Opportunities in the Packaged Food Market in India.pdf

Opportunities in the Packaged Food Market in India

Introduction 84

Consumer Trends Fuellingthe Indian PackagedFood Market 85

Key Growth Enablers 86

Emerging New Categories 89

| Opportunities in the Packaged Food Market in India84

| Volume 03perspectiveVolume 03 / 2010a q u a r t e r l y r e p o r t b y

IntroductionIndia saw rapid economic growth fuelled by economic reforms during the period 2004 to 2007. FDI inflow increased and GDP growth was at 8-10 per cent during the period.

The global economic downturn seen in 2008 had a deep impact on the economy with industrial output slowing down and inflation increasing by two percentage points over the previous year to 8.3 per cent. However, real GDP growth remained strong at 7.3 per cent.

With its vast population base, growing middle class and strong macro-economic environment, the Indian market has seen processed food emerge as the one of its fastest growing segments. Rapid lifestyle transformation, particularly in urban areas, has resulted in a dramatic increase in the demand for processed, packaged and ready-to-eat food products.

The arrival of food multinationals and the proliferation of Quick Service Restaurants(QSR) outlets have further added to the growth of this industry. The proliferation of modern retail trade and expansion of supermarkets /hypermarkets, shopping malls and fast food outlets, coupled with favourable industry trends is contributing to radical shifts in the Indian food and grocery industry.

The size of the packaged food market in India is estimated to be US$ 10 million and is expected to reach US$ 20 million by the year 2014. Packaged food, which is now 4 per cent of the overall F&G market, is expected to reach 5 per cent of F&G market by 2014.

The main categories of packaged food include baby food, bakery products, canned/ dried processed food, confectionery, dairy products, frozen processed food, ice cream, meal replacement products, noodles, nutrition/staples, pasta, ready meals, sauces, dressings and condiments, snack bars, soup, spreads, sweet and savoury snacks, etc. Exhibit 1 summarizes the key players in the packaged food segment.

Growing and organised retail penetration is expected to aid the growth of the processed food market in India. A number of categories which are highly dependent on organised retail-like frozen food products - are expected to witness significant growth in the years ahead.

Exhibit 1: Key Players in the Processed Food Segment

Player Segment Products

Hindustan Unilever Limited (HUL)

Beverages, Staples,Dairy, Snack FoodsTea, instant coffee, biscuits, ice creams, salt, wheat flour (atta), instant drinks, soups, jam and squash

Nestle India Pvt. Ltd. Dairy, Beverages and Snack FoodsInstant coffee, condensed milk, dairy whitener, infant food, choco-lates and confectioneries

ITC Ltd. Staples and Snack FoodsWheat flour (atta), salt, ready-to-eat meals, biscuits, confectioneries, snacks and cooking paste

Pepsico Beverages and Snack Foods Fruit Juices, cereals, snack foods, dairy derivatives

Dabur India Ltd. Beverages and Culinary ProductsFruit juice, cooking pastes, coconut milk, tomato puree, lemon drink, chilli powder and honey

Cadbury India Ltd Confectionery Chocolates, hard-boiled confectionery, maltfoods, cocoa powder

Haldiram Marketing Pvt. Ltd. Snack Foods Sweets, namkeens, syrups, crushes, chips and papads

Britannia Industries Ltd. Bakery Products Biscuits, flavoured milk, dairy whitener, ghee, bread, cake and rusks

Godrej Industries Ltd. Beverages and StaplesEdible oils, vanaspati, bakery fats, fruit drinks, fruit nectar, fruit juices and tomato puree

Parle Agro Private Ltd. Beverages, Bottled Water and Snack Foods

Opportunities in the Packaged Food Market in India | 85


The segment that has shown maximum exponential growth is the ready-to-eat segment. Ever since the processes of freezing and chilling products have become very refined, technologically sound and subject to stringent hygiene practices, this sector has expanded and is expected to grow in the next few years. Staples which are currently sold loose are also expected to undergo significant changes with the advent of private labelling. The trend of wellness food, in the form of nutritionally enhanced and fortified food, probiotic food and organic food is expected to grow. Organic food is rapidly becoming a distinct and well-defined category. Similarly, the other concepts mentioned here will grow as much and gradually occupy more shelf space in the near future.

