India's Processed-Food Market Offers Challenges And Rewards

By:Rina Chandran
Reuters

Wednesday, March 19, 2008

MUMBAI: When Kellogg introduced breakfast cereal to India 14 years ago, it underestimated the tradition of cooked breakfasts.

The few customers for cornflakes ate them with hot milk, because until recently milk was rarely pasteurized in India, and they were disappointed by the soggy results.

Kellogg responded with an extensive advertising campaign and, to adapt to local tastes, introduced products like Basmati rice flakes and mango-flavored cereal. To entice customers, the companies also produced small packs that sold for 10 rupees, or 25 U.S. cents.

"It would be foolhardy for me to say Kellogg has replaced cooked breakfast," said Anupam Dutta, managing director of Kellogg India. "I don't think we can ever hope for that. But we've become a part of the consideration set for breakfast in many Indian homes, and that's a tipping point."

Getting a foothold in India's processed-food market, estimated to be worth $90 billion, requires persistence and a willingness to adapt products to food and cultural preferences, according to analysts.

Rising incomes, more working women, modern stores and greater culinary choices are helping such companies as PepsiCo, Nestlé, Unilever, McDonald's and Yum Brands get a piece of the market.

"Every company that wants a share has to invest heavily, localize extensively and be very patient," Jayanta Roy of the consulting company Frost & Sullivan said. It estimates that only one-third of the processed-food market is controlled by large Indian and multinational companies. The rest is held by regional companies.

Adaptation appears to be essential for success in the sector. PepsiCo, for example, has produced strong sales from ethnic salty snacks and sells aam panna, or green mango nectar, along with its colas.

Nestlé promoted Milkmaid, a condensed milk, as being ideal for traditional Indian sweets. But it had better results with Maggi noodles, a bold step in a country divided between eaters of rice and roti, a flat wheat bread.

Maggi soon became a staple in school lunch boxes, helped by masala, or mixed spices. Nestle recently introduced packaged yogurt, competing with another time-honored tradition, while Danone, along with the Japanese dairy-products maker Yakult Honsha, responded with yogurt probiotic drinks.

A few years ago, Indian and foreign companies struggled to sell packaged foods. But now it is much easier to break into the Indian market because of a younger population, higher incomes, new technologies and a growing middle class, estimated at 50 million households.

Hemant Kalbag of A.T. Kearney, a consulting company, estimates that processed foods will grow at 15 percent annually over the next four years. "We have a young population with higher disposable incomes, living away from the large joint families and seeking greater convenience," Kalbag said.

Dutta, the Kellogg India executive, agreed, saying, "The market's constantly evolving and creating demand for products that you never thought would have had a chance."

Large Indian companies are also seeking a larger share of the market. For example, ITC, India's largest cigarette maker, is broadening its range of instant ethnic foods and pasta, cookies and salty snacks.

"Increasingly, Indian consumption patterns are mirroring global trends such as a preference for protein and for functional foods," Pankaj Gupta of Tata Strategic Management Group said. "So companies can choose to go after the mass market or focus on niche segments which are also viable now."

McDonald's and Domino's Pizza are also adding more vegetarian and ethnic options. McDonald's, which is doubling its outlets in India to nearly 300 this year, does not sell beef products in the country. Half its menu is vegetarian, with popular offerings like the McAloo Tikki Burger, which is essentially a potato patty. It also has more sit-down restaurants for large Indian families and home delivery, a first. Domino's also has an eat-in option in several locations.

Indian companies are imitating these fast-food rivals to attract young customers. For instance, Jumbo King, an Indian fast-food chain, is mass producing vada pav, a spiced potato patty in a bun, using modified cookie-dough machines and temperature-controlled stoves.

"We wanted to give the vada pav a modern look," said Dheeraj Gupta, the head of Jumbo King, which also offers a whole-wheat option. "Our inspiration is clearly McDonald's and Subway."

Despite the opportunity, there are longstanding hurdles. Cumbersome tax rules give an advantage to smaller local companies. And the refrigerated system of transportation and storage is inadequate. Problems in this cold chain result in waste of nearly 40 percent of all fresh produce.

"We need stronger legislation on food safety, more robust supply chains and improvements in the cold chain," Kalbag of A.T. Kearney said.

The government and modern retailers are addressing these issues with new laws on packaging and labeling, as well as greater investment in the supply chain.