Demand-supply
According to a Mckinsey-CII report, the size of the Indian foods market is ` 250,000 crore. The average Indian spends the highest proportion of their expenditure on food. Although with development, the share of expenses on food should relatively come down, however, in the Indian scenario, no major change in this proportion is likely to take place, keeping in view the relatively backward status of the economy
Despite the fact that food accounts for a major share of the average Indian’s overall spending, the processed food industry in India has been incessantly facing a number of constraints on the demand as well as supply side. As a result, value-added foods are estimated to account for just 32 per cent of the food industry. Some of the major constraints that emerge to provide a momentum to the growth of the processed food industry in India are given as follows:
A majority of the population cannot afford processed/branded foods because of their economic condition.
The development of the processed foods industry is highly related to the proportion of working women in the economy. This proportion continues to be relatively low in
India.
Indian culture and habits traditionally encourage a preference for homemade and freshly cooked foods, which adversely affects the growth prospects of packaged foods.
India being a labour-surplus economy, middle- and higher-income consumers are being able to afford employing servants/cooks to prepare homemade food. As such, there is no particular incentive to buy convenience foods.
Unorganized players have been mainly dominating the foods sector, which has led to a perception that purchased foods may be detrimental to health, as a majority of the players in the unorganized sector do not happen to invest adequately in maintaining quality/ hygiene standards.
As regards the supply side of the processed food industry in India, the market is characterized by small, regional players, most of them belonging to the unorganized sector, along with the presence of a few national-level entities. The unorganized sector accounts for around 70 per cent of the industry. Popular, traditional foods such as namkeens, sakharpara, fried dal, samosa, cutlet, vada, kachori, bhaji, tomato chips, banana chips, extruded snacks, cereals, flour and starch are made by small local players who have created their own market niche. These items are sold through local grocery/small food shops.
The urban fast food market is estimated to be to the tune of ` 5,000 crore. This is growing at the rate of 20 to 25 per cent per annum.1 This market too is mainly dominated by the unorganized sector, which delivers these products to customers on roadside stalls in the cities and on highways. The market share of MNCs such as Kentucky Fried Chicken and McDonald’s in India continues to be negligible, despite the considerable media hype created around their emergence. There are also a few strong local chains that have come up over the years, such as the Nirula’s chain in Delhi and Haldiram.
Some of the major supply-side constraints that emerge on the way of the growth of the food processing industry in India are given here:
Poor infrastructure facilities including cold storage and transport facilities that hamper efficient handling of perishable food items.
Small-scale local players do not have adequate required capital to invest in marketing and distribution, which poses a constraint in their geographical expansion.
Small shops lack the required finances and other resources to invest in adequate storage facilities, as processed foods dominate the retail industry in India.
In spite of the above-mentioned demand and supply constraints, India has great potential to emerge as a major player in the exports market for foods. Although rice and marine products accounted for 70 per cent of the processed food exports of ` 11,000 crore in 1997–98,2 there exists substantial scope to give a big boost to the exports of processed fruits and vegetables. The required investments in processing technology and improving quality perception among customers can help in giving this push to substantially raise processed fruits and vegetables exports well above the 1997–98 levels of ` 390 crore.
As per market research agencies, the annual growth rate of the industry has been pegged to 9 to 12 per cent per annum. According to McKinsey, packaged atta will expand into a $4 billion industry, packaged milk ($10 billion), bakery products ($3 billion), and poultry into an $8.3 billion business by 2005. Increasing urbanization trends, personal income growth and the emergence of retailing as an industry will contribute a great deal to support these growth rates in the coming years. Thus, from an objective analysis, it is evident that the Indian market is capable of registering significantly higher growth in the processed food industry in the coming years. For example, India is the world’s second largest producer of fruits and vegetables; however; only 2 per cent of these fruits and vegetables are processed, as against 40 to 80 per cent in other developing countries such as Thailand and Malaysia.3 In brief, there exists exponential potential for the growth of this industry, but for infrastructural and socioeconomic constraints.
The foods processing sector is multi-segmented, with each segment being highly fragmented. Some multinational companies, and a few local players such as MTR and Vadilal, enjoy nationwide recognition in specific product segments. The industry may be segmented in the following manner:
food grain/pulse milling
fruit and vegetable processing
milk and milk products
beverages
fish, poultry products (eggs)
meat and meat products
aerated water/soft drinks
beer/alcoholic beverages
breakfast cereals; bread, biscuits, confectioneries, malt protein, weaning, extruded
food products
edible oil/ fats
The unorganized sector dominates each of these segments, although market leadership may be vested with large, organized manufacturers. For example, Nestle and Cadbury are major players in the milk product and beverage segments, whereas Britannia and Parle lead the organized sector in the bakery segment.
The high level of fragmentation in the industry is reflected in the large number of food processing units in the organized sector alone .
4
Number of Food Processing Units in the Organized Sector
Flour mills 800
Fish processing units 412
Fruit and vegetable processing units 4920
Meat processing units 114
Sweetened and aerated water units 656
Milk product units 90
Sugar mills 429
Solvent extraction units 725
This sector is dominated by small, regional players, a few of whom have successfully created a distinct market niche in their respective segments. Margins in the industry are certainly low, but profit levels greatly depend on sales turnover. Market leaders in the industry have created their distinction primarily through brand promotion and distribution strengths. The huge size of the Indian market, coupled with the gradual liberalization of the sector, has led to investments to the tune of ` 60,000 crore5 by multinationals such as Kelloggs and Heinz over the last five years. However, keeping in view the prevailing food habits and relatively poor economic conditions of the Indian consumer, the growth in the immediate future is likely to be largely restricted to the top end of the market.
The serious volumes in the food business are found at the lower end, and in traditional foods. This has prompted companies such as Britannia and Hindustan Lever to look with renewed interest at niches such as glucose biscuits and packaged wheat flour, respectively.
Prices
Prices of processed foods as in other cases are mainly determined by the market’s capacity to absorb. Prevailing competition does not allow any substantial price hikes, which usually reflect changes in the cost of raw materials such as cereals, sugar, oils and milk. The raw materials constitute the major cost of production and, therefore, prices are set so as to maintain some margin to allow for cost fluctuation. Leading players in the industry operate on very thin margins, and the most profitable companies are those with the highest working capital turnover. For example, even for a market leader such as Britannia, gross margins are just 5 to 6 per cent. However, the high volumes achieved, with low capital spending, enable them to have overall better returns on investment.6
1. Why do you think entrepreneurial zeal has not caught the attention of the great opportunity that the food processing industry provides in India?
2. Why it is that the unorganized sector continues to play an important role in the industry, in spite of the scope for new ventures to enter the market through innovations leading to value propositions?
3. What could be some of the vital areas providing market demand for the food processing industry in India? Explain with the help of examples.
4. What innovations can help in overcoming infrastructural constraints that, if tackled effectively, can give a big boost to the industry?
5. What have been the broad findings of market research in the food processing industry in
India? What key aspects of marketing research need to be investigated more deeply to establish market opportunities in specific areas of the industry?
6. Identify some of the key market segments in the industry. Analyse and justify with facts and figures which segment for which product line is likely to provide the greatest opportunity.
7. What is the market development strategy that comes up with some major ventures such as the multinationals in India in this sector?
8. What kind of margins exist in this industry? What pricing strategy works well in the sector? Explain by giving concrete examples.