&

FOOD PROCESSING &

FOOD PROCESSING

EQUIPMENT INDUSTRY:

OUTLOOK SURVEY

The Economic Times an RedSeer Consultings Food Processing & Food

Processing Equipment Industry Outlook Survey

The Economic Times and RedSeer Consulting, the research and advisory firm surveyed

49 companies in the food processing and food processing equipment industry during

the first quarter of FY2015. Participants were asked about business conditions in their

sector, revenue growth opportunities, investment plans and any barriers to growth that

may affect the business. They were also asked a variety of questions about the overall

growth of the industry, including the factors that might affect the sectors recovery, and

to assess the impact of economic conditions on their business expansion plans.

The responses were analysed to review the existing market conditions and to project

future growth opportunities. A comparative study was carried out to assess the findings

against those of a similar survey conducted on the same participants in the previous

financial year.

Structure of the Report

Industry Insights

Key Findings

Economic Outlook

Growth and Challenges

Expansion and Future Strategies

Drivers and Inhibitors

Final thoughts from RedSeer Consulting

Industry insights Food production in India has witnessed significant growth in recent years, making India the second largest producer of food in the world next to China. A stable monsoon in the past decade, which still meets more than 60% of irrigation requirement, has been a major driving force behind increasing food production. The projected total food grain production in India is expected to be around 261 million tonnes in FY14-15 in comparison to estimated 259 million tonnes in the FY13-14 and 255 million in the preceding year.1

Availability of adequate, timely and assured irrigation for crops, low awareness among farmers on newer farming and crop technologies, access to credit for farmers to buy modern inputs for farming operations especially for the bottom 40% remain the major causes of concern. India ranks seventh in term of overall food wastage and first in wastage of cereals, pulses, fruits and vegetables. Agriculture produce to the tune of Rs. 50,000 Crore is wasted every year in the country.2

Food processing sector could play an important role in increasing farm gate prices, reduce wastages, ensure value addition, and promote crop diversification. Realizing the potential of the sector, the government of India has initiated many extensive reforms. For promotion and development of the sector, FDI up to 100% is allowed. The government has allocated a sum of Rs 5,990 Crore (US$ 1 billion) under various schemes of the food processing industries during the 12th Five Year Plan. In addition, the sector has attracted foreign direct investments (FDI) worth US$ 5,360.89 million during the period April 2000January 2014.3

1 Reserve Bank of India and Union Budget, 2014

2 Central Institute of Post-Harvest Engineering and Technology (CIPHET), Ludhiana

218

259 261

2009-10 2013-14E 2014-15P

Total food grain production (in millions tonnes)

18.7% 0.8%

0.8% 2.3% 2.9%

3.9%

6.0% 6.0% 6.1%

18.0%

Milk Meat Fisheries Poultry Cereals Oil Seeds Pulses Fruits &Vegetables

Annual cumulative wastage percentage in various commodities

Despite continual effort of the government, processing activity still remains at a nascent stage. Fresh or unpackaged foods dominate the food basket of most Indian consumers.

Level of processing across segments4,5

Segment % processing Comments

F&V 2.2% USA (65%), Philippines (78%), China (23%), Thailand (30%),

Malaysia (80%)

Fisheries 26% 60-70% for developed nations

Poultry 6% 60-70% in developed countries

Meat 20% 60-70% in developed countries

Milk 35% 60-75% in developed countries

Nonetheless, increasing urbanization, income levels and education levels are driving a gradual shift towards processed food. The following diagram lists leading drivers and impediment to future of the industry.

The projected GDP of the food processing industry in India is around Rs. 1, 03,943 Crores in FY2015, 33% more than the size of industry in FY2012.6 The sector is expected to expand further at a growth rate of 9% annually to reach Rs. 6, 00,000 Crores by 2030.7

4 MoFPI Annual Report 2007-08

5 OSEC Industry Reports

6 Ministry of Food Processing Industries

7 CII-McKinsey Report

52,161 57,320 60,378 58,752

67,508 78,094

103,943

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2014-15P

Gross Domestic Production Food Processing Industry (in Rs. Crores)

Dri

ve

rs

Imp

ed

ime

nts

Strong Domestic Demand Rising Exports Potential Supply Side Advantages Strong Policy Support Contract farming resulting in

guaranteed returns to farmers

Growth of organized retail

Erratic power supply Industry at a nascent stage Supply chain and distribution

network Rising energy costs Shorter shelf life Government procedures Marketing costs

Major segments in food processing industry include fruits and vegetables, dairy, grains, meat and poultry, fish and consumer foods (includes packaged food, packaged drinking water, alcoholic and non-alcoholic beverages). Following table represents total production of major food categories.

