Dec 14, 2007|
Food Processing: What's holding it back?
In the last few articles we looked at the prospects of the food-processing sector. In this article we highlight the factors that are hampering its growth.
Lack of Infrastructure: The major factor hampering the growth is the lack of infrastructure facilities. The food products especially the fresh food products are to be procured from various sources scattered over a vast geographical area. The agro-climatic and seasonality of the agricultural production also necessitate the procurement of products from the varied sources and its storage. The fresh agricultural products are heavy and voluminous which makes the transportation very difficult. Further, lack of connectivity between the centers due to inadequate transport infrastructure facilities add to the problem of procurement and pooling of these bulk agricultural commodities. Deficiencies exist not only for grading and packing but also in the cold storage facilities. 30% of its produce does not reach the end consumer, but gets wasted annually. This results in low prices for farmers and higher cost for consumers. Though private players are investing in cold storage facilities, support from government is needed on priority basis.
Long supply chain: The food supply chain in India is very long and fragmented. This not only adds to the cost but also results in higher wastage. Today a farmer has no contact with the end consumer or even the retailer who sells his produce and in turn, has no understanding of the pricing, consumer needs and preferences. With fewer middlemen, costs and commissions can decline up to 1.68 times the farm prices (even if retailers maintain current mark-up levels). Thus, organised retail can help achieve total savings of over Rs 1 trillion (source: CRISIL). On the distribution side, the Indian market is dominated by more than 12 m small 'mom and pop' retail outlets. However only 3% is in the organised sector, thereby reducing the reach.
Capital issues: Within the priority-sector lending target of 40% of their total deposit base, banks are mandated to lend 18% to direct and indirect agricultural activities. Food processing finds place within a further sub-category of indirect lending of 4.5%. This sub-category is usually oversubscribed by banks as even agriculture inputs are a part of this sub-category. Directed lending has its own limitations in expanding credit to this sector. Lack of financial resources further adds to the fury. Private-public partnership, government subsidy schemes, partnership with banks, JVs, SPVs for implementation as well as dedicated infrastructure financing institutions are required to give this area the requisite push.
Mindset of consumer: Indians are generally accustomed to eating fresh food rather than the packaged food. Processed foods imply a certain shelf life before consumption.
Unless the consumer is assured that the storage has not led to deterioration in food quality, the consumer would shun processed foods. Further, the mindset and the spending habit of rural and urban consumer is very different. Given the diverse cultures in India, the tastes also differ as per the cultural diversity.
Regulations: Food standards in India tend to be overlapping, contradictory and highly prescriptive. Though standards have been laid for all, but there seems to be a gap in implementing them in its entirety. Further, India has the one of the highest indirect tax rates in world. However, of late there has been a draw down of taxation for the perishable sector, along with income tax waivers for reduction/waiver in excise duties on such products.
Thus, there are several hindrances that form a vicious cycle. To enable the strong of the food-processing sector, mutual effort by the government and companies is needed to add the infrastructure facilities and market linkages. Conducive regulatory environment and tax regulations should also be made to suit the growth for India to make an important mark in the global food arena.
The path breakers...
FMCG majors like Hindustan Unilever (HLL) and ITC have an established presence in contract farming in
India. They have taken initiatives to strengthen their agri-linkages. Direct marketing initiatives and sourcing agreements have been signed by the players. For e.g. ITC recognized the rural potential and started the e-choupal initiative. The E-Choupal initiative creates a direct marketing channel, eliminating wasteful intermediation and multiple handling, thus reducing transaction costs and making logistics efficient. The E-Choupal project is already benefiting over 3.5 m farmers. According to ITC, over the next decade, the E-Choupal network will cover over 100,000 villages, representing 1/6th of rural India, and create more than 10 m e-farmers.
Further, Reliance and Bharti Enterprise too have invested in the agro processing space. Nestle over the last decade has helped setting up efficient milk collection system in Punjab. Starting in Moga with 511 kg of milk on the first day of collection (15th Nov 1961), today Nestle procures over 12,00,000 kg of milk per day during the peak season in the states of Punjab and Haryana. These companies have been successful in transcending the obstacles in the food-processing sector and have laid their own growth trajectories.
More Views on News
Jun 20, 2017
While GSK consumer reported muted revenue growth, volumes are seen to be recovering.
Feb 8, 2017
ITC Ltd has announced third quarter results of the financial year 2016-2017 (3QFY17). The company has reported 4.7% YoY and 5.7% YoY growth in revenues and net profits respectively. Here is our analysis of the results.
Dec 7, 2016
ITC has announced second quarter results of the financial year 2016-2017 (2QFY17). The company has reported 8% YoY and 10.5% YoY growth in revenues and net profits respectively.
Jun 8, 2016
ITC declared results for the quarter and year ended March 2016. During the year, the company's net revenues and profits rise by 1% YoY and 3% YoY respectively.
Jun 1, 2016
GSK Consumer Healthcare announced its results for the quarter and year ended March 2016. During the quarter, sales and profit came in lower by 9% YoY and 8% YoY respectively.
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 4, 2017
The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407