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Prospects of Indian food services industry - Views on News from Equitymaster
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  • Jan 19, 2010

    Prospects of Indian food services industry

    The size of the Indian food industry estimated at US$ 200 bn in the year 2006-07, is estimated to reach US$ 300 bn by 2015. The food service industry has two distinct sectors - the organized segment and the unorganized segment. The food services industry in India was estimated to be worth Rs. 580 bn in 2008, out of which Rs. 80 bn, or 7.24%, was accounted for by the organized sector. It is estimated that the consumer food services value sales grew by 20% in 2008 over 2007. Dhabas and roadside eateries comprising street stalls are the most common forms of restaurants and have traditionally addressed eating out requirements of Indians. The organized foods services segment is characterized by accounting transparency, organized supply chain with quality control and sourcing norms, and multiple outlets.

    Growth Drivers for the food services industry

    Rising income levels: The average real per capita income growth in India rose from 3.3% during the Ninth Plan (1997-2002) to 6.1% during the Tenth Plan (2002-2007). Growing affluence and higher spending capacity provides a huge opportunity for the food services sector.

    Growth of middle class: India has the presence of a strong 300 m middle class population. This is roughly equal to the population of US, the country with the third largest population in the world. The middle class has been the largest patron of the food services industry and the increase in the middle class is expected to lead to its growth.

    Younger population: Over 65% of India's population is below 35 years of age. A majority of this age group eats out. An increase in this population segment provides opportunity for the growth of the foods segment industry.

    Rising urbanization: On an average, the spending on eating out in Tier 1 and Tier 2 towns is double that of Tier 3 towns. With 29% of India’s population residing in urban centers and growing fast, higher spending on eating out is expected to benefit the industry.

    Increase in nuclear families: Going out and ordering in are more prevalent food habits among the nuclear families than the joint families in India. According to estimates, approximately 1.5-2% of joint families give rise to nuclear families every year. This is expected to benefit the industry.

    Increase in number of working women force: Participation of urban Indian woman in the workforce increased from 14% to 17% between 2000 and 2005. 51% of the population which eats out constitutes of woman. With the number of women who are joining work force on the rise, households are expected to increase the frequency of eating out. This is as a result of less time available for women for household activities. This is expected to directly aid in the growth of the foods services industry.

    Challenges faced by the food services industry

    Poor infrastructure: A major concern for a country like India is poor infrastructure. Food companies suffer from poor transportation facility and erratic power supply. An indication of the severity of the infrastructure problem is the spoilage of 25-30% of the crops each year due to infrastructure bottle necks. The result of these bottle necks is that prices for food material tend to be on the higher side with the quality being suspect.

    Lack of organized supply chain: Food companies in India suffer on account of non availability of facilities like high tech controlled production, on farm grading, packing, cold chains, logistics, warehousing, integrated processing units, inefficient supply chain and lack of specialized distribution companies for perishables produce/ processed food products. Such facilities are basic requirements for a food companies in the west where specialized companies provide such services, thus ensuring that food of the required quality and quantity is procured and it reaches the end customer on time with little or no loss.

    Food regulation and licenses: The Indian food and processing industry is governed by multiple legislations and dealing with the collection of food laws and governing bodies is a challenge. Furthermore, the number of licenses required to operate a food service store is a signification road block. There are at least 10 basic licenses which vary from state to state which have to be procured before setting up a food supply store. In addition the duration of these licenses vary from 1 to 3 years. The red tape provides hurdles for the growth of this industry.

    High price of real estate: The location of a food service outlet is critical to the success of the venture. However, high prices of land and high rentals have impacted the food service sector.

    Shortage of skilled and semi-skilled manpower: The food services industry is highly dependent of man power whether it is the chef or the delivery boy. Presently, there is a shortage of trained man power which is serving as a bottle neck for the growth of the industry.

    What we expect?
    With growing urbanization, rise in income levels and a young population, the food services industry in India is in a sweet spot. However, it has still to reach critical mass. While the industry faces several road blocks, as the organized industry matures, we expect to see better infrastructure facilities which will help the industry achieve high growth going forward.



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