Bain and Company, India – the New Delhi-based national unit of the global business consulting firm – and the Federation of Indian Chambers of Commerce and Industry (FICCI) – the country's apex business organisation – launched a report titled 'Processed Food in India: Enablers and Barriers' at the sixth edition of Food World India, the global convention for the food business and industry recently.
It was authored by Nikhil Prasad Ojha, partner, Bain and Company (who leads the firm's strategy practice in India and is also a member of the company's consumer products and retail practice); Rohithari Rajan, principal, Bain and Company, and member, consumer products and retail practice; and Sandeep Lodha, principal, Bain and Company, and member, consumer products and retail practice.
“Indian economic growth is powering great shifts in our lifestyle. What we eat and when, how we shop and how we share food are all changing at a fast rate. The packaged food market has witnessed strong annual growth for several years now, and this growth trend is likely to further accelerate in the light of ongoing shifts in the demographic, economic, cultural, regulatory and competitor landscape,” Ojha and FICCI's Arbind Prasad said.
“Our findings, based on extensive secondary and primary research, suggest that this will indeed be the case. In fact, our bottom-up estimates of growth for each sub-category within the market, in the context of ongoing trends and international examples, suggest that India's packaged foods market could well exceed current growth expectations,” they said.
The duo added, “This means a great opportunity for companies who serve the Indian consumer, for the agricultural sector, for several ancillary sectors and for investors. Moreover, it is an opportunity with the potential to impact positively on employment, economic growth and quality of life in India. However, for us to realise the full opportunity, we must first clearly identify the biggest enablers that will drive success and the barriers most likely to hinder it. Our task then is to develop and execute action plans that will optimise the first while mitigating the second.”
Introduction
The Indian packaged food market, including confectionery, dairy, baked goods, sauces and household staples such as packaged rice, was worth approximately Rs 1 lakh crore at the end of 2011. With rising incomes, favourable demographics and changing lifestyles, this sector has grown at over 13 per cent per annum over the last few years.
This report outlines the key factors that will shape the growth in India's packaged food industry, and also estimates likely growth over the next few years. It is structured in four parts.
The first section focusses on the drivers and potential barriers to growth. Based on extensive secondary research, four major drivers – namely the foundation for growth, demographic shifts, market-player interventions and policy – have been identified. Three potential barriers to growth – infrastructure, ease of doing business and profitability challenges – have also been identified.
The second section provides a snapshot of the recent qualitative research conducted by Bain and Company to understand the shifts and trends in consumer preferences towards packaged foods.
The third section focusses on the likely growth, looking at industry and analysts' estimates and historical trends. These have been compared to Bain's bottom-up, category-level forecasts, which incorporate insights from the first two sections.
Based on these, we argue that conventional forecasts underestimate the growth potential of the packaged food sector because they do not fully capture the way in which different trends and shifts are having a multiplier effect. We also look outward and argue that international examples provide a strong indicator of how this sector is likely to evolve in India.
And, finally, in the fourth section, the key stakeholders in the sector are discussed and what industry participants can do to ensure that this growth potential is achieved is outlined.
Key findings
Despite problematic infrastructure, India's existing agricultural and food processing output provide a strong foundation for growth in the packaged food industry
Changes in demography, disposable income levels and lifestyle have created a rapidly-growing domestic market for packaged food, with discernible patterns in consumption
These factors result in a multiplier effect, so that the growth potential for the sector is higher than the current industry and analysts' estimates
For companies, the market share can be increased by investing throughout the value chain, targeting young consumers and creating value-added products
Different categories of packaged foods are at different stages of product maturation and will require carefully targeted investment and product development
“The report depicts an industry in an exciting period of expansion, with many opportunities for companies and the government to work together. An expanded packaged food market will result in increased choice, quality and hygiene standards for the consumers and improved profitability for companies,” the authors said.
They added, “If the examples of market leaders are followed, it can also result in improved agricultural standards, better conditions for farmers and reduced wastage.”
I. Drivers and barriers to growth
India's size and economic growth has led to much excitement about the potential for growth in new markets. Despite the recent slowdown, the country's per capita GDP is set to rise at 7.4 per cent per annum in the next two decades, and will almost certainly create significantly higher consumption.
With a domestic market of 1.2 billion people, there is clear potential for packaged food purchasing to continue on the trajectory of growth seen in recent years.
