The Hindu Business Line : `Price point is a nightmare'

Settling for a cup of hot milk at the end of a book launch-and-signing session at Chennai's Crossword, author of Understanding Emerging Markets (Sage), Stefano Pelle, Vice-President and Chief Operating Officer (Business Unit Russia & South Asia) of confectionery major Perfetti van Melle, says that eventually, the Indian market will settle down to being a business of big players. BrandLine caught up with him for a chat on the segment, his outlook on the market and the trends in the business, apart from PVM's own plans for India. The book, based on Pelle's work across the BRIC countries, offers an insight into the rising power of emerging economies and can serve as a guide to understanding and doing business in such emerging markets.

Perfetti ended financial 2006 with a turnover of over Rs 600 crore. Its brands of candy, chewing gum and bubble gum include Alpenliebe, Chlor-Mint, Mentos, Cofitos, Marbels, Big Babool and Happydent White and Center Shock.

Excerpts from the interview:

A few years ago, at the time of integrating Perfetti and van Melle, you had said that you would invest Rs 150 crore - Rs 200 crore in India. Is that happening?

It has happened. In a couple of months, we're opening another factory in Uttaranchal, in Rudrapur. It's going to be operative since the first day. We are increasing capacity quite a bit. The plant could do even 15,000 tonnes in the long run.

How much are you at now?

Last year, we finished at 40,000 tonnes. With this, we will be over 50,000 tonnes.

Is the bulk of that investment in this factory?

About Rs 50 crore or so.

But are you getting people to work there, in Uttaranchal?

Interestingly, we are sending people from the Chennai factory there. It's a good opportunity, it will produce some other products vis-à-vis what we produce here, it's a cross-company, cross-territory experience. But we do have an obligation to employ a minimum number of local people there.

Will that factory make different confectionery or more of the brands you make now?

That and more. It will make what's now in the market as well as new products.

So what's new at Perfetti?

Well, we've stepped into éclair, we weren't there before. It's called Chocoliebe, it's a soft kind of shell éclair - this is a chewy éclair. But it doesn't stick to your teeth. There's also another four-colour lollipop, it's very unique, very unique. Some time ago, we launched more variants of our Happydent brands. So there's always something new, something exciting, we always want to innovate and come up with innovative products.

What has been happening to the confectionery market since you've been here, since Alpenliebe launched in 1995?

There was a moment of stagnation - in 2003-04, excise duty was hiked from 8 per cent to 16 per cent on candies and gradually rolled back. Then the market started growing again. This year, there has been good growth, especially in the chewing gum segment. As foreseen, the sugar-free gum category is also growing rapidly.

The other development, in the last 2-3 years, is the number of acquisitions of local players by international players but also local with local - Godrej and Nutrine. Eventually there will be a few big players.

Are you looking at any acquisitions?

Well, our organic growth is still very good. So we don't need to look at that locally, but in July 2006, we acquired Chupa Chups, a Spanish brand. In spite of not being distributed here, brand awareness is pretty good.

So what's happening to the various categories - how large is the market today?

My guesstimate is Rs 1,500-1,600 crore, candies and chewing gum put together.

What kind of share does Perfetti have?

I'd say more than one-third of the market. Well, in chewing gum, we might have excess of 70 per cent. In bubble gum, 40 per cent, all candies put together, 20-25 per cent. We don't buy Nielsen data, so these are my internal estimates.

You compete with different brands in different segments.

Yes, we compete with Wrigley's in chewing gum, even Lotte is coming up, it will take time, but will come up. In candies, Nutrine is likely to be our main competitor, more likely. But in lozenges, there's Cabdury with Halls and ITC with Mintofresh

What's happening to price points? The 50 paise price point is a barrier ...

It's a nightmare (laughs). It's a nightmare. The prices of the raw material have gone up. Last year, sugar increased by, like, 30 per cent. Luckily, it's coming down a bit. Glucose has gone through the roof. In spite of this, for the last 12 years, we sell at half a rupee. Sooner or later, we'll have to break this price point.

But it's a big leap from 50 p to Re 1.

Yes, that's the problem. Due to the lack of coinage, 60 paise or 75 paise won't work. The next useful price point would be Re 1 but it's double the price. So we're trying to launch products at higher prices.

Would they be bigger?

Well, yeah. This éclair, Chocoliebe, is bigger, and has 20 per cent chocolate, so it's much more expensive than Re 1. If prices are raised from 50 paise to Re 1, that should happen across the market, otherwise those who stay at 50 paise will gain.

So you don't see any cartelisation of various brands?

No, none.

So what's the solution?

More premium products. But at the same time, modern trade is coming up. There they don't sell by piece - they sell by stick, flip-top and bags. There's another solution - that they ban the 50 p coin!

What's the total capacity of your plants as of now?

We did 40,000 tonnes last year. Say 25,000-15,000 between Manesar and Chennai.

What are the other interesting trends in the eight-odd years you've been here? Impulse buying, adult candy?

Yeah, yeah, confectionery's becoming more adult thanks to ... functional gums - the sugar free gums. There's an upgrade in the quality of products vis-à-vis what was there in the market a few years ago, the business is getting concentrated amidst big competitors and competition is becoming more and more aggressive. They're ready to invest not just in advertising but also in promotion ... and with this fixed price point, there is a problem of bottomline, no doubt about it.

Do you have any plans to raise funds from the Indian market?

No, our profits, share, are not for this kind of reasoning ... see, they (the management) want to be free to act. When you get to shares and public companies, you have to answer to somebody, which is not what they'd like to do.

So your investments are entirely from the parent company and through debt?

No, debt's hardly anything. It's self-financing, from equity and inter-company loans, but only when necessary, and whatever profits and reserves we've been doing so far.

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