Bright future ahead for Indian food processing industry.
"INDIA can emerge as a leader in the global food processing industry," said Indian Prime Minister Manmohan Singh in December 2009 while addressing a conference of food processing ministers of different Indian states in New Delhi, noting the country's US$100 billion food processing sector grew by 14.7% in 2009. With a 1.14 billion population, 7.1% GDP growth in 2009, 4.1% food consumption growth also last year (2009), expanding affluent classes and diverse agro-climatic conditions supporting production of a wide variety of crops year round, the country continues to offer a growing opportunity for international food processing companies. A central government plan Vision 2015, prepared by India's ministry of food processing industries, envisions tripling the size of the country's processed food sector by 2015, by increasing perishables processing levels from 6% to 20%, adding 20% to 30% to the industry's value, and growing India's share of the global food trade from 1.5% to 3% in the next five years. This vision entails a targeted investment of US$21.7 billion, most of which is expected to come from the private sector. However, a recent report prepared by the Federation of Indian Chambers of Commerce and Industry (FICCI) thinks such expansion would cost as much as US$100 billion, with half going into capital investment such as plants and machinery. The FICCI report also said that by 2015 the Indian processed food industry will be worth US$150 billion - with the major growth contribution coming from the organised branded food sector. Presently, 75% of the food processing units are in the unorganised non-branded sector and the industry is highly fragmented.
However, with more integrated development of the entire food value chain, the situation is likely to improve, with demand already fuelled by macroeconomic and socioeconomic factors. "Broadly the pattern still stays the same as the earnings rise and people have higher levels of disposable incomes; nuclear families tend to grow, leading to a trend towards convenience food," said Sameer Barde (NOTE--SPELLING IS CORRECT), senior director at FICCI. "In urban India we have already started seeing this global trend in a very big way."
Indian cities have many more young nuclear families with double incomes, for whom precious family time and modern amenities weigh much more than the price tag of a product. Although their higher income levels means these middle class families would not spend the national average 30% proportion of income on food (according to FICCI), the amount of additional money likely to be spent on the processed food sector is substantial. Furthermore, eating out at restaurants remains an important part of Indian families' entertainment.
According to India Retail Report 2009 by Images F&R Research, 60% of those who shop in stores with branded goods also eat at restaurants regularly, and around 80% Indians eat out at least once a month, while almost 28% do so four to six times in a month. Positive signs can also be noticed inside the homes, where the growing sales of large-size (500 litre) refrigerators and microwave ovens are a direct indicator of the popularity of frozen and other processed foods, including exotic ones from abroad.
DEMAND AND SUPPLY
"As the booming economy has made Indians travel more (to other countries), they have got exposed to new lifestyle opportunities and experiences of quality and variety, which in turn has created demand for new processed food products in the country," said Prahlad Kakar (NOTE--SPELLING IS CORRECT), a marketing and advertising specialist who promotes olive oil in India.
An American company Chaski International is one company exporting foreign food to India. It sells, for instance, pancake mixes, muffin mixes, scones, banana breads, dessert sauces, chocolate caramels, white chocolate, peanut butter, olive oil, and balsamic vinegar in an innovative pump action spray. Its managing director Mathew S. Reno told just- food.com that products which are considered gourmet, upscale and healthier are in great demand in India and it is turning out to be an attractive market for the company.
Antonio Santospirito (NOTE--SPELLING IS CORRECT), area manager of Italy-based Conserve Italia International, which imports processed vegetables such as the Cirio brand of small tomatoes, also said that "we promote better Italian cuisine and authentic ingredients as in our view it has a good market in India." About marketing its products, he said that "we are on the learning curve and want to present our products to selected potential customers through large retail outlets, hotels and restaurants."
To achieve its goal the company is organising road shows across India where it prepares and serves dishes made out of its products. In future, though, he is certain that the company would also use mass media for advertising.
According to Vicky Aitken, marketing coordinator of London-based Tarsus Group Plc, which recently organised the International Food & Drink Expo in New Delhi and Mumbai, such companies will succeed if they develop a deep understanding of the Indian market place and the needs of Indian consumers, who according to her are having western influence on their pallets and expectations.
One issue, said Reno, is the pricing of imported products, which can be complicated. He told just-food.com that "competing with the domestic producers is going to be our largest challenge as high cost of manufacture, freight, customs duties, various taxes and payments to intermediaries like importers and distributers can make typical imported products cost twice as much." However, he said these products can still be sold for profit in India so long as consumers are persuaded of the superior quality, safety, innovation and consistency of their products. This formula of success, however, may get discounted as Kakar said local companies have already started to compete with foreign companies in terms of quality, packaging and flavour.
