Case Study – The Indian Food Eco-System – Challenges & Outlook

Case Study – The Indian

Food Eco-System –

Challenges & Outlook

Sudhir Warier

FIETE, MISTD, MIMA, M.Phil (Mgmt),

M.F.M, B.E (E&C)

Asst. General Manager,

Training & Development,

Reliance Communications Limited, 6W46, D Block, 1st

Floor, Navi Mumbai – 400 709

[email protected]

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Case Study – The Indian Food Eco-System – Challenges & Outlook

Abstract

Post-Independent India was predominantly agrarian and the initial five year plans laid

emphasis on developing the agricultural sector. However the current scenario is vastly

different with major focal areas being infrastructural development and the services sector.

The Indian food and grocery retail market was conservatively estimated at over US$168

billion in the year 20071, of which foodgrains and unprocessed fruits and vegetables

account for half of total food and grocery sales. India is currently the world's second

largest producer of food and the food production is likely to double in the next decade.

This provides an opportunity for large investments in farming, processing and the retail

sector. Food processing technologies, skills and equipment would present lucrative

investment opportunities. The major thrust areas comprise canned foods, food and dairy

processing, packaging, refrigeration and transport segments. The important subsectors

include the emerging packaged food segment, the beverages segments that embrace milk

and allied products, alcoholic and non alcoholic segments, thermo processing, grains and

pulses, fruits and vegetables. In addition health food which also includes organic farming

is other rapidly rising segments of this industry.

Processed food exports have increased from US$ 6.98 billion in 2002-03 to US$ 20.51

billion in 2006-07 recording a stupendous growth rate of over 190 percent. To effectively

harness this largely untapped sector, the Government of India has set an investment

target of US$ 25.07 billion by 2015 thereby doubling India's share in global food trade from

1.6 per cent to 3 per cent. Processed Food segment comprising of agriculture,

horticulture, animal husbandries, and plantation is estimated to be worth US$ 70 billion

with a projected increase of 35 percent by 2025 end. This sector is expected to receive

over US$ 23.5 billion over the next three years. This sector is expected to witness

unprecedented growth since only 1.5% of the world food processing happens in India. 2
1
India Brand Equity Foundation (IBEF) Report – Source URL <www.ibef.org>
2
Food Report 2008 prepared by the Ministry of Food Processing Industry

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Case Study – The Indian Food Eco-System – Challenges & Outlook

Given the above backdrop this paper presents the status of the traditional food chains in

India, while tracing the emergence of the organized retailing sector, their challenges and

strategies for sustained global competitiveness.

Index Terms

Organized Retailing, Packaged Food Industry, Traditional Food Supply Chains, Kirana, Local

Distribution Framework

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Case Study – The Indian Food Eco-System – Challenges & Outlook

1.0 Introduction

The grocery business in India employs techniques honed and handed over by generations,

representing a choreographed chaos. It exudes a unique charm and flavor while at the same time

adopts corrupt and unhygienic practices while being highly inefficient. The country's shopping

sector, especially in the rural and semi urban areas) belts, are dominated by more than 12 million

mom-and-pop stores aka ‘Kirana’ stores offering a small and unreliable selection of goods.

The Indian food and grocery retail market is estimated at US$168 billion, of which foodgrains and

unprocessed fruits and vegetables account for half of total food and grocery sales. The huge

trade volumes, current and projected, have made this sector a favorite with both domestic as well

as international investors.

Retailing in urban India has remained more or less the same, for several generations, till the

prevalence of the ‘mall’ culture in the country’s biggest metros. While several larger stores and

specialty shops in each major city catered to the less price-sensitive appetites of the wealthiest

segments of the population with wide selections of imported goods, virtually all other retailers

were small independent, owner-managed shops. Most of these shops had only their family

members assisting them in day-to-day operations. Most of these stores sold products at the

maximum retail price (MRP)i and hence price competition was virtually non-existent. The gross

margins are determined mostly by the mix of products offered.

