September 2014

CRISIL Insight

In Food & Beverages, Tier-2 players rising fast

CRISIL Insight

Analytical Contacts
Anuj Sethi
Director, CRISIL Ratings
Email: anuj.sethi@crisil.com

V. Bharath Kumar
Associate Director, CRISIL Ratings
Email: bharathkumar.v@crisil.com

Sai Hari BS
Associate Director, CRISIL Ratings
Email: sai.hari@crisil.com

Abhishek Anand
Rating Analyst, CRISIL Ratings
Email: abhishek.anand@crisil.com

In Food & Beverages, Tier-2 players rising fast

Small players to control 40% of the fastest growing FMCG segment by 2019
In the last six years, Tier-2 FMCG players have increased their share in the domestic Food & Beverages (F&B)
market to 30% from 20%, and grown at nearly twice the pace of Tier-1 players.
This is significant, given that:

F&B is a vast market. At Rs 1.2 trillion, it is over 50% of the FMCG market

These smaller, mostly regional, players have outgrown the high & mighty, including Nestle, ITC &
Britannia

This phenomenon has been witnessed only in the F&B segment. In personal care and home care
segments, Tier-1 players have fared better by and large
CRISIL has analysed about 125 FMCG players in F&B, including over 100 who make up two-thirds of the Tier-2
bucket. Based on this study, we forecast that the bucket will sustain strong growth in the next five years, leading
to a further increase in their share to 40%.1

Increasing share of Tier 2 in the fast growing F&B pie

2019
2014
2008

20%

CAGR
Tier 1: 16%
Tier 2: 28%

CAGR
Tier 1: 13% - 15%
Tier 2: 22% - 25%

30%

Tier 1

40%

Tier 2

While positive catalysts will continue on the business side, the key challenge for the Tier-2 band will be funding.
We estimate they will require at least Rs 160180 billion more for achieving this target.

1
For the purpose of this study, the 18 players classified as Tier-1 are large corporates with national presence/brands (includes ITC, Nestle, Britannia, Coke and
Parle), and currently account for 70% of total F&B market.
Rest of the market represents Tier-2, comprising mostly regional, smaller players present in fewer product categories.

CRISIL Insight

F&Bs big, but penetration is low

How the three broad categories in the Rs.2.2 trillion domestic FMCG market stack up

Penetration
levels

Share in the
FMCG market

CAGR
(2008-2014)

High

Home care

Medium

Personal care

F&B

Low

0%

10%

20%

30%

40%

50%

0%

60%

5%

10%

15%

20%

25%

F&Bs CAGR is over 1.5x that of other segments. As a result, F&Bs share in the total FMCG pie has increased to
54% from 45% in 2008.
The main reasons F&B is outperforming other segments:
Sheer size of the opportunity: While India ranks among the largest food producers in the world, its share in

the processed food industry is minuscule. So much so, the untapped opportunity in F&B is almost three
times that of personal care and manifold times that of home care
Shift to branded products: Consumers are increasingly becoming more brand and health conscious.
Industry experts note that even traditionally unbranded segments like staples (say edible oil/ flour) are
crossing over to the branded side

Now the interesting part: Tier-2 the main act in F&B

...hence the increase in Tier-2s market share

30%

60%

25%

50%
Tier 2's market share

6-year CAGR

Tier-2 has outgrown others only in the F&B segment

20%
15%
10%

30%
20%
10%

5%

0%

0%
F&B

Personal care
Tier-1

40%

Tier-2

Home care
Market

F&B

Personal care
2008

Home care
2014

Where Tier-2 players have made their mark

Break-up of the overall F&B pie

Biscuits

1%

Dairy value-adds

4%
4%

Edible Oil
19%

9%

Snacks, Bakery, Ready to Eat (SBR)

Soft Drinks

8%
14%

Tea/Coffee

13%

Chocolates & Confectionary (C&C)

14%
Branded flour

14%

Pickles, Condiments, Sauces & Jams (PCSJ)

