The increase in commodity prices, coupled with rising fuel and power costs, is eating into the margins of local biscuit manufacturers in Andhra Pradesh.
“We are facing a lot of competition from market leaders like Parle, Britannia and ITC. The cost of production has increased, but since they do bulk business, in both sales and purchase of raw materials, they get bigger discounts. But small and medium manufacturers have no scope for bigger revenue,” said Somasuresh Kumar, a director of Biking Foods Private Limited.
Sugar prices have increased by around 50 per cent to Rs 27 a kg from Rs 18 kg in 2008 while vegetable oil is up to Rs 51 from Rs 43 in the January-March quarter. The main raw material, wheat, has increased by Rs 3 a kg and is now ruling at Rs 15 a kg.
“The actual cost of the product has increased by 8-9 per cent due to a rise in cost of packaging, raw materials and other expenses. We have only managed to hike the price by 3-4 per cent on some products,” he adds.
The cost of power, which used to be Rs 3.20 per unit before August 1, has increased 10 per cent Rs 3.52 per unit, with an additional charge of Re 1 per unit between 6 pm and 10 pm.
Likewise, the price of bio-diesel (used as fuel) has risen by 20 per cent since January this year to Rs 37 per litre, from Rs 31. Petroleum products, including polythene and poly laminates, which are the main ingredients for packaging, have seen a big jump in prices — from Rs 200 per kg in January this year to Rs 240-250 a kg since June.
About 50 small biscuit-making units are members of the Biscuits, Wafers and Confectionery Manufacturers Association (BWCMA) in the state, producing on an average 5-50 tonnes per day. The average employee strength per unit is between 150 and 300; employees get an average wage of Rs 180 per day, while the skilled ones get around Rs 250.
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In contrast, Parle has a production capacity of 60,000-70,000 tonnes per month (including outsourced and own production), Britannia a capacity of 20,000-25,000 tonnes per month and ITC a capacity of around 15,000 tonnes per month.
Of the 50 units, around nine are into job work (outsourcing) of 300-400 tonnes per day for the majors players. “Slowly, local units are moving towards outsourcing work, as it saves them from the hazards of constantly spiralling raw material costs, and capital and marketing costs,” Kumar added.
Ravi Foods Private Limited, a Rs 400 crore biscuit manufacturer that produces 15,000 tonnes per month, earns its revenues both from working as a third-party manufacturer to some leading companies like ITC, Parle and Britannia, and producing for itself.
“The company does 50 per cent outsourcing work and 50 per cent own production,” Ravinder Kumar Agarwal, managing director of Ravi Foods, said.
For producing a tonne of biscuits, the average margin for a local manufacturer is Rs 1,000-1,500, depending upon the variety. For confectionery and wafers, it is Rs 3,000.
“Our distribution network is also not strong and we cater to only Tier-II towns and rural areas. The business is growing but the problem is mainly competition from the multinationals,” said Kumar. The established companies are able to survive, but new entrants are finding it difficult.
The small players mainly cater to rural and semi-urban markets, and are banking on the value aspect, ‘taste’, and cheaper price to retain their minuscule customer base. In the unbranded market, they sell it through a dealer in each district on a contract basis.
“When it comes to taste, we have our own loyal customers. Lack of resources to publicise and advertise our products are also a drawback for us. It is very difficult to create that mark and to get the existing customers,” says Nitin Sanghi, managing director of Pushiti Foods.