Barde too has his reservations about the demand for new processed food products as, according to him, it requires the consumers to be more open in experimenting with these products, which he said would take place gradually over the next three to five years. He added that to generate a widespread demand for modern products the country would require inputs from the entire cycle: i.e. raw produce, quantity, quality and variety on one hand, and innovation in the manufacturing process in terms of packaging, machinery, manpower and regulation on the other.
READY-TO-SERVE AND DAIRY
Regarding the organised branded ready-to-serve industry--it now has more than 3,000 outlets around the country and includes international brand names like McDonald's, KFC, Pizza Hut and Cafe Coffee Day. According to a FICCI report, more than 30% of all the new food outlets in almost all Indian cities are opening as franchises and the total number of food and beverage ready-to-serve companies exceeds 150. These consist of fast food, pizza chains, sandwich shops, juice bars and restaurants of which 42% serve north Indian cuisine, 34% serve American food and pizza, and the rest serve south Indian (with its accent on rice, lentils and spices), Chinese, Italian and others. Significantly in 2009, 26% share of all franchise business came from foreign companies. Some of these food franchise outlets, said the report, can be started for as low as US$2,200, especially those in a kiosk or as an add-on to another store, such as a coffee bar in a bookstore. For fine dining restaurants this start-up cost could rise to US$650,000.
The main problem for the dining industry remains pricy real estate in prime locations, and for that reason home delivery options offer added benefits to the ready-to-eat food companies. In the branded home delivery segment, American chain Domino's holds a 65% market share with 270 outlets in India and it plans to add another 65 soon. Its franchisee in India, Jubilant Foodworks, has raised US$65 million from the capital market for its expansion. The pizza market, according to the estimates of FICCI, grew by 35 to 40% in 2009 to reach over 3.5 million pizza sales in the year. In the Chinese food segment, 'Yo China,' which operates from malls, airports, railway stations and big company offices, plans to expand its presence from 245 to 765 outlets in 2012.
Despite this growth, foreign food chains, however still face a big competition from local food items. "The sheer complexity and variety in Indian diet is huge and an Indian restaurant could offer 40 different types of cuisines like Punjabi, south Indian, Bengali, Chinese, sandwiches and western junk food," said Barde. He added the majority of Indian consumers still tend to prefer freshly cooked food, noting: "In Europe people are coming back to fresh, so maybe we are at the right place and don't have to go around the whole circle."
The US$63 billion Indian dairy sector is one of the most important parts of the country's food processing industry, especially because India is the world's largest producer of milk, and because of constantly increasing domestic demand. Growing at 5% annually, it is mostly dominated by state cooperatives such as the industry leader the Gujarat Cooperative Milk Marketing Federation Limited (GCMMF) that has annual sales of US$1.5 billion and sources raw milk from 2.8 million milk farmers. Owner of country's most popular dairy brand Amul, the GCMMF has been going through difficult times, as is the case with many other companies in the sector.
According to Barde, "we had a bad rainy season in 2009, which impacted the agriculture and pushed the food inflation to 10 years high. This lead to a situation where the availability of commodities like butter became a big concern as the reduced milk supplies were diverted to fresh milk". He said that the situation improved towards the end of the year but GCMMF was still torn between the consumers' and farmers' interests.
Even after increasing the price of milk three times in a year and passing on 85% of its sales revenue to the farmers, it could not match their expectations. The Cooperatives' chief general manager Rupinder Singh Sodhi (NOTE--SPELLING IS CORRECT) has complained that the central government has not taken any action on farmers' demand of banning exports of de-oiled cake--a rice milling by-product used in cattle feed--and lowering of taxes on other feed ingredients. "The cost of production is still rising and if it goes up further, naturally we have to increase the price," he added.
Even in these difficult times, the country's largest industrial corporation Reliance Industries, mainly manufacturing textiles and petroleum products, consolidated its recent entry into the industry. In 2007, its brand 'Dairy Pure' had been launched as a private label for its 900-strong retail chain, but the company began its sales through general milk retailers and is now trying to find refrigerator space in small family owned shops across the country. With processing facilities in the states of Haryana, Rajasthan and Andhra Pradesh, the company's annual sales turnover grew three times in last financial year to reach US$39 million. The winning strategy for the company could be its offer of 10% extra milk in every packet than its rivals while sticking to their price line.
