In the midst of rising inflation and a recessionary environment, where many companies in India are struggling to sustain growth rates, the food processing industry has steadily advanced to emerge as a sector of choice for investors. Rising disposable income, changing lifestyles, and rapid urbanization have accelerated its progression. Currently, estimated to be worth Rs. 7,500 billion, the Indian food processing industry is expected to expand in value at a compound annual growth rate (CAGR) of 17% to reach Rs.12,000 billion by 2015, according to a report issued by Sathguru Management Consultants.
What is more promising is the sector’s transformation from low value processing in a relatively unorganized segment to delivering high value, technology oriented, branded packaged products in a fast emerging organized environment. As a result of this transformation, there has been a boom in the packaged food segment with new product launches, introduction of new product categories and entry of new domestic and international players.
Frozen food is one such category which has caught the attention of both processors and consumers alike. Unlike shelf-stable products, distribution of frozen items requires massive cold chain infrastructure, which is limiting its market penetration. However, freezing ensures that these products are minimally processed with better retention of nutritive value and hence have a potential to become an alternative to home cooked or restaurant food.
The market for frozen foods in India has grown at double-digit growth rate in last few years, reaching a size of about Rs.19 billion in 2012. Although the growth number looks impressive, it does not truly reflect the future growth potential of the industry. More than 45% of the current market is composed of exports of minimally processed low value marine products, meats, fruits and vegetables.
Domestic per capita consumption of frozen food is close to negligible, and is about 50 times less than intake in China. Even though the retail market value for frozen food products, doubled to Rs. 3,650 million between 2008 and 2012, it is still primarily driven by minimally processed vegetables. The market share of high value products such as ready meals has remained constant during the last five years. Also, comparing the growth rate for different categories of packaged food reveals that frozen food has lagged behind many other high base volume categories such as snack food, ice cream, and breakfast cereals.
A deeper analysis of the industry reveals that the market for frozen food has a potential to grow three times in next five years. However, there are certain constraints which are limiting growth. The industry is characterized by low revenue to asset ratio, owing to massive investment in high precision manufacturing and storage infrastructure required to serve the retail and foodservice segments. Typical revenue to asset ratio in the frozen food segment will be in range of 1-2.5, as compared to range of 2-5 in other comparable segments such as ice cream, confectionary, etc. This aspect, coupled with low market penetration due to an underdeveloped cold chain and food retail infrastructure, creates entry barriers for new players and also restricts the existing companies from investing heavily in branding and R&D for product innovation. This is leading to low awareness and acceptability of frozen product among consumers.
A market survey conducted by Sathguru Management Consultants revealed that consumers neither find the taste and texture of frozen products at par with so-called “fresh” food, nor is present packaging appealing enough to prompt them to buy such products. The major deterrents in consuming frozen food are perceptions among many Indians that it is unhealthy, due to an ill conceived believe that chemical preservatives are used, and that frozens have less nutritive value. Hence, consumers prefer to use frozen food only when so-called fresh food is not available and do not see it as a substitute to home cooked or restaurant food.
Moreover, the product range available in India consists of minimally processed products in contrast to specialty products such as desserts, pizza, ready meals, etc, that are available in frozen form in developed countries. Indians consume processed food to get a sensory experience that is difficult to obtain in home cooked food. Hence, in the foodservice sector, cuisines such as Chinese, Mexican and Italian are getting increasingly popular. However, frozen variants of these products are not generally available to Indian consumers.
It is, however, anticipated that recent changes in technology, macroeconomic environment and food consumption habits will catalyze the industry’s growth progression. The following trends will drive the transformation of the industry, according to Sathguru:
- Technological changes will improve product acceptability. Public initiatives like incubation centers and venture funds for food processing sector will improve the R&D ecosystem. Growing interest of private equity investor in the sector will provide the necessary risk capital for product and packaging innovations. Technologies such as Ultrasound Assisted Freezing and High Pressure Shift Freezing will emerge to make frozen products similar to the fresh ones in terms of taste and texture.
- Growth in the frozen sector of the food industry is highly correlated to expansion in the organized food retail and foodservice channels, both of which are poised to grow at CAGR of 20% for next five years. The entry and expansion of international retail chains such as Auchan, Carrefour and Tesco will create a distribution platform for frozen food companies for deeper market penetration. Similarly, the QSR segment will witness robust growth in a number of players and stores. These players will rely heavily on supply of products in semi-processed frozen form, which are consistent in terms of taste and offers a fresh value to consumers.
- Consumer preference will undergo remarkable change in next five years. Growing awareness about food safety and hygiene, coupled with busy lifestyles, will prompt them to look at frozen food as a safe and convenient alternative to home cooked and street food.
- Macroeconomic changes will also favor consumption of frozen food. Rising labor costs are driving fine dining and reputed hotel chains to look at frozen raw materials as a means of saving time and money. Rapid urbanization and increasing penetration of refrigerators and microwave ovens will broaden the target segment for frozen food. Increases in disposable income and growing number of working couples will accelerate the frequency of eating out and consumption of convenient ready to eat food.
As per the analysis carried out by Sathguru Management Consultants, the retail market for frozen food has a potential to grow at CAGR of 20.5% for next five years, from Rs. 3,650 million in 2012 to 9,300 million in 2017.
The frozen food market for the foodservice segment promises an even better opportunity. Estimated to be Rs. 6,350 million in 2012, it will expand at a CAGR of 26.6% to reach Rs. 20,600 million by 2017. Industry players with product innovation and delivery competency and willingness to invest in branding will benefit the most from this growth and will capture an envious share in the nation’s growing frozen food market.
To view the complete report, log on to www.sathguru.com
About Sathguru:
Since its establishment in 1985, Sathguru Management Consultants has evolved into a multidisciplinary consulting firm with solid expertise in technology commercialization and innovation advisory, strategy advisory, corporate finance and transaction advisory, regulatory advisory, audit and assurance services, international development, executive education and ERP product development. The company employs over 100 full-time professionals from both the technical and management arena. It has offices in India, the USA and Bangladesh, and representative/affiliate offices in Southeast Asia, Africa and Europe.
