Friday, June 14, 2024
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A golden period of growth for food and beverages in India

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India’s evolving economy, driven by affluence, aspiration, and improved F&B access, is spurring consumption and demand for branded products. Digitalization and quick-commerce are enhancing accessibility, benefiting rural areas and consumers, while select F&B segments are experiencing rapid growth. Innovation and investments are giving rise to novel products and brands, catering to health-conscious and India centric preferences. Digital technology, big data, and AI are optimizing industry efficiency, and the quest for high-quality F&B is fueling the premiumization trend.

India is expected to be the fastest growing among the top economies for the next five years, driven by affluence, aspiration, and availability. India’s GDP per capita in PPP terms grew 4.5 percent year-on-year over the past 30 years. As per capita income crosses the USD 2,000 threshold, an upward consumption trend is expected in line with other developed countries.

This article sheds light on the remarkable golden period for growth in the Indian food and beverages (F&B) industry. This surge in the F&B industry not only signifies unprecedented economic opportunities but also has broader implications for various stakeholders. For food processors, it means adapting to evolving consumer preferences and production demands. Policy makers need to consider the regulatory framework that can support and sustain this growth, fostering a conducive environment for innovation and investment.

Additionally, consumers will experience a wide array of culinary choices and potentially improved food safety standards, making it essential for them to stay informed about these exciting developments. This article provides valuable insights about the transformation of the Indian F&B industry and the multifaceted implications it holds for different sectors of the economy.

Drivers of F&B: Transformation in India

India is becoming affluent: With economic growth, the share of India’s population in rich and middle-class segments with annual household incomes of more than USD 6,000 (constant prices) will grow from 34 percent today to 87 percent in 2047. This inverted pyramid is expected to fuel an exponential rise in consumption with the top two segments contributing to more than 90 percent of the consumption by 2047.

Aspirations are high and increasing: Consumers’ ability to spend is growing, and so are their aspirations. Trends of increased experimental buying, a preference for branded and lifestyle products, more product trials and higher purchase frequency are on the rise.

Indian consumers’ growing appetite to spend and indulge is also clear in the drop in India’s gross domestic savings rate by 3.4 percent in the past five years, as per World Bank, accompanied by a surge in credit inquiries since 2020. Loan inquiries among individuals aged 18 to 30 have risen from 33 percent in 2020 to 43 percent in 2022, showing a growing trend of seeking new credit opportunities.

Year-on-year growth in consumption-driven products, such as consumer durable loans (67 percent increase), personal loans (32 percent increase), and credit cards (28 percent increase), further underscores consumers’ desire to access credit.

Availability is becoming hygiene: Digitalization, quick-commerce and far-reaching last-mile delivery are set to transform the accessibility landscape. The food and beverages e-commerce segment is on a remarkable growth trajectory and companies are poised to increase their e-commerce share from 3 percent in 2021 to over 10 per cent by 2030.

Last-mile delivery improvement is pivotal, particularly in rural areas. Most large fast-moving consumer goods (FMCG) companies are eyeing up to 35-40 percent of their sales from rural India. While the growing road network and electricity reach are supporting the supply to the remotest pin codes, cheaper service models such as wholesale, hub and spoke, and e-B2B are appearing to overcome the cost-to-serve barrier. For instance, DAAS (distribution-as-a-service) companies have connections with more than 300 brands, including industry leaders such as P&G, HUL, and Dabur, extending reach to 80,000 villages and nearly two million outlets.

Turning Point in Discretionary Consumer

Packaged Goods Categories

As the GDP per capita crosses the USD 2,000 mark in 2023, most F&B categories are expected to reach an inflection point, heading towards steeper growth. This per capita market size growth will lead to a golden period for growth, reaching high levels of affluence before stabilizing in a saturation phase.

Common discretionary F&B categories: Across common discretionary categories, India is at an inflection point, or just past it and is poised to enter an accelerated growth phase. This category consists of items such as breakfast cereals, coffee, confectionery, soft drinks, and sweet and savory snacks. These product segments typically show limited adoption until a country reaches the GDP per capita range of USD 2,000 to USD 2,500.

As disposable incomes among mid-tier households grow, and as consumers’ aspirations expand, their preference for convenient F&B options is clear. This consumption trend is driven by busy lifestyles and an increasing population of working women. The proliferation of brick-and-mortar distribution channels, coupled with the establishment of online platforms such as e-commerce and q-commerce, has enhanced the accessibility of these products. Consumers are ready to experiment even more with the diverse range of available products, such as breakfast cereals. A leading quick-commerce platform houses more than 15 brands in breakfast cereals, with the leading brands providing a range of 20 to 25 products in flakes, granola, muesli, and oats. This segment is also home to premium variants for products such as snacks, drinks and health-conscious product variants that strike a perfect balance between convenience and responsibility. For instance, multiple soft drink brands have launched diet variants with zero-sugar.

