India is the 2nd largest population in the world, has the 3rd largest economy and ranks 2nd in the world in terms of agricultural production. Experts have named India as one of the hottest destinations for food manufacturers, food producers and food ingredient professionals. The Indian food industry is tracing an uphill growth trajectory and has emerged as a high-profit sector due to its extensive potential for value addition, especially within the food processing industry.
The potential of the processed foods, health supplements and nutraceuticals is well acknowledged by the industry and the government. We appear to have just got over the “Tipping Point” for this particular market. But en-route to capitalizing on the opportunity at hand there are several challenges that the industry will need to face.
In India the wastage of produce due to physical damage and rotting has always been on the higher side. Some experts believe that more than 50% of the farm produce in India can be lost in the journey from the farm to the table.
The quality of farm produce in India is also far from being considered superior and consistent. McDonalds faced a similar problem when it attempted to locally source potatoes for their French fries.
The value chain of farm produce today is tightly controlled by a series of intermediaries or “agents” who have a significant monetary incentive to vehemently oppose direct sourcing, educating of farmers and adoption of state-of-the-art farming processes, systems and information flow which could make their role in the system redundant.
The experience of breakfast cereals in India offers a lot to learn from with respect to proliferation of processed foods in India. After experiencing relatively low acceptance in the initial years, breakfast cereals have steadily grown by over 20% YOY for the last 5 years and this trend in only likely to continue. This journey is what companies preparing for a venture into the processed food space must be keen on understanding. There is a very wide range of processed foods which are hugely successful in western markets and would superficially appear ripe for an India launch but companies would do well to create a business ready to tackle the pace and uncertainty of the market.
Launching a business in the processed food / health supplement space - Companies can use the following guidelines when designing a business to capitalize on this opportunity.
Refrain from making large investments and developing large capacities
Create a business unit small enough to keep cost structures low
Organization must be ready to make mistakes and correct course quickly
Maintain flexibility in branding and communication
Develop superior supply chain management and new product development capabilities early
Refrain from making large investments and developing large capacities early - Since there is no real precedent for a bulk of the potential processed foods, forecasts are likely to be tenuous at best. Hence new businesses should be careful when developing investment plans as the product’s acceptance in the market and growth may not meet expectations.
Create a business unit small enough to keep cost structures low - Although the market overall is growing at a significant pace, individual niches that are known to be growing quickly are already rife with competition and there is little to no certainty on the future for others. In such an environment, companies must, by intention, develop small business verticals which can work outside company expectation of market size to identify and establish pockets of future growth even though their current market size may be small. Gross margin and other performance metrics must be decided for the business unit taking into account these factors.
Organization must be ready to make mistakes and correct course quickly - Right from the first step organizations must see themselves as pioneers into a new market and not a quick money generators. Organizations must be encouraged to explore different products and markets. Assessments and learnings must follow and unprofitable or infeasible markets must be exited promptly. Managers need to acknowledge this fact and hold these fledgling businesses to a different standard.
Maintain flexibility in branding and communication - A good trusted and reputable brand image can be an advantage in the processed food sector. However companies entering the space must keep their branding and communication flexible over the initial periods as the business evolves finding high potential niches and exiting undesirable ones.
Develop superior supply chain management and new product development and launch capabilities early - Companies must also acknowledge that with the low entry barriers that exist in the business, it is likely that competition would soon turn the blue ocean you just identified and developed red with competition. Hence the managers must develop differentiators like supply chain management and new product development capabilities simultaneously to allow them to draw maximum advantage for their efforts.
Supply Chain in the sector
Currently only 2-3% of India’s vegetables and fruits production is processed as compared to 90% and 40% in USA and China respectively. Long supply chains push the prices upwards and also result in more wastage. Adequate storage facilities, direct farming, contract farming and negotiable warehouse receipt system are some of the mechanisms to streamline, strengthen and shorten the supply chain. While the supply chain is currently dominated by the traditional set up of traders and a lot of intermediaries, a lot of investment has been taking place in developing robust food supply chains with modernization of cold storage and transportation.
Some of the key challenges that are currently being faced by the food processing sector in India are –
Ambiguity in the regulations as there is no comprehensive national level policy on food processing sector
Low productivity of agri products
Availability of trained manpower
Cost effective food machinery and packaging technologies
Inadequate infrastructural facilities in terms of cold storage, warehousing, etc.
Inefficient supply chain and involvement of middlemen
High transportation and inventory carrying cost
Lack of product development and innovation
Agri-Export Zones – The government has established 60 fully equipped agri-export zones, in addition to food parks, to provide a boost to agricultural and food processing exports.
National Food Processing Policy – Increase the processing of food to 25% of the agro produce by 2025
Food processing sector has been recognized as priority sector for bank loans
Companies able to define strategies and tactics that can acknowledge and leverage these challenges stand to create significant competitive advantages in both the short and long term. Businesses must also see themselves as evangelists and pioneers and must be ready to hold themselves to a higher standard to win the trust of the Indian consumer. The enormous upside of the market is well known and the companies that do it right stand to establish themselves as success stories.