Market Assessment of Food and Food Processing Industry in India Final Review 4 March 2014

1. Tecnova’s Presentation for Italian Trade Agency Market Assessment of Food and Food Processing Industry in India Final Review 4 March 2014

2. Table of Contents India Macro-economic Overview Food Habits in India Processed Food Industry in India Processed Food Distribution Formats in India Processed Food Industry Overview Competition Analysis Developments in Processed Food Industry Regulatory and Custom Duties Analysis Presence of Italy in Indian Food Industry Food Processing Machinery Industry Overview Major Target Industries for Machinery Manufacturers Customer Concentration Cold Storage Overview Packaging Machinery Overview Conclusion and Recommendation

3. India Macro-economic Overview

4. The Indian Dimension North East West South

5. Indian Geographical Classification 1.2 Bn Population 8 Majority of packaged food consumption will be concentrated in the metros, cities and towns

6. The Story so Far… * Proportion of dependent population (0-14, Above 65 age group) to working population (15-64 age group) Source: Census 2011

7. Indian Demographics Population classification by age group With 1.2B population, India is the second most populous country making it a huge market for processed food companies 65% of the population falls in the working age group of 15-65 years leading to rise in disposable income * As per Census 2011 (latest census available) Source: MOSPI

8. Metros of India Delhi Ahmedabad Kolkatta Mumbai Pune Hyderabad Bangalore Chennai ~7% of India’s population lives in metros; a high potential segment for processed foods Source: NCEAR & Census

9. Major Cities in India Amritsar Jalandhar Chandigarh Ludhiana Faridabad Lucknow Jaipur Kanpur Bhopal Nagpur Surat Coimbatore Tier I cities will drive the demand for Ready-To-Eat (RTE) and processed foods as there is a steady increase in number of working women in these cities Source: NCEAR & Census

10. Income group classificationAspirers and Middle Class groups are expected to rise With majority of consumption lying with the Middle Class and Population (% of total population) Annual Income Aspirers, these two groups are expected to play a critical role in the development of processed food industry in India Above US$60,000 per annum 4 Mn Households 25 million (2%) Between US$12,000–US$60,000 per annum 28 Mn Households 164 million (13%) Between US$5,400–US$12,000 per annum 75 Mn Households 431 million (34%) Less than US$ 5,400 per annum 114 Mn Households 647 million (51%) • Source: NCAER (National Council for Applied Economic Research); Average household size in India: 4.8 • NCAER reports income levels at 2001-02 prices; to bring these to current prices (2010-11) income levels, a conversion factor of 2.7 has been taken to adjust the nominal per-capita income growth.

11. Rate of Inflation While WPI has been largely volatile, CPI has been increasing consistently indicating that consumption in India is increasing WPI: Wholesale Price Index; CPI: Consumer Price Index Source: Central Statistical Organisation (CSO)

12. International Agreements Joined by India India is a member of more than 65 international organizations. The predominant ones are listed below. • ADB – Asian Development Bank • BRICS • ASEAN • Commonwealth of Nations • FAO – Food and Agriculture Organisation • G-15, 20, 24, 77 • ICC – International Chamber of Commerce • IMF – International Monetary Fund • IMO – International Maritime Organisation • ISO – International Organisation for Standardisation • ITUC – International Trade Union Confederation • SAARC – South Asian Association for Regional Cooperation • UN – United Nations (and those that come under UN) • WFTU – World Federation of Trade Unions • WTO – World Trade Organisation For complete list, refer to the attached excel India has been a founding member of a number of international organizations, and hence exerts significant influence on policy making

13. India currently has Free Trade Agreements (FTAs) with… • South Asian Countries (SAFTA) • Bangladesh • Bhutan • Maldives • Nepal • Pakistan • Sri Lanka • Afghanistan • Japan • South Korea (India-Korea CEPA) • ASEAN (AIFTA) • Brunei Darussalam • Cambodia • Indonesia • The Lao PDR • Malaysia • Myanmar • Philippines • Singapore • Thailand • Vietnam FTAs are beneficial for companies with manufacturing facilities established in partner countries (above) making them entitled in import duties reduction The much talked about bi-lateral trade agreement between India and EU is still pending due to few last mile hurdles

