RESEARCH IT!  >>  SECTOR INFO  >>  JULY 10, 2009

 Beverages, Food and Tobacco [Key Points | Financial Year '09 | Prospects | Sector Do's and Dont's]
  • India is the world's second largest producer of fruits, vegetables and milk. A large coastline and a huge cattle population ensure abundant supply of meat, poultry and fish.

  • Only about 10% of output is processed and consumed in packaged form, thus highlighting huge potential for expansion of the food processing industry. Potential size of the semi-processed and ready to eat packaged food is over US$ 90 bn.

  • 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.

  • Of the total amount of tobacco produced in the country, around 48% is in the form of chewing tobacco, 38% as bidis, and only 14% as cigarettes. Thus, bidis, snuff and chewing tobacco (such as gutka, khaini and zarda) form the bulk (86%) of India's total tobacco production. In the rest of the world, production of cigarettes is 90% of total production of tobacco related products.

  • High government taxes on cigarettes is a key cause of concern for the industry, which amount in excess of 130% of the net value of the product. Notably, the cigarette industry contributes nearly 85% of the total excise collections from the tobacco segment. The industry faces a problem in the form of the unequal distribution of excise burden.

     Key Points
    Food, Beverages: Abundant supply of vital foods. The industry faces over supply in certain segments like coffee and tea. However, more than half of this is available in unpacked or loose form, thus benefiting only the unorganised sector.
    Tobacco: The segment enjoys high penetration even in rural areas. Supply is higher because of unorganised sector (bidis).

    Food, Beverages: Processed food demand is growing at 10%-15% per annum. Growth of dual income households has given rise to demand for instant foods, especially in urban areas.
    Tobacco: Demand is largely inelastic. Demand growth is pegged at 4%-6% for cigarettes.

    Barriers to entry
    Food, Beverages: Huge investments in promoting brands and setting up distribution networks.
    Tobacco: Punitive taxation policies of government. Huge investments in brand building and setting up distribution network.

    Bargaining power of suppliers
    Food, Beverages: Many established players have a slight edge in bargaining power. However, for commodities like coffee and cocoa, companies are dependent on the international demand-supply scenario.
    Tobacco: Most companies have integrated backwards and have their own supply chains. Therefore, the bargaining power of suppliers is not high.

    Bargaining power of customers
    Food, Beverages: High as a result of intense competition both among branded and unbranded products.
    Tobacco: As the consumption is more or less a habit, the bargaining power of consumers is only to the extent of choice of brand.

    Food, Beverages: The competition takes place mainly on basis of product quality. However, in a bid to increase penetration of new products, companies often compete on pricing and by offering discounts and freebies.
    Tobacco: Competition is mainly between branded cigarettes, bidis and contraband.
     Financial Year '09
  • Higher excise duty was levied on non-filter cigarettes to bring it on par with both filter cigarettes. While higher excise duty would reduce its sales volumes in non-filter segment, no increase in excise on filtered cigarettes was positive. Hence the severe taxation and regulatory milieu for cigarettes in India remained a cause of concern.

  • Indian food processing industry continued to see an impressive growth rate. Overall economic growth was favourable for the F&B market, with more products becoming affordable due to rising incomes, changing lifestyles and a rapidly growing population. It is also experiencing good growth from the modern trade format. Processed food products, impulse food products and packaged grocery are the segments that have witnessed immense growth from urban Indian modern stores.

  • Seeing the huge demand, HUL, ITC and Dabur have increased their foods portfolio. Even Britannia and GSK Consumers are looking at increasing their presence in other food categories.

  • Though the problems of infrastructure, logistics, wastage, high input prices exists, 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 a big scale as never before.
     Current Scenario & Prospects:
  • With changing eating habits and increased affordability of the growing Indian population, the market for branded foods is growing at a healthy 10%-15% per annum. It is therefore likely that companies will opt for consolidation to generate growth. Cash rich companies may buy-out well-known brands to gain market leadership. This trend will reduce fragmentation besides improving the pricing environment. The larger FMCG players, given the strong cash flows, are looking at growing through the inorganic route, which we believe will help consolidate market share going forward.

  • 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. Products like 'atta' are already seeing hectic competition between players like HLL, Pillsbury and ITC.

  • The food processing industry in India is estimated at Rs 4,600 bn, with a mere 5% held by the organised sector. This segment is expected to touch Rs 13,500 bn by 2015 at a CAGR of 10%. Companies like Nestle and Dabur have identified this sector as their growth drivers in the 21st century. The sector is witnessing large-scale ad spends and focus on improving the distribution muscle to woo the Indian palette. India is seeing new/existing entrants like Heinz, Mars, Marico, Conagra, Pepsi, ITC, Dabur, Britannia and Amul looking to expand their product folio. Regional players like MTR are also making their presence felt. Though profits will take a few years to come, the topline growth is likely to get a leg up.

  • The growth in the tobacco industry is greatly dependent on the policies of the government (both excise related and ban of public smoking). Higher duties result in higher prices of the product. Contraband cigarettes have become competitively priced as compared to domestic brands given the frequent excise (price) hikes. It has started affecting volume growth of domestic companies as the consumers are showing resistance to price hikes.

  • Domestic food consumption estimated at Rs 8.6 trillion. Currently forms the largest component of the total consumption expenditure in Indian household accounting for as much as 51%. This is highest compared to 9.7% for an average American and 15% for both Japanese and British. Though with rising income, the share would go down, but would increase in absolute terms. With consolidation of the agri marketing chain and investments in the sector aided by the government, it is likely that rural India will see economic growth at a faster rate going forward and a larger mass of Indians will participate in India's development. This is a good sign for the industry as a whole.

  • Food processing is hailed as the ‘sunshine industry’ in India. The food processing industry has emerged as one of the major driver of economic growth and is expected to continue in future. Growing economy, surplus food and a shift in the consumption pattern will continue to be the key factors behind the growth of the sector. At present, the industry is seeking investments to create necessary infrastructure, state-of-the-art-technology and expand production facilities to match the international quality and standards. Further, the Government’s measures like de-licensing of the sector, several duty and tax relief, financial assistance for infrastructure building etc up will benefit the sector going forward.

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