India’s booming 40,900 Crore snack food market is attracting the hungry eyes of many profit seekers; from the budding local start-up to multinational giants. Yet potential entrants should first consider the possible risks and develop their strategies accordingly.
• Evolving consumer needs, as well as a growing population and rising income levels, has resulted in significant growth in the snack food sector and attracted a number of new entrants.
• Potential entrants should carefully consider all the challenges associated with intense competition, rising costs and diverging consumer trends.
• Companies should develop an entry strategy that plays to their strengths, pursuing backwards integration and monitoring micro as well as macro trends in order to be in a good position to exploit the growing market opportunity.
Thanks to a growing population and rising income levels, the Indian food sector has one of the strongest growth fundamentals of any industry. For packaged snack foods these fundamentals are complemented by two further growth drivers; convenience and the nation’s eating habits.
With smaller families leading busier urban lives, the time and resources for regular home cooking are rapidly declining. At the same time, longer working hours and lengthy commutes leave less time for regular sit-down meals. Snack foods have been a long-time favourite in the Indian diet and now packaged and branded variants of namkeen, sweets and wafers have become the natural solution to the culinary cravings induced by the modern Indian lifestyle. The combination of these factors is propelling the snack food sector toward a projected compound annual growth rate of 14% from 2011 to 2015.
An attractive sector for new entrants
Established snack food players like Haldirams and Pepsi Lehar have been joined by a new wave of market entrants in recent years, attracted to the sector thanks to its high growth rate and the relatively low level of capital required to establish production.
Amongst the new arrivals are many regional entrepreneurs who have backed themselves to succeed based on a better understanding of India’s distinctive local tastes and delicacies. Meanwhile, large FMCG players have bet that their brand name and marketing expertise can extend their clout to a new product category.
Although the market is large and diverse enough to accommodate a broad range of both existing players and new entrants, those moving into the sector need to be aware of a number of challenges to long-term success and develop their strategies accordingly.
Key Challenges and Strategic Responses
Challenge: Competition from above and below
Companies entering the Indian snack food market need to be braced for competition on all fronts. Simply transposing the competitive scenario from the national level to a regional setting could be a recipe for over-optimistic sales projections. In many areas, local producers catering to specific regional tastes may actually be a greater threat than the leading national brand names.
At the other end of the spectrum, the existing pan-India competition may be disrupted by large consumer goods firms and major retailers making a foray into the snack food sector. ITC has been the most notable example of this through its heavily promoted Bingo chip brand. With the scope of organized retail ever expanding, private label brands such as Tasty Treats from Big Bazaar will also pose a stiffer challenge to snack food manufacturers hoping to sell through this increasingly important channel.
Response: Develop an entry strategy based on your own strengths
Companies entering India’s snack food market should build their entry strategy around their own key strengths to ensure they are better prepared to take on the competition. For example, those companies starting out with a more limited product range may benefit from launching in multiple locations in order to achieve sustainable volumes and gain sufficient customer insights. On the other, hand those companies possessing a wide variety of products may do well to focus on a particular region first. Allowing them to achieve penetration across categories as well testing the more complex distribution this entails before they expand elsewhere. In both scenarios, companies need to carry out a detailed analysis of consumer tastes and conduct competitor mapping at the local and national level before deciding on their preferred points of entry.
Challenge: Rising Input Costs
Input costs are a critical factor in the food industry and commodity prices have been rising at record rates in recent years. In India, the vagaries of the monsoon have a major effect on the price of snack food staples like wheat and potato, and the volatility of the Rupee creates additional challenges for those using imported ingredients like cocoa. Furthermore, as food accounts for a high percentage of the average Indian’s budget, even small price movements can a have a major effect on demand
Responses: Develop a clear pricing strategy, innovate lower cost alternatives & pursue backward integration
With global food price inflation set to persist, snack food manufacturers need robust strategies if they are to sustain growth and protect margins.
Firstly, snack food manufacturers need to develop a clear pricing strategy so they can respond in a timely and effective manner to rising costs. When confronted with such a scenario they have three possible options: increase prices, reduce pack size or keep prices the same.
All of these options have advantages and disadvantages but manufacturers should prepare their response according to their target customer, the response of their competitors and their long-term strategy. For example, a mass-market potato chip manufacturer with highly price-sensitive customers may seek to absorb lower margins to gain market share from competitors who immediately pass on rising costs to their customer.
In addition to pricing strategies, manufacturers could develop lower cost alternatives to their existing products to retain price-conscious customers. Due to high cocoa prices, a number of leading Indian brands have launched biscuits with lower cost vanilla fillings rather than the traditional chocolate in order to keep prices affordable.
Thirdly, India’s highly fragmented food chain offers plenty of scope for backward integration. This would eliminate the margin captured by a large number of non-value-adding intermediaries, resulting in lower input costs. Pepsi Lehar pioneered such a strategy through contract farming in Punjab. By agreeing directly with the farmers to purchase potatoes at a fixed price in advance, they can guarantee future supplies at stable prices. With the regulatory environment becoming more favourable, such initiatives will become a critical factor for long-term success in the Indian snack food market.
Challenge: Diverging Consumer Trends
In a large market like India, with such extremes in income levels and lifestyles, consumer trends can seem to move in conflicting directions at the same time, posing a major challenge to strategic planning. In response to a wave of media concern about rising obesity and diabetes in recent years, leading snack food players began offering health-oriented products advertised as low fat, low sugar and low salt. However, the market response to many of these initiatives was less than rewarding. Marico, for example, had to withdraw its healthy baked snack Saffola Zest after poor sales. Whilst health foods may be a growing niche, for many Indian consumers packaged snack foods represent a new and exciting way to add some long sought after indulgence to their daily diet. Even for those wealthier groups afflicted by lifestyle diseases, taste still overrides health as the main determinant of their snack food choices.
Response: Closely monitor micro as well as macro trends
Snack foods manufacturers must balance the urge to respond to prevailing trends in the broader market place with a constant focus on their target customers. Whilst innovation is an integral part of success in fast-moving consumer goods, if it is not driven by customer needs it will result in alienation rather than improved brand loyalty. For example, the FMCG sector is currently focused on consumers’ search for value in a tougher economic climate. However, consumers of a premium snack food brand may be largely indifferent to changes in price given the small part of their budget such purchases account for. What is more, by adopting a lower cost positioning or offering cheaper variants, such a company could actually undermine its value proposition to its target segment.
To counter this risk of misreading the market, snack food companies should closely monitor the micro trends occurring within their target customer group as well as tracking the macro trends affecting the sector as a whole. Such an approach will give companies the confidence to take a divergent view from the competition wherever it better serves their customers.
Taking stock of the challenges in the Indian snack food sector and preparing a coherent set of strategic responses will stand companies in good stead as they seek to exploit the growing market opportunity and withstand the intensifying competition.