1.1 Traditional Retail Food Supply Chains – Threats

There are numerous advantages as well as disadvantages of both the traditional food chains and

the newer ‘convenience’ stores. A country like India, with a predominant rural population, and one

of the most growing economies in the world cannot afford to own or disown both these formats. A

practical solution would be mutual co-existence of these formats with steps to identify and

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mitigate the system deficiencies. The following are some of the threats to the traditional retail food

chains in India.

1. Cartelization

The food-distribution system in India is a legacy of the pre-independence and early post-

independence era that was plagued with chronic food shortages. This led the government to

crack down on hoarding of produce by unscrupulous cartels. In 1966 the government

introduced a new law that banned farmers from dealing directly with retailers and forced them

to sell through licensed middlemen, called mandis. The law, which also aimed to give farmers

a fair and consistent price, was initially done with a good purpose. But over the years it grew

into an ogre gaining layer upon layer of intermediaries. None of these layers added any value

to the fruits and vegetables they traded even as they added on their own margins. This

resulted in a grossly inefficient system in which farmers were detached from market feedback

and received payments for their goods in an adhoc manner. The traders who brought the

produce from the farmers started to lend money to buy seeds and fertilizers and trapped then

in a vicious loop, even as customers were being forced to buy food of reduced quality and

irregular supply. Thus a system designed to protect the interests of the farmers while

ensuring good quality supply for the customers became highly counter productive affecting

the groups that they intended to serve.

2. Logistics

The food supply chain in India is a sophisticated string that links farms and consumers, states

and cities. It represents one of the most fragmented produce-supply chains wherein more

than 30% of all fresh produce is lost or spoilt before it reaches the market 3. Any consumable

passes through six to seven layers of middlemen resulting in highly inflated prices for

customer, extremely low payback for the farmer and highly diminished quality. In addition to

this another major challenge for the Indian food ecosystem is the quality and availability of the

3
Industry Estimate

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transport infrastructure. The Indian government has been investing heavily to shore up its

highway network, the golden quadrilateral being a good example, however the state networks

condition continue to be highly below par. The booming economy has led to the creation of a

swelling middle class resulting in increasing car sales negating the addition to the road

infrastructure. The high level of corruption in the entire infrastructure development chain also

ensures that the quality of roads built remains extremely poor.

This has prevented multi-national players entering the system in a big way. An example of

this is the Reliance Industries retail venture – Reliance Fresh which buys most of its produce

from farmers located within a couple of hours of major cities to shorten transport times. The

company is building its own fleet of trucks in addition to outsourcing some of its transport

needs. Eventually these trucks will be fitted with radio or satellite transmitters that will allow a

central control room to track locations and cargo. It is surprising to note that even today a lot

of transport in the rural and even some semi-urban areas is done using bullock carts and

hand carts.

3. Value for Money/Differentiation

Many of the Indian behemoths’ have forayed into the fast moving food industry. They include

Godrej, Reliance Industries Limited (RIL), Imperial Tobacco Company of India Limited (ITC)

and value chains like Subhiksha. These organizations have also brought in fresh strategic

perspectives and changed the rules of the game in this sector. Brands such as Godrej

Nature's Basket are planning to begin global sourcing directly, to ensure better quality,

product mix, handling, and continuity in supplies. Subhiksha, which is expanding its retail

outlets very rapidly, has a separate team that continuously looks for best prices in groceries

across the world. Reliance Retail has stated that it stocks over 100 international brands,

which are not available in other formats. With almost all retailers moving into these segments,

the need for differentiation, quality enhancement and value for money are all becoming

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increasingly imperative. Retailers are moving fast to set up supply chain infrastructure and

lines with vendors, to spruce up sourcing operations.

4. Quality

The need for product differentiation and value addition, in order to ensure sustenance in the

highly competitive global markets of today, has made the new entrants adopt stringent quality

mechanisms in the entire food value chain – from sowing to packaging of the final end

product. This is a sorely missing link in the operations of the traditional food supply chains- A

major disadvantage. Consider the following example:

 For its retail venture RIL has sourced/build huge warehouses which is temperature

controlled (18oC).