Our research identifies four key factors that will drive the development of the packaged food industry over the next two decades:
Driver 1: India's status as a world hub of food production and processing lays the foundation for expansion in packaging food production
India's agricultural strength is due to a unique combination of natural resources, low production costs and a vast skilled labour force. The nation contains the world's second-largest arable mass, with diverse geo-climactic zones and abundant livestock. This natural wealth makes India the global leader in milk production, the second-largest producer of fruit and vegetables and the third-largest producer of fish.
In addition, the Indian food processing industry, essential to packaged foods, is thriving. Currently the fifth-largest sector of India's economy, the industry has reported steady growth over the past few years and shows potential for much expansion, particularly in the export market. The costs of processing and packaging food can be upto 40 per cent lower than it is in parts of Europe which, combined with India's resources of skilled labour, make it an attractive venue for investment.
In and by themselves, these elements may not guarantee growth. However, together they provide the environment needed for the packaged food industry to flourish, a growing momentum to food production and an ecosystem of supply chain and infrastructure.
Driver 2: Demographic change is powering rise in domestic demand
The next 20 years will see India adding approximately 245 million youth and young adults to the workforce. At the same time, there will also be a rise in the middle-class population, as well as 6.1 per cent increase in disposable income across the socio-economic spectrum, higher among urban residents. Continued migration from villages to cities means that by 2020, a third of all Indians will live in urban areas – good news for the packaged food market, 78 per cent of which is accounted for by urban areas in 2011.
Other influencing factors include the number of women entering the workplace and the evolution of the Indian household, from a multi-generational extended family to single occupant or nuclear family households. These changes mean higher disposable incomes and less time to buy and prepare food, both of which encourage a move towards convenience products such as ready-to-cook (RTC) and ready-to-eat (RTE) meals. The emergence of organised modern trade and new retail formats create more choices for consumers and will facilitate changes in shopping habits.
Driver 3: Growing foreign investment and participation in the sector will stimulate and encourage expansion
In the past decade, many multinational corporations (MNCs) have established themselves in the Indian market, increasing competition and providing greater variety for consumers.
Expansion by local players
ITC Ltd: Planning to enter branded dairy
Parle: Rebranded Parle Wafers; entered health snack category
CavinKare: Growing its food business through acquisition of small regional brands
Parle Agro: Entered health snack category through Hippo in 2009
Marico: Entered breakfast cereal market by introducing Saffola Oats
Emami: Launching in multiple categories like breakfast cereals, ready-to-eat
Britannia: Entered flavoured yoghurt in 2012
Amul: Launched chocolate milk Amul Kool Koko in 2011 to target youth
Entry/expansion of MNCs
Kraft: Oreo under Cadbury and Tang under Kraft
Del Monte: Acquired 40 per cent stake in FieldFresh Foods in 2007
Ferrero: Launched chocolate egg product Kinder Surprise
United Biscuits: Introduced McVities in 2010
Danone: Yoghurt (flavoured and plain) and flavoured milk
McCormick: Joint venture with Kohinoor Foods in 2011, planning to launch RTC and RTE brands
Orkla: Orkla bought MTR And relaunched MTR as a pan-Indian brand in 2010
General Mills: Pillsbury atta in 2008 and expanding to other categories
PepsiCo: Baked snack Aliva and breakfast cereal Quaker Oats
Perfetti Van Melle: Salted snack market through launch of Stop Not in 2011
Coca-Cola Minute Maid: Entered juices in 2011 through 100% Juice
The past few years have also seen increases in investment, through joint ventures, foreign institutional investment and private equity (PE). Between 2008 and 2011, PE investment in the food and agriculture sector totalled $650 million (Rs 3,400 crore). In the coming years, the Indian government has set a target of $20 million (Rs 1,04,000 crore) for investment in food-related infrastructure from the private sector.
Driver 4: Government policy is favourable towards growth
Importantly the government recognises the importance of the food production and processing industry and is facilitating expansion. One hundred per cent foreign direct investment (FDI) is allowed in the agricultural sector, with plans to establish a venture capital fund to support investment requirements. The decision in September 2012 to allow upto 51 per cent FDI in retail will greatly transform the industry, opening up new possibilities of partnership and bringing increased investment. The government should continue its efforts to bring in greater consensus, working with all players in India's retail landscape to address any concerns.
