Food Distribution In India Profile 2009

FOOD DISTRIBUTION IN INDIA

Gunender Kapur

FOOD DISTRIBUTION IN INDIA

Gunender Kapur

India - Huge & Growing Market

� Indian Agriculture sector contributes 17% to the GDP and provides

60% of employment

� Food is the single largest component of private consumption

expenditure, almost 53% of the total

� Consumption of food products is growing at 7.8% per annum

� Consumer demand for foods is diversifying in favor of perishables

such as fruits, vegetables, milk and animal protein

Food Market Break-upIndian Food Market: Sectoral Break-up, 2006-2007 (US

$billion)

Packaged Foods segment is

the fastest growing across

sectors

India Food Industry

� Indian Food consumption is at $ 200 bn in of which Food Processing industry

contributes a share of 43% ($ 85 bn)

� Directly employs about 2 mn people

� Highly fragmented and dominated by the unorganized sector

Source: Ministry of Food Processing Industries, Technopak Analysis, * Projections

INDIAN FOOD INDUSTRY : KEY STATISTICSINDIAN FOOD INDUSTRY : KEY STATISTICSINDIAN FOOD INDUSTRY : KEY STATISTICSINDIAN FOOD INDUSTRY : KEY STATISTICS 2002-032002-032002-032002-03 2006-072006-072006-072006-07 2010-113*2010-113*2010-113*2010-113* 2014-15*2014-15*2014-15*2014-15*

Food Industry Size ($ billion) 175 200 250 300

Food Processing Industry Size ($ billion) 70 85 110 150

% Food Processing Industry in total Food Industry 40% 43% 44% 50%

Size of organised sector in Food Processing Industry ($ billion) 13 23 37 60

Organised sector in food processing % of total food indutry 8% 11% 16% 20%

Segment Dairy SectorFruits &

Vegetables

Meat & Poultry

ProcessingFisheries

Packaged Foods

BeveragesStaple Foods

Growth rate of the market

15% 20% 10% 20% 8% 27% 85%

Key Segments

Value added milk

products like butter,

cheese & ghee

Raw fruits & vegetables, fruit pulps,

canned fruits and pickles

Cattle, buffalo and

poultry

Marine fisheries,

frozen products

and minced fish

products

Noodles/ vermicelli

Fruit based drinks and carbonated

drinks

Sugar, wheat

flour and salt

Extent of processing

37% 2% 1% 12% 3% N/A -

Share of organized

sector15% 48% 5% - 80% 77% 50%

Food Processing Segments

Food Target 2015 US$ 310 billion

• Estimated investment opportunity of about US$24 billion in the next 8 years

• Major investment opportunities lie in processing milk, sugar, fruit, vegetables, grain-based snacks and marine product

• An estimated 30% of new capacity could be for the export market

Key Growth Drivers

� Increase in per capita disposable income by 8%,

� Increase in per capita expenditure on food by 20%

� Literacy levels increasing. Literacy rate 66% in 2007

� Indian media industry growth projected at 18% CAGR between 2008-12

� Increasing Urbanisation

� Growth of Organized retail

� Increasing health awareness driving demand for Functional Foods

Challenges In the SectorFragmented Land Holding

CONTROL

� Support to small farmers to grow high

value crops, and land policy reforms

such as legalization of land leasing

throughout the country

� Public investment in agricultural

infrastructure

THE CRISIS

� Fragmented holdings of land—the

average size of holdings declined from

2.63 hectare in 1960-61 to 1.06 in

2002-03, making it difficult for farmers

to come out of the poverty trap

� Over-dependence on agriculture for

employment due to slow growth of

non-farm sector in villages

Stagnating Yields

Productivity- barely growing

� Weak Framework for Sustainable Water Management and

Irrigation:

� Inequitable allocation of water

� Deteriorating irrigation infrastructure

� Groundwater tables have dropped rapidly

� Unreliable or expensive electricity also hamper the growth in food

production

� Multiplication, distribution and availability of good quality seed is

crucial to accelerate food production

Infrastructure

Productivity Issues

India's overall agriculture productivity is still low

Source: Innovative technology to ensure food security, UNI (United News of India), 25 March 2009

Challenges in the Sector

� Production not directly demand or consumer preference led:

Leads to famine or feast syndrome

� Package of Practices: lack of farmer knowledge of efficient crop

management practices.

� Cost & quality of distribution: The fragmented retail structure

results in inefficient storage and transportation of food products,

wastages, value loss, and high cost of distribution.