The larger food processing companies like Nestlé, Parle, Britannia etc., have diversified often over the years. Nestlé’s foray into the pre-cooked noodle segment (Maggi noodles) from milk products-which were its core competency-proved that there was a huge untapped market for packaged goods. Similarly, Britannia, synonymous with biscuits, had boldly entered the space for milk products, with its range of cheeses and later curd.

Consumer Trends Fuelling the Indian Packaged Food MarketChanging Demographics of the Indian PopulationThe Indian population is younger, more urban, with greater disposable income and high purchasing power parity (PPP). Urban consumers are typically busier and more affluent, thus more willing to pay for convenience. The main impact of urbanisation has created a growing demand for convenient products. Ready meals thus saw a strong 18 per cent growth in 2008 over the previous year, with these products regarded as a convenient alternative to cooking from scratch. Packaged soup also benefited, with dehydrated soup growing by 21 per cent in current value terms, while instant noodles became an increasingly popular snack or meal component, with sales thus growing by 24 per cent.

Convenience The demand for ‘convenience’ is dominant in more than one segment. Apart from convenience in cooking at home, food services and chains have an equally strong share in the purchase of packaged foods. There was a strong focus on expanding consumer food service chains across urban areas which is set to continue to grow. Consequently, urban commuters will enjoy easy access to trusted consumer food service brands offering affordable food.

This demand for convenience also supported good growth in canned/preserved food and frozen processed food, with consumers appreciating the convenience of stocking up and keeping easily-prepared food at hand. Consequently, canned/preserved food saw 12 per cent current value growth in 2008 over the previous year, while frozen processed food grew by 13 per cent.

Exhibit 2:Break-up and Category Share within

the Packaged Food Sector

Cereals, pulses & spices

(All figures in %)

Milk & milk products

Fruits & vegetables

Meat, fish & poultry

Packaged food

Beverages

43

2335

12

13

19

In 2008 and 2014



Nutritional and Health BenefitsThere has been a growing focus on health conditions, with most consumers having at least a rudimentary awareness of cancer, diabetes and heart disease. The bulk of new product development is expected to focus on nutritionally enhanced and fortified/functional products, with these areas having proved successful. Increasingly, the two concepts will be combined, with low-fat impulse and indulgence products more and more likely to offer fortification. Players meanwhile launched numerous products with a health and wellness positioning. Nestlé India, for example, re-launched Maggi Two Minute Noodles fortified with 20 per cent of the RDA of calcium and protein in 2008. Gujarat Co-operative Milk Marketing Federation Ltd. launched Amul Sugar Free Probiotic Frozen Dessert and Amul Prolife Probiotic Wellness Ice Cream in 2007, thus creating a new niche of probiotic ice cream.

Players will also seek to become first-movers in the niches of health and wellness packaged foods. Organic products are thus likely to see strong development, generally targeting affluent urban consumers. Naturally healthy products could also see a growing emphasis on their health benefits, with basmati rice, for example, having its low glycaemic index emphasised on the packaging.

Exhibit 4 shows how the packaged food category has grown in China.

The food and grocery market will continue to grow at a real growth rate of~4.1 per cent in the next 5 years•

Organised F&G will grow from~US$ 3 billion in 2008 to~US$ 19 billion by 2014 at a CAGR of 33 per cent•

F&G retail is dominated by the unorganized sector, with ~98 per cent of the market being local kirana stores •

Packaged food is 4 per cent of the F&G market. RTE/ frozen food share is less than 1 per cent of the packaged food market at US$ 64 •million

2,800 organised retail outlets catered to F&G in 2008. The bulk of these are supermarkets (87 per cent) followed by hypermarkets (13 per •cent)

Total organised F&G space was ~20 million sq. ft. in 2009, of which 60 per cent were hypermarkets and 37 per cent supermarkets•

Between 2004 and 2008, the number of outlets grew by 68 per cent CAGR, while space grew by 70 per cent CAGR •

The key decision-maker for food and grocery shopping for the household still remains the housewife in 95 per cent of all cases•

Key implications: Supermarkets/ hypermarkets and Cash & Carry formats will fuel F&G organised retail in India. Larger formats like Cash & Carry and Hypermarkets can be significant sales contributors for the frozen food

Exhibit 3: Outlook for the Food and Grocery Market

In 2007, China’s food market estimated at US$ 96.2 billion was the biggest value among the five BRICM countries. It also recorded a strong •track records of value growth from 2002, putting it in second position behind Russia.