Fruit Juices

and where Tier-2 players have grown

Six-year CAGR
40%

35%

30%

25%

20%

15%

Segment-wise share
10%

5%

0%

0%

10%

20%

30%

40%

50%

60%

70%

C&C
Fruit juices
Soft drinks
PCSJ
Biscuits
Dairy value-adds
SBR
Branded flour
Edible oil
Tea/Coffee

CRISIL Insight

Some magic ingredients

Examples of success stories of Tier-2 players

Gujarat Tea Processors and Packers Ltd

Brand: Wagh Bakri
2013 sales:Rs.7.3bn CAGR: >20%

Wagh Bakri Tea addressed the taste

preferences of consumers in Gujarat

Made it difficult for competition to penetrate

into that region

Aachi Masala Foods Pvt Ltd
Brand: Aachi Masala
2013 sales: Rs.5.8 bn CAGR: ~25%

Offers region-specific spices in TN, the

countrys biggest market for masalas

Getting the
regional taste
Kali Aerated Water Works
Pvt. Ltd
Brands: Bovonto
2013 sales: Rs.1.3 bn (est)
CAGR: >20%

DFM Foods Ltd

Brands: CRAX
2013 sales: Rs.2.3 bn
CAGR: >30%

Indigenous soft drinks

Pioneered

since 1916
Retained consumer

loyalty despite market

domination by Pepsi &
Coke

packaged snacksintroduced its

CRAX corn rings
in the 80s

Havmor Ice Cream Ltd

Brands: Havmors
2013 sales: Rs.2.2 bn
CAGR: >30%

Being an
early bird

Key Success
Factors

Building
a strong
network

Expanded distribution From being a single

to multiple outlets
across Gujarat,
Rajasthan, and
Maharashtra

Being
innovative

Hector Beverages Pvt Ltd

Brands: Tzinga, Paper Boat
2013 sales: < Rs.1 bn (est)
CAGR: >30%

Offered multiple flavours in a largely single-flavour energy-

drink category
Packaged and branded traditional un-branded drinks like

jaljeera, aam-panna, kalakhatta, and kokum

Innovated on packaging to offer affordable prices for consumers

Mapro Foods Pvt Ltd

Brands: Mapro
2013 sales: Rs.1.2 bn
CAGR: >35%

Offered juices with additional fruit content and jelly sweets with

new fruit-based flavours

Anmol Biscuits Ltd

Brands: Anmol
2013 sales: Rs.4.2 bn
CAGR: ~30%
location player,
Anmol now has a
wide network
covering ~3000
distributors and 6 lac
retailers across
North and East India

The ad-spend conundrum: Push versus pull

The operating model of Tier-1 players is quite different from that of Tier-2 players. Large players operate on a
model of high ad spend and low distributor margins, while it is the reverse for Tier-2 players. The latter model
seems to be working well incrementally for food categories, especially in smaller towns & cities (as these are
relatively more brand-agnostic markets).

Acquisitions by Tier-1 are fewer in F&B

In personal care, acquisitions add new sub-categories/extensions to the product portfolio of Tier-1
players. A smaller player thus becomes an attractive target for acquisition by a Tier-1 player who could
look at taking the brand national
But in F&B, Tier-1 players might not be interested to acquire a regional F&B brand that does not have
significant scale
F&B offers the lowest margins among all FMCG categories; margins for Tier-2 players in F&B are still
lower (see below). This does not allow much headroom for brand-building
Average operating margin by segment

Tier-1

Tier-2

F&B
Personal care
Home care

10.5%
19.4%
12.0%

7.9%
10.9%
10.8%

Not surprisingly, over the last decade, acquisitions by Tier-1 players in the domestic FMCG market have
been primarily in the personal and home care segments (Femcare by Dabur, Zandu by Emami, Paras by
Reckitt/Marico, Henkel by Jyothi). Very few local F&B companies have been acquired

