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Food Processing - Ready to eat? - Views on News from Equitymaster
 
 
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  • Sep 26, 2007

    Food Processing - Ready to eat?

    Major FMCG players like HLL, Dabur, ITC, and Nestle among others are increasing their presence in food and beverage segment. The massive size of the industry and faster growth in the processed segment is generating interest in the segment from a large number of companies. We give a further insight to the food-processing segment.

    Level of Secondary Processing
    Country %
    USA 80
    Australia 25
    Poland 31
    Germany 33
    Netherlands 12
    India 1.3
    Source: Rabobank Estimates
    Food processing is a transformation of raw agricultural and horticultural products into products of final consumption. The Ministry of Food Processing Industries has estimated the size of the Indian food market at US$ 191 bn (Rs 8,600 bn) of which processed food consumption accounts for 53%. The segments that fall under the industry are: (a) dairy, fruits & vegetable processing (b) grain processing (c) meat & poultry processing (d) fisheries and (e) consumer foods including packaged foods, beverages, and packaged drinking water. Food processing enhances the shelf life of the produce, reduces wastages and adds value to the produce. The food processing business in India is at a nascent stage. The level of processing of agricultural products into food is low, compared to other major agricultural producers.

    What is driving the growth?

    Changing lifestyle: As far as the processed food market is concerned, Indian households are closely knit and the percentage of nuclear families and working women is very low. Therefore, while the market itself is one of the largest in the world, the penetration of packaged and branded products is abysmally low. People prefer homemade or fresh products, which are cheaper than branded products. However, over the last couple of years, private players have started taking enormous interest in the sector, with many MNC's already testing the waters. Their efforts have been aided by the fact that urban India is showing a marked shift towards ready-to-eat food. With urban incomes increasing and urban consumers squeezed for time, they are slowly demanding more of the products they consume. Also, the hygiene factor is facilitating growth. With 200 m people expected to shift to processed and packaged food by 2010, this presents an opportunity for makers of branded products like HLL, ITC, Nestle to convert potential consumers into patrons on as big a scale as never before.

    Large share of wallet: Food forms the largest component of the total consumption expenditure in India accounting for as much as 51%. This is highest compared to 9.7% for an average American person and 15% for both Japanese and British. Though with rising income, the share would go down, but would increase in absolute terms. Multi-national companies such as Coca-Cola, PepsiCo, Britannia, Danone, Nestle, Cadbury, Heinz and Perfetti ae have made their presence felt in India. Indian majors like HUL, ITC, Dabur too have lined up investments in this segment.

    Competitive advantage: Despite current under-development of food processing, India has the potential to become one of the leading players in the industry, due to its low labor and food production costs, and the availability of raw materials. This processed food market is projected to be over US$ 100 bn, of this the primary processed food market accounts for 60%, while the value-added processed food market is around 40%. The Indian food processing industry is an highly fragmented industry. A large number of players in this industry are small sized companies, and are largely concentrated in the unorganised segment. This segment accounts for more than 70% of the output in volume terms and 50% in value terms. This provides huge opportunity for the organised players.

    Government initiatives:The food-processing sector in India has been accorded high priority by the government. A number of fiscal relief and incentives have been given to encourage commercialization and value addition to agricultural produce. The government has undertaken incentives to encourage the industry, like removal of price controls, de-reservation of small-scale industry, reduction in import tariffs and fiscal incentives for encouraging investment in the sector. Valued at Rs 4,600 bn in 2004, the food-processing sector is expected to touch Rs 13,500 bn by 2015. The government has set an investment target of Rs 1,000 bn for the food-processing sector by 2015. The move aims at increasing processing of perishable food from 6% to 20%. Cumulative foreign direct investment in food processing has touched US$ 1.3 bn in March 2007, which is about 3% of the total FDI inflow of US$ 15.7bn.

    Going forward
    India will continue to benefit from its growing population, rapid urbanisation, rising levels of affluence in the middle income group, demand for quality products and the scope for investment and expansion. Opportunity to modernise food processing technologies, packaging and distribution would aid the growth. Further we also expect the organised sector to gain dominance as the consumer becomes quality and brand conscious.

     

     

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