of demand for trustworthy, good quality, good nutrition and safe products coming out of Bharat, the so-called tier II, tier III and tier IV towns and the rural markets are actually asking for better quality and safer products. I do not know whether it is as a consequence of the pandemic or indeed there has been a journey towards better brands and better consumption at least in the consumer good space. I see this as a very positive trend.
There may not be shifting of the entire market into a premium portfolio but definitely there are opportunities based on consumer trends that we are seeing and not just in the food space but in a lot of other consumer good spaces as well.
How do you see the market shifting from unorganised to organised players?
I think regional competitors and small players are definitely going to benefit from the surge in the packaged goods. The $35-billion branded packaged food market is likely to double in the next couple of years. Whether that happens in the next two to three years or three to four years depends on the economic outcome.
Just big players are not going to benefit from it. When I invest Rs 2,600 crore in the business, there is a multiplier effect. That is why I am excited about the food processing industry. The multiplier effect is anywhere between 2 to 4, which means that there will be additional suppliers, logistics and services created and some of these additional suppliers created will also look at coming up with their own brands, their own propositions and team up with other players regionally.
It is possible that the surge in packaged goods that will take place will be the beneficiary of ethically straight good quality, good value and longer term players albeit small. If they do this on a consistent basis they do have a place under the sun and I think that is good for India because we need a larger number of medium and large enterprises to grow. The production linked incentives (PLIs) that have been announced by the government also has food processing as a beneficiary. It will create the employment and footprint for entrepreneurs in this country.