Top Editors ... India Path to Innovation

Title: India Path to Innovation
Date: 15/10/2008
Autor: Chandrasekhar Shankaar

With a population of 1,100 million and a food industry that accounts for over 40% of total consumer spending, India represents a land of opportunity

Following a series of reforms in the early 1990s, India has witnessed tremendous economic progress. Its Gross Domestic Product (GDP) growth clocked an impressive 5.8% between 1995 and 2000, and 6.8% between 2000 and 2005. In 2008, GDP growth stands at 9.0%.
Apart from making India one of the fastest growing economies in the world, this prolific GDP growth has also increased the spending capacity of its citizens, resulting in the emergence of the ‘modern middle class’ of India. As a segment of the overall population, the Indian middle class now represents about 250 to 300 million out of a total of 1,100 million people. With growing income packages, this middle class has modified the spending pattern of the country, from pure necessities to luxuries.
With a median population age of 24.8, India’s population has a higher tendency to spend than save. All these factors have cumulatively increased the demand for consumer products across sectors such as clothing, food and beverages, consumer electronics, automobiles and so on.
Accounting for 42% of total consumer spending, the food and beverage industry represents one of the largest sectors of consumer expenditure.
Since 2005, the Indian food industry has grown at an average of almost 14.0% each year; and the growth in per capita spend on food and drinks has averaged 18.0% in the past few years. Although this current level of spending is lower than India’s western counterparts, it is more than balanced by the country’s population growth, which has been expanding at a rate of 1.7%. This figure is even higher for the middle class and will see India become the fifth largest consumer market by 2025.

The Indian food and beverage industry can be classified into four main categories:
dairy products; baked foods and cereals; snacks; and beverages.
India is the world’s largest producer of milk, and dairy is the biggest application sector in the country, accounting for more than 56% of its total food and beverage market. Dairy products are worth around US$10.5 billion overall, and the segment grew at 6.5% during 2007. Within the dairy category, milk is the most lucrative product, with a production capacity of 95 million tonnes and accounting for 90% of total dairy revenues.
In comparison with the rest of the world, there are no industrialized dairies in India.
Instead, the industry is made up of about 70 million families who are each engaged in the production of milk from one or two animals.
Consequently, dairy co-operatives dominate, with the top players in the market including three large co-operatives: Gujarat Cooperative Milk Marketing Federation Ltd (GCMMF), Tamil Nadu Co-operative Milk Producers’ Federation (TNCMPF) and Madhya Pradesh Dugdha Mahasangh (Sahakari) Maryadit (MPDMSM). Around 75,000 such co-operatives exist in India.
Several of the dairy products that have been launched recently reflect the significance of the health and indulgence trend in the Indian market. In September 2007, Amul launched the Kool Koko Chocolate Milk, a pure milk drink with added cocoa solids, which is targeted at teens and young people. In April 2007, Amul ProLife Probiotic Wellness Ice Cream, which is claimed to help indigestion and improve the immune system; and Sugar Free Probiotic Diabetic Delight were launched. The probiotic sugar-free diabetic product replaces sugar with zero calorie and low calorie sweeteners.
The Indian probiotic dairy market stands at US$25.2 million, and is expected to witness rapid growth in the next few years.
An increasing number of global probiotic players are already keenly eyeing the market. There are currently three active competitors prominent in the probiotic dairy market namely Amul GCMMF, Mother Dairy India Ltd, and Nestlé India Ltd. The potential new entrants include Yakult and Danone, which are likely to introduce their probiotic drinks into the market by the end of 2008.
Although the Indian dairy market is large and exhibiting fairly good growth, the structures of the co-operatives may represent both formal and informal barriers to entry for manufacturers new to the market, and as such this is an area that would require extensive research before pursuing.

Beverages

The beverages market in India is estimated at over US$3.8bn and enjoys a yearly growth rate of 6.5%. It is the second most lucrative category in the Indian packaged foods industry. To date, carbonated beverages represent the biggest proportion of sales, followed by bottled waters, and the sector is led by The Coca-Cola Company, closely followed by PepsiCo and Parle Bisleri, which has traditionally sold bottled water, but has recently launched a range of fruit juices. As is the case in Europe, there is evidence that carbonated drinks sales are decreasing. However, in India this is partially attributed to widespread publicity surrounding pesticide contamination in major brands. As a direct result, the demand for bottled waters, ice teas, fruit juices and other functional beverages is on the rise. The total Indian functional beverages market, which includes energy drinks, enhanced juices and soya enriched beverages, stands at about US$200 million. Although the sports and energy drinks market is currently in its infancy, with India's growing economy and the fact that the products target highend consumers, it is expected to experience a substantial growth in the future.
Fortified juice accounts for a major portion of the total revenue in the beverage market, and is expected to grow at a rate of 20 to 25% in the near future. Coca-Cola’s latest product launches in the country have all been variants of its Minute Maid juice drink, such as the pulpy orange variety, which was launched in June 2007. This drink is designed to tap into the growing fruit juice market as it contains real orange pulp. Given the fairly high growth and market size, as well as the challenges facing some of the major brands, the Indian soft drinks market should be considered an attractive opportunity for companies innovating in soft drinks that can offer alternatives to the larger brands.