The way forward

The positive conditions that contributed to Tier-2 players growth in the past were of a structural nature. This can
also attract several new entrants. We therefore estimate that this bucket is likely to continue growing at least 7580% faster than Tier-1 going forward, provided the players secure the necessary capital.
FMCG has traditionally been considered a business that runs on negative working capital. However, CRISILs
study found that this is true largely for the Tier-1 bucket. In fact, Tier-2 players appear to provide more credit to
distributors, and receive lower credit from their suppliers low scale clips their bargaining position. Further, the
proportion of contract manufacturing is also relatively low, adding to their working capital intensity.
The challenge in funding is evidenced by the fact that Tier-2 players have met about 60% of their requirements
during the last six years through debt which provides them limited headroom to leverage further. This is despite
the fact that these players have been able to attract some PE funding, too 16 out of 22 PE deals analysed by
CRISIL were in Tier-2 F&Bs.

CRISIL Insight

Working capital cycle

Transition in working capital cycle

Tier-1 versus Tier-2

Effect of scale

60

Small
Players

Tier 1

Tier 2

-20
-40
-60

Positive

Rs.7
10 bn
Negative

Days

20

Working Capital Cycle

40

-80

Inventory

Receivables

Payables

Large
Players

Net working capital

So, how much will be needed to fund this estimated pace of growth?
We estimate that capital intensity will reduce 30-40% from current levels as the players pick up scale. Our study
indicates that, exceptions aside, working capital cycle turns negative once players reach a scale of Rs 7-10
billion.
The Tier-2 bucket will, therefore, require about Rs 160-180 billion more to touch projected revenues of Rs 1.1
trillion by 2019. This compares with their current size of around Rs 370 billion funded by capital employed of Rs
125 billion.

Note: Sources used - CRISIL estimates, company reports, industry participants

Top 20 FMCG players rated by CRISIL (by revenue size)

Company

Sl. No.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

ITC Ltd
Hindustan Unilever Ltd
Nestle India Ltd
Dabur India Ltd
Britannia Industries Ltd
Marico Ltd
Nirma Ltd
Mondelez India Foods Ltd
RSPL Ltd
CavinKare Pvt Ltd
Agro Tech Foods Ltd
Mrs.Bectors Food Specialities Ltd
Ravi Foods Pvt Ltd
Fena (P) Ltd
Anmol Bakers Pvt Ltd
Karnataka Soaps & Detergents Ltd
Laxmi Snacks Pvt Ltd
Gopal Snacks Pvt Ltd
Harvest Gold Industries Pvt Ltd
Sona Biscuits Ltd

HC: Home care

Revenue
(Rs. Billion)
357.2
292.6
91.0
70.7
68.9
46.9
42.8
40.5
31.4
11.7
7.6
6.2
5.4
3.5
3.0
2.6
2.3
2.1
2.0
1.5

Segments
present in

Rating

F&B, PC
HC, F&B, PC
F&B
F&B, PC, HC
F&B
PC, F&B
HC
F&B
HC
PC, F&B
F&B
F&B
F&B
HC, PC
F&B
HC, PC
F&B
F&B
F&B
F&B

CRISIL AAA/Stable/ CRISIL A1+

CRISIL AAA/Stable/ CRISIL A1+
CRISIL AAA/Stable/ CRISIL A1+
CRISIL AAA/Stable/ CRISIL A1+
CRISIL AAA/Stable/ CRISIL A1+
CRISIL AA+/Stable/ CRISIL A1+
CRISIL AA/Stable/ CRISIL A1+
CRISIL AAA/Stable/ CRISIL A1+
CRISIL AA-/Stable/ CRISIL A1+
CRISIL A/Stable/ CRISIL A1
CRISIL A+/Stable/ CRISIL A1+
CRISIL A/Stable/ CRISIL A1
CRISIL A-/Stable/ CRISIL A2+
CRISIL A-/Stable/ CRISIL A2+
CRISIL BBB+/Stable/ CRISIL A2
CRISIL A/Stable/ CRISIL A1
CRISIL BBB+/Stable
CRISIL BBB/Stable/ CRISIL A3+
CRISIL BBB/Stable
CRISIL BBB-/Stable/ CRISIL A3

PC: Personal care

CRISIL Insight

Note

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CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are
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Last updated: August 2014

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