Further incentives such as high tax rebates, depreciation benefits and reduced custom and excise charges also encourage companies into food processing. Imaginative and targeted policies such as food parks are designed to address weaknesses throughout the value chain. By 2017, 50 food parks are expected to be built across the country, providing accessible transport and processing facilities to even small farmers.
However, the picture is not all positive. Barriers exist, and would need to be overcome if India's packaged food industry is to grow strongly.
Barrier 1: Lack of integrated supply chain and infrastructure
Every year, India's farms lose between 20 to 25 per cent of their fruit and vegetable output – worth an estimated $10 billion (Rs 52,000 crore) – due to spoilage at various stages. Nearly 90 per cent of food processing units are small-scale, operating with limited use of technology to enhance the life span of their produce. These problems are compounded by India's poor transport infrastructure, which compares unfavourably to other nations in transit time and transaction costs. An Exim container of foodstuffs, for instance, would take about 12-13 days to process in India, compared to just three to five days in France or Denmark.
Barrier 2: Difficulties in conducting business
India is currently rated behind other BRIC nations (Russia, China and Brazil) by the World Bank when it comes to the ease of conducting business. Excessive documentation is an example where bureaucracy gets in the way of efficiency: transporting goods to India requires an average of 11 documents, as opposed to two or three documents in France and Singapore. The current high rate of 12.5 per cent value added tax (VAT), along with a complicated range of other taxes such as octroi and excise duty, also affects the competitiveness of the sector and can put the price of packaged foods out of reach for many consumers.
Barrier 3: Profitability continues to pose a challenge
In order to be profitable in the packaged foods sector, companies need scale, the ability to charge a premium and an efficient cost structure – each of which is problematic in India. Scale is difficult precisely because India is so vast, requiring time and effort to fully establish market penetration. Low levels of disposable income, a tendency towards value-consciousness and a strong bargaining culture make it hard for companies to charge a premium, particularly with competition from the unorganised sector.
To date, this has been met with no-frills products and small package sizes. However, this strategy reduces profit margins and constrains the potential for enhanced products. These factors combine with India's problematic infrastructure to make efficiencies in the cost structure difficult. When the food industry's vulnerability to inflation and changing commodity prices is taken into account, the difficulty of striking a profitable balance is clear.
II. Evolution of consumer preferences
It is India's domestic market that causes excitement among commentators and potential investors, and indeed, domestic consumption accounts for the majority of packaged food production in India. With over half the private expenditure currently on food, India provides an appealing market for new food products.
Here diversity is important. It may be cliched to say Two Indias but the reality is that there are many Indias, each undergoing a rapid economic and cultural transformation. For the savvy marketer, this is a tremendous opportunity. On one hand, there are several distinct consumer segments large enough to support customised offerings. On the other, ongoing shifts in attitudes, incomes and lifestyles within each segment create opportunities for new categories or brands.
Bain and Company recently conducted a qualitative study of evolving consumer behaviour towards food purchasing. The purpose of the study was to understand different consumer segments are behaving, and what's changing – to find out what people buy, how they buy and why.
India's new consumers
Bain and Company's research covered a cross-section of Indian society, with representatives from different locations (villages, towns, large metropolitan cities and developed market cities), different social strata (lower, middle and upper income market) and from different professional backgrounds.
The interviewees were questioned on their shopping habits, expenditure and typical meals, as well as on the qualities they look for packaged foods and how their habits have changed over time.
The questions focussed on four priorities in buying packaged food:
Convenience: Consumption driven by difficulty in making/storing items (such as pickles or yoghurt) or by the lack of food preparation time (instant noodles or idli batter mix)
Taste: Consumers seeking enjoyment or variety (i.e. snacks, new sauces or luxury items)
Health: Choices influenced by concerns for well-being (for example, low-fat yoghurt or wholegrain bread)
Ideology: Choices based on a brand's values (sustainably fished or organic produce)
Emerging themes
Firstly, these factors can be ordered in terms of importance. For Indian consumers, taste is the first priority, followed by convenience, health and finally, ideology. As a market matures, this may change: in developed markets convenience and health are beginning to override taste.
Secondly, affordability and quality remain key decision-influencers, particularly for categories at the lower end of the soical strata. For these groups the local grocer is still a critical player, although less so for consumers in more developed markets.
