| Supply |
| Food, Beverages: |
Abundant supply of vital foods. The industry faces over supply in certain segments like coffee and tea. However, more than half of this is available in unpacked or loose form, thus benefiting only the unorganised sector. |
| Tobacco: |
The segment enjoys high penetration even in rural areas. Supply is higher because of unorganised sector (bidis).
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| Demand |
| Food, Beverages: |
Processed food demand is growing at 10%-15% per annum. Growth of dual income households has given rise to demand for instant foods, especially in urban areas. |
| Tobacco: |
Demand is largely inelastic. Demand growth is pegged at 4%-6% for cigarettes.
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| Barriers to entry |
| Food, Beverages: |
Huge investments in promoting brands and setting up distribution networks. |
| Tobacco: |
Punitive taxation policies of government. Huge investments in brand building and setting up distribution network.
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| Bargaining power of suppliers |
| Food, Beverages: |
Many established players have a slight edge in bargaining power. However, for commodities like coffee and cocoa, companies are dependent on the international demand-supply scenario. |
| Tobacco: |
Most companies have integrated backwards and have their own supply chains. Therefore, the bargaining power of suppliers is not high.
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| Bargaining power of customers |
| Food, Beverages: |
High as a result of intense competition both among branded and unbranded products. |
| Tobacco: |
As the consumption is more or less a habit, the bargaining power of consumers is only to the extent of choice of brand.
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| Competition |
| Food, Beverages: |
The competition takes place mainly on basis of product quality. However, in a bid to increase penetration of new products, companies often compete on pricing and by offering discounts and freebies. |
| Tobacco: |
Competition is mainly between branded cigarettes, bidis and contraband. |
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During the year, VAT on cigarettes at the rate of 12.5% became effective in most states. In the State of UP, a trade tax of 33.5% (inclusive of Development Cess) was levied on cigarettes. These imports were in addition to the increase in excise duties on cigarettes in excess of 6% in the Union Budget 2007. Hence the severe taxation and regulatory milieu for cigarettes in India remained a cause of concern.
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Awareness of the health and wellness platforms, increase in women work force and changing lifestyle has led to strong topline growth in the food segment. New products, better distribution channels and higher investment in this segment was also witnessed.
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Recognising the tremendous opportunity in the food segment, a number of FMCG majors have invested in this segment. Reliance entered this segment with Reliance Fresh and has proposed ventures worth US$ 3 bn. It also acquired the Sahakari Bhandar chain of stores. Also Bharti is entering the field and has partnered global major Wal Mart. While ITC is increasing its presence through e-choupals and Choupal Fresh, Dabur has merged its subsidiary Dabur Foods with itself to benefit from the huge potential of the sector. Hindustan Unilever is also not way behind as it has made plans for its food ventures with the management being very bullish on the foods business. In the next fiscal, the company is planning new launches in this segment.
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| Current Scenario & Prospects: |
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With changing eating habits and increased affordability of the growing Indian population, the market for branded foods is growing at a healthy 10%-15%. It is likely that companies will opt for consolidation to generate growth. Cash rich companies may buy-out well-known brands to gain market leadership. This trend will reduce fragmentation besides improving the pricing environment. The larger FMCG players, given the strong cash flows, are looking at growing through the inorganic route, which we believe will help consolidate market share going forward.
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A large chunk of the Indian consumer is low on the value chain. Awareness is high for all basic food items, which form part of the staple diet whereas it is low in the case of snacks and culinary products. Even in basic foods, regional players (organised and unorganised) dominate the scene. To some extent, this can be attributed to government policies of the past, wherein many segments were reserved for the small-scale industry. However, the segments, which are dominated by the unorganised sector, have the potential to grow faster in the years to come. Products like 'atta' are already seeing hectic competition between players like HLL, Pillsbury and ITC.
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The food processing industry in India is estimated at Rs 4,600 bn, with a mere 5% held by the organised sector. This segment is expected to touch Rs 13,500 bn by 2015. Companies like Nestle and Dabur have identified this sector as their growth drivers in the 21st century. The sector is witnessing large-scale ad spends and focus on improving the distribution muscle to woo the Indian palette. India is seeing new/existing entrants like Heinz, Mars, Marico, Conagra, Pepsi, ITC, Dabur, Britannia and Amul looking to expand their product folio. Regional players like MTR are also making their presence felt. Though profits will take a few years to come, but topline growth is likely to get a leg up.
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The growth in the tobacco industry is greatly dependent on the policies of the government (both excise related and ban of public smoking). Higher duties result in higher prices of the product. That said, price sensitivity and the effects thereof on demand are more significant at the lower end of the market. Cost intensive and cumbersome process of establishing a distribution network acts as a hurdle for new companies vying for a share of the Indian market. However, contraband cigarettes have become competitively priced as compared to domestic brands given the frequent excise (price) hikes. It has started affecting volume growth of domestic companies as the consumers are showing resistance to price hikes.
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Domestic food consumption is Rs 8.6 trillion. However per capita consumption is just US$ 0.19 as compared to US$ 2.07 of US and US$ 3.67 in UK. With consolidation of the agri marketing chain and investments in the sector aided by the government giving a fillip to infrastructure development by focusing on roads, rails, air, ports, electricity and river linking, it is likely that rural India will see economic growth at a faster rate going forward and a larger mass of Indians will participate in India's development. This is a good sign for the industry as a whole.
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Other positives are the implementation of VAT, which will reduce the tax burden of companies over the long run and make brands cheaper as unorganised players will no longer be able to evade taxes. Also, with the government showing interest in opening up the retailing sector for FDI, it will spearhead employment, as well as growth in the food processing industry.
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