 The fruits and vegetables have to pass stringent quality control checks before they

are dispatched for public consumption, in the shortest possible time using an efficient

transport system.

 To ensure refrigeration units keep humming during the country's frequent power

outages, RIL is installing diesel generators not only in all its shops but also at its rural

collection hubs, where farmers bring their produce, and at its processing centers,

which usually sit on the outskirts of a city.

 A reliable supply of safe water in which to wash fruits and vegetables is also a basic

necessity. Because city water often runs dry and can carry dangerous bacteria, RIL

has installed reverse-osmosis machines at its processing centers to clean the local

water supply.

 As per RIL the total investment in building its distribution network, over the next few

years, will be in the order of $4 billion.

5. Liberalization Measures

The Indian fresh produce marketing was largely under state control. Most states have their

respective boards which regulates the functioning of this sector. For example: In Maharashtra

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the fresh produce marketing is controlled by the state-owned Agriculture Produce Marketing

Cooperatives (APMCs). The Maharashtra Agricultural Produce Marketing (Regulation) Act

was passed in the year 1963, with a view to regulate the marketing of agricultural produce in

market areas. The government control over this sector is being reduced with key reforms

being enacted in the APMC Act in many states. This has opened up the space for private

players, and all major retailers are planning to set up private 'mandis' (marketplaces/bazaars),

from where they can directly source their requirements of fresh foods.

6. Buoyant Economy

As per a research report by McKinsey Global Institute (MGI) more than 90 percent of Indians

lived on less than a dollar a day in the year 1985. However since then India has undergone a

remarkable transformation. The reforms initiated in the early nineties saw India’s growth spiral

to over 7% through the early nineties. There was a brief slowdown in the late nineties.

However since then the growth rate has been astronomical, only being surpassed by China.

This has helped create a burgeoning middle class population (figure 1) that is expected to

grow further. These upwardly mobile middle-class households consume goods ranging from

high-end cars to designer clothing and the country is poised to become the world’s fifth

largest consumer market.

This growth has helped in reshaping the lifestyle of Indian families with dramatic

transformation touching most of the Indians up and down the income pyramid, from the

poorest rural farmer to the wealthiest IT entrepreneur. Organizations are making a bee hive to

understand and satisfy the unique desires and tastes of the new Indian middle class

consumer which represents a half-billion-strong market that along with China ranks as one of

the most important growth opportunities of the next two decades. 4

An important thing to note is that this middle class segment is divided in its purchasing habits.

The families on the upper end of the spectrum often strive to emulate the wealthy and usually

4
Farell Diana, Beinhocker Eric, Next Big Spenders : India’s Middle Class, Business Week, May 19, 2007

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Case Study – The Indian Food Eco-System – Challenges & Outlook

employ their domestic help to do their shopping. This has been also necessitated by a

growing pattern of households with two working parents. Many families at the lower end of

the middle class, however, would continue to do their own shopping being extremely cost

conscious, frequenting their favorite local shops. This is more so in the case of families that

have risen from the ranks. However these families are concerned about quality of the

products, often leaving a list with a trusted shopkeeper to pick out and deliver the best quality

products. The buoyant Indian economy has increased the purchasing power of the

burgeoning middle class populace in India resulting in a change in their buying/spending

pattern, moving this huge base towards the convenience store format. This is as evident from

the following table 1 depicting the consumer preferences in the urban and large semi-urban

areas.

Table 1: Indian Middle Class Shopping Patterns

Figure 1 – Indian Economic Growth - Effects

Recent trends 5indicates that a large number of urban consumers already use organized retail

stores thus demonstrating shift towards the organized retail atleast in the urban areas. It is

estimated that organized retail would contribute to 10% of FMCG sales in India and even as

high as 30% in the top 28 towns. This trend as illustrated in figure 2 below is likely to

percolate to towns where modern banking practices are employed.

