Tuesday, January 25, 2011

Food inflation to spill over, says RBI, hikes rates

With rising prices becoming the “dominant concern”, the Reserve Bank of India on Tuesday hiked its key short-term rates by 25 basis points and cautioned that food inflation has remained at an “elevated level for about two years and the prospect of it spilling over to the general inflation process is rapidly becoming a reality”.

Though the latest RBI measures will push up the cost of funds, bankers are not expecting an immediate hike in lending rates. Putting upward pressure on borrowing and lending rates, the RBI raised its repo rate—at which it lends to banks—to 6.5 per cent from 6.25 per cent and lifted its reverse repo rate—at which it borrows from banks—to 5.5 per cent from 5.25 per cent.

Though the latest RBI measures will push up the cost of funds, bankers are not expecting an immediate hike in lending rates.

Putting upward pressure on borrowing and lending rates, the RBI raised its repo rate—at which it lends to banks—to 6.5 per cent from 6.25 per cent and lifted its reverse repo rate—at which it borrows from banks—to 5.5 per cent from 5.25 per cent. “Even as the rate itself remains unacceptably high, the reversal in the direction of inflation is striking. Primary food articles inflation has risen again sharply. Non-food articles inflation and fuel inflation are already at elevated levels. Non-food manufacturing inflation has remained sticky. There are signs of food and fuel price increases spilling over into generalised inflation,” RBI Governor D Subbarao said.

Food-cost competition trims Metro sales

Quebec and Ontario supermarket giant Metro Inc. said Tuesday that aggressive price discounting and lower drug pricing bit into first-quarter sales, but it is ready to fight new food-counter competition from Wal-Mart Canada and soon Target Corp.

CEO Eric La Fleche said heavy investment in the retail food network, a successful Metro et Moi loyalty program through Quebec to match Air Miles in Ontario, plus transportation and warehousing savings and tighter cost control will keep Metro competitive and growing.

"Ontario remains a very challenging market especially in the discount sector," La Fleche told analysts, “but intense promotional activity is continuing in both provinces, indicating more pressure on the topline in the current quarter."

But he also said with the surge in commodities worldwide, many food prices may well trend higher this year. "We’re collaborating with our suppliers to ensure cost increases will be passed on to consumers in an orderly way and not all in one go.”

Walmart is expected to start selling a full range of food products at its Quebec Supercentres, as it already does in Ontario. Target has food counters in the U.S. and is buying Zellers, which is already in the food business.

In the first quarter ended Dec. 18, Metro said, $84 million was invested in the network. with five new stores opened, eight renovations and three closings. About $250 million will be invested through fiscal 2011.

Metro, with almost 300 supermarkets and discount stores in Quebec and more than 270 in Ontario, has low debt and the cash flow to continue share buybacks and dividend increases and to finance network expansion, said La Fleche. A special team is working on long-term expansion opportunities in Ontario.

Last year Metro made a sizeable acquisition in Quebec "and we’re always looking at food-sector opportunities and we want to expand our Brunet and Drug Basics drugstore networks in Quebec and Ontario despite the prospect of lower generic prices."

"We see two years of built-in deflation in the drug business with the Ontario and Quebec generic laws and so we must lower costs, reduce our product offering and sharpen up our warehousing," he added.

Earlier Metro said first-quarter sales slipped by 0.5 per cent from a year earlier to $2.64 billion and earnings were $92 million or 88 cents a share, down 6.2 per cent from $98.1 million or 91 cents a share in the first quarter of 2009. Excluding special items, including its share of Alimentation Couche-Tard’s profit, adjusted earnings equalled 88 cents a share, up 3.7 per cent on the year.

Adjusted operating earnings (before interest, tax and depreciation) were $168.8 million or 6.4 per cent of sales versus $172.2 million or 6.5 per cent of sales. Same-stores sales were flat compared with the 2009 period.

Fast food industry on fast track

Constantly experimenting with the tastes of consumers by mixing western and ‘desi’ menus, fast food industry has seen a rapid growth in last few years, thanks to high disposable incomes and greater exposure to multiple cuisines.

A lot of Indians are travelling abroad experiencing changes in lifestyle and are keen on experimenting with food, say experts.

“Our comparable sales in metros have been nearly 20 per cent in 2010 and as the fast food market continues to expand across the country and across various consumer segments, there is tremendous scope for expansion,” says Mr Vikram Bakshi, MD, McDonald’s India (North & East), adding that they are targeting to open around 40 plus stores in the country soon.

McDonald’s made its India debut in 1996 with one outlet at Basant Lok in Delhi and at present, it has 211 restaurants of which 105 are in North & East India and 106 in West & South India.

Apart from metros, McDonald’s is fast reaching rural areas as well, as there are 14 outlets in Haryana, 11 in Punjab and 28 in Uttar Pradesh.

“With ever increasing pool of working population, nuclear families and a progressive middle class, the demand for fast food already on the rise will see a tremendous growth in future also,” says Ms Ritu Chaudhri, VP Marketing, Nirula’s.

Nirula’s has 80 outlets (company owned and franchised) in 7 cities across Delhi, Uttar Pradesh, Uttaranchal, Haryana, Rajasthan and Punjab and are planning to open 70 more till 2012.

The move to ‘localise’ the fast food tastes has paid rich dividends and increased brand loyal customer base for the companies.

Pizza Hut is known to introduce Indianised version of pizzas to attract the local customer base. “We launched products like Karahi Paneer, Teekha Paneer and Karahi Chicken long time ago and it was a complete success. Soon, you will see more of such produ cts,” says Mr Umesh Kumar, Manager, Pizza Hut, CP.

Mr Bakshi says the age old saying of ‘when in Rome, do as the Romans do’ holds the USP. “Keeping in view the strong liking of north Indians towards spicy stuff, we had to introduce in our menu dishes like McAloo Tikki Burger, Pizza McPuff, McVeggie,” he says.

To reposition itself as the preferred choice for young adults, Nirula’s also launched its Desimania campaign.