Demonetisation: Food companies' top line to take 15-20% hit in Q3, says Varun Berry

Britannia MD says Q4 will be better because the cash position will improve by then

Food major Britannia has just opened a new research & development centre at Bidadi near Bengaluru. The state-of-the-art unit is expected to help the company churn out new products not only for existing categories, but also new segments. Britannia Industries' managing director VARUN BERRY talks to Viveat Susan Pinto about his priorities for the company and the pain in the near-term due to demonetisation. Edited excerpts: 

Will the new R&D centre help you in your endeavour to get a firmer foot in dairy?

It's the largest for us not only in terms of area, but also in terms of technology and capability. We had one R&D centre in Chennai earlier, which we have closed now. That was nothing compared to the one we have set up in Bidadi. We've both a plant and an R&D centre here (Bidadi), spread over 16 acres of land. The R&D centre opens up a number of areas for us in terms of innovation. Not only can we look at innovation in existing categories, but also check out the feasibility of entering must-win segments and look at how we can succeed there. While the whole snacking space including biscuits, rusks, cakes, croissants etc is something we're looking at in terms of innovation. We've a separate section for dairy at the R&D centre. Yes, this should help us in differentiated products in dairy, but the scope for dairy goes beyond this.

What is the impact of demonetisation on food and fast-moving consumer goods?

The impact is significant. I was out in the field the second day after demonetisation was announced, visiting 20-25 outlets. Business in terms of sales for these retail outlets was down 40-70%. So, the impact is huge across a range of products. While essential goods and commodities will see a lower impact, the discretionary space is hit harder. 

To what extent do you see the third-quarter numbers being hit because of demonetisation?

There’ll be a big impact not only for us, but the market as a whole. My sense is the impact will be 15-20% on top line for food companies in the third quarter. Q4 will be better than Q3 because the cash position should get better by then. But, Q3 will be bad. 

What kind of delay are you seeing in rural recovery because of demonetisation?

The recovery will take longer than we expected. The consensus was that the second half of this year would be better than the first half. I don't see that happening now because the feel-good factor is not there. While farmers don't have to pay taxes, they need cash for their farming and other requirements. That is not available at the moment. While the government has stepped in to provide them relief in terms of increasing their withdrawal limits and allowing them to buy seeds in old Rs 500 notes, rural will still take time to recover. 

What is your position on manufacturing now? Earlier, you'd indicated earlier you wanted a better handle on production...

About 55% is now in-house and 45% is outsourced. We want to take this to 60% in-house and 40% outsourced. We should get there by the end of this financial year.  We already have 13 plants of our own, which is significant. So yes, we are moving in that direction of having more of our products made in-house, which gives us a better grip on quality and production. 

You were also pushing direct distribution aggressively. How much ground have you covered in the past few quarters?

We've doubled our direct distribution to 1.4 million outlets in both urban and rural put together. Our overall retail reach is 4.5 million outlets. Of this, our distributor salesmen reach 1.4 million outlets; the balance is through the wholesale channel. This is a fairly decent spread in terms of direct and indirect distribution.