Thirdly, consumers across the spectrum are upgrading. Whether this means a change from preparing all foods from scratch to purchasing certain ready-made items, a move from standard to premium snack items or the switch from basic staples to enriched, organic or luxury versions, consumers are moving upwards through food categories and prices.
So what?
This snapshot does not only reveal the change in consumption habits within each segment but also a more general pattern. Consumer preferences tend to occur in gradual shifts, as individuals progress from non to new to light to regular users. Our research shows that as India's different market segments evolve, they move in the same order through the same stages, with a five-to-seven-year time lag. Thus, the premium currently placed on health by a high-income urban housewife will be echoed in time by a lower income consumer, who will subsequently begin to purchase items such as soups or breakfast cereals.
Many changes can be expected if this pattern continues. Specifically, the following can be expected:
More consumers, as new segments (and particularly the rural population) enter the market
Greater expenditure, as each segment increases its spend on packaged foods
Changing rationales for buying, as groups move through the stages of consumption outlined above
Other trends emerging from this primary research and other industry analysis include:
Experimentation with new brands: Across segments consumers are increasingly willing to try new brands, rather than remaining loyal to one. This has far-reaching implications for marketers, who now need to work not just to attract new consumers but also to retain existing ones
Exploitation of new tastes: Seeking novelty in more than just brands, consumers are starting to play with new formats and flavours. However, this experimentation is best described as cautious. Taste continues to be of paramount importance and new purchases occur within a comfort zone. In practice, people are more likely to experiment in snacks and beverages than in meal-time choices
Greater individualism: Consumers are making decisions based on individual preferences within families. This means a variety of products would be on the table rather than one single meal for everyone – perhaps probiotic versions for some family members, and low-fat versions for others
Leapfrogging: Sometimes consumer trends will skip several steps in the regular preferences evolution. For example, a consumer may move from making snacks and/or yoghurt at home to buying elaborate flavoured wafers or low-fat packaged yoghurt
Influence from restaurant chains: The continued growth of the HORECA sector (hotels, restaurants and cafes) and the growing Indian propensity to eat out also affect decisions. The result is more experimentation with new flavours, increased purchasing of branded goods, and growth in the consumption of ready-to-eat meals and snacks
III. Estimating growth
Currently, the packaged food industry is valued at Rs 1 lakh crore, the majority of which is accounted for by dairy and biscuits.
The growth in this market over the coming years is inevitable. The question is 'How much growth?'
Bain and Company looked at four ways to forecast this:
Approach 1: Looking at historical growth
Almost half the sector is in plain milk, bread and biscuits. Despite recent high levels of growth due to inflation, a longer term perspective shows that the average annual growth rate for packaged foods has been 13.5 per cent per annum since 1998. This provides a baseline estimate which could be used to forecast growth for the coming years.
Approach 2: Aggregating contemporary forecasts
Analysts predict growth rates for the packaged food sector anywhere between nine per cent and 13 per cent per annum for the next five or six years. At one end of this scale, EuroMonitor points to high inflation and reduced consumer spending power as factors which may limit growth, backed up by Datamonitor's conservative estimate of 10 per cent. At the other end, Gyan Research's higher figure looks optimistically at the availability of raw materials, changing Indian lifestyles and the promise of favourable regulatory policies.
Approach 3: Lessons from China
For decades now, India's per capita GDP has mirrored that of China with a lag of around 10 years. At India's current stage of domestic market development, China witnessed a significant upswing in packaged food consumption.
Between 1995 and 2010, per capita packaged food consumption in China grew at an annual rate of approximately 11 per cent.
Adjusting for three per cent higher inflation and 0.6 per cent high population growth, the Indian market could grow at approximately 15 per cent.
Approach 4: Bottom-up analysis of the sector
Obviously, growth will not be uniform throughout the sector. While annual growth in certain emerging sub-sectors may reach as high as 20 percent, mature categories of the market such as plain milk, biscuits and bread are unlikely to see rates higher than eight per cent.
These considerations led Bain and Company to assess the predicted rate of growth for India's packaged food market at around 14 per cent per annum. It is worth noting that this figure, whilst higher than previously predicted, will still leave India behind peer nations such as Brazil and China by 2020.
