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Food processing: Latent potential - Views on News from Equitymaster
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  • May 25, 2001

    Food processing: Latent potential

    The bourses have re-rated a lot of old economy sectors in the past few months. However, the food processing companies except a few like Nestle have not seen much upward movement. This could be probably because companies like Hindustan Lever have recorded degrowth in the branded staples, culinary products and packed tea in the quarter ended March 2001. Uneven monsoons in the past year resulted in consumer downtrading. But all this may be about to change.

    The metrological department has already stated that India is in for a normal monsoon this year. Early showers have already hit the southern states. Though this doesn’t mean that growth will return immediately to the sector, it does give confidence for the future.

    There are several other reasons, which give confidence for growth of this sector. Only about 5% of output is processed and consumed in packaged form, thus highlighting huge potential for expansion of the food processing industry.

    Over 90% of fruits, vegetables and milk are still consumed fresh. But there is disparity in the quality and prices of food items available across regions. Also, a lot of these items are seasonally available, hence no uniformity in quality and prices.

    Rural FMCG market will boom
    (figures in Rs m) Total size % growth** Rural size
    Category (urban + rural)   2006-07*
    Toilet soap 75,000 13.4 112,910
    Body talcum powder 9,400 23.7 22,920
    Toothpaste 20,800 23.5 41,400
    Cooking medium (oil) 170,000 10.9 258,060
    Cooking medium (vanaspati) 39,000 7.6 41,080
    Tea 65,000 11.0 83,370
    Health beverages 9,080 28.5 21,100
    Electric bulbs 7,500 9.4 5,550
    Electric tubes 1,580 10.2 1,210
    Cigarettes 76,620 13.1 118,790
    Packaged biscuits 25,000 6.8 18,370
    Hair oil / cream 1,750 30.9 6,890
    * Projections     ** annual growth rates componunded for last five years
    Source: Business Intelligence Unit and NCAER

    With changes in eating habits and the increased affordability of the growing Indian population, the market for branded foods is growing at a steady 8-12%. It is likely that companies will opt for consolidation to generate growth. Cash rich companies will buy out well-known brands to gain market leadership. The most recent example is Pepsi’s Frito Lay buying over market leader ‘Uncle Chipps’ to consolidate. This trend will reduce fragmentation, improving the pricing environment. Moreover, globally companies are consolidating like Unilever buying over International Bestfoods. Consequently, this has led to a takeover of International Best Foods Indian operations by Hindustan Lever.

    Investments in cold-storage chains are likely to see an upsurge in ice cream and processed dairy products including cheese, butter and yogurt supply. HLL has already earmarked Rs 2 bn to beef up its cold storage chain in the next two years.

    A big mass 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. Only for snack foods, culinary items and junk food awareness levels are low. Even in the basic foods segment there is dominance of the regional unorganized sector. 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.

    India is seeing a dramatic shift towards prosperity in rural households. As per NCAER the lowest income class will shrink from more than 60% in FY95 to 20% in FY2007. The higher income classes will more than double and hence rural market for FMCGs will boom.

    It is estimated that the US$ 70 bn Indian food processing industry is set to double by 2005. Companies like HLL and Nestle have identified this sector as their growth drivers in the 21st century. The sector is witnessing large-scale ad spends and an improvement in the distribution muscle to woo the Indian palette.

    In the last 2-3 years urban cities have seen a rise in the number of brands available for various processed food items.

    In light of all these facts, the food and beverage companies have a lot to look forward to.



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