� Presence of intermediaries: Numerous intermediaries, lead to

cost addition without value addition while blocking the information

flow

Challenges in the sector -

� Cost of packaging: Higher, on account of high cost

packaging material varying from 8-20% including statutory

levies (taxes, octroi, freight) on packaging, significantly

reducing the consumer’s affordability.

Challenges In The Sector-

� Tax Structure

� The incidence of taxes on food processing is high in India as compared

to other countries thus reducing the affordability.

� Central & state tax levies together increase costs by 30-40%. As

against UK, Ireland, Malaysia etc where there is Zero taxation on Food

& Beverages (excluding liquor)

Front End Challenges

Organised Retail

Very Rich

Consuming Class

Climbers

Aspirants

Destitutes

The Metros

Population > 1 MN

• 36 cities

• 117 MN population

Rural India

• 4,200 small towns

and 650,000 villages

• 766 MN population

Tier II Town

Population < 1 MN

• 748 towns

•120 MN population

Many INDIA’s

� Investment in infrastructure is less than 5% of the GDP

� Availability & cost of Real Estate

� Urban Land Ceiling Act (ULCA) is archaic

� Availability of public transport/ parking space

Real estate/infrastructure

Source: India infrastructure Report (IIR)

Lack of reliability in supply chain

� Infirm agri supply chain – leads to value & quantity loss.

� Poor physical conditions of roads - less than half of the roads are paved.

� Over-burdened ports - turnaround time is high.

� Non-existent warehouse standards - no standards for suppliers, and little vendor compliance.

� Disorganized trucking operations – difficult to manage volumes.

� Non existent tracking systems -IT implementation is low.

• Farmers – Production not demand linked, low productivity & realisation, lack of services such as credit, insurance etc.

• Numerous intermediaries, lead to cost addition without value addition while blocking the information flow

• Inefficient supply chain & lack of infrastructure lead to wastage & high consumer prices

Agri Supply Chain

Farmers

Traders

Commission Agents

Wholesalers

Retailers

0

20

40

60

80

100

Farm

er

Trade

r

Com

missio

n Age

nt

Who

lesa

ler

Ret

aile

r

Con

sum

er

Quantity drop through Food Supply ChainConsumer Price is 3.5 times of

Farm Gate Price

Source : KSA Analysis

Price Increase through the Chain

100125 131

196

344

0

100

200

300

400

Farm

er

Trade

r

Comm

issio

n Age

nt

Whole

sale

r

Retail

er

Abnormal Cost Addition

Very High Wastage

Illustrative Example – the humblepotato!

• FDI in Retail

� Lack of recognition of ‘Retail’ as an Industry

� Procurement & movement of goods, specifically agri product

� Implementation of model APMC Act

� Ability of farmers to directly sell produce to 3rd party of their

choice (trader / corporate entity / wholesaler) has increased

realizations

� An increasing no. are entering into agreement with corporate

customers

� 15 states have implemented the new act

Regulatory/Legislation

Range availability

� Food market largely loose - Not enough branded products to

stock shelves

� Vendors struggling to meet good fill rate levels

� Imported products – high price points and less consumer

relevance.

Talent

� Shortage of trained personnel - The retail sector will

require 1.5 million trained personnel in the next 5 years.

� Employee attrition - low now but expected to worsen.

� Improper training – leads to retail customer dissatisfaction.

Source : KSA Analysis

Reliance - Initiatives

� Backward disintermediation leading to:

� Better Prices to the farmers

� Eliminating of wastage across the supply chain

� Procurement of milk & vegetables from farmers at good prices

� Creating infrastructure to reduce wastage

� F&V:

� 38 Collection Centers & 15 CPC’s

� Quantity Bought- 900 mT /day

� Dairy:

� 2100 VPP (Village Pooling Points across 5 states)

� 60 Chilling Centers/Bulk Coolers

� Quantity bought (Milk) - 2.81 lac litres/ day

� Provide farmers with best agri inputs, education and services

� Launch differentiated processed products in general trade

Reliance – Initiatives

500g_Tur_Dal_R2-...

Noit_323_Atta_W...

