Given a wide market and lower coffee penetration, there is only one room and that is the room to grow, says Suresh Narayanan, CMD, Nestle India. He told ET Now that the secular nature of growth is satisfying and it has been across categories.
Edited excerpts:
You have had a stellar quarterly performance. I think you have stunned Street with a 60 per cent gross margin uptick. How are you going to sustain that?
It is ultimately the team, the partners, the distributors and everybody else who have made the results happen. It has been a very satisfying first quarter. And what is satisfying, especially is the secular nature of the growth, it has been across categories.
Normally, you would expect one or two categories to give us the growth, but this has been a growth across categories. So, milk and nutrition has grown, Maggi and the whole prepared food portfolio has also grown, chocolates and confectionery has grown and also the coffee and beverages have grown in volume terms.
What is important is to go back to the original strategy that we had set for ourselves which is very simple, which is to increase the salience of consumption through increased penetration and increased volume. So, that is really where the rubber hits the road and that is really where I believe that the team has done a terrific job. Our reported sales are at about 6.3 per cent. If you look at the comparable growth number taking GST into account, it is about 13.4 per cent.
The volume increase together with new launches and products has led to these happy results that we have had to report for the first quarter.
Nestle is paying a lot of money, over $7 billion to sell Starbucks products across the world. Does India feature in that plan?
Look, as of now, I am as much privy to the news as you are. There is clearly a global understanding for the sale. This is what the announcement has been, let us watch and wait the space.
I cannot believe your parent has not told you about where India features, it being a very important market for them?
Well, well, the parent is very clear, the parent has announced the birth of the new deal and I believe that as you might have read also that, the deal is to be fully consummated by the end of this year. Therefore, let us watch the space and I am sure we will have numerous interactions when we will share it with you.
As far as the coffee space goes, it is a space that is dominated by Nestle as well as HUL at the moment. I see a lot of Nescafe around in your office, how are you going to prevent the cannibalisation of Nescafe?
Well, you see, coffee has got different offerings. There is mainstream coffee, instant coffee that we have, there is premium coffee that we have, there is potion coffee which is there and there also brands like an Espresso which we do not sell in India, but which is also there.
So, I think it is fair to say each of the product dimensions we have got to offer has got a distinct proposition and it appeals to consumers and connoisseurs, depending on what coffee experience or what beverage experience they are looking forward to. So, honestly, in a market as wide as it is and with the kind of lower levels of penetration of coffee, there is only one room and that is the room to grow.
Have you given a new target, can you share what it is, what is it that you are looking at as far as coffee goes and can we expect new product launches?
Well, coffee clearly has been one of the star performers of the first quarter. I am happy to report that we have had very strong double-digit volume growth in coffee across geographies. Clearly, for us, it is an area which is as our global CEO has also put as one of the priority products in our portfolio. You will see that in due course of time we will be accelerating the pace of launches and premiumisation that we can play in the coffee space.
So, you will enter the premium market whether it is for an Espresso, for example, which is quite popular in the luxury segment?
Look, within instant coffee itself, I think there are opportunities that we are looking at.
And that is all for this. For the rest, you follow the different financial model…
Well, we will. One of the things that we have talked about in the past as well is the company is really valorising the power of innovation and renovation and in that cycle, the premiumisation of coffee also figures.
There is no doubt that you have also benefited from deflation of food articles, you have seen input prices go down. Look how milk is doing at the moment, that must have been a big contributor for the good results as well.
Sure. I think a benign commodity space price together with scale benefits because coming out of the Maggi issue we have increased our volume now. I think the advantages of scale also play into it. Part of the margin, of course, is also because of the base effect. GST because of the lower base effect also has contributed to the overall spread as far as the profitability is concerned.
You have mentioned GST, but I have to ask you how Nestle and a couple of other FMCG companies have been hauled up by the government, notices have been sent out for denying benefits of the lower GST to consumers, cheques apparently have been submitted, where does this entire controversy stand and why did not you pass on the benefits to your consumers?
Well, I think, let me clarify if you think then I will say it as succinctly and as simply as I can. Number one, is that as far as the word hauled is concerned, I am sorry but it is nowhere being hauled up. The discussions that we have had with the anti-profiteering authority have been extremely cordial, extremely professional, extremely candid and extremely transparent.
