For the food, beverages and tobacco industry, year 2000 proved to be a good testing ground. The year saw many interesting changes happen in the industry, some big, some small. It is time to recap what 2000 meant for the companies and the industry as a whole and also, what does 2001 hold for the sector.
The year 2000 was good for the food companies as a whole. Healthy growth continued in food product categories such as sugar, chocolates, coconut oil and biscuits. Tea production was up 5.9% over 1999, though the prices continued to be depressed. Coffee suffered a similar fate in 2000. Global coffee industry suffered as a result of depressed demand and excess supply.
This is however, the macro picture on food products as commodities. Let’s take a look at what it meant for organised/branded companies.
Let’s start with the tea companies. The year 2000 was a landmark year for the branded Indian tea industry. The year saw Tata Tea acquire UK-based Tetley, which has a 7% share (valued at US$ 600 m) of the world tea market. The acquisition has put its short-term outlook under pressure, given the strain on its profits and cash flow as also the higher interest costs. The company’s valuations took a hit as a result. But the fact that the company has taken the first tentative steps towards becoming a true Indian MNC made it a landmark year.
On the domestic front, Tata Tea continued to give market leader Hindustan Lever (HLL) a run for its money. Tata Tea's new brand launches (Agni and Gemini) saw HLL's market share erode to 40% (47% in FY98). Bigger ad spends, smaller quantity (sachets) became the order of the day. In a small step towards backward integration HLL too, acquired 76% stake in Rossell Industries, a domestic plantation company. Although HLL stands to benefit from the larger in-house sourcing of raw materials for its tea business, the size of the plantations acquired is very small as compared to its total needs. Nevertheless, the move though small was a step forward towards complete self-sufficiency that would see the company's bottomline benefit in the long run as the volatility in price and availability of tea is minimised.
Domestic coffee industry faced severe competition from imported coffee from Vietnam and Indonesia. Low priced Robusta coffee from these countries found its way into Indian markets. This also raised concerns as post April 2001 quantitative restrictions on imports as per WTO agreement will be eased. This could lead to major imports of cheaper Robusta coffee, which is used in making soluble coffee. Thus, Indian coffee will be exposed to tough competition from the world’s major coffee producing countries like Brazil, Colombia and Latin American countries. In light of this industry analysts are expecting the union government to hike the import duty on coffee from 15% to 35% to protect the domestic coffee industry.
The price of the coffee beans in the international and the domestic markets hovered near 30-year lows. Although, this indicated a bad year for coffee growers in the country, for Nestle India it was a win-win situation simply because it derives its revenues from branded coffee. Raw coffee contributes around 21% to the company’s total raw material consumption.
In 2000, the bakery items saw a reasonable 14% growth in demand. In the branded bakery segment, market leaders Britannia and Parle continued to slug it out by introducing new variants of biscuits and other bakery items. HLL was a new entrant to this segment. The company acquired Modern Foods from the government. It is expected that in 2001, HLL will make a concerted effort to make its presence felt in the segment. Nestle is another company to watch out for in this segment. Its presence in this segment is through Excelsia Foods. The company is looking to outsource biscuits from the small-scale industries for cost competitiveness.
Branded Flour (Atta):
There was intense competition in the segment between Pillsbury and HLL (Annapurna brand). Increased competitive activity has spurred market growth. HLL is the market leader with a 22% market share. The segment is growing at a scorching rate of 45-50%. The market has huge potential, as even in urban areas (market size: 35 m tonnes), branded atta accounts for miniscule 1-2% of consumption. There is even talk of Unilever (HLL’s parent) introducing the ‘Annapurna’ brand of flour in the global markets.
HLL (Kissan range) and Nestle (Maggi) continued their domination in this segment, as both have large product portfolios. The year 2000 was very good for HLL in the culinary segment. The company managed to catch on with Nestle in the tomato sauces range. As per the latest ORG MARG survey, both companies now command 40% each of the tomato sauce market. However, competition has intensified in with the entry of Heinz (only 1.8% share). The segment saw huge 50% growth in adspends in 2000. In a bid to expand the market, HLL is now focusing on institutional sales i.e. sales to railways, airlines, hotels and restaurants.
