At century’s door, Parle is an icon with over USD2 billion in sales. What next?

103105660At century’s door, Parle is an icon with over USD2 billion in sales. What next?One of India’s most recognised brands has built its business sellingbiscuits and snacks to low- and middle-income families. With customer preferences evolving, what are the emerging growth options for this storiedname as it eyes a larger share in the premium segment?Story by Debleena Majumdar and Anil K SoodDesign by Sadhana Saxena and Muhabit ul haq103105685From Alappuzha to Zoji La, the ubiquitous packet of biscuits has figured on breakfast tables,school tiffin boxes, and teatime chit-chat. An upscale restaurant has even created a dessert featuring Parle-G. On the one hand, it can evoke childhood memories of relishing the biscuit dunked in tea, on the other, an INR 5 pack is sometimes all one can afford to keep hunger at bay.103105703Parle Products, a privately held family firm, has built a USD2 billion business by selling biscuits and snacks to low- and middle-income families.How did a company born during the Swadeshi movement, which got named after its birthplace, become an enduring brand nearly a century later? Having ruled the market for almost a hundred years, how well is it prepared to stay at the top?103105718The company, which started with confectionery in 1929 (first factory in Vile Parle; image on right), baked its first Gluco biscuit in 1938, and is today the world’s largest biscuit manufacturer by volume. Parle-G’s INR5 pack became the second Indian fast-moving consumer-goods brand to cross theUSD1 billion mark in retail sales in 2020-21, after sweets and savouries maker Haldiram’s.The company has not only stayed relevant to its Indian consumers but has also expanded its reach in developed and developing markets. It has set up manufacturing facilities in eight countries, including Mexico and Nigeria.Parle manages 132 manufacturing units in India. Currently, biscuits account for 70% of its annual sales followed by snacks and confectionery.In India, Parle has topped consulting firm Kantar’s Brand Footprint rankings for more than a decade. It topped the 2022 rankings, with only Britannia coming close. Britannia’s footprint has been catching up with Parle since its entry into the top five ranking in 2014.103105742103105745What is the strategy that has helped Parle leverage its reach, grow sales, improve profitability, and manage the risk associated with its revenue growth and margins?Economics of Parle’s business: India’s consumption story is just about two decades in the making. During the last 15 years, while the country’s private consumption expenditure has grown at about 12%, Parle Products’ revenue has grown at the rate of 18%, compounded annually.103105770Given that biscuits and snacks are part of the discretionary consumption basket, particularly for low-income households, Parle faces a greater risk of growth in its sales. Its risk, measured in terms of coefficient of variation, is nearly 2x of the risk associated with growth in household consumption. Consequently, managing variability of sales across cycles is critical.103105805On the input side, Parle’s key raw materials include wheat flour, sugar, and vegetable oil – all of them agricultural commodities. As a result, the company faces significant cost volatility from variations in input prices.The annual inflation in wheat, sugar, and vanaspati prices, measured by the wholesale price index (WPI), during the last 15 years has ranged between 4.7% to 6.4%. While the inflation rate is not high, the price volatility across years is high. In addition, the market experiences large variations across seasons. It is, therefore, important for Parle to build robust procurement and material-productivity processes.Parle is expected to face significant challenges in periods of low economic growth, particularly if they are characterised by higher volatility in commodity prices, as has been the case during the last couple of years. What’s the best way to address this?103105848Parle’s growth strategy: Be a dominant player in the core segment and invest in greater value-adding productsParle has been investing in building a market for higher-value biscuits since 1996 with the launch of Hide & Seek. In addition, it has diversified into cereals and savouries.103105862In 2017, Parle consolidated its premium products under a new division, christened Parle Platina with the objective of offering an “indulgent and aspirational range”. This division includes Hide & Seek, Milano, Nutricrunch, and Mexitos, which are made from premium ingredients.103105891In June 2021, it launched wheat flour under the Parle-G brand, a product in competition with ITC, which is aiming to build Sunfeast as a competitive brand in the biscuit market. The company entered the breakfast cereal market in September 2021 with the launch of Hide & Seek chocolate fills.The evolution of Parle’s product portfolio suggests that it has been aware of the limitations of a volume-led strategy with a narrow product range.The company has reduced its dependence on volume-led revenue growth during the last decade, with its net sales growing much faster than growth in biscuit volume.undefined103105934Parle’s market strategy has focused on selling small-sized packs priced to make them affordable for low-income households. This also allows consumers to make purchases for immediate consumption rather than store for consumption.Consequently, it has been adjusting volume instead of the price for its small packs. For example, the Parle-G pack now weighs 50g against 100g in 2008, implying an annual reduction of 4.5% in the pack weight over the last 15 years. Parle has experienced inflation in raw materials