Figure 2 – Evolution of Indian Retail

1.2 Organized Retailing – Benefits

5
AC Nielson Shoppers Trends

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The Indian retail market is valued at $328 billion. However the formal or organized retail sector

accounts for only 4% of this market. 6 There has been opposition from certain state governments,

individuals as well as trade bodies to the emergence of the organized retail market. Inspite of all

these organized retailing provides innumerable benefits; some of the prominent ones are listed

below:

1. Win – Win Situation

The entry of multinationals in the retail arena has provided the country the ability to link up all

its markets in a seamless supply chain. This will result in reduced wastage; give the farmers

more money and consumers better quality produce. The national coalition government is also

committed to reform as a way of helping farmers boost their incomes. In the process the

farmers, consumers and governments will benefit from the competition. By structuring and

organizing the trade the government is set to achieve additional revenue due to collection of

taxes from the corporate, as opposed to the current day mandis which regularly underreport

their trade by up to 50% to avoid government levies.

2. Technological Advances

In the recent times vending machines have found their way to the Indian markets. They are

used extensively for vending beverages, milk and even books and condoms. A vending

machine is a machine that provides various snacks, beverages and other products to

consumers. The idea is to vend products without a cashier. Items sold via vending machine

vary by country and region. There are a number of obvious advantages to vending:

 Convenience: Vended goods are available 24 hours a day and machines can be

sited just where it is needed.

 Time Saving: Vending machines are not only convenient, they are time and cost

saving too.

 Hygiene - With vending one can get a clean cup every time and avoid the chore of

washing up cups or worse still having dirty crockery hanging around all day.

6
Federation of Indian Chambers of Commerce and Industry

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 Variety - Vending machines offer a whole range of different products. Drinks vending

machines can offer not just black and white coffee and tea but can also make the

drink weak or strong according to taste. Fresh brew, cappuccino, chocolate drinks,

tea (masala, black, herbal, green and iced tea) and even soups are also available

through this medium.

 Telemetry - One of the newest vending innovations is telemetry. It signifies the

advent of reliable, affordable wireless technology and provides a medium through

which cashless payments can be authenticated. This is important because research

shows that 50% of consumers will not make a purchase from a vending machine they

need to tender exact change. Machines equipped with telemetry can transmit sales

and inventory data to their remote offices so that restocking schedules can be

effectively worked out. Also data pertaining to faults, trends and other pertinent

information can be effectively generated. Thus telemetry represents one of the most

significant developments in vending technology since its invention.

 Extremely High Profit Margins - Vending is an all-cash industry and is an emerging

international 40 billion plus dollar industry, the largest all cash industry in the world.

There are no bad checks, credit risks, accounts receivables, or other collection

problems that typically plague business owners. Besides the returns outstrips that

from conventional retailing mediums. A good example is the Malayala Manorama

magazine vending machines available at major airports and railway stations. The

new vending technique has yielded good results right from the beginning. Vending is

a business that can be started part-time while still retaining an individuals profession

 No Personal Selling - Vending machines can be employed ‘24by7by12’ and does

not have any employed related problems, inherent in other forms of business.

3. Packaged Food Industry ii

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A booming Indian economy resulted in higher disposable income for the Indian consumer and

pushed up retail value growth of the packaged food market to over 8% in 2006. 7 The growth

in this arena has been steady since 2004 and has exceeded all expectations in 2007.

Consumers increasingly seek the convenience of packaged food products such as ready to

use salad dressings, sauces, soups and other meal components. Food products like salad

dressings may comprise of an aqueous phase, an oil phase and pieces of vegetable, nut,

cheese or any other type of food. To ensure that packaged food products are successful a

number of requirements need to be met. The primary requirement is that of proper/hygienic

storage and the transport of these products. Ideally, packaged food products need to be

storage stable as it usually takes some time for packaged food products to reach the end

consumer.

