Biscuits, snacks and ready-to-cook meals are flying off the shelves in India, as busy consumers buy into the promise of convenience and hygiene. Where once housewives toiled for hours in the kitchen making traditional fare, urban consumers are now spoilt for choice in a growing economy that has boosted incomes. India's market for processed food is worth some $105 billion a year, about 53 percent of the overall food market, says research from investment bank Rabo India, a food sector specialist.
So far served mostly by local brands through neighbourhood grocers, the market is now attracting big firms. They hope rising incomes and rapidly modernising retail can make pre-prepared food a growth engine.
So companies like Hindustan Lever Ltd, ITC Ltd, Godrej Industries Ltd and Dabur India, which have traditionally pushed non-food items, are focusing on products from iced tea to ready-to-eat meals as the segment expands.
"Food products are the single largest item of consumer expenditure," said Sonal Shah, head of Rabo's food and agri-business strategy.
"With rising incomes, an increasing need for convenience and hygiene, and a shift in the demographic profile of the population, demand for processed foods will grow quickly."
Industry estimates peg the growth of processed foods - from packaged flour to pasta - at nearly 10 percent annually, with snacks and beverages growing even faster.
"Firms are facing plateauing growth in segments such as soaps and detergents, so they are forced to look at other segments," said Nikhil Garg, an analyst at Edelweiss Capital.
The Indian government has also helped by permitting foreign investment in food processing, and lowering import duties on refrigerated vans and on foods. The move has led to an explosion of foreign food labels in stores.
ITC, India's biggest cigarette maker, has recently added biscuits, conserves, cooking pastes, ready-to-eat dishes and pasta to its earlier menu of cooking oil and packaged flour.
Foods, which piggyback on ITC's large urban distribution network, make up only a small part of its consumer goods revenues. But that share has doubled in the last year and is expected to maintain the same pace of growth over the next few years.
"The share of the population that is able to afford processed and packaged foods is growing," said Ravi Naware, chief executive of ITC's foods division.
Lever, India's biggest consumer goods maker, gets more than 40 percent of its revenues from soaps and detergents, but the firm is serious about foods, which accounted for 16 percent of revenues in 2004, down by 1 percent from the previous year.
The unit of Anglo-Dutch Unilever Plc sells Brooke Bond tea, Wall's ice cream, Kissan jams and Knorr Annapurna soups and cooking aids. It has a small presence in the bakery industry and has tied up with PepsiCo to sell iced tea.
Hair care maker Dabur recently said it would invest 100 million rupees ($2.3 million) in Dabur Foods, which makes juices, cooking pastes and soups, and aims to be a 2-billion rupee integrated food services company by 2006/07.
Last year, the foods division accounted for only 7 percent of Dabur's overall revenues, but it has been expanding at about 33 percent annually, compared to Dabur's 4 percent growth rate.
But the challenges are many: the unbranded segment is large, and firms have to compete not just with local stores, but also with street vendors.
Also, basic commodities such as oil and milk make up more than 60 percent of all processed foods sold, and while India is the world's largest producer of milk and the second-largest producer of fruit, only 6 percent of all perishables are processed.
The fragmented nature of the retail trade is another handicap. Food and food products are sold through over 5 million stores in India, mostly neighbourhood grocers and street vendors.
"Which is why firms like ITC are investing in logistics and taking control of the supply chain, through their procurement of wheat at the village level," said Garg at Edelweiss.
"Middlemen's margins are huge, between 15 and 60 percent, so companies have to find a way around that," he said.
There are also socio-cultural factors such as a preference for freshly cooked foods and the easy availability of cheap domestic help, said Rabo's Shah.
"The challenge is to make products that cannot easily be made at home, so the consumer is willing to pay a premium," said M.P. Pusalkar, executive director, Godrej Foods, a unit of Godrej Industries, which makes cooking oil, juices and soya products.
Even deep-pocketed food firms such as Kraft Foods and Kellogg have not had it easy, but Pepsi has scored with its potato chips and Kurkure, developed specially for India.
Pepsi's Frito-Lay snack unit has grown five times over the last four years, and has a 44 percent share of the branded salty snack market, the company estimates.
"As incomes rise, a consumer's expenditure on food will actually fall as she spends more on entertainment and health care," said Garg. "But the share of processed foods will grow."
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