Meanwhile, Indian-owned Britannia Industries, which holds a 50% share in the US$33 million organised cheese market and sells butter and liquid milk in tetra-packs, added more products last year. With annual revenues of US$43 million, the company launched Actimind, a new milk-based health drink in mango and strawberry flavours meant especially for children that costs US$0.32 for a 150 millilitre pack. Pursuing its emphasis on health products, the company also launched a biscuit-based Health Starter Kit that contains three biscuit boxes along with a 7-day gym pass, a gym sipper bottle and a health diet chart. Yakult Danone India (NOTE--SPELLING IS CORRECT), a 50-50 joint venture between Yakult Honsha of Japan and France's Groupe Danone also entered the Indian market in 2009, offering a probiotic health drink, which is priced at US$0.22 for a 65 millilitre bottle at big retail outlets in Delhi, Mumbai, Jaipur and Punjab.
Given the overall strength of the industry, there has always been little doubt that foreign players would be attracted to it. Australia's dairy state of Victoria showed its keen interest in doing business in India while its delegation comprising of representatives from six of its companies Bemco Australia, Longwarry Food Park, Tatura Milk Industries, Fresh Cheese Company and Ballantyne Foods (NOTE--SPELLINGS ARE CORRECT) toured India in November 2009. The aim was to promote its products and technologies for production and tropical dairy farming in India. They held discussions with various dairy cooperatives and private companies in New Delhi, Mumbai, Bangalore and Hyderabad to look for possible co-marketing and co- branding opportunities.
MEAT, FISH, VEGETABLES, CONFECTIONERY
In the meat and fish sector, India produces 6.1 million tonnes of marine products and exports around 1.8 million tonnes, (albeit mostly unprocessed fish). Efforts are being made by India's Marine Products Exports Development Authority to step up the exports of finished products such as coconut battered shrimps and breaded battered fish, however. For the domestic market, the marine products on the retail shelves include pomfrets, crabs, prawns, cuttlefish, shrimps, squid, fish octopus and tuna that are marketed by Indian companies such as Allanasons, IFB Agro, ASF Seafoods, OKK Fresh, Bell, Sea Sparkle, Sumero, Gadre Marine and Deep Sea Products.
Meanwhile, the processed meat segment, according to FICCI, is growing by 15% to 20% annually. Key brands such as Godrej Agrovet, Suguna, Venky's and Al Kabeer are marketing broiler chicken, processed chicken, frozen mutton, beef and chicken. The report said the sector offers investment opportunities for foreign companies in breeding, animal health, feed, equipment, processing and retail distribution. The US$1 billion exports in this category are mainly comprised of buffalo meat, which is not popular amongst beef-averse Indian meat eaters (especially Hindus) but provides better investment opportunity for those targeting the export markets.
In the northern state of Punjab the state government has recently approved a US$170 million investment plan for Brattle Foods Ltd to set up three food processing units in the next three to five years near Gurdaspur, which would be spread over 200 acres and deal with meat, dairy, fruits and vegetables.
The advantage of low cost production has always been present in India, but there is something more than that, Barde explained. "The countries that have successfully been able to manage cold storage and supply chains had received heavy subsidies from [public authorities]. However, Indian farming is based on a far more self sustainable model even though it is facing certain pain at this point of time."
According to FICCI, the confectionery market is doing well, too. This US$3billion market is equally divided into organised and unorganised sectors and has a capacity of 85,000 tonnes. In terms of growth, the branded organised sector is growing at 15 to 20%, a rate that is more than double that of the unorganised division. Heavy advertising by Perfetti Van Melle (NOTE--SPELLING IS CORRECT) has made its Alpenliebe, Happydent, Chlor-Mint, Center Fresh, Marbels, Mentos, Cofitos and Big Babol (NOTE--SPELLINGS ARE CORRECT) brands favourite amongst Indian children. In the chocolate segment, Cadbury's Dairy Milk brand tops in visibility while Nestle maintains its presence with Kit-Kat and Munch bars.
The industry has faced a serious supply side problem and continues to deal with the high price of sugar. Just before the last Hindu festive season in August-September 2009, many state governments had issued a sugar control order to check hoarding, which they thought might be responsible for the commodity price shooting up to thrice normal levels in the open market. No company was allowed to keep more than 15 days of stock of their yearly average. This had a huge impact on manufacturers of chocolates, toffees, hard sweets, biscuits and other confectionery items as larger broader-based food manufacturing companies required extra raw material supplies before the festivals. FICCI lodged a strong protest with the governments, and according to Barde, some orders were amended but not all their issues were addressed. Among the snacks segment, potato crisps remain the favourite in India and are available at the smallest of the shops across the country. Lays and Uncle Chips brands from Pepsico are the most popular crisps, and maintain a similar price line of US$0.22 for a 30 gram pack, though the half and double size packs are also available at proportionally varying prices. Local brands such as Haldirams and Bikano (NOTE--SPELLINGS ARE CORRECT) sell only bigger packs at relatively cheaper prices.