New-age discretionary items: In this category, India is at a nascent growth stage and is expected to accelerate in the coming years.This category encompasses products such as processed fruits, vegetables, meat, seafood, meat alternatives, and ready meals. The threshold for the inflection points for these categories tends to be higher at GDP per capital of approximately USD 3,000 to USD 3,200, after which the category continues to grow at a steep rate. The delayed adoption is primarily due to the recent introduction of these products to the broader consumer base, thanks to technological advancements such as the development of cold chain infrastructure and reach to tier 2 and tier 3 locations.

Ready to eat (RTE) and ready to cook (RTC) categories are seeing a swarm of new and growing products and brands. These categories are set for significant expansion thanks to the preferences of convenience-seeking consumers, increased demand for sustainable packaging, ongoing product innovation, the rise of food delivery apps, and a thriving startup environment. India ranks among the top five regions for RTE products, with leading companies such as Haldiram’s, Bikanerwala and ITC entering this space with a diverse range of 15 to 20 options. Brands are expanding their RTE product portfolios, introducing a range of modernized dishes with a Western influence, such as chicken jalapeno sausage, Thai curry, Szechuan chicken.

India’s F&B industry has experienced steady progress in this segment, but there is more potential for market maturity before entering a phase of exponential growth.

Staple items: Staples include essential items such as baked goods, bottled water, and edible oils. The market size per capita will grow steadily before reaching a saturation point.

In India, there is constant transition from the unorganized to the organized sector, driven by the growing emphasis on safety and hygiene. This shift results in a greater preference for branded and packaged products over unbranded alternatives. The surge in options from traditional stores to organized retailers and q-commerce channels has enhanced the penetration of packaged and branded products.

A small section of consumers is showing a preference for healthy alternatives such as gluten-free bread, wheat-based pasta, noodles, and basmati rice. New variants of the age-old products have emerged, catering to the evolving preferences of consumers.This inflection across food categories presents an opportunity for companies to capitalize on this growth.

Shift in Food Categories Offers Companies a Chance to Capitalize on Growth

The F&B industry holds substantial promise for companies, driven by innovation, premium product adoption, customized route-to-market strategies, and expanded reach into rural markets.

Innovation and New Product Launches Proliferation of brands and products: India’s F&B market is expected to reach nearly USD 350 – 400 billion by 2027 with a CAGR of 9 – 10% percent. More than 1,500companies have ventured into the industry, collectively raising a substantial USD 1.6 billion in investments from 2017 to 2021. Several startups in this industry have secured substantial funding in the last 10 years, such as Country Delight, Curefoods, Paper Boat, Epigamia, Wow! Momo, and many other.

There has been a notable change in consumer behavior recently, marked by a larger appetite for experimentation, customization, and variety. As per Food Service & Restaurant Business Report 22-23, in FY 20, the 15 to 24 age group in India ate out twice a month and ordered in once a month. Rising disposable income and e-commerce penetration are the top factors

Leading companies are diversifying and expanding their product range and are introducing health-conscious options such as gluten and sugar-free Oreo by Mondelez’s, Cadbury’s Fit Fuse, and PepsiCo’s functional water, alongside diverse flavor offerings and focus on regional preferences by top brands such as Lay’s and Britannia.

Focus on health and indigenization: Reports project the Indian health food market to reach USD 30 billion by 2026, growing at a 20 percent CAGR. Indian households are set to double their spending on health-focused foods and beverages over the next five years. Tier 2 cities are increasingly embracing health-conscious diets, leading to greater attention to nutritious and delicious food alternatives.

Established players are enriching their ingredient-driven product ranges; for instance, Subway India has upgraded its protein flavors and menus nationwide, while traditional and contemporary brands are embracing ayurvedic superfoods such as turmeric and amla. Additionally, the trend of an India-centric menu is growing, evident in recent launches such as Domino’s paratha pizza and Starbucks’ masala chai and filter coffee offerings in India.

Digital transformation and innovation: The industry has experienced a significant transformation driven by innovation, technological advancements, and changing consumer preferences.

The proliferation of delivery apps such as Swiggy and Zomato, and the collation of big data have enabled businesses to better understand customer preferences. For example, some players in the QSR industry are using computer vision and AI, helping chefs automate the cooking process. The use of AI in the F&B industry is set to grow rapidly over next 5-10 years.

To stay competitive in the F&B industry, businesses are focusing on distinctive food offerings, captivating presentations, and elevated dining experience. Success will depend on creative and innovative solutions, including using technology, meeting evolving consumer needs, embracing ESG standards, and enhancing the overall dining experience

Premiumization

As middle-class income in India continues to rise, there is a growing demand for high-nutritional, sophisticated, and premium food products. The Indian gourmet food market is continuing to expand across various categories, like exotic sauces, olives, honey syrup, spreads, and cereals. These segments reflect the changing palate preferences and growing interest in premium offerings.

