FOOD AND BEVEGERAGE INDUSTRY

Food and Beverage: Background

The food and beverage industry is composed of companies involved in processing raw food
materials and manufacturing, packaging, or distributing food or drink - the steps in food
production after harvest and before retail purchase. In the food industry, the dairy sector is
the largest, followed by baked and cereal items, and chilled foods. The beverage segment is
composed of alcoholic and nonalcoholic beverages. For alcoholic beverages, beer, cider, and
other flavored alcoholic beverages make up the bulk of the market, followed by wine and
spirits. In the nonalcoholic segment, soft drinks far outsell coffee, tea, juice and water. The
food and beverages industry is considered a mature industry; it is very competitive and relies
strongly on advertising to promote brand names.

The food and beverage industry used to be considered the production of food, which we now
distinguish agriculture as a separate industry. Now, the industry is much more focused on
technology and mechanical manipulation of raw foods to create more value-added food
products. Reliance on transport has increased as the industry has developed to be more global
in nature, with most food products being offered by a handful of globe-spanning
corporations.

History:
In the late 18th and early 19th centuries, the Industrial Revolution contributed largely to the
production and distribution of food and beverage. The results were the ability to mass
produce food products at a lower cost and improved transportation, such as railroads and
barges, enabled many food products to be enjoyed in regions where food cannot be grown.

During wartime, the food and beverage industry shifted, as food is often a precious
commodity. Prices were determined by availability and regulation. After World War I, the
U.S. federal government established the U.S. Food Administration to regulate the contents of
domestically produced food. Most countries involved in World War II rationed food and
regulated prices in order to stabilize the economy.

After World War II the food and beverage industry began branding products through
advertising to increase popularity. In many instances, product advertising costs more than the
cost of production, and branding is partially responsible for the emergence of radio and
television. The Cola Wars, a campaign of mutually-targeted television advertisements and
marketing campaigns between soft drink manufacturers The Coca-Cola Company and
PepsiCo, was one example of extensive advertising.

In the 1950s and 1960s, the concept of franchised restaurants was promoted. This enabled
franchisers to expand with limited capital investment. One such franchise is McDonalds,
currently the world’s largest chain of fast food restaurants. Since the 1980s there were many
mergers and acquisitions of food and beverage companies. This trend continues today, with
many companies actively buying and selling brands. Some of the industry’s biggest growth
spurts have come from mega-mergers between food industry giants. For example, Kraft
Foods and Nabisco, and General Mills and Pillsbury were two major mergers.

India's Food and Beverage industry is valued at Rs. 3584 billion. India produces above 600
million tonnes of food products every year and is one of the major producers of food in the
world.

The food and beverage industry registered a growth rate of 8.5% in 2005-06. According to
Mckinsey's report, the total beverage consumption will grow at 9% over the next 20 years. Of
which, alcoholic beverage and non-alcoholic beverage will see a spurt of 9.6% and 8.8%
respectively.

Leaders:
In the food and beverages industry, diversification, whether into many different types of food
or beverage or into different preparations, has been shown to be key to ensuring future
growth. Nestle, the largest food and beverage company in the world, Unilever and Kraft
Foods have all diversified well and performed well, becoming leaders in their market. The
nonalcoholic beverage segment is led by Coca-Cola, with PepsiCo and Cadbury Schweppes
following;

The key players currently operating in the Indian food and beverages industry including
Dabur India Limited, Godrej Industries Limited, Hindustan Lever Limited, Britannia
Industries Limited, ITC Limited, Nestle` SA, PepsiCo, Inc., Cadbury Schweppes PLC,
Future Group, RPG Enterprise and Godrej Agrovet Limited.

Trends:
Recently, companies have spent a lot of money researching consumers eating habits and
preferences. Statistics show that more people are dining out, and food producers are finding
themselves devoting more attention to products designed for restaurants, vending machines,
and other foodservice providers. Although this is bad news for grocery retailers, food makers
realize food eaten away from home is still food they can provide, many times at higher
margins.