The Indian bakery industry is dominated by bread and biscuits that according to the Federation of Indian Food Industry constitute over 70% of this US$1 billion segment, but most of it is in the unbranded unorganised sector. The problems facing the industry include rising cost of raw materials, lack of skilled manpower, slow acceptance of technology, and unhygienic operation standards and practices.
On the higher end of the market, Rich Graviss Products (NOTE--SPELLING IS CORRECT), a joint venture between Rich International Holding Incorporation, (RIHC), of the USA, and Kwality Frozen Foods India, known for its frozen food and as a solution provider to the food service, bakery, and retail markets, recently launched Rich's Truffle Base, a chocolate and cream mixture--in raw form--to make truffles, for bakery applications, designed for and especially targeting service customers such as bakery chains, cake shops and hotels as it saves on chocolate consumption.
A French company Inducia Food & Beverages International also offers similar products to a similar category of clients. Major Mayanka Sharma, (NOTE--SPELLING IS CORRECT) director of the company, told just-food.com that they import ready-made colour concentrates, fruit purees, quick frozen fruits, chocolate powders, cheese and other fine food products used by professional bakery chefs. Sharma, a former army officer who used to develop packaged food for Indian soldiers, said that higher prices of their imported products require a lot of convincing customers about the advantages of their superior quality. Still the biggest problem, she said, was the lengthy custom clearance procedures. "Our last consignment took 50 days for the clearance at the port and it was havoc because the quality deteriorated and overhead costs like charges for humidity and temperature control added on." She complains that until now they have not received any support from the ministry of food processing in terms of securing efficiency improvements at Indian ports.
Barde, however, argued that there is no deliberate attempt by government or the local trade bodies to discourage direct food imports, which according to him are anyway still small-scale compared with domestic production. "There has always been a through-put issue at the customs, partially because of the old bureaucratic mentality and the limited numbers of inspectors at any port who are not necessarily trained in terms of food imports." However, he agrees that as a consequence there is no appreciation for the requirements of the food safety, or of maintaining a certain temperature or humidity levels for the products at the ports. Kakar has his own argument, as he said that, "when one creates a demand and doesn't allow the supply in smooth transition, then people will find other avenues like smuggling to get the products, depending upon what the margins are." Many tariffs for importing dairy products, for example, range around 30%.
But the foreign trade is not just restricted to imports as Indian food companies are also looking towards international markets. Capital Foods, a Mumbai-based company that manufacturers noodles, sauces and snacks plans to launch ready-to-eat meals in the US, Canada, Singapore, Australia and the Middle East next month under the brand name Ching's Secret. The company is investing US$7.4 million in two new units in western India, which will be operational by the middle of 2010.
Scandic Food India, a wholly-owned subsidiary of Denmark's Good Food Group also announced plans to begin exports of jams sold locally under 'Sil' brand name, even as it expands its Indian distribution network to 100 cities by March 2010. The company also markets tomato ketchups, frozen foods and canned sweet corn.
To help Indian processed foods find better markets, the French government has recently proposed to set up a joint Indo-French testing lab for Indian processed foods before exporting these products to the European Union. Such a lab would be a big boon for Indian marine products consignments, which at times get rejected at European ports.
ORGANISED RETAILING AND REGULATIONS
According to 'Land of Opportunities The Food Industry in India', a FICCI- Technopak report released in 2008, the organised food retailing and food services industry in India has been growing at 25% annually and is expected to reach US$53 billion by 2013. Also, the Associated Chambers of Commerce and Industry of India (Assocham), another trade body, claims the country's overall retail industry is growing only at 5.5% annually but its projections indicate that over 100 malls with a combined area of more than 2.8 million square meters will start operations in 2010. The industry body stressed that Indian food retail outlets are witnessing exponential growth even in the smaller towns.
All this growth aside, the organised food retail sector has not had a smooth ride in the past year. Although US giant Wal-Mart has made its much-published entry in India and has already opened two big stores and many small ones, other competitors have run into trouble. "The real estate rates crashed all across the country when the Indian economy started slowing down, and that had a huge negative impact on the big retail chains as they have procured the properties at a phenomenally high prices," said Barde. A south India-based chain Subhiksha (NOTE--SPELLING IS CORRECT) expanded across the country but then had to shut down in early 2009, and many others are facing financial trouble, too. In 2009, Reliance shut 50 supermarkets; Spencer's Retail Ltd 150 and Aditya Birla Retail 70. According to Barde, retail business requires phenomenal cash flows and after the financial crisis, funds dried up and many companies that were about to approach the stock markets with their initial public offerings had to postpone their plans.
