With India set to become the world’s third-largest grocery market by 2015, international food and drink producers are salivating at the prospect of serving Indian consumers’ growing appetite. However, exporters eyeing-up the India opportunity must still overcome a number of challenges to ensure a profitable entry into the shopping baskets and stomachs of the Indian consumer.
Several forces are transforming Indians’ consumption of food and drink, creating an attractive market for international producers. The overall grocery market is projected to grow over 60% between 2010 and 2015 to an expected $560bn, behind only China and the US in value.
In particular, four growth drivers are creating an opportunity for foreign food and drink producers: rising incomes, a growing preference for convenience food, a greater willingness to explore new tastes, and the increasing penetration of organised retail.
The most important driver of growth is rising income. This is not only growing the size of the Indian grocery market but it is also altering Indians’ food buying behaviour. Greater discretionary spending means food purchases are shifting away from the basic staples and toward a wider range of more expensive items. Per capita consumption of cereals and pulses have seen steady declines in recent years while more expensive meat and dairy products have shown significant increases.
Simultaneously, wealthier consumers are seeking out superior alternatives to find better quality and taste as well as to signal their growing wealth to their friends and family. International products have benefited substantially from such trading-up. The growth in imported food and drink has been running at a compound annual growth rate (CAGR) of 13% since 2005, twice the 5% CAGR growth in overall food consumption. As incomes continue to rise, the higher price tag of imported food and drink will come within reach of an ever larger class of Indian consumers.
Secondly, socio-demographic change is also affecting the way Indians eat. With decreasing family sizes and more women entering the workplace, urban families are looking to spend less time and effort in preparing food. Eating out and pre or part-prepared food are growing in popularity as Indians seek to balance the pressures of modern life by choosing more convenient eating options. The growing preference for convenience has supported rapid growth in imported quick-to-prepare foods like Italian pasta and sauces. International players’ extensive experience in the convenience segment from developed markets and their wide offering of products make them well positioned to exploit this emerging market opportunity.
It is not just how Indians are eating and how much they are spending that is changing, increased exposure to a diverse range of foods from around India and overseas is driving a wave of culinary experimentation. There are now 125 food shows across Indian channels and according to Zee TV, the average Indian viewer watches 8 minutes of cooking shows a day. Hit TV shows like Masterchef India have showcased the creative blending of Indian and international cuisines to millions of middle-class households. Importantly, the stars of the show weren’t celebrity chefs but Indian housewives. International food and drink producers can capitalise on these trends in popular culture to launch foreign products in the Indian market.
Finally, the much-vaunted rise of organised retail in urban India is helping drive the growth and diversification of food and drink consumption through the ever-wider range of product offerings on supermarket shelves. Modern retail is expected to account for 10% of grocery sales by 2015 and in certain cities like Kochi, it has already reached 49%. In order to fill their expanding shelf space retailers are increasingly seeking out international brands with their well-developed product ranges. In addition, modern retailers' growing market share offers international products a faster and more familiar route to market than had previously been available.
Challenges to overcome
While India represents an attractive opportunity for imported food and drink, foreign companies must take heed of the particular challenges of the Indian market if they are to avoid potential pitfalls.
The differences of the Indian palette have been readily acknowledged by leading international food brands. McDonalds and Domino’s have extensively adapted their menus to the spicier preferences and vegetarian requirements of the Indian market. However, the country’s tastes are yet more complex than this with cross-cutting preferences based on region, religion and socio-economic class. Add to this the generational shifts in taste and the market could seem a bewildering patchwork to international producers exporting from more homogeneous home markets.
A second challenge is represented by weaknesses in the supply chain. This comprises both infrastructure bottlenecks and the absence of a robust cold chain. The former results in greater transportation times, whether in transit through the country’s ports, or on its congested roads, adding significant costs to importers. On average, a container can take 12-13 days to process at an Indian port compared to 3-5 days in most developed countries. Container handling costs are also much higher, typically $2,600 to $3,000 compared to $440 - $450 in Malaysia and Singapore. The cold chain is limited and fragmented and it is estimated that only 2% of food that should be temperature controlled currently is so. For international exporters used to a seamless journey from the factory to the shelf, extra efforts must be made to identify dependable logistics providers who will ensure the integrity of their product at the point of consumption.
The third challenge for international exporters is the difficulty of navigating the relatively complex system of tariffs and regulations that govern the import of food and drink to India. The compounded effect of multiple import duties, along with occasional anti-dumping and safeguard duties can raise tariffs to as high as 68% on certain items (and much higher for alcohol). However, tariffs on some imported products are low or even zero - with the lowest tariffs on products where local production is unsuitable such as the case of olive oil. Furthermore, the signing of Free Trade Agreements between India and other international markets is likely to see tariffs further reduced in the near future.
Strategies for a successful India entry
Assess the demand
India’s headline growth rates may seem attractive but getting a more granular break down of your product segment is essential.
In many cases, an imported product may be entering virgin territory with little or no current offering in the Indian market. In these cases, sales projections will have no past data to extrapolate from.
Identify the right target segment(s)
A scattergun approach is usually a recipe for failure in the Indian market. The scale and size of the country, regional differences in growth rates, varied consumption habits and diverse penetration of organised retail all necessitate a targeted approach. The vast majority of international brands won’t have the resource to attempt a blanket entry strategy in India. And even for those that do such a strategy is ill-advised.
Using indicators like SEC classification are helpful as they combine both income and education level to give a fuller picture of consumers likely spending behaviour. However, developing a customised method of segmentation that is specific to your product and market is often the best way to identify target customers. But remember, in a diverse market like India, defining several distinct target segments may be more useful than attempting to group all your customers together under common characteristics.
Understand their behaviour
Understanding the way in which consumers buy and consume your product is pivotal and this is all the more important when entering a new market like India. For example, when the first Italian pasta brands entered the Indian market the only similar category that existed was noodles. These were packaged, priced and consumed as snacks, whereas pasta comes in much larger packets at a substantially higher cost than the typical Rs15-25 per portion of noodles. Pasta can be considered as a substantial meal. Therefore highlighting the equally fast preparation time while justifying the higher price tag required significant education of the consumer.
Choose the right channel
While the channels to market remain fragmented by international standards, rationalisation is being driven by the rise of modern retail and consolidation among distributors. Still, for most international brands the first landing point will be Tier 1 cities, where organised retail has a higher presence and the exposure to international items by well-travelled or expatriate residents is highest.
Choosing the right partner is equally important to ensure that the environment your product is sold in aligns with its positioning. The up-market UK retailer Waitrose partnered with the high-end Indian supermarket Hyper City to distribute their range of premium packaged foods and juices through locations in the major metros. Furthermore, by having its own in-store specialty area, Waitrose has been able to re-create its UK store experience despite restrictions on FDI in multi-brand retail.
Build a connection
Many popular foreign brands have a long heritage in the Indian market. Whether it’s the confectionary of Cadbury’s or Horlicks’ drinks, these products have won over the hearts of generations of Indian consumers. Despite the recent explosion of branded goods, recent surveys indicate that the jump in brand awareness has not been matched by a corresponding leap in brand loyalty. However, new entrants need not be discouraged. Although a long-term strategy is essential, focusing on key aspects of Indian life - traditional and contemporary - will go a long way to securing sustainable growth.
Most importantly, however, a product should speak to the new found aspirations of the Indian consumer. With improving incomes, the horizons of the Indian shopper are broadening and international food producers have the chance to establish their product as an integral part of the modern Indian diet.