While the economic slowdown is taking roots, it is feared that the food industry will show at least 2 percent lower growth in the domestic market. In that scenario, it is always better to target neighbouring markets. Rajat K Baisya advises Indian companies to look for newer markets to seek growth.
As per available indication and forecast, the Indian food industry will show at least 2 percent lower growth in the domestic market than the previous year. That is for the reason of the general recession in the economy where automotive and infrastructure sectors are facing negative growth compared to last year and both these two vital sectors’ performance is deterministic for the economic performance of the country as such.
The government is responding in installments which can be seen as knee jerk reactions. Post budget three times new proposals have been announced by the finance ministry. The last one is the reduction of corporate tax that will benefit corporations which are in the relatively higher tax bracket. Some multinational food companies will also benefit. The stock market had welcome that decision by responding positively and Sensex after fall in earlier weeks had sharply risen again.
The de-growth in the processed food sector is the result of lower consumption expenditure under a recessionary environment. To drive growth, consumers have to spend more money in the category. Primary food is essential, but processed food does not fall into that category and that can be considered as discretionary items which people eat for pleasure and fun. FMCG companies which include food companies have announced that the gain from lower corporate tax liability will be passed on to the consumers which otherwise would mean that prices will be lowered to drive consumption and growth. But it is doubtful how much impact on end selling price will have on the corporate tax rate cut. Let us take an example. If you look at the balance sheet of an MNC or large Indian food business like saying Britannia or Parle the bottom line post-tax profit will be about 7 to 8% of the gross sales revenue. Many of them are not even in higher tax bracket and for them, it will not impact. It is unlikely that this will make any difference to product pricing. The incremental profit, if any, will only be an indication of the category attractiveness which might influence investment decisions to some extent but not the pricing decisions. Under these circumstances, how our processed food industry can derive growth in business to deliver shareholders expectations?
If the domestic business is shrinking, there are only two ways business can grow. One, to acquire new businesses that large players might be resorting to and acquire smaller businesses. The other way to grow is to enter into new product categories and that can be possible also for large companies.
Large MNCs will explore both these possibilities because they cannot go to other countries. But Indian companies will have to look for newer markets. Some of our homegrown companies are exporting their products. They may not get that much impacted by the slowing down of domestic demand. But those who are not in export business, they will have to explore new territories. That exercise is also not very easy.
Traditional food sectors including spices, agricultural commodities etc. are not going to suffer much. Likewise, marine and dairy sector will also not get impacted much. But convenience foods, beverages and also confectionery etc. are going to face problems if they are not trying to reduce the end selling price to the consumers. However, the price can be reduced if manufacturers and marketers can derive the corresponding cost advantage. Otherwise, the lower price will eat into the profit and profit will come down and that will not be desirable.
In any case, homegrown domestic players in the processed food industry must eye the overseas market. And in that, it is always better to target first the neighbouring market. Bangladesh is a small country. But their economy is better. Their currency is standing now almost at the same level as Indian currency in comparison to USD. Bangladesh is building the economy through export. The food processing companies in Bangladesh are selling their products mostly in India and more particularly in North-eastern part of India. The popular brand of Bangladesh ‘Pran’ is selling beverages, chips, convenience foods and everyday truckloads of their products are crossing the Indian border. Some of that may not be through the official channel. In Bangladesh, the cost of labour is still lower than in India and that makes their products even more competitive.
Our SME sector can focus on the neighbouring countries as well as middle east countries routing through relatively stable Dubai, developed and also efficient market. Indian food processors should forge alliances with retailers in middle east countries and produce products for them to sell through those organised retail outlets.
Focusing on natural and organic products will be advantageous as the market acceptance is better – provided pricing is right. Organic sells, but not at a significantly higher price. Directly marketing any products from India in those countries is not an easy task. A local associate has to be there. To identify local partners it is always better to forge alliances through some referral. Of late, these trade shows and fairs and bilateral meetings are being organised by almost all trade bodies and everyone must be receiving such invitations. One can even follow those leads.
But my own experiences tell me that direct visits are always better than attending such trade fairs to meet your counterparts in other countries. Whatever may be the process but you need to identify a reliable partner or associates to work through. Trust and reliability are the key criteria in such associations. If you can identify such partners and also forge a good working relationship then it will give dividend in the long run.
It should be pointed out here is that a strong domestic presence helps in terms of forging overseas and global alliances. If reputation in domestic business is good then it helps in identifying equally good and reliable partners also abroad. For long term survival and growth, good presence in the overseas market provides more confidence and assurance.
For new players to enter the overseas market requires altogether a different entry strategy. New entrants in the food categories should use the distribution route and appoint a reliable and financially sound distributor in the overseas market, who also has some influence on the local trade and commerce. Identifying reliable and financially sound distributors who will be willing to invest in your products will not be very easy.
And even if you find them, they will demand their pound of flesh. Distributors in those countries don’t work with low margins and therefore, the products that you intend introducing in the middle-east market must have a very healthy margin which you can share with your distributors. Global trade should not be done on a credit basis to start with unless you are sure about the security and safety of the transaction. Credit sales can only be resorted to once established business relations are developed over a considerable period. To beat recession in the domestic market, look at the overseas market with an open mind to develop long term relationship and Dubai could be a good stepping stone for you.