Opinion: Food Processing Can Take Off in India

The food processing industry in India is currently a $250 billion market, growing at a CAGR of 8.5%. Despite already being such a large industry, it has the potential to increase two-fold to $550 billion by 2026. India does not only have a very large domestic market to cater to through this industry, but also can become a major export hub for processed food in the South Asian region.

Currently, the norm of purchasing food is from "Mandis", which are local markets for all different types of food produce. They come through a complex marketing channel, with the source at local farmers. If manufacturing and agriculture were aligned to provide processed food to the mass market, it could be a very large opportunity. The agricultural output potential, growth of food retail, India's geography, rising middle class and export potential are the main drivers. There are, of course, many challenges to doing this.

What is Food Processing? (Source: YesBank)

Current State of Food Processing in India

India is currently the second largest producer of food in the world after China. In addition to being the second largest producer of food, India is the leading producer of certain core foods such as milk, bananas, ginger, potatoes, tea and buffalo meat. Despite having such a large production capacity, India's food retail sales to GDP ratio is quite low. While compared to other nations, some of which are on a similar growth track, India falls behind significantly in their overall food processing level.

As it stands, dairy is the category of food which is processed the most in India. 35% of the food processes in India is for dairy goods. The homegrown brand Amul, turnover of almost $8 billion, is a great testament to packaged dairy products in and outside of India, with their pouched milks the highest selling product. Amul has been an inspiration for food processing in India, given its rich history and contribution to the "White Revolution". Their business model claims to cut out middle-men for farmers trying to sell their milk to consumers by following a "three-tiered structure" of cooperatives. Amul, which was established in 1946, had quickly realized the potential of the large-scale agricultural production of India. For them, it was a matter of matching the agricultural sector with the manufacturing side and creating a brand which now has a capacity of 14 million tons of milk per day. The dairy segment of food processing is fairly mature, with the opportunities mainly in adding more value-added products, such as flavored yogurt, and technology advanced.

The other major categories of foods which are being processed are meat, poultry and marine produce. The three of these account for 45% of the overall food processing level in India. Major groups such as Godrej, are leading the way in this segment of processed food through brands such as Yummiez and Real Good. COVID-19 has only fueled the growth of this segment, and packaged in general, as consumers are more conscience of sanitation.

The segment with least food processing penetration is fruits, vegetables, grains and seeds. As stated, India is one of the largest producers of many foods which come under these four categories. This segment only represents 2% of the overall food processing in India, yet it is one of the highest produced goods. Some major brands, like McCain have tapped into this segment by providing consumers with frozen potatoes, mainly french fries, and have also realized the opportunity to sell to the hospitality sector, with McDonald's and Burger King its biggest customers.

The 1.3 billion people in India create a huge domestic market. However, the export potential of processed food coming from India is also immense, given its agricultural output potential. Currently, India contributes 2% of the agricultural export in the world. Despite its potential to export many different types of processed food, has a very focused products being exported. As it stands, marine products, basmati rice, spices and buffalo meat are the biggest food exports, representing a total value of approximately $16 billion. In the grand scheme of things, this number is relatively low.

Why Can India be a Powerhouse for Processed Food?

As mentioned, India has one of the highest agricultural production capacities in the world for a range of different products. Almost 60% of the total population still rely on agriculture for their livelihood, and agriculture, as a whole, contributes up to 20% of the GDP. Agriculture contributes around $580 billion to the GDP, whereas only about $40 billion is contributed to the GDP by the export of processed food. Though a large chunk of the $580 billion services the domestic market, there still remains a huge gap.

Being such a large country, India has many different geographical traits. Each region has its own abundance of raw materials to produce specialty food produce. For example, Gujarat is known as the "Milk Capital", and Andhra Pradesh, the fruit and vegetables hub. Yet, only a few of players have realized the opportunity in these regions and created value. Amul, being headquartered in Gujarat, is an example.

In addition, urbanization trends are in favor of food processing in India. The country has the largest working population in the world. Though urbanization has been relatively slow compared to other countries, it is still moving in the upwards direction. With more jobs being created and an increase in overall business activity, disposable incomes have risen. With rising incomes, along with a more busy work life, younger consumers have less time to prepare food. If one were to look at the US, it used to be an agricultural hub, wherein non-processed food used to be the norm. Now, the US is the capital for processed food in the world because of overall changes in consumers lifestyle. The same will happen in India.

Retail food outlets have had a great boom in India in recent years. The food services industry is expected to grow to $80 billion by 2023, from $50 billion right now, growing at a CAGR of 9%. This includes restaurants, fast-food chains, hotels, grocery storers and supermarkets. The organized sector currently holds 35% of the market share, and is expected to continue growing at a CAGR of 15%. Such food outlets are going to be very large buyers of processed food, as it will make economic sense to buy preserved foods.

India is very ideally located for exports into the Asian region. Being located close to Nepal, Bangladesh, Myanmar, Vietnam, the Middle East and Europe, India has a huge export potential. These other markets do not have the access to the same amount of raw materials as India, making the production capacity of India more than three or four times than each market. Specifically, the Middle East. The Middle East has very minimal agricultural output, and thus relies heavily on imports of a range of food products. Though many businesses in India already realize this, particularly for fruit exports, there is still a gap.

