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Beverages, Food & Tobacco Sector Analysis Report

 
[Key Points | Financial Year '11 | Prospects | Sector Do's and Dont's]

  • India is the largest producer of milk and second largest producer of fruits and vegetables. A huge coastline and a large livestock population have ensured it self-sufficiency in marine, meat and poultry products. Indian food market is valued at USD 182 bn whereas value of the food processing industry is USD 70 bn. The food processing industry grew at a compounded annual growth rate of 9% during 2004-10.

  • The food processing industry encompasses dairy products, fruits & vegetables, meat & poultry, fisheries, packaged foods and beverages. In most segments of the industry, the processing/value addition is a paltry 8%. The industry is characterized by the huge presence of small scale and the unorganized sector forming 70% share by volume and 50% share by value. The scope of growth can be further gauged from the fact that the share of the Indian processed food in GDP stands at a mere 9%. Countries such as Brazil, China and Thailand have more than 20% of their GDP being contributed by processed food.

  • Cigarettes account for only 15% of the total quantity of tobacco produced in the country whereas in the rest of the world, 90% of the tobacco produced is consumed in the form of cigarettes. The bulk 85% of the domestic tobacco produced is consumed in the form of chewing tobacco (gutka, khaini and zarda) and bidis.

  • The cigarette industry is subject to disproportionate and high taxation. Resultantly, cigarettes account for a mere 15% share in overall consumption but contribute more than 75% of taxes raised from the tobacco sector. Excise duty constitutes more than 50% of the cost of a cigarette.


     Key Points


    Supply

    Abundant supply of processed foods. Packaged products such as tea, coffee and snack food are largely available in the unorganized market. Tobacco segment enjoys high penetration even in rural areas. Supply is higher because of bidis that are manufactured by the unorganized sector.

    Demand

    Processed food demand is growing at 10%-15% per annum. Rising contribution of women to the working force and growing nuclear families has led to higher demand for convenience foods, especially in urban areas. Tobacco demand is largely inelastic. Demand growth is pegged at 4%-6% for cigarettes.

    Barriers to entry

    Huge investments in promoting brands and setting up distribution networks. Punitive taxation policies of government in case of tobacco.

    Bargaining power of suppliers

    Suppliers being small and fragmented have limited bargaining power. Only some companies like ITC source their agri-inputs internally thereby reducing their dependence on suppliers. Most tobacco companies have integrated backwards and have their own supply chains. Therefore, the bargaining power of suppliers is not high.

    Bargaining power of customers

    In packaged foods, the bargaining power of customers is restricted to the mass or the lower end of the price segment which is highly competitive. As tobacco consumption is more or less a habit, the bargaining power of consumers is only to the extent of choice of the brand.

    Competition

    Segments such as biscuits, noodles and snack foods are highly competitive. In a bid to capture market share, companies offer discounts and freebies. Recently inflationary environment has led to increased demand for private label brands that are available at a discount. In case of tobacco, branded cigarettes, bidis and contraband compete with each other.

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     Financial Year '11


  • The processed food industry continued to witness robust sales growth in FY11 led by higher volumes. A number of companies effected modest price-hikes to counter food inflation that soared to double-digits during the year. Backed by improved product mix and cost rationalization, a majority of the companies succeeded in maintaining or improving operating margins during the year. The cigarette industry was impacted by a 17% increase in excise duty and hike in VAT rates by state governments.

  • Growing health awareness has spurred demand for nutritious and healthy foods which led to a slew of product offerings from Britannia (healthy breakfast cereals and biscuits), Marico (Saffola oats) and GSK Consumer (Foodles). Even ready-to-eat segments witnessed a number of launches in FY11.
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     Future Prospects:


  • The food industry is expected to grow to $ 300 bn with the market size of processed foods reaching $ 150 bn by 2015 (Technopak). Demand drivers such as urbanization, increase in the number of nuclear families and working women, higher disposable income and the changing consumption pattern are likely to boost demand for processed foods. Higher penetration of organized retail from the current 5% to 30% of FMCG sales by 2020 will aid the growth. A number of categories which are highly dependent on organized retail-like frozen food products - are expected to witness significant growth in future.

  • A large chunk 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 whereas it is low in the case of snacks and culinary products. The segments, which are dominated by the unorganised sector, have the potential to grow faster in the years to come.

  • A large chunk of the Indian consumer is low on the value chain mainly in snacks and culinary products. These segments, which are dominated by the unorganized sector, have the potential to grow faster in the years to come. The FMCG sector is witnessing large-scale ad spends and improving distribution network. New and existing players like Heinz, Marico, Conagra, Pepsi, ITC, Dabur, Britannia, Danone, Kraft and Amul are expanding their product folio in the domestic market. At the same time, Indian food brands such as Bikanervale Foods, MTR's ready-to-eat foods and ITC's Kitchens of India are making their presence in the overseas markets.

  • Presence of numerous segments has diversified the processed food offerings. For instance, Dabur deals in beverages and culinary products, HUL offers beverages, staples, dairy and snack foods, Britannia is present in bakery products, ITC is present in staples and snack foods & Nestle has dairy, beverages and snack foods in its product basket. Regional players like Haldiram and MTR are focused on traditional snack and food mixes.

  • The growth in the tobacco industry has been impacted by high taxation and burgeoning illegal trade that accounts for 16% of the total industry size. Higher duties result in price hikes affecting volume growth of domestic companies due to competition from the contraband and bidi segments. Rationalization of taxes is likely to provide a level playing field to the industry.

  • The Indian government has approved funds for establishing 15 mega food parks across the country. The Union budget 2011-12 has increased allocation by $ 45 m to $ 135 m to the Food Processing Ministry. The government of India had also announced Vision 2015, which lays focus on enhancing the competitiveness of food processing industry in both domestic as well as international markets. The Vision 2015 provides for enhancing the level of processing of perishable to 20%, enhancing value addition to 35% and increasing the share in global food trade from 1.5% to 3%, by 2015.
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