14. Food Habits in India

15. Food Habits in Each Region Vary with Climate, Topography, Culture & Heritage India is a culturally rich & diverse nation having varied lifestyles, religions, art, culture, attire & food. Weather & topography vary widely with region: North: Closest to the Himalayan range, hilly regions with extreme weather conditions; high fertility area with high wheat production West: Arid areas of Rajasthan and Gujarat – which are dry and hot through most of the year. In some coastal areas of Maharashtra, fish is the staple diet South: Temperate climatic condition all through the year; high rice production & consumption area East: Hilly regions with varying weather conditions; East is the poorest regions of the country North East West South

16. Diversity of Food in India Indians take food very passionately Mealtimes are considered as occasions and time for families to get together and spend quality time. Fresh cooking is essential in most Indian homes, with limited preference for stocked food Most meals comprise of several dishes ranging from staples like rice and breads, to meat or vegetables, rounded off with a dessert

17. Regional Food Habits – North North Region – Madhya Pradesh, Uttar Pradesh, Haryana, Punjab, Himachal Pradesh, and Jammu and Kashmir Wheat-breads are the staple diet which accompany all meals Largely meat-based diet characterized by tandoori-style cooking methods Fair amount of cooking is done using deep frying in oil High consumption of milk and milk-based products High consumption of fresh fruits such as apples, cherries, plums and strawberries which are unique to this region due to its cooler climate. Increasing number of households are shifting toward replacing traditionally made food items such as curd and cottage cheese with packaged items (packaged curd or cottage cheese) Punjabi Food Food served with milk-based beverage (Lassi)

18. Regional Food Habits – South Southern India – Andhra Pradesh, Karnataka, Goa, Tamil Nadu, and Kerala Primarily vegetarian population barring coastal areas where fish is a staple diet Rice is abundant & appears in almost every dish during a meal & are eaten in multiple forms Tamarind and coconut form the base for most preparations, with most curries based in coconut gravy Hot spicy foods are cooked, with chettinad cuisine being one of the most fiery Food is often eaten on banana leaves Major shift is seen in people moving towards ready-to-use packaged food items for idlis and dosas, rather than going through the relatively longer process of preparing the batter in-house Food served on a banana leaf Idli, Dosa

19. Regional Food Habits – West Western India – Rajasthan, Gujarat, and Maharashtra High demand of dairy products, including yoghurt, buttermilk, cow's milk, and goat's milk Rice is the staple food grain Goan cuisine is dominated by rice, coconut, fish and seafood Gujarati cuisine is largely vegetarian, with a hint of sugar or jaggery in every preparation Peanuts and coconut are widely used Other popular cereals include gram flour, bajra and corn Goan Fish curry Gujarati Thali

20. Regional Food Habits – East Eastern India - Orissa, Bihar, West Bengal, Assam, Meghalaya, Tripura, Mizoram, Manipur Nagaland, and Arunachal Pradesh Relatively more simplistic and less elaborate food Characterized by a variety of different types of rice Predominantly fish eating population in coastal areas Common practice to eat steamed food, e.g.: momos Curries include lot of poppy, mustard and cumin seeds, cumin seeds World famous for sweets Rasagolla Sandesh Momos

21. Changing Trends in Consumer Preferences for Food Growing middle class population and household incomes are driving people to spend more on food Increasing cases of lifestyle diseases have resulted in shift towards healthier food options such as fruit juices, pro-biotics, cereals and oats Shift in consumption preferences & increasing demand is driving the food companies to introduce innovative products such as digestive biscuits, fortified dairy products, etc. Increased demand for processed & packaged products with high shelf-life Willingness to pay a premium for value-added products such as cheese, butter, flavoured milk Overall change in palate and preference for newer varieties of food due to western influence