Packaged food segment is primarily driven by urban population which account for more than 78% of the total market. It is presently valued at US$ 39.7 billion and is expected to reach US$ 65.41 billion by 2020. Other major food segments such as packaged drinking water, confectionery, beverages etc., have been growing at double digit growth rate. Governments continued effort in improving the overall food supply chain is expected to open plethora of opportunities for companies in the agriculture value chain. The food processing industry is expected to be one of the biggest beneficiaries of this process.

2,590

2,270

1,324

91 37

Food grain Fruits andvegetables

Milk Fisheries Broiler meat

Food Production by Category in Lakh Tonnes

Key Findings from the Economic Times and RedSeer Consultings Food Processing & Food Processing Equipment Industry Outlook Survey The Economic Times and RedSeer Consulting surveyed 49 companies in the food

processing industry with an average size of 132 employees having 70% permanent and

30% part-time employees with estimated average revenue of INR 72 Cr. Participants

included business owners and unit heads who spoke optimistically about the upcoming

financial year which included the revenue, the company headcount, the industry growth

and the capital expenditure. They also spoke about input costs being the greatest threat

to the company margins. The participants emphasised on target marketing and

geographical expansions being the top most priorities for the companies. The survey

comprised of companies in three major categories: processed food, perishable food, and

kitchen appliances.

Survey Key Findings

Nearly half of the business owners and unit heads believe that there would be a slight

improvement in the economy in the wake of the general elections, and the other 40%

of the respondents feel that the economic growth would remain same in comparison

to FY14

The survey shows that most of the respondents (~78%) are of the opinion that their

revenues will increase in the current fiscal year in comparison to last year. A similar

trend has been observed for the headcount and the profit margins

The respondents (~86%) point out that input costs have increased significantly. As a

result, input cost is seen as a major threat to company margin by around 54% of the

responding companies followed by marketing costs

Most of the respondents state that economy followed by quality measures would be

biggest bottlenecks in the growth of their companies

The companies look to focussing on improving their marketing and advertising

programmes, and to invest in new product development and improve their quality

standards

More than half of the respondents (~54%) state that the cost of raw material local

and imported is expensive and it directly affects the issue of rising input costs and

becomes a threat to the profit margins of the company

Around 50% of the respondents state that cost of quality control, certifications, and

marketing required for domestic and export market is reasonable

Around 56% of the respondents state that firms operating at national/state levels are

the biggest competitors for their business followed by the local firms operating in the

same state (~53%)

96% of respondents expect an increase in the revenue, while 86% say they would

recruit in the coming 12 months

To counter economic and input cost uncertainties and attain vertical growth target

and improved marketing (~38%) along with entering into new markets (~35%) are

key priorities of the companies in the coming 12 months

The companies also intend to focus on cost reduction (~31%) and new product

development (33%) and their capital expenditure plans are in line with these priority

areas with 56% planning to invest in new products and 42% in marketing and

advertisement

Around 79% of the respondents say that their capital spending plan will increase in

the next 12 months

More than 90% of the respondents are optimistic about the positive growth of the

industry next year

Performance of the economy is identified as a major issue hindering the growth of the

industry by an overwhelming 68% of the respondents

Complex and cumbersome taxation policy is highlighted as a major factor impacting

the overall business environment for the sector, which has deteriorated further in the

past 5 years

Around 76% of the respondents feel that the government should make effective

changes to the tax policies and simplify government procedures

From industry initiative perspective, business owners and unit heads say that

improving productivity at root level, with benchmarked industry quality measures

would improve the competitiveness and the business environment

Economic outlook

Nearly half of the business owners and unit heads believe that there would be a slight improvement in the economy in FY2015. Around 40% of the respondents believe that the economic condition will remain same in FY2015 as it was in FY2014. The survey was conducted before the general election results were announced, and many at that time were of the view that a regime change will expedite many of the impending bills, which will boost economic growth.

Growth and Challenges

The survey shows that most of the respondents (~78%) are of the opinion that their revenues will increase in the current fiscal year. A similar trend is observed for headcount and profit margins of the companies surveyed. The respondents (~86%) point out that input costs have increased significantly. As a result, input cost is seen as a major threat to company margin by around 54% of the responding companies. This was followed by marketing cost. For 65% of the responding companies, the input cost increased by more than 10%. However, only 32% managed to increase their pricing by more than 10%. Most of the respondents have an opinion that economy followed by quality measures would be the biggest bottlenecks in the growth of their companies. To counter these bottlenecks and to increase their competitiveness, the companies would focus on improving their marketing and advertising programmes, investing in new product development, and improving their quality standards. More than half of the respondents (~54%) state that the cost of raw material local and imported is expensive and it directly affects the issue of rising input costs and is a threat to the profit margins of the company. Around 50% of the respondents also indicate that cost incurred for the technology is expensive and significantly contributes towards the rising input costs. Most of the respondents (~40%) have an opinion that the cost of the labour, machinery and power is reasonable, and 50% of the respondents state that cost of quality control, certifications, and marketing required for domestic and export market is reasonable.