Another big problem for the major retail chains is are a series of state laws known as the Agricultural Produce Marketing Committee (APMC) Act, which forbid retailers from buying farm produce directly from the farmers in most Indian states. The central government has been trying to persuade states to amend these laws and follow a national model APMC Act, which would facilitate more market-driven farming. The opposition comes from the traditional food supply chain businesses and services.
Meanwhile, on the retail shelves there is a separate battle brewing between the manufacturers and retail chain owners finding it more profitable to launch and promote in- house brands. Reliance, Spencer and Future Group have already made their own brands such as 'Reliance Fresh', 'Smart Choice' and 'Fresh n Pure' that are well entrenched among its regular customers. Their strategies are supported by market surveys that reveal that their quality is perceived by customers at par with national brands. Reports in India's Economic Times newspaper have noted in-house brands (some excelling in product packaging), are not only 10% to 20% cheaper to customers but also offer far higher profits to retailers. This has increased the bargaining power of the retail chains with the manufacturers, who until now, according to the Economic Times, offered only 10 to 15% margins.
The situation has prompted many manufacturers to keep the small family-run stores in their good books by offering better margins and services as these small stores still lead the Indian retail scene. Their dominance is unmatched in the rural areas, where 75% of Indian population still lives. Especially targeting the poorer population, some companies have started to offer their products in cheap and very small packaging. Food majors such as Nestle, Hindustan Unilever, Marico, Dabur and Godrej have introduced their food products in packs that cost as low as US$0.10, to target the vast population of bottom-of-the-pyramid consumers, estimated to be around 350 million strong.
Meanwhile, complex tax codes also hamper the development of the food industry in India. Prime Minister Singh himself admitted that the food processing sector was subject to "multiple levies" and said there is an urgent need to rationalise tax structure to replicate the international success of the Indian information technology industry. At present, various states impose additional taxes despite suggestions by a panel of state finance ministers to levy a simple 4% VAT rate on processed fruits and vegetables. Such practices are clearly hindering the flow of investment into the country's food processing sector, Prime Minister Singh said at the December conference.
Also, Draft Food Safety and Standards Rules and Regulations, 2009, a recent proposed central government Food Safety and Standards Authority regulation on the labelling of processed food products has raised concerns in the industry regarding its complexity. The new regulations require the following items to be displayed on the food product label:
1. Product names and categories of foodstuff
2. An ingredient list (in descending order of weight)
3. Logos for vegetarian or non-vegetarian food
4. Nutrition facts panel which includes energy, protein, carbohydrate (sugars) & fat data
5. Shelf life (best before date)
6. Storage conditions
7. The name and address of the manufacturer, packer and/or seller
8. The country of origin (in the case of imported foods)
10. Instructions for use
Many manufacturers have claimed these requirements are too strict and complained about the additional costs for compliance. This has led to an indefinite delay in its implementation by the authority.
And if this was not enough, consumer interests have prompted the government to draft another regulation relating to food product advertising. With the aim of reforming the law on advertising and unfair trade practices, government has proposed formal 'Guidelines--Code of Self-Regulation in Food Advertisement' for the food industry. This new proposal, if approved, would make endorsers--mostly celebrities--accountable for the claims made by the companies. It said that the celebrities and prominent people who promote food should recognise their responsibility towards society and not promote food in such a way that undermines healthy diets.
This new regulation however has the whole industry protesting strongly against it by arguing that the celebrities have no means to verify the product claims. According to FICCI, celebrities should only be held responsible if, for example, they talk to under-age consumers, or promote over-consumption.
Such concerns are if anything an indication of how far the branded food industry in India has developed. The richer strata of Indian society that was slightly hit by the financial crisis is already regaining its economic strength and the processed food market industry is growing to serve these consumers. It is experiencing some hindrances such as the deficit of production and processing technology, research and development, and trained manpower to deal with the growing demand, but with appropriate strategies and adequate investments, established and innovative companies have fertile ground to reap profits.
Areas offering good investment opportunities, according to the Indian Trade Promotion Division of Ministry of External Affairs' website, are many. In a long list, it cited mega food parks, agro-infrastructure, supply chain aggregation, logistics and cold chain infrastructure, fruit and vegetable products, animal products, meat and dairy, fisheries and seafood, grains and cereals, packaged convenience goods, ready to eat food, machinery, packaging and establishing distribution infrastructure such as cold chains.