The size of the Indian urban food market is estimated at Rs 350,000 crore. The domestic market for processed food is huge and fast growing. The retail boom will create a huge demand for the food-processing sector in the coming years. Little wonder that 2007 has been designated the Year of Food Technology.
The private sector is yet to realize its full potential in the food-retailing sector, as the market is still to explore. Though, it has now started discovering the money there is to be made in the urban food retailing market.
Urban centres have the potential of development process. But they do not produce food as they lack agricultural land; on contrary the rural areas do. In that sense, the urban areas provide an assured market for the food produced by farmers. The urban food marketing system thus assumes considerable importance for both feeding the urban population and helping farmers.
There are certain distinct characteristics of urban food demand. The urban population generally has a higher purchasing power. The rising average income is leading to greater demand for high-value processed food. A considerable number of urban women work, creating a demand for heat-and-serve foods.
The urban population density is high and this demands a chain or a network of retail outlets. Indian food retailing is poised for a quantum leap. Not only are newer names set to dot the retail landscape but also such new formats, as hyper-and super-markets are to emerge.
The key drivers for increased demand in value-added processed food products are: a) growth in consumer class; b) change in lifestyle characterized by expanding urban population, increased number of nuclear and dual-income families; c) change in attitudes and tastes with increasing modernization and to a lesser extent westernization of tastes, particularly, of the youth; d) low penetration rates; and e) ability to offset seasonal supply-and-demand effects in fresh products.
It has been estimated that during the Eleventh Plan period, an investment of Rs 1 lakh-crore is expected in the food-processing sector. Realizing the need for a regulatory framework for the retailing sector, the government has merged 16 laws relating to the food-processing sector into one piece of legislation and this is expected to be put in place from the 2007-08 financial year.
Stress on Marketing
To tap into the huge market for processed foods, an efficient marketing system is necessary to bring about demand-driven production; marketing becomes the key to catalyzing agricultural development and with that fostering inclusive growth. Besides, it reduces intermediaries, increases farmers' realization and lowers consumer prices.
An efficient marketing system can reduce post-harvest losses, promote graded processing, packaging services and food safety practices, induce demand-driven production, enable high value addition and facilitate exports.
Marketing reforms are needed, as they are critical to development of the potential urban food demand. The National Commission on Farmers, headed by Dr M.S. Swaminathan, has suggested encouraging public-private partnership besides encouraging private sector investments to tap this huge potential.
At present, there are 7,521 regulated markets. Most of these lack critical infrastructure. Therefore, massive investment is needed to provide critical agricultural marketing infrastructure. It is estimated that at least Rs 12,234 crore is needed for the regulated markets. Initiative has to be taken to promote public-private partnerships as they ensure efficient resource utilisation and better management practices. There are many examples of successful public-private partnerships. Safal market in Karnataka is an instance of the modernisation of wholesale markets. ITC's e-Chaupal, Haryali Kisan Bazaar, Mahindra Subh Labh, Cargil Farmgate Business and Tata Kisan Sansar are all initiatives of marketing distribution in the PPP format. Besides, commodity exchanges and futures markets have come up in the form of National Commodity and Derivative Exchange Ltd (NCDEX) and Multi-Commodity Exchange Limited (MCX).
Incentives to Corporates
To encourage the private sector to make investments in marketing infrastructure on the required scale, a favourable regulatory environment needs to be created so as to attract large corporates.
This would include: a) liberalised credit norms to entrepreneurs for agricultural marketing activities; b) changes in the market regulatory framework to allow private entrepreneurs establish market yards and other regulatory facilities; c) changes in the co-operative laws to allow farmers' co-operatives to work along corporate lines and compete with private trade; d) review of several legal instruments to facilitate the entry of entrepreneurs in marketing activities; and e) provisions to allow private entrepreneurs to cover price and yield risks for farmers.
The emergence of organised retailing in recent years and the creation of quality retail space have led to an increased demand for quality produce and thereby investments in supply chain infrastructure by private players.
A visit to the fruits and vegetables stores of a leading corporate would reveal the depth and width of the market for processed foods. In fact, the company opened more than 17 such stores in one city alone. The company also plans to enter into agri-horticulture and the processed food sector. Subsequently, a subsidiary is to market agri-horticultural products across the country. Conceptually, the company is creating a virtuous circle of prosperity by bringing farmers and consumers together in a win-win partnership.
The retail business should partner with farmers, logistics operators and traders to enhance their purchasing power. A supply chain, logistics and information technology infrastructure would string the whole plan together.
It has taken some time but finally it seems that the evolution of organised retailing in food products is on in India. Many retail start-ups promised a lot. But failed. Through trial and error, a sustainable business model is evolving. A significant number of new businesses are poised for a major surge.
Notably, private investments in marketing of processed food for urban centres have reached the inflection point with several large corporates beginning to invest significantly. Each of these retail businesses has created a sustainable model of its own. In fact, each has developed a model unique to the Indian context. The entry of large business conglomerates is likely to attract greater investments and create a cascading effect across the SME segment of the food and agri-space.
This coming of age for retailers in the organized retail sector augurs well for consumers and farmers in India.
