Realising the potential

F.A.IDA Revisited R.·eal:is1 ng the potential

Executive Summary:: Re,,alising a $ 50 bllllon potential by 2008

The FAIDA report, ~denmied 'enormous pow,Hlti1al' for the Indian 'food industry, and laid down a bold and ambitious roadmap to achieve that potential. IF.A~DA identified a s~gnificant opportunity in basic 'foods that could be unlocked by irnteglrating the chain and removing inefficiencies. lnteqration would require both ~igniffcallt investment as weilas a vital role for the qovernment in the creation of a supportive policy environment In achieving the potential, there would be enormous benefit tQta~l- fa rrners , consumers, oovsrnment and industry,

Although the pace of movement towards achievi:ng this potenti.'ai has been slower than we expected, we beli-eve that the inherent potential outlined In FAIDA remains. We expect the Rs 250,000. crore food 'processing potential [0 be achieved by 2008, and not by 2005 as outlined 111 FAIDA" Further, new trends are also be,ginning to create ad.ditlonal opporturutles wlithin toed. We shall briefly summarise our findings Oil both the achievements tilll date and the potential in this documenf.

Over the cou FS eof the's i x years since. the repo 11. was Fe I eased ,6 lot of P osltive tracnon has been observed in thefood ~ndustry,. Organised retail has; begun to emerqe as 81 true force: the poultry chain has been inteqrated; th,ere has bsen siqnlflcant increase in value addition in dai~; a number 'of key g.Qvemmeh't re,g,uliations have been changed; and there has been an overall explosion ill food products and services (restaurants, fast-food. home delivery) ill the industry. Nearly Rs. 90;0.00 crore of output has been added to the overaf food processinq industry aver the last seven yeats, though pnrnarity throuqh unorqanised players and in low margin activities. However, it is clear that the potBnti:al has also ~1Ot been fully captured. New larg,g players have not yet emerged I profltabllity levels remain low, the core wheat, dairy and horticulture industries remaln unorqanised and there has been limited ,addition to infrastructure.

Globally, emergence of successful corporate business models is based on their ability to. ensure the appropriate level of efficiency and product! ssrvtce lnnovation. As we look at the performance of lndian companies in food in select 'categod'Els (Wheat dairy. poultry and fruits/ vegetables), we t"ilnd that 'SUC08S.S·f'U~ i mtiatlves have. been eharactensec by reasonable levels, Df performance on either the effidency or innovatlon axes, The efficf8rul sectors have been characterised by signiificard increases hi yield, decrease in prices ana capture of share from unorqanlsed players This- has been true for poultry, especially in the South, and for pans of dairy" driven by sel's'ct co-operatives. HOwever, fora Iarqe number of sectors, due to lack of corporate tnltlatlve or unfavourable regulatm~r:e.nvilronment91 issues, companies have not been able to create sustainable business models.

C 11- McKinsey

111 .aHa, the inability to indy integrate -the value chain due to regulations, arid in horticult.ure, tbe combination of lack. or source access and p-oor infrastwctl,lf:e (cold ch-a.in~) has prevented siqnitlcant progress .. Further, prrJduG1; innovation has been limited to the niche product areas, where smaH but profltab.le businesses have been created

Going . forward, b,esi,des the core opportunities created by a market IIk,e India In terms of Its size, fragmentation i lack of value-addition' and ,inefficiem::y, four emerging trends will further 'shape the opportunity. These h1Glude the emergence of organised retail, an increased consumer desire 'for convenience and value-addition, alii increased acceptance of hl.di.a as a globa.l sourcing base and a continued trend in the. government towards deregulation of the sector,

Given th~s context, Wfl, seeflve key :oppmtul1'itiesemerging in the Indian market reqllirlng targeted strategi'e$ with strong focus on achieving the right balance of efficiency and innovation:

'. Mass-market basic foods will continue to be the largest area and will require companies to ensure distInctive effi.dency across their business system to reduce inefficiencies. and compete wit.h the low-cost unorqamsedsector

0; A mass-market value-added food opp'OrtunIty is beginning to emerge. in products like rotis, reaoy-to-ccck/ eat products and Condiments. Given their mass 'ccneumpnon nature, product. mnovation needs to be backed by B. hIghly effiGisl1t. business system to' succeed

.' Nir::he market opportunities in more. exotic product categories wil! .continue to exist end proV,ide reasonable profitability! but will' require tallorhl'g ot the product mix to local tastes to gain acceptance

.. Exports of food products cam become Ell va!uabl.e.growth driver for the industry, leveraging the hJstotic- basel new specialty categories and other areas when;) India can b.Llik:l a dj,stinotive. advantage arid a strong brand

It Finally, there: will be" -sigl1ificsnt gro~tth In terms of input providers, logistiCS suppliers and retail

As we, assess the chajllengl8s and their implicatlonsac:ross these five opportunity areas; Indian companies: need to focus their efforts on four things. First, they should creats mark.et driven linkage-sacross the entire chain, The key succeesJactor is achieving integra;tioJ1 through partnrership$ and vi,rtual linkages, rather than do-lt-alone or build new Infrastructure. Second, companies shou.ld deveiop lnnovative products driven off consumer insights. These products will have to- deliver both quality and convenience, ,at the right price, Third'" companles should devt?lop .. 6 tow-cost business system to acquire pricing fle'.x;ibil.,ity and compete w,ith a very strong' unorganis,ed sector, A distrl'buted, a$set~.light manu'fi:J;c:turing model and an innovative distribution system are essentlat elernsnts of t.his system. Fourth" companies should work together to shape regu~aUon" much Hkea Nass-com has done :in ,IT services.

FAlDA Revis:itsd - R€hfilir<Sfng thG! potentraJ

CII- McKinsey

'Whih:!; the direction and potentlal are clear, the pace of chang,e. towards n:!Hlising tlhlis potentia! is uncertaln, In order to acceterate the. pace of change, the qovernrnent should enable direct access to agricultural produce" create a level playing 'fi,e!<i:1 through tax reform and a revlsed food law~ push ~gl'o\i\l1:h -of key enablers such as retail, reduce market interfererioe and proactlvely fa ei hiate i r1l d ILIstry ~,ni tta ti ve s 'C111 d expo rts.

We,· firm:ly believe that both government and corporate initiatives can be lmplemented. The integra.t'ed action will bring about benefit to all - greater returns and lower risk for the f,(3llmer" improved quality and variety at lower price to the consumer, new and profitable business opportunlties for industry and empiloyment creation and demand growth torthe country, Then there wi'll 'truly be 'F,AIDA' for all~"