39%

2% 2%

46%

11%

0%

10%

20%

30%

40%

50%

Economy, one year from now

About the same Significantly improved Significantly worse

Slightly improved Slightly worse

~46 of the respondents feel that there will

be slight improvement in the overall

economy of the country

Around 56% of the respondents state that firms operating at national/state levels are the biggest competitors for their business followed by the local firms operating in the same state (~53%). Only 26% of the respondents view international companies as a competition.

7%

26%

20%

15% 17%

15%

0%

10%

20%

30%

Revenue growth in last year

Decreased by 1-30% Increased by 1-10%

Increased by 10-20% Increased by 20-30%

Increased by more than 30% No change

5%

34%

25%

14%

2%

20%

0%

10%

20%

30%

40%

Company headcount since last year

Decreased by 1-10% Increased by 1-10%

Increased by 10-20% Increased by 20-30%

Increased by more than 30% No change

4% 4%

29%

16% 20%

4%

22%

0%

10%

20%

30%

40%

Profit margins compared to last years

Decreased by 1-10% Decreased by 10-20%

Increased by 1-10% Increased by 10-20%

Increased by 20-30% Increased by more than 30%

No change

Around 60% of the respondents stated that the employment in their companies is higher in comparison to FY14, and around 5% of the respondents were of the view that the headcount had decreased

29% respondents stated that the profit margins of the company increased by 10-20 percent and twenty-two percent respondents stated that there was no change in the profit margins.

~78% of the respondents stated that their revenue increased compared to the last year. Around 1/5th of the respondents stated that there was no change in the current revenue of the company.

54%

10% 15%

35%

17%

4%

19%

2%

0%

20%

40%

60%

Threats to company margins

Input costs Discounting and incentives

Decreased sales volume Marketing Costs

Inventory carrying costs Administrative Costs

Regulatory Compliance Any other

21%

41%

16%

4%

14%

0%

10%

20%

30%

40%

50%

Company increase in input cost since last year

Increased by 1-10% Increased by 10-20%

Increased by 20-30% Increased by more than 30%

No change

33%

11%

17%

4%

35%

0%

10%

20%

30%

40%

Pricing compared to last years

Increased by 1-10% Increased by 10-20%

Increased by 20-30% Increased by more than 30%

No change

More than half of the participants surveyed stated that of all costs, input cost will be the greatest threat to the companys profit margins in the coming 12 months, followed by marketing cost

Of the people surveyed, 4/5th of the respondents stated that there was a significant increase in the input costs as compared to last year, out of whom 4% stated that the increase was over thirty percent.

35% respondents feel that there has been no change in pricing the products as compared to that of the last year and 65% respondents stated that there was an increase in the pricing of products

Expansion and Future Strategies When the respondents were surveyed about future growth of their company, 96% responded that they expect there will be in an increase in the revenue, while 86% say they would recruit in the coming 12 months. To counter economic and input cost uncertainties and attain vertical growth, targeted and improved marketing (~38%) along with entering into new markets (~35%) are key priorities of the companies in the coming 12 months. The companies will also focus on cost reduction (~31%) and new product development (33%). Capital expenditure plan of companies are in line with these priority areas with 56% planning to invest in new products and 42% in marketing and advertisement. In addition, expanding facilities is also a focus area for capital spending. Upon asking about their capital spending plan, around 79% of the respondents said that it will increase in the next 12 months.

0% 20% 40% 60% 80% 100%

Raw materials

Imported raw materials

Technology

Skilled labour

Power

Machinery

Land

Quality control

Domestic marketing

Export marketing

Cost of Items

Very economical Economical Reasonable Expensive Very expensive

16%

38%

22% 20%

4%

0%

10%

20%

30%

40%

Expected revenue growth in FY2015

Increase by 1-10% Increase by 10-20%Increase by 20-30% Increase by more than 30%No change

38% respondents said that they

expect their company revenue to

increase at a rate of more than 20%,

a year from now

2%

30% 32%

18%

5%

14%

0%

10%

20%

30%

40%

Expected Headcount FY2015

Decreased by 1-10% Increased by 1-10%

Increased by 10-20% Increased by 20-30%

Increased by more than 30% No change

31%

38%

6%

33%

17%

35%

2%

0%

10%

20%

30%

40%

Priority for sustainable growth

Cost Reduction Improve targeted marketingSecurity of Supply New Product DevelopmentPricing Strategy Geographical ExpansionNo Planned Change

56%

6%

38% 42%

21% 17%

2%

0%

20%

40%

60%

Focus of capital spending

New Products or services Information TechnologyExpanding facilities Advertising and MarketingGeographic Expansion Research & DevelopmentEmployee Salary and Training

The respondents stated that their main priority over the next 12 months would be targeted marketing followed by geographic expansions.