Snacks

Presently valued at just over US$2bn, the Indian snacks market experienced a healthy 9% growth in 2007. India accounts for almost half the snacks consumed throughout the Asia-Pacific region in volume terms. The industry is highly fragmented, and is largely dominated by small players, which account for nearly 70% of the total market, and a few prominent participants such as Frito Lay (a division of PepsiCo), Haldiram Foods Ltd, ITC Foods, Nestlé, Indo Nissin, and Unilever. PepsiCo leads the Indian market for snacks with brands such as Lays and Kurkure, while SM Dyechem is another prominent player with its brands such as Peppy, Piknik and Senor Pepito.
The snacks segment includes noodles, pasta, soups, chips (crisps) and nuts; and many of the new product launches in the country have already positioned themselves to meet a growing health trend. The latest innovations from PepsiCo have included potato chips (crisps), such as Frito Lay Kurkure Snacks, launched in October 2006, which are Monosodium glutamate (MSG)- and cholesterol-free. Many product launches claim to be low in fat and calories.

Baked foods and cereals

Currently valued at US$1.8bn, the Indian bakery and cereals market is growing at a healthy 12% and is the fastest growing application sector in India, which suggests the potential for significant opportunities for bakery and cereals manufacturers.

Breakfast

cereals are estimated to be worth around US$100 million and are growing at 15% CAGR, with major participants being multinationals such as Kellogg's, Quaker Oats (product of PepsiCo), Bagrry's, and Mohan Meakins Limited. Products include white oats, cornflakes, muesli and porridges.
Sales in this market are highly fragmented and this is particularly the case for baked goods due to the widespread presence of artisanal bakeries throughout the country.

Opportunities

Consumer convenience and health represent the two most important trends in the industry, with the majority of new product launches taking place in the area of health and convenience. The World Health Organisation predicts that cardiovascular disease (CVD) will be the leading cause of death in India by 2010; and although there are numerous products launched with low or no cholesterol or fats, the number is still low in relation to the number of people affected by cardiovascular problems. Diabetes is another looming issue in India and is expected to become more prevalent than in China in future. There has been a surprisingly low number of new sugar-free or low sugar introductions in India in recent years, which indicates that this area provides tremendous market potential.
Convenient products are also on the rise as the young and urban population in India works longer hours than ever before. The recently launched Maggi Cuppa Noodles clearly captures the concept of convenience and eating on the go in its advertisements; and all the major food processing companies such as Unilever, ITC and MTR have launched various ‘heat and eat’ dishes in the past couple of years.

Lessons to be learned

Despite the issues of low per capita spend and difficulties with the fragmented retail infrastructure, India provides immense scope for food and ingredient manufacturers, which has been more than demonstrated by those companies that have addressed the innate challenges of the market and achieved success over the past few years.
McDonalds represents a classic success story. While KFC failed, McDonalds respected the local culture and created customised menus avoiding pork and beef, and adding a higher vegetarian selection to suit Indian tastes. Knowledge about the market coupled with greater flexibility resulted in McDonalds’ success in the Indian market.
Chyavanprash, a traditional Indian paste made from amla (Indian gooseberry), suffered from stagnant volumes and a flat market growth curve for many years; and research showed that Indian children did not like the taste of the product. Dabur then launched an innovative solid bar of the same chyavanprash, which could be eaten as a snack. It offered the luxury of convenience, which effectively broke the barriers confining the product to home consumption. This example demonstrates that Indian consumers are ready to accept product modifications even if they challenge traditional usage, as long as the new product adds both value and convenience.
If producers and food manufacturers can understand the intricaciesof the Indian market, there is a plethora of opportunities waiting to be seized. New relaxed rules regarding foreign investment and the enormity of untapped population in India should make this an extremely attractive market for development for decades to come.