There is no question for an issue of a notice of any kind of misdemeanour that has been done. This was a discussion around how GST benefits have been passed on. We were committed and we were one of the first companies to announce that we are committed to passing on the benefits of GST down the stream.
Now, obviously there are operational issues as well when you pass on these benefits because the fact of the matter is that if there is, for example, on a brand a 50 paise benefit, it is very difficult to pass on a 50-paise benefit because of the issues of coinage.
Similarly, in some cases, if you change the grammage of the product, it changes the taste of the product and then you have a double whammy that you are giving extra grammage. But the consumer says look I do not like the taste of this product. So, these are all the practicalities which we have also explained and there is therefore a lead time…
Why did you change the grammage, I do not understand?
Well, because if you are not able to change a price point, you can either offer value to the consumer in two ways; either give more of the product or give it at a lower price. So, either of these options is available to a company.
The question of just cutting down the price…
Well, cutting down the price, if I were to, for example, look at a category where I get a benefit of let's say 5 per cent and that translates into a price impact of 45 naya paise or 50 naya paise. How am I going to pass it on? Even if I pass it on, there is no way in which the transaction is going to happen as far as the trade is concerned.
So, these are some of the practical issues. In the case of new production of stock, there was clearly a lead time for the right reasons, for operational reasons that you have to print the packaging material, produce it and produce the packs and put into the market. Then that goes and reaches the trade. So, in the interregnum, the amount of money that was involved is the discussion that we had with the antiprofiteering authority and suo motu we offered that you kindly suggest to us what do we do as far as this fund is concerned.
So, have you given that cheque?
What we have really done is the anti-profiteering authority has referred this matter to the Director General of Safeguards who are having a discussion with us on the quantum.
What kind of a quantum is the conversation?
Let me not give that at the moment because it is still undergoing the process of verification. I believe that the company is here in terms of its ethics, standards of compliance and governance to ensure we will do the very best to see that the benefits are passed on suitably.
And I think this is the spirit in which it being done. Once we get to know which account and how and when, the modalities get worked out.
But you did not set aside any money in the…
We have set aside. This money is not reflected in the results.
How much have you set aside that is part of your results?
It is not part of the results. What is reflected in my results is the 38 per cent improvement in profit after tax that you are seeing and the top line. These are set aside and these amounts are in the privy of the anti-profiteering authority.
If there is one play that is doing very well in stock markets or is the flavour of the season, it's clearly the consumption story. I think all FMCG companies, all the consumption related stocks, for example, have posted very good earnings. So is that the trend that is going to continue? Do you think you will carry on with the kind of earnings that you have displayed in the quarter and maybe even grow on it?
Look, I would not like to comment since we do not give any guidance on the future results of the company. I would like to say I think the consumption space is a very interesting space and in fact, as you yourself have rightly alluded, most of our peer groups have also declared good results. This is a consumption economy and the core of the economy remains consumption.
Consumption is a strong story. The kind of growth that we have seen on average in the last year or so has been in terms of volumes which are in high single digits. I do not see that this is going to substantially decelerate unless of course there is an economic headwind.
So, obviously things like the oil prices or the rupee would have some impact on this. But as of now, on the assumption of the reported satisfactory monsoon, increased government spending, the benefits of the Pay Commission, increased urbanisation and aspiration, opening up of tier-2 and tier-3 towns, I still believe that consumption will be a relatively strong story for this economy.
And what about some analysts who always fear that maybe Nestle is not well suited to capitalise on the rural growth and the recovery we are seeing in rural India, what do you have to say?
Look, the fact of the matter is that we have a portfolio and we developed the portfolio in order to address the segment of consumers who best choose the brands that we seek to offer. Now, it is fair to say that for the rural play of Nestle, we do have products in rural India. But our rural play is probably lower than some of the other peer group companies.
As far as we are concerned, I think urban India and the next 600 towns that are being talked about in both the McKinsey and other reports, I think there is enough opportunity for companies like Nestle to, in fact, grow in the market.
So, is that also a conscious decision also because your strategy will not be negative on the margins?
No, see any growth strategy has to be sustainable. Sustainable means that you have to have both a top line and a bottom line that you can carry sustainably into the future.
As far as we are concerned, our introduction of products, our play on nutrition, our play on valued added products are all with a very clear direction to ensure we increase penetration and volumes and offer value to the consumer. This also benefits in terms of generating the fuel for growth and profitability.
So, there will not be a compromise of one for the other.
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