The market has responded to premiumization by offering a spectrum of premium and super-premium products, each with its distinct characteristics. Among the many examples are Tata Consumer Products Ltd introducing health-focused variants such as Gold Care, Britannia’s successful Good Day Chunkies commanding a significant premium, a higher priced Horlicks variant Kesar Badam, and the introduction ofParle Platina by Parle, addressing the evolving demand for premium biscuits among newer consumer demographics.

Premiumization in the Indian F&B industry is a response to the rising middle-class income and evolving consumer preferences. This shiftis a significant opportunity for the industry to cater to the evolvingtastes and demands of the Indian consumer base.

Tailored route-to-market: In the context of a tailored route-to-market for the Indian F&B industry, it is crucial to recognize the evolving landscape influenced by digital transformation, online grocery market growth, and the role of pharmacies as pivotal retail channels. Today, the FMCG market penetration is at about 11 million outlets, yet this is not close to the full potential. Essential avenues such as educational institutions, offices, and crucial sectors such as hotels, restaurants, and caterers (HORECA), pharmacies and commercial establishments are being overlooked.

There is significant variance across town classes. In areas with populations of more than 10 lakhs, larger grocery stores dominate, while in other population strata, medium and small grocery stores are more common. HORECA and paan-plus and convenience stores categories make up 30 to 40 percent of all outlets, and the mix stays consistent across town categories.

However, the proportion of pharmacies becomes notably higher as we transition to lower population strata and rural areas. Strikingly, urban regions stand out with fourteen times higher outlet density than rural areas (three outlets per km). A completely different RTM approach is needed as we traverse different population strata and urban-rural areas in India.

Digital transformation in retail is on the rise, with companies using proprietary platforms to improve product discovery and purchases. In March 2022, Marico’s acquisition of True Elements, a digital-first brand, underscores the company’s commitment to a digital transformation, particularly in the direct-to-consumer (D2C) segment. Other major F&B players, such as PepsiCo and ITC Ltd, have also ventured into D2C channels; PepsiCo introduced Snacks.com and Pantryshop.com for snack and cereal deliveries, while ITC Ltd uses D2C websites and national/local partners for essential deliveries.

Pharmacies and chemists constituted up to 10% percent of FMCG outlets in 2022. Most F&B companies should treat pharmacies on par with other retail channels. Beverages such as coffee, tea, juices, soft drinks, and alcoholic drinks are found in major drug store chains to cater to the needs of timepressed consumers. Localized drug stores promote relationships with shoppers and staff. With expanding F&B departments, consumers can conveniently buy groceries alongside medications.

Increased suburban and rural penetration: According to the Kearney India Retail Index, smaller cities beyond the top 100 will drive the next wave of development. Middle-class households in India’s tier 2 and tier 3 cities have increased their annual spending on fast-food restaurants by 108 percent over the past two years, as per Food Service & Restaurant Business Report 22-23. The quick-service restaurant industry has rapidly expanded in FY23 within tier 2 and tier 3 towns. This growth is driven by aspirational demand, digital payment convenience, and the influence of social media. Platforms such as Instagram and YouTube provide information accessibility, and e-commerce ensures delivery to smaller markets. More power brands are shifting their focus from metros and tier 1 cities to emerging markets, and this trend is likely to become more prominent as consumer preferences in these emerging markets evolve and consumers’ appetite for shopping in modern stores grows.

India’s rural markets have started to account for 35% – 40% of total FMCG sector sales. F&B companies are implementing diverse strategies to connect with rural consumers, such Nestlé India’s and Dabur’s extensive village outreach plans, PepsiCo’s collaboration for affordable rural PET bottles, and ITC’s e-Choupal network for digitally engaging with more than 40,000 villages, collectively aim to expand rural market presence.

However, challenges persist, such as high operational costs and inadequate infrastructure, which is limiting market access. In the face of these challenges, it is essential to recognize that rural India is not synonymous with poverty, just as urban India is not synonymous with wealth. The rural market presents substantial opportunities for growth, fueled by aspirational demand, digital accessibility, and strategic expansion efforts by F&B companies.

The evolution of Indian consumers behavior driven by aspiration, affluence and availability in the country will continue to unlock new directions of growth for F&B players. Companies will need to lead this evolution by breaking from the shackles of legacy thinking, embracing new avenues of growth, innovating, expanding, and efficiently and profitably serving the newer, larger, and deeper India.

The authors of the article are Subhendu Roy, Ayush Sharma and Nivedita Sinha. The authors would like to thank Shrika, Pranay and Priyamvada from Kearney for their contribution to this chapter.

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