56% of the respondents would focus on spending on development of new products/services followed by extensive Advertising and marketing techniques

Around 1/3rd of the total

respondents stated that they expect

their company revenue to increase

by 10 to 20% in the next 12 months.

Drivers and Inhibitors More than 90% of the respondents are optimistic about the positive growth of the industry next year. Performance of the economy has been identified as a major issue hindering growth of the industry by an overwhelming 68% of the respondents. Following are major costs incurred during the operation and running of the business:

Major costs head as percentage of total cost

Interest rate at which loan is available or taken 12%

Cost of raw-material 53%

Power cost 11%

Complex and cumbersome taxation policy is highlighted as a major factor impacting the overall business environment for the sector, which has deteriorated further in the past 5 years. As a result, around 76% of the respondents feel that the government should make effective changes to the tax policies and simplify government procedures. Despite deterioration in the availability of skilled labour and regulatory framework in the past 5 years, the respondents are satisfied with these factors. There has also been deterioration in the quality of power supply. From industry initiative perspective, business owners and unit heads say that improving productivity at root level, with benchmarked industry quality measures would improve the business environment along with the competitiveness.

2% 2%

10%

42%

17%

10%

17%

0%

20%

40%

60%

Expected capital spending

Decrease by 1-10% Decrease by 10-20%Increase by 1-10% Increase by 10-20%Increase by 20-30% Increase by more than 30%No change

4%

17%

40%

19% 15%

6%

0%

20%

40%

60%

Industry/Sector Growth

Decreased by 1-10% Increased by 1-10%

Increased by 10-20% Increased by 20-30%

Increased by more than 30% No change

Around 2/3rd of the participants indicate that they are going to increase their capital spending by 10-20% in the coming year, whereas few said that they would be cutting down on the capital expenditure

90% of the respondents have an

opinion that industry would increase

in the coming years.

1 Taxation Policy 5 Electricity 9 Innovation and R&D

2 Availability of Skilled Labor 6 Environmental Regulations 10 Training Facilities

3 Lobbying 7 Access to Capital 11 Supply Chain

4 Regulatory Framework 8 Quality Management

Different components of business environment in the industry were rated on a scale of 1 to 5. 1 being very poor and 5 being excellent.

Also the trend in these in last 5 years were rated from 1 to 3 (1 is declining, 2 is no change and 3 is increasing).

68%

20% 23%

7% 9% 14%

0%

20%

40%

60%

80%

Issue facing the industry

Overall economy Changing consumer demand patterns

Supply(food or raw material)/commodity prices Unavailability of quality manpower

Limited access to credit Incresed Govt. Regulations

1

5

7 9 6

4

11

2

3

8

10

1.5

2.0

2.5

3.0

2.0 2.5 3.0 3.5

Imro

vem

ent

/ d

eto

riat

ion

in t

he

Fact

or

Current Rating of Various Factors

Current and past trends impact of various factors on the industry

Very Poor

Imp

rovi

ng

De

clin

ing

Excellent

68% of the respondents feel that the

biggest issue facing the industry in

the coming next 5-10 years would be

the overall economy of the country.

Final Thoughts from RedSeer Consulting

Conducted in the wake of the general elections, the business owners and the unit heads believe that the economy would slightly improve in the current fiscal year. The belief that there would be a slight improvement in the overall economy will also see an increase in the revenue of the company, which increased for most companies in the previous year. To support future growth, companies would focus on increasing their capital spending in areas of marketing, new product development, geographical expansion, and expanding facilities. Expensive technology poses a risk to their planned capital expenditure in the next few years. Companies feel that increasing input cost is the biggest threat to their bottom line, which increased for most of the companies in the previous year. Marketing cost and regulatory compliance are other areas which have major impact on the bottom line of companies. Only a quarter of companies have managed to increase their prices in line with rising input cost while others have focussed primarily on cost reduction to boost their bottom line. Compared to food processing equipment industry, more number of respondents from food processing industry expect an increase in their profit margin. Accordingly, their expectation on capital spending is higher than that from food processing equipment industry. Economic uncertainty and lack of standardised quality practices are major bottlenecks for future growth. Simplification of government procedures and taxation policies are considered biggest business environment issues. While business owners and unit head expect government to tackle these issues, they are emphasising on improving the productivity at root level with standardised quality practices to improve the overall competitiveness of the industry.