ITC, which aims to be at the top of the Indian packaged food industry, made its entry into the

branded & packaged Foods business in August 2001 with the launch of the Kitchens of India

brand8. A more broad-based entry has been made since June 2002 with brand launches in

the Confectionery, Staples and Snack Foods segments. The packaged foods business is an

ideal avenue to leverage ITC's proven strengths in the areas of hospitality and branded

cuisine, contemporary packaging and sourcing of agricultural commodities. ITC's exquisite

understanding of the Indian palate along with the experience and expertise to craft delightful

dining experience is demonstrated by the success of its world famous restaurants like the

Bukhara and the Dum Pukht. ITC has stood for quality products for over 96 years to the

Indian consumer and several of its brands are today internationally benchmarked for quality.

4. Explosive Growth

The research firm AC Nielsen using its proprietary Store format Census studied the modern

format stores in the top 28 towns in India. The study projected that even without FDI the

number of organized stores would double from the current 2500 stores to about 5500 stores

7
Packaged Food In India, Bharat Book Bureau Source URL <http://www.bharatbook.com/>
8
Source URL < http://www.itcportal.com/>

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by 2010, in sharp contrast to the growth in the developed and other developing markets. This

is indicative of the desire of the Indian Government to boost the growth in the retail sector by

bringing in suitable legislation to remove administrative bottlenecks.

1.3 Traditional Food Supply Chains – Strategies for Success

The global retail market, specifically the developed markets have a very organized retail

environment with a well developed supportive infrastructure The Indian retail market (food chain,

malls, retail pharmacy etc..) is said to be in the vicinity of Rs 8, 00,000 crores or about USD 185

billion and is growing at the rate of about 8% per annum as per the 2005-2006 statistics. 9

However organized retailing is found to be less than Rs 35,000 crores which is only slightly more

than 4%.

 The retail sector has yet to be conferred the status of industry by the Government of India

a status which gives it benefit in terms of tax benefits and other such benefits.

 As per CII Mckinsey survey for the year 2001-02 the Indian retail industry was estimated

to be US $ 180 billion with an employment of about 8% of the workforce and of this the

organized retail market is estimated to be around US $ 3.60 billion.

 This organized retailing grew @ 15% p.a and rose from an initial number of 70 stores in

1995 to 2500 in 2004, accounting for 3% of the total FMCG plan.

 As compared to this slow growth in the organized retailing the unorganized retailing has

grown in leaps and bounds.

 It is estimated that the number of unorganized retail stores will increase from a level of

6.54 million numbers in 2003 to a level of 7.80 million numbers in 2007. The growth being

led in the urban areas.

Thus it is evident that although the organized retail sector is growing, all is not lost for the

traditional food supply chains. Following are some specific strategies that could be

adopted by this sector to stem the rot and garner market share:

9
Report by Ministry of Food Processing Industry

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1. Improved Supply Chain Logistics

The growth of the traditional food supply chains is hampered by the inadequate supply chain /

logistics systems. The problem gets aggravated due to the presence of the ‘middle men’.

Though it may be argued that there are pros and cons of the tiered distribution system, the

inefficiencies caused by these middlemen makes it imperative for any retail chain to

i
MRP refers to the maximum sale price of a product that is fixed by the manufacturers, and enforced by the government.

ii
Conventional supermarkets seek to simultaneously satisfy the value drivers across many customers. This initial

strategy of trying to be all things to all shoppers may be its eventual downfall. Several retail formats now provide

alternatives that focus on specific consumer value drivers, creating greater value.

A major and growing competitive threat to the traditional supermarket is meals prepared away from home. This segment

is growing significantly in India and is projected to grow rapidly. ‘Heat and Eat’ foods are available at a wide range of

outlets, including supermarkets, or are available for home delivery. Restaurants are selling as many meals for carryout’s

as they are for on-site consumption. This segment focuses on providing time and form value, giving customers what they

want, when and where they want it. The rapidly growing mass merchants pose the second threat to traditional

supermarkets. Merely 5 years ago, Big Market Bazaar was not considered a player in the food distribution. Today it is the

second largest retailer of grocery products in India. Many other mass merchandisers are following a similar strategy of

focusing on a limited assortment of grocery products sold at the same stores with numerous non-food products.