22. Key Markets and Product Preferences (1/2) • West • Being the key port region, majority of players have a presence in this region • Market is led by Modern retail channels and HORECA segment, also has a significant grey channel • Product Preference • Biggest market for candies and confectionary • Key market for fruit based flavours, especially strawberry and orange • North • Second most important market • Market led by wholesalers, but large volume of sales through grey channel; large number of Modern Trade food & grocery outlets • Product Preferences • Wheat based products

23. Key Markets and Product Preferences (2/2) • South • Highest penetration of Modern Trade, having high sales per outlet • High levels of consumer awareness • Product Preferences • Biggest market for chocolates and bakery products • Highest incidence of diabetic population in India leading to consumer awareness about healthy breakfast choices • Fastest emerging market for RTE/RTC foods • East • Lowest sales volume by channels • High presence and consumption of mass/regional products • Product Preferences • Preference for non-oily and less spicy food products • Beef and pork products are heavily consumed

24. Processed Food Distribution Formats in India

25. Distribution Formats for Food Products in India Retail Formats Modern Format Institutions Traditional Format • Super Marts • Hyper Marts • Convenience Stores • Food Gourmet Stores • Petro- Convenience Stores • Cash and Carry • Railways and Airlines • Hotels, Restaurants and Catering (HORECA) • Canteen Store Department • Others (Schools, Colleges, Offices and Hospitals) • Neighborhood general store • Bakery Shops

26. Modern Trade Formats in India (1/2) Hypermarts • Large retail store offering wide range of products and brands • Average size between 4,000 – 10,000 sq. mtr. • E.g. Big Bazaar, Spencer Hyper etc. Supermarts • Smaller version of a Hyper marts with a average size of 300 to 1,000 sq. mtr. • Mainly offers food items like groceries along with non food items • E.g. – Food Bazaar, Reliance Fresh etc. Convenience Stores • Small store (average size of 100-150 sq. mtr.) • Mostly stock essential items such as groceries, food items and daily need items • E.g. – Big Apple, LM 365

27. Modern Trade Formats in India (2/2) Food Gourmet Stores • Store size of ~300-1,500 sq.mtr. • Targeting SEC A population with assortment of fresh food and grocery • High focus on imported food products • E.g.: Lemarche, Nature Basket, Modern Bazaar Cash and Carry • Wholesale store with a size b/w 5,000 to 10,000 sq. mtr with focus on staples and food items • Sell to Distributors / Dealers (B-2-B transactions only) • Recently, many international players entered in Indian market e.g. Carrefour, Walmart, Booker, Metro Petro Convenience Stores • Stores located at petrol pumps • Generally having an assortment of impulses purchase & utilities

28. Traditional Trade Formats in India • Neighborhood/General Stores • Traditional small shops located in residential areas • Stocks daily groceries and sundries • Bakery/Sweet Shops • Gaining popularity in the ready-to-eat food segment which tops-up as consumption points for Juices, Candies, Flavored Milk & other milk-related products, etc.

29. Key Institutional Segments in India • Railways and Airlines • Work on contract based arrangements • Contracts are based on volume & price negotiations/tenders • CSD Canteens • CSD (Canteen Stores Department), run by the Ministry of Defense catering to the Armed forces • Assortment of food and non food products at subsidized rates and differentiated packaging • Work on Tender based arrangements • Hotels • Indian Hotel and Restaurant industry is growing @ 20-25% due to increase in foreign tourists and business-related travel • Multiple consumption points (Breakfast Buffet, Restaurant, Gym, Bar, Mini-bar) • Others (Schools, College, Offices & Hospitals) • Products such as yoghurt, juices etc.. are gaining popularity on back of its health proposition • Companies are tying up with institutions such as Schools, Hospitals, Offices etc. to club their products along with meals