India's Potential Untapped-Food Industry
India is the world's second largest producer of food next to China, and has the potential of being the biggest with the food and agricultural sector. The processing food segment accounts for 29.4 billion, in a total estimated food market of about USD 91.7 billion. The food processing industry is one of the largest industries in India. It currently ranks fifth in terms of production, consumption, export and growth prospects.
The Confederation of Indian Industry (CII) has estimated that the food-processing sector has the potential of attracting USD 33 billion of investment in 10 years and generates employment of 9 million person-days. The Government has formulated and implemented several Plan Schemes to provide financial assistance for setting up and modernizing food processing units, creation of infrastructure, support for research and development and human resource development in addition to other promotional measures to encourage the growth of the processed food sector.
Though the industry is large in size, it is still at a nascent stage in terms of development. Of the country's total agriculture and food produce, only 2 per cent is processed.The highest share of processed food is in the dairy sector, where 37 per cent of the total produce is processed, of this only 15 per cent is processed by the organized sector.
India's food processing sector covers fruit and vegetables; meat and poultry; milk and milk products, alcoholic beverages, fisheries, plantation, grain processing and other consumer product groups like confectionery, chocolates and cocoa products, soya-based products, mineral water, high protein foods etc. We cover an exhaustive database of an array of suppliers, manufacturers, exporters and importers widely dealing in sectors like the food industry, dairy processing, Indian beverage industry etc. We also cover sectors like dairy plants, canning, bottling plants, packaging industries, process machinery etc.
The most promising sub-sectors includes soft-drink bottling, confectionery manufacture, fishing, aquaculture, grain-milling and grain-based products, meat and poultry processing, alcoholic beverages, milk processing, tomato paste, fast-food, ready-to-eat breakfast cereals, food processing, food additives, flavours etc.
The Government of India has identified the Food Processing Industry sector as a high priority area. It has given a number of fiscal relief and incentives to encourage commercialization and value addition to agricultural produce. As per a study conducted by McKinsey and Confederation of Indian Industry (CII), the turnover of the total food market is approximately USD 69.4 billion out of which value-added food products comprise USD 22.2 billion.
The Government has also approved proposals for joint ventures; foreign collaboration, industrial licenses and 100 percent export oriented units envisaging an investment of USD 4.80 billion during the same period. Out of this, foreign investment is over USD 18.2 billion.
India is also considering investing another USD 22.97m in at least 10 mega food parks in the country. The move is besides working towards offering 100 percent foreign direct investment and income-tax benefits to the sector. According to Indian Credit Rating Agency (ICRA), the processed food market accounts for 32 percent of the total food market.
International fast food brands spice up their plans of entering India. Many like UK brand Dixy Chicken and pizza outlet Papa John's made their foray recently, Cinnabon and Barnie's will open their first store this year and a host of other brands, including SumoSalad and Panda Express, are scouting for local partners to tempt the Indian palate.
Fast-food retail chains such as KFC, McDonald's, Domino's, Pizza Hut and others are re-learning marketing lessons and segmenting their product portfolio to capture Indian consumers across diverse income levels and lifestyles. The strategy is an attempt by some top retailers to tone up profit margins with a multi-layered product portfolio that addresses the aspirational need of consumers willing to splurge while meeting the basic requirement at the bottom-end.
With cut-throat competition to set up standalone outlets at busy marketplaces getting tougher, fast-food chains have come up with a new recipe for success takeover and manage canteens across schools, colleges and corporate offices.
With global supermarket majors such as Wal-Mart,Tesco and Carrefour among others increasing sourcing of processed foods from the country, it makes monetary sense for local companies to enter/expand in this arena. In fact, Food Processing Minister Subhodh Kant Sahai had said at the beginning of the year that foreign retail giants are willing to buy as much as USD30 billion worth of processed food from the country.
Milk and Diary Products
This segment needs a special mentioning. India's milk and milk products output (milk equivalent) growth is set to outpace the growth in the global market. While world milk and milk products output is expected to grow by 2.6 per cent again in 2006, India is expected to register up to 4 per cent increase. The country will account for nearly half of the expected 5 per cent growth in Asia.
As the largest single dairy producing country in the world, India's output continues to grow strongly in the 3-4 percent range, largely in response to internal demand growth and sustained by increasing productivity. India will account for nearly half the 226 million ton total milk output of Asia. Given recent high international prices, it has started to enter certain export markets, particularly for skimmed milk powder, and is expected to export 0.3 million ton dairy products of the total milk and milk products output of 98.9 million ton. In 2005, the country had produced 95.1 million ton of dairy products.
Amul is set to become the largest liquid milk brand in the world after the consolidation of Gujarat's milk cooperatives, which envisages bringing all district milk brands under the Amul umbrella brand. Until now, Amul's marketer GCMMF claims, it is Asia's largest milk brand.
The market of the Amul brand of liquid milk will increase by 3.6-3.8 million litre per day to 4.5-4.6 million litre a day, once the district-level milk brands are phased out. The market size for Amul milk will increases further by 200,000 litres if sales from liquid milk in paper box packs are also added to pouched milk sales.