This segment continued to be dominated by Smithkline Beecham Consumer Healthcare’s (SBCH) ‘Horlicks’ (55% share) and ‘Boost’ (10%). The company has been the flagbearer for this segment. SBCH has managed to improve its operating margins in each consequent quarter. However, following the merger of Glaxo-Wellcome’s worldwide merger with Smithkline Beecham Plc., there are concerns regarding the fate of SBCH. HLL, Cadbury and Nestle are the top runners for buying out this malted beverage giant.
This segment is growing between 7-9% and its penetration even in urban areas is around 15-20%. In light of this the segment offers huge potential to grow.
Milk & Dairy Products:
Britannia continued to give competition to market leader Amul in the butter and cheese segment. But after initial hiccups Amul has managed to hold its own. Both Amul and Nestle entered the high-end packaged milk segment in 2000. The segment is seeing an upgradation of cold-storage chains for market expansion.
This Rs 5 bn segment though small, was one of the most active in 2000. New entrants, smaller sized packs and a bold new retailing strategy by market leader ‘Bisleri’ (70% share) were hallmarks of this segment. The list of potential new entrants keeps on growing. Pepsi (Aquafina) and Coke (Kinley) have already entered the market. Nestle and Britannia are the two other majors who are eyeing this segment. In a bid to thwart competition, homegrown market leader ‘Bisleri’ looked at strengthening its distribution network. The company also concentrated on selling mineral water to institutions in bulk and on a daily basis in a bid to expand market. As a result of rising competition adspends hit the roof.
The potential for this segment to grow is huge. According to estimates, India's per capita bottled water consumption is a miniscule 1/2 litre per year compared to 111 litres consumed by France and 45 litres consumed by the US. Given the relative difference in living standards of the western countries and India, it is foolish to presume that India will consume even 30 litres of bottled water. However, given the scarcity of clean drinking water especially in urban areas and mid size towns, the segment offers huge potential.
Chocolates & Confectionery:
In 2000, the segment grew at 10-12% per annum. In chocolates, Cadbury remained the undisputed king with a 70% market share of this 21,000 tonne market. The market leader reinforced its No.1 position during the year by introducing smaller packages of all its brands. It is estimated to add around 8 million more customers as a result of this. Nestle on the other hand saw a mixed performance in this segment. The company’s smaller size chocolate is doing well. However, it had to cut prices for its flagship brand ‘Kit Kat’ in a bid to curb the slide in its sales. To set the tone for 2001, Cadbury has already hiked prices for some of its brands in January. The company has been planning to enter the confectionery segment in a big way but has dithered on the issue because of low realisations.
The Rs 80 bn cigarette market continued to be dominated by ITC (70% share). The segment saw a 6-7% growth during 2000. Growth in this segment has been hit by anti-smoking moves initiated by various state government's like ban on smoking in public places, ban on sale at railway platforms. Smuggled foreign brands also affected growth. However, the company continued to improve its operating margins, despite a small growth in turnover by cutting costs and low tobacco prices. In a bid to spread its risk, ITC is looking at other investment avenues like retail stores, hotels, readymade garments, greeting cards and information technology. Though this seems a logical strategy, in the long run, it is likely to prune its operating margins, as these other businesses are unlikely to yield higher realisations like its cash cow cigarettes.
So the year 2000 was good for some, not so good for some others, but the future undoubtedly holds great promise for this sector. Currently, only about 5% of output is processed and consumed in packaged form, thus highlighting huge potential for expansion of the food processing industry. Size of the semi processed and ready to eat packaged food is over US$ 70 bn. This size is estimated to double by 2005. In light of this, a number of new MNC’s are expected to enter India in the next few years. This means more products, more brands, more retailing stores and cold chains. Looks like bonanza future for the Indian consumer.