30. Processed Food Industry Overview

31. India Food Production – Key Facts Varied agro climatic zones 2nd largest arable land (161 M ha) in the world Largest irrigated land (55 M ha) in the world Largest producer of Wheat, Pulses & Milk Largest producer and exporter of Spices Second largest producer of Tea, Rice, Fruits & Vegetables Second largest producer of Sugarcane Largest exporter of the world's best rice (Basmati) Third largest producer of Coarse grains and Edible Oilseeds

32. Food Industry – Market Size • Indian food industry was estimated at US$241 billion in 2010-11 • Growing at a CAGR of 5.1% (2003-11) • Higher disposable income resulting in greater spending and consumption is driving the growth of food industry in India • Expected to reach US$300 billion by 2015 • Food processing industry represents ~43% of the total food industry; expected to grow to 50% by 2015 CAGR: 5.1% Spending on food constitutes the largest share of consumer wallet; as the overall economy grows, spend on food is expected to grow Source: FICCI, Tecnova analysis

33. Industry Segmentation The Indian Food and Food Processing industry (FPI) primarily comprises of the following segments Fruits & Vegetables (F&V) Dairy Meat, Poultry and Marine Grains and Seeds Packaged Foods (including Beverages) Relative Share of Various Food Segments in Food Processing (2011) Source: MOFPI

34. Food Processing Industry – Market Size Processed Food Industry organization • The size of the processed food sector in India was approximately US$105 billion in 2011 • Includes both the organized and unorganized sector where organized forms 50-55% of the overall market • Sector is growing by 13-15%, but is expected to grow by ~25% in the coming years to reach size of US$530-550 billion by 2020 • Within the food processing sector, segments like meat, and packaged foods are expected to witness high growth rates • Historically, food processing industry has contributed around 1.5% to Indian GDP Organized45-50% Unorganized50-55% Source: MOFPI, Tecnova analysis

35. Processing Levels for Key Segments in the FPI India’s food processing levels are significantly low compared to other developing nations such as Brazil, Malaysia and China Source: Ministry of Food Processing Industry

36. Processing Stages for Various Products Primary processing Secondary processing Tertiary processing Fruits & Vegetables Cleaning, sorting and cutting Slices, pulps and paste Ketchups, jam, juices and pickles Milk Grading and refrigerating Cottage cheese, cream, simmered & dried milk Processed milk, spreadable fats, yoghurt Meat & Poultry Sorting and refrigerating Cut, fried, frozen and chilled Ready-to-eat meals Marine products Chilling and freezing Cut, fried, frozen and chilled Ready-to-eat meals Grain and seeds Seeding and grading Flour, malt and milling Biscuits, noodles, flakes, cakes, savory Beverages Sorting, bleaching and grading Leaf, dust and powder Tea bags, flavored coffee, soft drinks, alcoholic beverages Source: Ministry of Food Processing Industry

37. Export from FPI sector In 2012-13, total exports from FPI sectors reached US$36 billion, growing at a CAGR of 21.9% since 2008-09 The major markets for Indian processed food are Europe, the Middle East, Japan, Singapore, Thailand, Malaysia and Korea Source: Ministry of Commerce, DIPP

38. India – Total Food Imports Total Food Imports from Italy 16.3% India – Total Food Imports 16.5% Top 5 Food Imports from Italy, 2012-13 • Italian food imports are growing at a similar rate as that of total food imports by India • Top 5 imports account for more than 73% of total food imports from Italy Values in $ M Source: DGFT

39. India – Total Food Exports Total Food Exports from Italy 7.8% India – Total Food Exports 12.1% Top 5 Food Exports to Italy, 2012-13 • Food exports to Italy are growing at a relatively slower rate as compared to India’s total food exports • Top 3 exports account for more than 81% of total food exports to Italy Values in $ M *Mollusc and Crustacean Source: DGFT

40. Food Processing Demand Drivers Increasing spending on food products Increasing urbanization – lifestyle and aspirations Growing nuclear families and working women Food Processing Demand Drivers Rising demand for functional food (oatmeal, etc) Changing demographics – Rise in disposable incomes Increasing modern trade formats and private label penetration