The popularity of processed and Western-style food in urban China is starting to be mirrored in parts of rural China, and will grow dramatically as •major retailers such as Carrefour seek to expand out of saturated ‘first-tier’ cities into other regions over the next five years. It is the increasingly sprawling urban population that will drive strong value and volume growth in processed and packaged foods; by 2050 an increase of 115 per cent to 970 million is anticipated in the urban region-up from the 450 million ‘urban-dwellers’ found in China in 2000.

Previous growth has been driven by strong economic development in China, increased penetration of organised retail, and the entry of •multinational brands. The demand for packaged food grows annually as people trade up to packaged rather than loosely packed food. The rising role of modern retail formats such as supermarkets, convenience stores (c-stores) and hypermarkets is also having a big impact on the type of food people are buying.

Exhibit 4: Growth of Packaged Food Sector in China: A Case Study



Key Growth Enablers Urbanisation India has witnessed ongoing urbanisation in the past decade or so, and this is linked to the country’s economic growth and foreign direct investment. The main impact of urbanisation was a growing demand for convenient products, with consumers preferring to have ready access to easy-to-prepare foods that were either canned/preserved or frozen.

Aggressive advertising campaigns by food companies have led urban consumers to develop an increasing interest in Western lifestyle trends. Urbanisation boosted sales of products such as breakfast cereals and ketchup, which grew by 13 per cent each in current value terms in 2008 over the previous year. These products are strongly advertised and benefited from a fashionable western image. Canned/preserved food saw 12 per cent growth in 2008 over the previous year, while frozen processed food grew by 13 per cent. Exhibit 5 shows the share of food and grocery sales in the organised and unorganised sector between 2005 and 2008 and its estimated growth in the next 6 years.

This is expected to drive strong growth in many product areas in meal solutions, with pouch instant noodles, for example, set to see 115 per cent growth. These products offer a quicker and more convenient meal

component than rice and, thanks to their use of flavouring, can also be consumed as a snack. This trend is also expected to benefit ready meals, canned/preserved food, frozen processed food and sauces, dressings and condiments, all of which make food preparation quicker and more convenient.

Growth of Organised Retail Retailing saw strong growth in India benefiting from strong GDP growth and the emergence of a large consumer base-the urban, young middle class. Supermarkets notably saw strong growth, with sales rising by 108 per cent in 2008 alone. Exhibit 6 summarises the key facts of the growth of organised retail formats, and consumption of packaged food and grocery products.

Supermarkets/hypermarkets gained share across packaged food during the review period, thanks to expansion in the number of outlets. This channel more than doubled it’s share from 5 per cent in 2003 to 11 per cent in 2008. In the year 2008, supermarkets/hypermarkets also accounted for a dominant share in canned/preserved food and

The share of organised retail is expected to grow from current ~5 •per cent of total retail to~12 per cent by 2014 and will show a CAGR of 25+per cent between 2008-14.

F&G forms the largest share (65 per cent) of retail consumption. •The market was about US$ 270 billion in 2008 and is expected to reach~US$ 345 billon by 2014.

Exhibit 6:Organised Retail and F&G Consumption

0

50

100

150

200

250

300

350

2005

1.42.1

2.93.3 4.3

6.1 8.111.7 14.7

18.5

195 216 237 266 277 288 298 307 316 326

2006 2007 2008 2009P 2010P 2011P

Traditional or Organised

2012P 2013P 2014P

Organised

Exhibit 5: Growth of Indian Food and Grocery Retail Market

US$

billio

n



frozen processed food, at 68 per cent and 79 per cent respectively. The channel’s most significant growth was seen in impulse and indulgence products such as sweet and savoury snacks and ice cream and dairy beverages. Share of supermarkets/hypermarkets grew from below 4 per cent in 2003 to 11 per cent in 2008, challenging the regional dairies’ dominance in this area by offering good quality fresh milk at affordable prices.

Improvement in Packaging TechnologyUntil recently, the majority of foodstuff was sold unpackaged. In the last few years, all sectors increased their share of packaged production. Despite a definite rise in the number of packaged products, many products are still sold unpackaged.

The technology for packaging products and increasing their shelf life is being developed and adopted very rapidly. Along with the emergence of various forms of processed foods, a corresponding suitable packaging technology is also developing. Milk is one product which is sold in four different types of packaging, with each type further having different designs and forms.