prices ranging from 4.7% to 6.4%. But the price has been constant at INR5, all these years.103105968While the weight-reduction strategy does create the impressionof Parle being consumer-focused, its gross margin would depend onits ability to reduce the pack size consistently with increases inraw material prices.Given that Parle enjoys a much larger share (more than 70%) in thelow-price segment of the glucose-biscuit market, it should have beeneasier to pass on the cost increases through volume reduction,but that has not been the case.Between 2008 and 2018, the weight of a 100g pack came down only by20g (CAGR of 2.2%). During the last five years, it has come down by 30g(CAGR of 9.0%), achieving a much better balance between cost and effective price. WPI inflation for wheat and vanaspati during 2018-23 has been higher, at 1.4% and 1.9%, respectively.)In markets where Parle’s position is not strong, it is expected to sacrifice margins, depending on Britannia’s and ITC’s pricing or promotional tactics.On the other hand, if commodity prices decline, the companies may offer an additional 10%-20% volume to compensate the customer.undefined103105987Parle has grown to offer 150-plus products under 36 brands and operates in around 20 countries. During the last 15-plus years, its costs have increased from 13.3% of sales to over 20% of sales.Parle’s products are available in nearly 8 million outlets, up from 4.5 million in 2017. The company derived between 55% and 60% of sales from rural markets during the 2021-22 fiscal.undefined103105994The sale of premium products has been growing at 2x the rate of low-value products. In the case of premium products, Parle, like its competitors, has been able to raise prices to compensate for increased input costs.103106020Consequently, the company’s operating margin, too, has ended up being low. During the last five years, Parle has earned an average operating margin of 4.5%. On the other hand, Britannia’s operating margin has been 14.8% on average over the last five years, probably explained by the nature of its portfolio.Even under tough market conditions, Parle has sustained its gross margin, except during the last year, when the gross margin fell by 8.5%.undefined103106099One of the factors that has helped Parle maintain its gross margin is the increase in sales of its premium brands.103106142Building ability to invest in growthParle has consistently invested to grow its business andhas retained all its earnings, which enhances its abilityto invest. It is nearly 100% equity financed, as thecompany has taken very little debt.As a result, Parle’s leverage has been just 1.02, and it hasearned a relatively low return on equity at an average of 12.9%during the last 15 years. The decline in return on equityduring the last year was largely because of a sharpdecline in operating margin. On the other hand, its largest competitor, Britannia,earns around 35% return on equity, with its financialleverage being 2.7.Investing in growth During the last 15 years, Parle has invested about INR2,000 crore in capital expenditure and another INR1,400 crore in financial assets. The biscuits segment has generated a cash flow of nearly INR4,000 crore during this period. A large part of this investment is in factory equipment and building.Parle manages its inventory and receivables well. It has held around 35 days of stock during the last 15 years, and receivables being equivalent to just about nine days of sales.The company has partnered with IBM to build a hybrid cloud-based IT infrastructure. This is expected to help innovate faster and find new ways to get products to consumers in India and abroad.103106232Restructuring to build resilience, but is it making adequate investment in building people capability?Parle has not hesitated to restructure its operations to manage costs. For example, it laid off nearly 10,000 people in 2019 to deal with an economic slowdown and decline in rural demand.Currently, its wage cost is about 2.5% of the net sales and it spends about 0.1% on staff welfare. Britannia spends about 2x the level on staff welfare.Shying away from an acquisition-led growth strategyThe company has relied largely on organic growth to build its business. It is only recently that it was reported to be in discussion for acquiring Dr Gerard, a Polish biscuit manufacturer.Looking aheadParle has done well to build a strong price-value proposition for its core market — price-conscious low- and middle-income households in India and abroad. It has also invested well to grow its portfolio to cater to aspirational requirements of these households as their earnings increase.Britannia has expanded its reach, building a formidable premium portfolio to stay ahead of Parle in terms of value market share. ITC, while still a small player, has created a niche for itself in the cream biscuits market and is continuing to invest in other categories.103106251As earnings grow and consumer preferences change to healthier food (organically grown ingredients, low-oil, low-sugar, low-salt products), the industry will need to not only rejig portfolios but also rebuild brands.Parle has the required resources and has demonstrated the willingness to invest in growing sales with its core consumer base. Can it continue to grow 1.5x the nominal GDP with its existing base or does it need to slug it out on Britannia and ITC’s turf? If Parle can build a portfolio of products for consumers across income groups, it has a chance of becoming the Volkswagen of the biscuit industry.

At century’s door, Parle is an icon with over USD2 billion in sales. What next?

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At century’s door, Parle is an icon with over USD2 billion in sales. What next?