The convenience store format presents a third threat to the prominence of traditional supermarkets by creating value of

time and place. Today a growing variety of meal solutions are sold at convenience stores. These stores also provide a

quick way to obtain select items, thereby avoiding a prolonged trip to the supermarket. A final alternative to traditional food

supply chain is home delivery. A total cost comparison of the supermarkets and the home delivery must quantify the

‘Convenience cost’ associated with the shopping time and the reclamation cost of clearing unsalable products from the

market place. The industry’s Rs 200 Crore annual expenditure for reclamation is virtually non-existent in home delivery

format. As long as the product is delivered within its expiry date, it will be consumed. Home delivery creates value through

time and place. Other competitive arrangements –such as vending machines- are also chipping away at the traditional

supermarket’s share of the consumer food rupee. All alternative formats build on the fact that the traditional supermarket’s

custom of creating value through price and assortment does not offer sufficient relevancy. The success of these

alternatives pressures supermarkets to reinvent themselves and streamline the supply chain. Selected companies are

using efficient replenishment to counter alternative formats.

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strengthen its logistics/ supply chain systems. This includes the entire gamut of activities

starting from the harvest of the food material to the finished product and its distribution to the

end user.

2. Elimination of Middlemen

The problem of middlemen also needs to be tackled on a war-footing. It is therefore

imperative that retailers should develop effective and modern retail solutions in all facets of

retail, like merchandising, marketing, store refurbishment, staffing, systems training, point of

sale (POS) development and also focus on single point sourcing. The introduction recently of

uniform tax will help overcome the hitherto inter-state price barriers.

3. Pricing

There should be sustained emphasis on local sourcing of goods to meet day-to-day

requirements. This coupled with the improved supply chain logistics and the elimination of

middlemen as described by points 1 & 2 above can translate to better price offerings to

consumers.

4. Credit Facility

One of the unique benefits offered by the traditional ‘kirana’ stores is the extension of the

interest free credit facility, for a minimum of one month and even longer, that was beneficial to

the common man. This is one aspect that cannot be countered by the modern day

hyper/mega marts. This area needs to be emphasized by the traditional food supply chains in

their communication with the general populace. This facility provides the same convenience

as that of a credit card with the ‘revolving credit facility’ without the attendant evils and the

huge interest rates.

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5. Traditional Stores Format

In view of the changing customer needs/ expectations, the unorganized retail stores will also

have to undergo a sea change in the stores format to match the look and the feel of the

organized and sophisticated organized retail chains.

6. Convenience/Better Response Times

The traditional stores offer another area that cannot be matched by the organized retail

sector, the convenience of ordering and the delivery times. It is quite common in most homes

to discover the non availability of an item/product at the last moment. In such a case a call to

the local grocery store will ensure faster delivery of the item/product. This convenience

cannot be matched by big retail marts. This is an important facet that has to be developed by

the traditional retail outlets and communicated with the masses.

7. Product Lifetime/Freshness

Improved supply chain logistics and single point local sourcing can ensure that the traditional

retail outlets can provide fresh produce (in case of the food sector) to the consumer. Although

the organized retail sector is building an effective supply chain it may find it difficult to ensure

freshness of products especially fruits, vegetables, meat and other edible produce.

8. Contractual Relationship

The traditional retailing outlets need to enter into contracts to have greater security. On the

input side forward contracting on feed is a growing trend. For the perishable commodities

segment it is beneficial to have supply contracts with their processors. To gain best value

from these contracts retailers will need to upgrade evaluation and negotiation skills.

9. Local/Regional Retailing Initiatives

Local/Regional retailers can create an effective network to which small organic businesses

can cohere without sacrificing autonomy. The network would support networking practices by

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improving the regional organisation, logistics and technical infrastructure of organic producers

and retailers. Rather than working with isolated businesses the project is based on

establishing new partnerships between local growers and distributors, and with local

consumers, restaurants, schools and hospitals.