Advances in packaging technology have not only improved the shelf life of products but also significantly reduced the cost of packaging.

New Product Introductions by BrandsMany manufacturers/brands are creating the market by frequently introducing new products for packaged food. Large multinational companies like Nestle have been able to do this very successfully. The new products are customised as per the requirements of Indian consumers and are targeted at satisfying their unmet needs.

In addition to existing brands, a number of importers are also importing a significant amount of processed food from European and South-east Asian countries. The imported product categories are targeted at the premium segment of the market.

Growth in Freezer SpaceThere has been a remarkable expansion in product categories and ranges due to considerable growth in freezer space in modern retail formats. The retail freezer space for 2008 is estimated to be 247,000 cu. ft. This is expected to grow to 531,000 cu. ft by 2014 at a CAGR of 14 per cent. The frozen food segment, originally covering only frozen meats, fish and poultry products, currently includes frozen vegetables, ready-to-eat foods also, and will grow from US$ 1.8 billion in 2008 to US$ 2.6 billion by 2014. This growth has been fuelled by the increasing availability of freezer space in modern retail shops.

Exhibit 7 shows the increase in freezer space corresponding to the increase in number of stores in future. Dairy products, confectionery and ready-to-eat products have received a robust boost in obtaining shelf space and corresponding sales due to their positioning and supporting infrastructure.

Exhibit 7: Increase in Freezer Space

0

300

600

900

1200

1500

0

100

200

300

270

878 10131148

1215 1215 1215 1215

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18

Freezer space (Cu.Ft)

Free

zer s

pace

(Cu.

Ft)

No. o

f sto

res

No. of stores



Emerging New Categories Value-added Dairy ProductsIndia is the world’s largest milk producer and dairy is one of the most promising segments of food processing.

The market for dairy products is currently estimated to be US$ 33 billion. The demand for dairy products is expected to grow at a healthy rate of 15 per cent to 20 per cent over the next five years. The segment offers a high potential for value addition-the level of processing value-add, at 37 per cent, is amongst the highest in the food processing industry. At the same time the share of organised players is still small, at 15 per cent, indicating the potential for growth for organised players.

Dairy segments have also been focus areas for policy support by the government with major initiatives like:

Foreign equity participation permitted to the extent of 51 per cent in dairy processing sector•

De-reservation of many segments like ice cream and ghee from small-scale industries•

Excise duty of 16 per cent on dairy processing machinery fully waived for promotion of dairy processing•

Subsequent to decanalisation, exports of some milk-based products are freely allowed provided these •units comply with the compulsory inspection requirements of concerned agencies like the National Dairy Development Board, Export Inspection Council, etc.

Health-focused Snack FoodsThe market for snack foods in India is estimated to be US$ 265 million. For mass products, this business is characterised by high volumes and low margins and is also highly competitive. Growing health consciousness has opened up the market for health-focused snack foods category. A number of existing companies like Frito Lay, Parle Agro, and ITC Foods have taken notice of this segment and are targeting consumers through new product offerings. Given the increasing demand for healthy food, this segment will witness significant activity.

Frozen Ready-to-eat SegmentIncreased penetration of organised retail is expected to significantly increase the size of this nascent category-currently estimated at US$ 1,804 million. It is estimated that freezer space will double in 4-5 years leading to the increasing availability of these products in the market. Entry of large international companies like Tyson Foods (In a joint venture with Godrej Agrovet), McCain, etc. is expected to play a significant role in the growth of this market.

Non-vegetarian Processed FoodsCurrently, most of the non-vegetarian products in India are sold in raw unhygienic form. Given the increasing health consciousness and increasing need for convenience, it is expected that processed non-vegetarian food category will show significant growth. The increasing penetration of supermarkets/hypermarkets and improvement in cold chain infrastructure will significantly aid the growth of this segment.

The processed food segment in India is currently at a very nascent stage. Changes on the demand as well as supply side such as increasing urbanisation, need for convenience, health consciousness, increased penetration of organised retail, improved cold chain infrastructure and entry of international players are key drivers that will result in significant growth in the market.

AuthorsRohit Chadha, Associate Director| [email protected] Rohit Bhatiani, Principal Consultant | [email protected] Mrinalini Dutta, Associate Consultant| [email protected]

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Opportunities in the Packaged Food Market in India.pdf