The Food & Beverage industry is one of the well established service industry in India. It has registered unprecedented growth in recent years and is expanding continuously owing to change in demographics, urbanisation, rise in disposable income and growth of retail industry. The Indian food & Beverage industry had a value of USD 33.22 billion in 2020 and it stood at USD 156.25 billion by 2026. The CAGR value of this sector was registered as 29.88% during the forecast period between 2021-2026. Due to increased demand for packaged food and requirement for quality products, there has been a sustainable rise of the F&B sector.
The global Food and beverage industry stood at a value of USD 5,943 billion in 2019 and is expected to grow at a CAGR of 6.1% from 2019 and reach USD 7525.7 billion in 2023. It is expected that by 2025 the market will reach USD 8639 billion and it will reach around USD 11980 billion by 2030.
The rapid growth of this sector can be attributed to following parameters:
I. Higher ratio of agriculture sector in India
II. Rising consumption culture
III. High percentage of young and working population with rising disposable income IV. Favourable macroeconomic conditions
V. Cost competitiveness
VI. Abundant livestock, India is emerging as a sourcing hub for processed food at a
rapid pace.
Availability of organised retail space has also helped the industry to encourage the growth of local and international brands across different formats. The impact of this segment on the entire ecosystem is significant from the initial stage of launching a food variant or setting up a restaurant to setting up the entire supply chain.
The Indian food service sector has witnessed several changes with evolving and varying consumer landscape, increasing food tech models and marketing through social media platforms. These trends will continue shaping the food service sector of India.
According to a report provided by the Confederation of Indian Industry (CII) and Grant Thornton, it is estimated that by 2025 India will become the world’s fifth- largest consumer market. Food and beverage segment is the largest in the consumption category . The vast agriculture sector of India is one of the major contributing factor for the food and beverage sector. India is the world’s largest producer of pulses and the world’s second-largest producer of rice, wheat, sugarcane, and fruits and vegetables. It is also the world’s largest producer of milk and buffalo meat, as well as the fifth-largest producer of poultry. Other factors contributing F&B sector include vast areas of arable land, a pleasant climate, a long coastline, and low wages. The total number of registered food and beverage manufacturing enterprises in India remained consistent from the year 2018 to 2020 with slight changes in their numbers.
As per reports of march 2021, the total revenue generated from the food and beverage industry in India significantly increased from 75,046 (100 crore INR) to 119,949 (100 crore INR).
The organised food services industry in India started to take off in early nineties when many home grown brands like Nirula’s, Udupi, Sagar Ratna, Haldliram’s started building their presence, mostly regionally to begin with. It picked up momentum in late nineties with entry of some of the marquee international brands like McDonald’s, Domino’s, Pizza Hut, KFC, Subway. The next phase started in the new millennium when café chains (like of Café Coffee Day, Barista, Costa) started to take off. After 2005, this sector caught the fancy of venture capital and private equity (VCPE) investors. The VCPE investors attracted by huge potential for growth and consolidation have invested in over 50 deals since then in the sector.
The last three years have been most fascinating which further accelerated the growth momentum – with lines blurring between food retail, packaged food, food delivery and food services. Food services+ delivery is clearly taking share away from food retail.
India now has over 50 home-grown restaurant chains, most of them concentrated in certain regions. In addition, there are about 20 international chains which are either already pan India or aspiring to be pan India. In this e-comm era, we are witnessing the emergence of restaurant rating / food ordering platforms with likes of Zomato, Foodpanda, Swiggy taking off. The last phase of evolution has been “made-to-order food at your doorsteps” models with likes of holachef, frsh delivering chef-cooked and pre-booked food and beverages.
What these disruptive changes mean for the consumers, vendors, entrepreneurs and investors in the agricultural and food supply chain?
For consumers, he has the maximum choice in what / when /where to eat. For vendors (mostly SMEs), it has opened floodgate of opportunities to work closely with food services firms in developing new products/ recipes / ingredients / logistical solutions . Most vendors now have in-house teams dedicated to Horeca segment. For entrepreneurs, the innovation and execution is getting rewarded by customers and funded by investors. Most food services brands are going omni-channel which include home delivery, web-ordering, tie-up with rating / ordering / cab aggregators etc to serve the end customer. I am sure omni-channel strategy will improve the economics because cost of delivery is usually less than the rental cost. The increase in share of offsite sales would improve margins. The changes driven by new-age online delivery models are forcing even offline – conventional restaurant chains – to rethink their strategy.
For investors, there are many emerging choices to invest in early-stage food services companies. However, there is increased obsolesce risk than ever before. There is a chance that what the investors are investing today can become obsolete by the time they plan to exit. In such situations, how should investors decide to invest or not to invest in a brand? The answer lies in looking at fundamentals:
Focus on backend and developing linkages with food / agricultural supply chain
Central kitchen, vendor development and product development is at the heart of any food services brand. It allows the brand to scale faster and saves cost to the extent of 15-20% of sales. This will continue to remain at the core of any successful food services model. In this context, investors should note that while the pure-play front-ended online ordering sites are easier to replicate, it is difficult and time-consuming to develop a business model with strong linkages in the agricultural supply chain. Robust back-ended models have more entry barriers than the front-ended models. There are food services companies who have backward integrated till the farm level sourcing staples, vegetables, spices, herbs and fruits from farmers. There are many farm aggregators who have developed their farm linkages, storage and logistics to cater exclusively to food services.
Unit economics and location: Managing a chain of restaurant is no different than managing a portfolio of stocks. If 30% of stocks are making losses, then there is good chance of portfolio making losses at an aggregate level. Likewise, if 30% of restaurants are making losses, there is a good chance of the brand making losses at the corporate level.
The brand’s ability to quickly exit loss making locations is key to sustainability. In this context, online ordering channels helps to hedge the risk of making wrong location choices. Dominos has demonstrated the irrelevance of locations by focusing entirely on home delivery.
Integrated supply chain is also key to capture supply chain margins. Businesses with supply chain integration can have gross margins as much as 60-70%.
Scalability: Though most brands focus on multiplying number of stores to build scale right from the beginning, the brands with long-term vision first focus on building supply chain for all key ingredients including flour, staples, spices, condiments, vegetables, meat etc. McDonalds in India spent five years in India at the time of entry (1991) to build supply chain before opening first store (1996).
Scalability is also determined by brand’s ability to go multi-format, omni-channel and adapt to different locations – high street, malls, corporate campuses, college canteens, format and potential for franchising. This in turn is a function of standardisation quotient of menu and process orientation in delivery to provide consistent experience across locations and channels. Recruiting, retaining and training manpower is also part and parcel of scalable models.
Though, scalability is key to create value, both investors and entrepreneurs must avoid “scalability at any cost”. The e-tail models in India who seem to be solely driven by scale (in quest for higher valuations) have spoilt margin discipline in other industries including food services. Many entrepreneurs justify short term losses in pursuit of scale, which investors should evaluate with caution
FAQs
What are the 3 problems with our food industry?
Food losses, food crises, and food safety are the main problems that are faced by the food industry.
Why is the food industry struggling?
- Rising labor cost
- Inflation
- Unsustainable agricultural practices
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