10. Technological Advances

The networks mentioned above could deploy technology like internet systems to set new

standards of user-friendliness, functionality and effectiveness to foster a culture of mutually

supportive co-operation between autonomous businesses and consumers. Such a

sophisticated information community would allow buyers to find out what is coming into

harvest and who has surpluses, and enable growers to assess demand, share good practice

and plan planting. An e-bay-like method of assessment, providing feedback on all

transactions and from all users, will be used to develop indicators for quality, value, speed of

payment, and speed of delivery.

11. Local Distribution Frameworks

A detailed approach is required to understand the context and functions of the Indian food

ecosystems or networks. This is especially so to grasp the innate relationships between the

traditional food chains and the new organized retail chains. There will be a great diversity of

approach to supply chain of both these sectors. The local food and fair trade systems are

intertwined as complementary activities whilst providing models for establishing collaborative

partnerships between the alternative and conventional sectors. There is a need to integrate

the local fair trading networks with international food chains so as to bridge the gap between

local and global economies.

12. International Supply Chain Integration

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The local stores can become community/social outlets for the population that they serve.

They can play an important role in disseminating global awareness to the local populace and

in the process become supply points to national/international supply chains

1.4 Government Initiatives

Government has been taking various progressive measures to accelerate the growth of the food

processing and retailing sector. Some of the recent initiatives taken by the government include:

 Allowing private sector companies engaged in business of warehousing or transport of

food grains in procurement operations on behalf of the Food Corporation of India (FCI)

 A weather-based agricultural insurance scheme is to be rolled out across select districts

in 12 states for the rabi season.

 Construction of seven Modern Terminal Markets with modern infrastructure facilities that

will help farmers realize maximum returns for their produce, removal of middlemen and

ensuring lower prices for end-consumer.

 In addition, the government has already approved 60 agricultural export zones (AEZs).

 Besides, four zones have been identified to provide US$ 12.1 million worth of funds

under a scheme called Assistance to States for Infrastructure Development of Exports.

 Further the Government will provide an additional US$ 6.17 billion for new farm initiatives

launched by states to double the growth rate in agriculture to 4 per cent over the previous

plan period. 10

1.5 Foreign Direct Investment11

The Indian processed food industry, which constitutes only a mere 1.3 per cent of total

agricultural products, will see major investments in the next three years. Following are some of

the highlights:

10
Statistics by Ministry of Food Processing Industry & Ministry of Consumer Affairs, Food and Public Distribution
11
Food Report 2008 prepared by the Ministry of Food Processing Industry Source URL< http://ibef.org/>

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 Investments to the tune of 23.5 billion dollars in the food processing sector over the next

three years. This is just the right time for global firms to invest in the food processing

sector, especially with buoyant Government support and initiatives.

 The total market for food in India, estimated at over Rs 8, 00,000 Crore, accounts for

about 2/3rd of the total Indian retail market. Of this only less than 1 per cent belongs to

the organized sector

 Food segment that contributes about 13 per cent of the total organized retail pie offers

huge scope for investment. Only a little over 1 percent of the total food output gets

processed and packaged in India as compared to 80 percent in developed countries.

 In the last one year alone, FDI approvals in food processing have doubled.

 This is in addition to around $55mn that has been invested in sugar and cooking oil

companies.

 The FDI in the food processing industry exceeds that of the hotel and tourism industry.

 According to previous year’s data, the cumulative FDI inflow in food processing was Rs

9,826 Crore in March ’06.

 As a result, the food processing segment now has an almost 4% share of the total FDI

approved by the government.

 Meanwhile, investor interest is growing in vegetable oils and sugar. Vegetable oils and

vanaspati have received $37.4m in foreign direct investment until now. Sugar has

received $17.3m in foreign direct investment cumulatively.

 The farm machinery segment has also received $166.8m in overseas investment. These

numbers are still too low, given the potential the food processing segment has for

generating profits and jobs.

 The government is also considering investing another $22.97m in at least 10 mega food

parks in the country. The move is besides working towards offering 100% foreign direct

investment and income-tax benefits to the sector.

