Most could easily dismiss this commodity-plus, region-specific company worth around Rs 100 crore, which sells varieties of pulses under the brand name Jeyyam, but there’s a story here. That innovative valueadds and small scale food businesses have a chance of making it big.
Given the context, it’s not surprising that small businessmen such as Sandeep Gogia, owner of The Fresh Produce Shoppe in Gurgaon that sells imported fruits and processed food and grocery brands, is considering private equity to fund his expansion plan. He’s got two outlets and is planning to open 10 more in the same region.
|Size does matter|
How much are these segments worth?
|Food (value added)||2,42,200|
|Total Market Size||10,86,800|
|Source: YES Bank |
Figures in Rs crore
+ such as wheat flour and rice
Fuelling this interest are the changes in the industry’s fundamentals. For one, the news of excise duty reduction in food processing and the reduction in customs duty on the import of machinery required for the industry have enthused investors.
For another, the economy— never mind the stock markets—is still humming along nicely, and that’s virtually pushing entrepreneurs to scale up operations to meet demand. “We estimate that the investment requirement for the food supply chain will be $30 billion through to 2015,” says Sonal Shah, CEO, YES Food & Agri-business India Fund.The economic progress is evident in the value addition to food that is taking place. Kalyan Chakravarthy, Country Head (Food and Agri Strategic Advisory Research), YES Bank, says: “Research has proved that irrespective of whether they are urban or rural consumers, as the per capita income increases above $2 per day, people start eating meat and when it crosses $10, they start consuming processed food.”
Big food investments
Investors are looking at opportunities across the food chain. Here are some of the deals:
Today, the total food processing market accounts for 32 per cent of the total food market. The advent of organised retail will lend a hand too. According to Gurgaon-based consulting firm, Technopak, the organised food and grocery segment is worth $1 billion and represents just 0.6 per cent of total food sales.
That means there’s plenty of room for growth. “Modern retails formats are a big positive as they offer an environment where new players have a chance to ride on them and offer products that fill need gaps,” says Avnish Bajaj, Co-founder & MD, Matrix Partners India.
But there are challenges. “Manufacturers have to identify the right need-gaps and product differentiation that have a pull,” he adds. “They then must create the distribution network, which should precede any brand-building activity.”
Also, according to another private equity fund head, most investors in the FMCG/branded food business need to understand that companies here face a genuine challenge in growing the scale of their business beyond a certain size and geography to achieve critical mass. “Players in this space have to first build ‘brand-ability’ and then think of investing huge sums on advertising and marketing to push their market size,” he says.
While it’s not entirely a bad thing for a company to continue being a regional player or make moderate gains, the investor will always want introduction of more progressive ways and considerable expansion in market reach, and therefore, consumption. Added to this, investors will have to necessarily look at a long window on investment of at least eight years.
Hence, it’s not surprising that most of the investors are looking first at specific areas in the value chain. “I see the supply chain side of the mechanics attracting funds. That’s the hard part of infrastructure that needs to be coming in. Also, deliveries of infrastructure is exciting to a fund manager,” says Harish Bijoor of Harish Bijoor Consults. To be sure, the country’s third-party logistics is set for explosive organic growth.
The current market is valued at over $90 billion. This is set to grow to $125 billion by 2010, according to Datamonitor report. At another end, the cold chain industry, currently estimated to have annual revenues of $2 billion, is set to boom, although it is already growing at 20 per cent a year. In fact, the market expects $300-billion worth of investments to flow into food infrastructure.
And it’s not private equity alone that’s driving the gravy train. Many food transnationals and Indian companies are driving the change as well (see Big Food Investments).
Even as players are looking to set up shop in India, companies here are acquiring business in the segment internationally to add to the value chain. “You will witness many companies of unconventional origin wanting to come in,” predicts Bijoor. Let’s hope he’s right.