Another trend in the industry has been the development of health foods, such as those
containing less trans-fat or fewer calories, or those containing only organic ingredients.
Bottled water has become well established in the market as many beverage companies, and
enhanced waters containing vitamins or supplements are gaining popularity. Energy drinks,
such as Red Bull, have also burst forth onto the scene;

Rising costs have become an issue in the food and beverage industry, as the rising costs of
petroleum cause a twofold increase in cost for companies in the food industry: costs have
increased at the agriculture end, which increases raw materials costs for food processors who
also deal with increased production and transportation costs at their end. Since the industry is
so competitive, it is difficult for these companies to raise their prices accordingly and profit
margins have suffered as a result.
Quality control and assurance are vital to this industry. Food safety programs have been
adopted recently as issues of chemical and bacterial contamination and new food-borne
pathogens remain a public health concern.

Challenges in the Food and Beverage sector

• Poor infrastructure
• Lack of adequate facilities for storage, transportation, and cold chain facilities
• No common food law (13 laws are enforced by 9 ministries)
• Food standards are confusing and contradictory

 High cost of raw material and packing material and high railway freight put pressures on
margins
 Different rules and regulations and licensing are defined for different commodities

Growth Prospects

With increase in disposable income of consumers, growing awareness among consumers

about health products, rapid urbanization, and increasing popularity of convenience foods,
food and beverage sector is expected to grow at a high rate. This sector holds a huge potential
to grow because of the increase in advertisement spending, awareness campaign about
products in urban as well as rural areas, and large scale transformation.

India's Food and Beverage industry is valued at Rs. 3584 billion. India produces above 600
million tonnes of food products every year and is one of the major Producers of food in the
world.
The food and beverage industry registered a growth rate of 8.5% in 2005-06. According to
Mckinsey's report, the total beverage consumption will grow at 9% over the next 20 years. Of
which, alcoholic beverage and non-alcoholic beverage will see a spurt of 9.6% and 8.8%
respectively.

Future Outlook
RNCOS "Indian Food and Beverages Forecast (2007-2011)” report gives an in-depth
analysis of the present and future prospects of the Indian food and beverages industry. It
looks into the industry in detail with foci on organized food retailing, consumer food
purchasing behavior, food processing industry and packed/convenience food industry. This
report helps clients to analyze the factors and examine the opportunities critical to the success
of food and beverages industry in India.

Key Findings
- Supermarket sales will expand at a much higher rate than other retail formats. This
is because greater number of
higher income Indians will prefer to shop at supermarkets because of convenience,
higher standards of hygiene,
and attractive ambience.
- It is expected that fruit consumption will increase at a CAGR of 4.33% for the
period spanning from 2007-2011,
highest among all the food products taken in this report.
- The processed-food market is the main focus for foreign companies as this segment
is underdeveloped and
presents enormous potential for growth. The growth of modern, organized retailing —
in contrast to the
kiosks and small shops from which Indians have been purchasing food traditionally —
will also increase the
demand for value-added foods.
- Rising household incomes, increasing urbanization, changing lifestyles and the
rapid growth of the private-sector
and dairy-processing industry should lead to greater demand for value-added, milk-
based products, such as
processed cheese, table butter and ice cream.
- Rising incomes will make fish more affordable for a larger segment of the population.
It is expected that the
consumption per head will increase at a CAGR of 3.45% for the forecasted period.
 - The growth rate of soft drink sales will decelerate during the forecasted period due
to pesticide contamination issues
and growing popularity of fruit juice drinks and bottled water.
- Coffee consumption is likely to expand at a rapid rate during the forecasted period. It is
expected that it will increase
at a CAGR of 10.05% for the period spanning from 2007-2011.
- Consumer expenditure on food, beverages in India is forecasted to grow at a CAGR of
12.2% during 2007 to 2011.
- The rapidly developing and full of potential processed food market will attract foreign
companies.
- Fast-food outlets appear to be taking market share from street hawkers as consumer
purchasing trends are turning more westernized.
- Consumption of soft drinks expanded at an average annual rate of11% by volume
during 2002 to 2006, and this is forecast to accelerate only slightly to 12% during 2007 to
2011.
- Production of branded snack food is estimated to be growing at an annual rate of 20% in
coming 2-3 years, albeit it has a small base of consumers.
- Being the world's largest market for whisky, India will remain major global spirits
market in the coming 3-4 years.