Opportunities

Scope for Imported foods in India

� Market for the imported food products and fresh fruit

stands at more than US$1.1 billion per annum and is

growing steadily

� Growth of organized retail, food service industry

� Major high value imported food items: Dry Fruits, Fruit

Juices, Ketchup, Chocolates, Sauces, Specialty

Cheese, Potato Chips, Canned Fruits & Vegetables,

Cookies, Cake Mixes

Importing Processed Food products

Import regulations -

� No specific export certificates required from country of origin for imports of

processed food products

� All processed food and beverages products imported into India should meet the

requirements established under various domestic food laws, such as:

� The Prevention of Food Adulteration (PFA) Act, 1954, and PFA Rules of 1955, as

amended.

� The Standards and Weights and Measures Act, 1976

� Meat Food Products Order,1992

� Milk and Milk Products Order, 1992

� Fruit Products Order, 1955

Best High-Value Product Prospects

Export Potential

Currently, only 2% of the country's fruit and vegetable produce is processed and India's share of the global market stands close to a dismal 0.03%.

The national policy aims to increase the level of food processing from 2 per cent to 10 per cent in 2010 and to 25 per cent in 2025.

31

Food Processing Sector in India

• 52% cultivable land compared to

11% world average

• All 15 major climates in the

world exist in India

• 46 out of 60 soil types exist in India

• 20 agri-climatic regions

• Largest livestock population

• Largest producer of milk

• Largest producer cereals

• Second-largest fruit and vegetable

producer

• Among the top five producers worldwide of rice, wheat, groundnuts,

tea, coffee, tobacco, spices, sugar and oilseeds.

• Sunshine hours and day length are ideally suited for round the year

cultivation

SignificantOpportunity

India as a global sourcing hub

India has huge supply advantages due to diverse agro-climatic conditionsand wide ranging raw material base…

Way Forward

Policy Initiatives

� The Indian government has abolished licensing for almost all food and agro-processing industries except for some items like beer, and items reserved for SSI.

� Automatic investment approval up to 51 per cent foreign equity or 100 per cent for NRI and Overseas Corporate Bodies (OCBs) investment, is allowed for most of the food processing sector, except malted food, alcoholic beverages and those reserved for small scale industries (SSI)

� Most of the items can be freely imported and exported except for items in the negative lists for imports and exports.

� Zero import duty on capital goods and raw material for 100 per cent export-oriented units.

Policy Initiatives

� Wide-ranging fiscal policy changes have been introduced progressively.

� Excise rates have been reduced substantially in many categories:

� 24 to 16 percent on aerated drinks,

� 16 to 12 percent on packaging paper,

� 16 to 8 percent on meat, poultry and fish,

� 32 to 16 percent on food grade hexane used in edible oil industry,

� 8 to 0 percent on all kinds of food mixes including instant mixes.

� Processed food items like condensed milk, ice cream, preparations of meat, fish and poultry, pectins, pasta and yeast , soya bari (food supplements) and ready to eat packaged foods, hydrogenated vegetable fat are totally exempt from excise duty

Policy Initiatives

� Custom Duty Relief

� Custom duty reduced from

� 7.5% to 5% on food processing machinery

� 20% to 10% on refrigerated vans

� 65% to 50% on sunflower oil (crude)

� 75% to 60% on sunflower oil (refined).

� Special additional duty of 4% waived in the case of refined edible oil.

� Customs duty on packaging machines reduced from 15 percent to 5 percent.

� For making value addition in palm oil sector, customs duty on refined palm oil are fixed at 75% whereas the same for crude palm oil remains at 65%.

� Income tax rebate allowed (100% of profits for 5 years and 25% of profits for the next 5 years) for new industries in fruits and vegetables besides institutional and credit support.

Mega Food Parks

� The Government is developing 30 mega food parks which would cover

the entire food processing cycle 'from the farm gate to the retail outlet'.

� Provision of common facilities like cold storage, food testing effluent

treatment plant, power, water supply, etc

� Government would provide a grant of US$ 12.53 million for each one,

private investment to the tune of US$ 75.21 million would be

encouraged in these parks.

� The first five such parks would be set up in Punjab, Maharashtra,

Andhra Pradesh, Jhark-hand and the North-East region in the first

phases.

37

• A developed Food Processing sector will help overcome the biggest challenges in front of India:

- Low farmer income and high subsidies

- High wastage along the value chain

- Poor hygiene and safety standards

Food Processing sector has strong synergies with the inclusive growth mandate of the government and also provides a platform tosignificantly transform the face of rural India…

Given the huge potential opportunity, players should consider the constraints as opportunities waiting to be exploited and make investments for the overall growth of the

industry.

Outlook