Meanwhile, the organized food retailing industry is likely to grow by 30per cent in the next five years and become a USUSD 2.4 billion industry by '10 from the current USD 562 million-USD 674 million, an industry expert said.
The country's seafood exports rose 11 per cent in dollar terms to USD 1.64 billion in 2005-06, helped by the increasing demand from the European Union, China and the West Asia. This is the first time seafood export from the country crossing the USD1.5-billion-mark. Last year, the exports stood at 1.47 billion.
The food-processing sector needs investment of about USD 28-35 billion to meet the changing food demands in India, according to industry estimates. The outlay for the food-processing segment has been increased from USD 19.5m in '04-05 to USD 41.4 million in the next year, more than twice the earlier amount.
Foreign direct investment (FDI) in the country's food sector is poised to hit the USD 3-billion mark. In the last one year alone, FDI approvals in food processing have doubled.
Add to this the USD 55 million that has been invested in sugar and cooking oil companies, and you can see how the changing diet of upwardly mobile India along with the new mega food parks are becoming dishy to overseas investors. Foreign direct investment in food already beats the money being pumped into the far-more-glamorous hotels and tourism industry.
According to latest industry ministry data, the cumulative FDI inflow in food processing reached USD 2,804 million in March '06. In '05-06, the sector received approvals worth USD 41million. This figure is almost double the USD 22million approved in '04-05.
Foreign investors are keen in investing in the country. Recently, India has received an encouraging response from investors in the UK for establishing joint quality control testing facilities for agriculture products and establishing cold storage facilities in the country, Minister of State for Food Processing Industries Subodh Kant Sahai said.
The total food production in India is likely to double in the next ten years and there is an opportunity for large investments in food and food processing technologies, skills and equipment, especially in areas of Canning, Dairy and Food Processing, Specialty Processing, Packaging, Frozen Food and Refrigeration and Thermo Processing. Fruits and Vegetables, Fisheries, Milk and Milk Products, Meat and Poultry, Packaged/Convenience Foods, Alcoholic Beverages and Soft Drinks and Grains are important sub-sectors of the food processing industry. Health food and health food supplement is another rapidly rising segment of this industry, which is gaining vast popularity amongst the health conscious.
In a bid to remove constraints in the way of investments in the sector, the Ministry of Food Processing Industries (MoFPI) is set to push for creating a favorable fiscal environment to induce venture capital and mutual funds to invest in different components of supply chain or in the entire chain. This follows the recommendations of a Rabo Bank study commissioned by the Ministry to unlock investments to the tune of USD 33.4 billion in this sector over the next 10 years.
Since the sector offers immense growth potential, a large number of multi national companies (MNCs) have entered India to take advantage of the opportunity. Unilever, Nestle, Pepsi and Cadbury are some of the big, successful overseas players in India that face strife from established Indian brands.
According to a recently published report by RNCOS, Indian Food Processing (2006), :"In next 3 years, the Indian food processing industry is anticipated to grow to 3 times its current size making India a key and consequential player in the food and agriculture trade. Despite being recognized as a promising growth area, the current share of Indian food processing market in the world food trade is only 2 percent."
The food processing and bakery products sector has given the stock markets something to munch on. Stocks of major players in this slow-moving sector have been performing well on good corporate results, helpful economic conditions and good weather. Although thin margins will call for increased volumes for these companies to remain afloat two years down the line, the long-term prospects are still good because opened-up rural markets and an ever-expanding consumer base will ensure volumes.
Godrej Foods, Reliance, Namdhari, ITC, Nestle, Ruchi Soya Industries, Tata Coffee, Tata Tea, RPG group, Subhiksha.
Retail sector pushes for reforms in food processing
According to The Times of India, New Delhi dated February 09, 2007: Major players in the retail sector are pushing hard for abolition of or amendment to the Agricultural Produce Marketing Commission Act to speed up growth in the food processing industry, which is expected to bring in a major chunk of their moolah.
Global consultants Dun & Bradstreet last year estimated that India wastes roughly $13 billion worth of farm products, including dairy items, annually because of inadequate processing and cold-storage facilities. A FICCI study now says that despite being the second-biggest food producer in the world after China, India's share in the $6.2-billion global processed food market stands at less than 1 %, leaving a huge scope for growth.
The study identifies the APMC Act as one of the major hurdles impeding growth as it does not allow processing units to store fruits or vegetables for more than a month.
This hampers firms that deal in seasonal produce like mango or litchi. Noting that Bihar has led the growth strategy by abolishing the Act, and several other states are following suit, the study says the system of seeking licences for each item being prepared by the same unit should also be scrapped.
The study also suggests a 10-year tax holiday, excise relief, fiscal incentives for cold-chain setups and a regulatory mechanism. Special incentives have been suggested for investors who enter all levels of processing industry in an integrated manner and for those providing one or more services. An excise exemption has also been sought on equipment and refrigerated trucks to attract investments and keep prices down.
Available data pegs Indian food exports in 1998 at $5.8 billion against a world total of $438 billion. At the start of 2000, the Indian food industry had a turnover of Rs 140,000 crore. This indicates a vast scope for both investors and exporters. India processes only 2% of the fruits and vegetables it produces annually.