A motorcyclist transports a wholesale pack of potato chips in the Gol Bazaar market in Nagpur, India. (Photographer: Dhiraj Singh/Bloomberg)

Indians’ Love For Rs 5 Snacks Is Unhealthy For FMCG Companies

The growing demand for everything in bite-sized helpings in India is extracting a price.

Consumer goods makers are relying on small, affordable packs to drive volumes more than ever. Nowhere is it more evident than in the snacks market. But demand for chips, namkeen and salted peanuts in Rs 5 packs is so high that it’s hurting the margins of manufacturers.

“Lower price point packs squeeze margins,” Chandu Virani, founder of Balaji Wafer Pvt. Ltd., the maker of namesake branded foods, told BloombergQuint. The proportion of packaging and labour costs to the overall value is higher for small-sized packs, he said.

India’s snacking industry is dominated by regional and smaller players. The formal sector contributed about 40 percent of the Rs 55,000-crore market in 2016, according to Frost & Sullivan. But the organised segment, it said, is expected to double by 2021.

Most of that demand is expected to come from smaller-sized packs costing Rs 5 and 10 each. That’s because small grocery stores account for 75 percent of the distribution channels for the snack makers, Frost & Sullivan said in a 2017 report. Modern trade through supermarkets accounts for 20 percent.

The snacks market comprises three main categories—chips, namkeens and extruded foods, with each accounting for about a third of the market.

Between-the-meals foods is one of fastest-growing categories, supported by the smaller packs and extensive expansion in distribution for ITC Ltd., said Hemant Malik, chief executive at the food division of the company, said in an emailed response. The Rs 5 packing is widely prevalent in rural markets, accounting for a substantial portion of the snacks business in such geographies, he said. In urban markets, Rs 10 and Rs 20 packings are more prevalent, according to Malik, but rural demand outpacing growth in the cities.

ITC gets a significant proportion of sales from Rs 10 and Rs 20 for its Bingo! Mad Angles and Bingo! Potato Chips portfolio. The Bingo! No Rulz, an extruded snack, is dominated by Rs 5 category, it said.

The market for snacks is growing but margins have started to come under pressure as most of the demand is for the Rs 5 pack, a senior executive of a large namkeen maker said on the condition of anonymity. The margins are as good as negligible in a Rs 5 pack, making it difficult for offer much to distributors and retailers, he said.

Distributors Bloomberg spoke with agreed that demand for the Rs 5 packs is high—they didn’t want to be identified out of business concerns. But the margins on such packs for them are low since they get 6.5 percent across price points, at least two distributors from the north said.

Like other categories of consumer goods, consumption pattern has also changed for snacks, another distributor said. People who used to eat unpacked snacks have switched to branded ones since they are available in lower-priced units, he said.

Prataap Snacks Ltd., in its Feb. 2019 investor presentation, said small shops usually stock the smallest packs. The domination of such small grocery stores is expected to continue for the next five to 10 years and increase the demand for low-priced packs, according to the maker of Diamond chips. The company refused to comment on specific queries citing silent period ahead of the earnings.

Local Competition

Still, large snack makers are not just facing the pressure on margins. Intense competition from smaller and regional brands, who cater to local tastes, is also hurting profitability.

In fact, ITC tweaked the flavours of its Tedhe Medhe extruded snacks, adding Gondhoraj Lemon in Bengali, pudina in Assam and the rest of north east, tomato in South and spicy ‘Wakhra’ (different) flavour in Punjab and Haryana.

But likes of Balaji Wafers have a bigger ambition. The company that sells namesake chips to corn puffs in western India plans to expand into Punjab, Chhattisgarh, Bihar and Uttar Pradesh over the next two years.