There are two important conclusions to be drawn. Firstly, the growth will continue to be strong going forward and will be some what higher than anticipated. Secondly, the growth is going to be especially intense in select categories which have estimated in recent years, such as flavoured milk and instant noodles. In contrast, categories that are basic and large today, such as bread and spices, will see slower growth going forward.
IV. Key market success factors
To achieve this predicted annual growth rate of 14 per cent, industry players must work hard to engage with the Indian consumer and create a suitable environment for growth. This report ends with an outline of critical factors which will affect profitability and outcomes for companies.
Success Factor 1: Secure quality input
Packaged food demand is racing ahead of India's agricultural production capacity and is beginning to cause shortages. Following the example of market leaders such as Lay's, Amul and ITC, companies must pay attention to the back-end of production, working intensively with each stage of the value chain. This might involve:
Training farmers to improve produce yields, through contract farming, better seeds or improving farming methods
Supporting research to improve produce
Investing in infrastructure, such as transport or processing machinery
Working with vendors, encouraging them to promote certain products
Educating consumers about the benefits of packaged food, such as improved product quality, variety and health
Case study – Amul
Amul's example shows how companies can develop scale while continually nurturing their supply base. In growing its share of the dairy market, Amul has invested in:
Collection infrastructure: Providing logistical support to transport milk from distant locations to processing sites has allowed the company to include farmers with no previous access to the market
Quality standards: Easy-to-understand measurements, quality circles and weekly feedback sessions make it easier for farmers to comply with standards and ensure reliable supplies of market-ready produce
Training and support: Amul representatives provide veterinary care and educational services, low-price animal feed and support with accounting at a village level
Technology: Innovations such as embryonic transfer have improved cattle breeding and e-kiosks provide farmers with instant access to information
This sustained engagement with each level of the supply chain has consolidated Amul's position as Asia's leading dairy producer.
Success Factor 2: Connect with young Indian consumers
India's population has a median age of 25.5 years, with young consumers more likely to purchase packaged food. Cadbury, Lay's and Pepsi all provide good examples of sustained and targeted marketing campaigns. They have also introduced country-specific products, helping to establish their brands as in tune with the tastes of India's youth market.
Success Factor 3: Focus on value-added products
Moving beyond basic offerings allow companies to increase market segmentation and penetration. Enriching products with nutrients, offering low-fat alternatives or promoting low-sugar options for diabetics are examples of ways in which brands increase market share by catering to the health-conscious. In the same way, luxury products (such as Cadbury's Silk range) sell at a premium and yield higher profit margin. In beverages, premium spirits account for just eight per cent of category share, but provide 35 per cent of industry profits.
Success Factor 4: Select the right categories
The market for packaged foods is evolving and companies must choose their entry point based on two criteria – whether the criteria is large and growing (therefore open to scalability), and/or whether it is not mature (therefore open to innovation and new brand competitors). To take biscuits as an example, savoury snacks are a rapidly-evolving category, whereas mass sweet biscuits are a mature sub-section of the market. Operators in this sub-category would need greatly different products and marketing campaigns to achieve growth.
Success Factor 5: Do what it takes to be in the top three
India's unique retail environment, with crowded sales channels and little direct interaction between consumers and products, means that brands must work hard for recognition. However, doing so is critical. Companies must choose carefully where they enter the market and do so based upon their strengths. Sustained, profitable growth in packaged foods is not easy, and in India – more than elsewhere – it is critical to establish a leadership position.
Conclusion
Making a profit in India's package foods market may not be easy. However, the current moment represents a tantalising opportunity that food companies cannot afford to ignore.
To succeed in this sector, participants must plan and act smartly. But they must also bear in mind the existence of multiple stakeholders. Bain and Company's value-web, below, demonstrates the network of relationships and dependencies that form the packaged foods sector. In order to create new markets or win in existing ones, companies must recognise these dependencies and work productively with each element, as several leading players have already done.
The packaged food industry relies upon a complex web of relationships. Each player in the value web can benefit from the expansion of India's packaged food industry, and each has a part to play in promoting expansion. The sector as we see it is at an exciting point of inflection, with accelerated growth beckoning around the corner. How sharp that inflection point will be depends, to some extent, upon developments within the policy and macro-economic context. But for companies which understand this context, and are prepared – and able – to seize the opportunities presented by India's new markets, the prospects are bright.