 According to Indian Credit Rating Agency (ICRA), the processed food market accounts

for 32% of the total food market.

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Case Study – The Indian Food Eco-System – Challenges & Outlook

 The food processing industry is today one of the largest industries in India ranking fifth in

terms of production, consumption, export and growth prospects. iii

 The Confederation of Indian Industry (CII) has estimated that the food processing sector

has the potential to generate employment of 9m person-days.

iii
As per the Food Report 2008 prepared by the Ministry of Food Processing Industry, India is the 2nd largest vegetable
and 3rd largest fruit producer in the world. India's annual rice production would increase by 16.3 million tonnes (mt) from

the current value of 9.1 mt. India is also the second largest producer of fish with an annual production of 6.57 mt. India

also accounts for 44 percent of the worlds total quantity of spices traded and the trade values is expected to US$ 10

billion by 2017. The food processing sector has witnessed nearly 14 percent growth over the last few years and the

targeted to cross 20 percent by 2015.

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Case Study – The Indian Food Eco-System – Challenges & Outlook

Conclusion

While the organized retail industry is growing at an explosive rate fuelled by a buoyant

economy, changing customer preferences and liberalization of government policies, there

is still hope for the traditional food supply chains and the thousands of ‘kirana’ stores that

dot our landscape. To ensure their survival and growth these traditional outlets have to

focus on:

 Reliable supply

 Range of products

 Full traceability for all products

 Knowledge of market trends adequate to anticipate customer demands

The elements of product derivation and genuineness can therefore be retained within

trade systems through diverse local trade strategies. However, the success of a strategy

depends significantly on existing human and natural resources including the ability to

achieve critical mass among the small and micro enterprises. This will help in achieving

the economies of scale and increase the potential for branding and marketing

The opening of the Indian economy , the increasing per capita income (at least in the

urban markets), the easy availability of foreign exchange (thus allowing Indians to travel

abroad) have all changed the lifestyle of the Indian consumer. The Indian consumer is

today expecting the same or at least same level of service in the retail sector-akin to that

available in the developed nations. Additionally when one sees the increasing trend of

working women, it is clear that today’s customers are demanding that all the needs must

be available under ‘ONE’ roof. This is one of the biggest threats to the traditional food

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supply chains in India and across the most of the developing nations globally. There are

six key factors that have driven the transformation of the retail industry in recent years:

1. Deregulation

2. Supermarket strategies

3. Food safety and supply chain integration

4. Innovation

5. Environmental sustainability

6. Rationalization of supply base

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Bibliography

1. India Brand Equity Foundation (IBEF) Report – Source URL www.ibef.org

2. Food Report 2008 prepared by the Ministry of Food Processing Industry

3. Farell Diana, Beinhocker Eric, Next Big Spenders : India’s Middle Class, Business Week,

May 19, 2007

4. Federation of Indian Chambers of Commerce and Industry

5. Packaged Food In India, Bharat Book Bureau Source URL <http://www.bharatbook.com/>

6. Statistics by Ministry of Food Processing Industry & Ministry of Consumer Affairs, Food and

Public Distribution

7. Food Report 2008 prepared by the Ministry of Food Processing Industry Source URL<

http://ibef.org/>

8. Fanfani, R., Lanini, L. and Torroni, S. Invention Patents in Italian Agro-food Industry: Analysis

of the Period 1967-1990

9. Galizzi, G. and Venturini, L.,Economics of Innovation: The Case of Food Industry.

Contributions to Economics.

10. Commodity Policy and Projections Service Commodities and Trade Division

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Case Study – The Indian Food Eco-System – Challenges & Outlook

Figures

Greater Per Capita Burgeoning Middle

Indian
Consumer

Affordability
Falling interest rates &
Easier consumer credit
availability

Figure -1

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Figure - 2

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Case Study – The Indian Food Eco-System – Challenges & Outlook

Tables

OUTLET POPULARITY
%
Grocery (Big) 30

Supermarket 16

Grocery 11
(Small)

General Stores 11

Wholesalers 08

Others 24

Table -1

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