41. SWOT analysis of Food and Food Processing Industry in India Strengths Huge domestic consumption market Large production base of raw material Breadth in crop base offering scope for varied processing activities Inadequate infrastructure facilities High upfront capital investments Lack of adequate quality control & testing protocols Large number of intermediaries resulting in inefficient supply chain and increase in prices Seasonal variability of crops Low packaging aesthetics Weaknesses

42. SWOT analysis of Food and Food Processing Industry in India Opportunities Government incentives (priority sector, tax relief, R&D support, etc) Increasing western influence on Indian palate (cheese, pasta, sauces, cereals, aerated drinks, juices, yoghurt, etc) which is driving the demand for processed foods Increase in nuclear families and working women who prefer ready-to-use food items Traditional preference for freshly cooked food especially in rural areas Affordability (e.g., processed fruits are significantly higher than fresh fruits) High supply chain costs Threats

43. Distribution System in Food Processing Industry Company’s Warehouse or Importer-Distributor 3 - 5% Rate contract Carrying and Forwarding Agent/ Super stockiest Modern trade Distributors CSD contractor Intermediaries Rate contract 8 - 15% Distributors Institutions Sales Agents 25 - 35% Retailers Institutions/ Foods services Modern Trade Chains/ Stores CSD canteen End users * The figures mentioned are trade margins of channel partners. These are taken as an approximate value and vary depending on company, distributor and industries

44. Competition Analysis

45. Competition in Dairy Processing Dairy market is largely dominated by regional cooperatives in Gujarat, Karnataka, Maharashtra, Tamil Nadu, Rajasthan and Punjab; Amul (Gujarat Cooperative) has ~26% pan-India market share in liquid milk; Nandini (Karnataka Cooperative) has significant presence in South India Amul captures nearly 85% of the butter market and ~70% of the cheese market, while other players such as Nestle manage rest of the market; Unilever has strong presence in ice cream segment Value-added products such as cheese, yoghurt, pro-biotic drinks, flavored milk, and infant nutrition products are the key growth segments for international companies

46. Competition in Fruits & Vegetables Processing Processed forms of fruits & vegetables in India include jams, juices, pickles, chutney, and fruit concentrates While the fresh fruits & vegetables market in highly unorganized with local farmers, wholesalers, and intermediaries selling directly to customers, the processed F&V market is somewhat organized with presence of national and international players With the potential to become one of the largest producers of F&V, coupled with abysmally low levels of processing, India offers huge potential for international companies

47. Competition in Meat, Poultry and Marine Processing Highly fragmented industry with only a handful of large players Uttar Pradesh, Andhra Pradesh, Maharashtra, Delhi are the key areas of processed meat and poultry production Within this industry, poultry is the fastest growing segment owing to strong domestic consumption As European and western cuisines expand in India, demand for processed meat products such as sausages, hams, steaks and fillets has been increasing consistently

48. Competition in Grains & Seeds processing Grain processing includes milling of rice, wheat and pulses; seed processing include extraction of oil for edible and industrial purposes A highly fragmented industry with thousands of rice hullers, flour and pulse mills, and ghanis and oil refineries operating in every part of the country; competition in the organized segment is intense Though primary processing is the most important activity in this segment, secondary and tertiary processing is limited to few large players As one of the world’s largest agricultural base, India offers huge potential for international companies in grain and seeds processing; however, domestic competition is intense

49. Competition in Consumer Foods Processing Consumer foods is a highly competitive industry in India with presence of large national and international companies Britannia, Parle and ITC capture ~90% share of biscuit industry, while Perfetti has over 70% market share in confectionery market; Nestle, with its Maggie brand, is a market leader in noodles segment, while Coca Cola and Pepsi has over 90% market share in aerated beverages segment RTE and RTC segments have large untapped potential; with modern trade formats growing at a rapid pace, RTE offers huge scope for investment

50. Key Players – Profiles #employee data for entire company; *only for food division Source: Company Annual Reports