There is obviously a big trend away from processed foods to more organic foods in all segments. The global CAGR of this industry is 16%. In India as well, organic food is picking up great traction. However, I believe India has not gone through its revolution from bulk, agricultural produce to processed food. Therefore, jumping the barrel from bulk, agricultural produce to organic food will not be feasible in the mass market. Organic food is expensive, and Indian consumers, on a mass scale, will not purchase them. I believe a transition to processed food is first required, before organics comes into play on a mass scale.

The Challenges to this Industry

Despite being such a large opportunity, many hurdles come in the way of the progress of food processing. These hurdles are mainly lack of infrastructure, quality inputs and meal protection rights. These hurdles must first be overcome to realize this $550 billion opportunity.

Infrastructure seems to be at the core of many problems in India. For food processing, it is certainly a big one. As mentioned in a previous article, India has a mere urbanization rate of 35%. This means, there is a lack of good transport, lack of retail food outlets and a lack of industrialization. If none of the above exist, then getting packaged food to many areas of the country, where 93% of the population live outside metropolitans, will be a herculean task. Without investing in infrastructure, the food processing industry will not reach its true potential.

Fortunately, the Government does plan on spending on infrastructure. Initiatives by the Government are planned to spend around 25 lakh crore rupees on developing infrastructure in rural areas. This could be a big win for food processing, as the masses reside in such areas. However, of the 25 lakh crore rupees promised, how much will be actually spent is always a good question. In addition, cold storage, which is a big need in food processing, is picking up quite fast in India. The cold storage industry is growing at a CAGR of 16% and is expected to keep this momentum going up till 2025. With more cold storage warehouses available across India, food processors will have a more effective logistics and supply chain.

India's agricultural system is poised with inefficiencies. One of the biggest is their level of agricultural waste. Up to 20% of output is wasted when harvested because they are not up to par. This in turn, will have an effect on the food processing industry as almost $116 billion is lost in value annually. Without quality inputs, at a good, consistent quantity level, the food processing industry could struggle. Technology and better practice teachings are the only way to overcome the output inefficiencies in the agricultural system, and those, will likely take some time to be implemented in India.

Processed food has always had a love-hate relationship with its consumers. The negative connotations of being filled with preservatives and non-nutritional food has been the image of processed food, specially now that organic food is gaining traction in more developed markets. To some extent, this may be true. Processed food contains more added sugar, fatty oils and other preservatives to make the packaged food taste better. However, it does not mean that all processed food is bad. Take a look at Chobani, an upcoming greek yogurt company. It is processed food, yet has double the amount of protein and half the amount of carbohydrates as regular packaged yogurt. Though it does demand a slightly higher premium to it, it is an example that not all processed food can be unhealthy. Indian businesses have the opportunity to make sure their packaged food not only tastes good, but also remains relatively healthy. Otherwise, the meal protection rights will not be an easy hurdle to overcome.

Conclusion

Processed food has a huge potential in India. Being a very large domestic market, in addition to having export potential to neighboring nations presents a strong opportunity for those looking to enter the food sector. India's large abundance of raw materials and manpower in agriculture can make them a global powerhouse in the production of packaged food. Furthermore, the urbanization and economic trail winds suggest that packaged food will have a growing demand because of the rising middle class, specially in the youth, who have a more busy work life, increasing their dependency on more ready-to-eat foods.

Organic food is the disruption to to the processed food industry. It is growing incredibly fast and may be a problem for the processed food industry in the long term. However, I believe the more immediate threat is to more developed markets. India, still a very developing nation, may not have any immediate threat from organic food. This is because of pricing. The top 1% will purchase organics, yes, however the 99% of the 1.3 billion people may not have the purchasing power to continuously buy organic foods for a while. The market has to first transition to processed food, in the mass scale, before organic foods is a threat.

The industry will have challenges, and they are major ones. Infrastructure is always a debated topic in India, and perhaps the reason why so many opportunities have not been realized yet. If things go as promised in the budget, the food processing industry could benefit. Additionally, India has to make sure quality inputs from the agricultural sector is also procured. The inefficiencies in the agricultural sector will take a long time, and support from the private & public sector will be required.

Meal protection and good, nutritional food is incredibly important for a country like India, which ranks 94 out of 107 in the Global Hunger Index. Businesses entering this industry must have the conscience to provide quality products, though processed, to the consumers. The Government will have to have a good level of involvement in this sector in order to maintain regulations.

In conclusion, I believe food processing will explode in India, if certain hurdles start to be overturned. The rise of e-commerce will significantly supplement the growth of processed food, as more consumers are ordering their food online. Arguably, the biggest opportunity lies in processing the fruit & vegetables segment, as it has the lowest penetration. India's overall food penetration of 10% is very low compared to other nations, and should be seen as a huge gap to fill.

Hope you enjoy the read. Please let me know if you have any thoughts, questions or feedback. Thank you!

Written By,

Abhishek Khetan

[email protected]

BU 2020 Graduate