india food & drink 2014 q2 report

8/10/2019 India Food & Drink 2014 Q2 Report

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India Food & Drink Report Q2 2014INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMIs Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: February 2014

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CONTENTS

BMI Industry View ............................................................................................................... 7

SWOT .................................................................................................................................... 9

Food ....................................................................................................................................................... 9

Drink .. .. .. .. ............................................................................................................................................ 11

Mass Grocery Retail ........ ........ ................................................................................................................ 13

Industry Forecast .............................................................................................................. 15

Consumer Outlook ........ ........ ........ ......... ........ ........ ........ ......... ........ ........ ........ ......... ........ ........ ........ ........ 15

Food ..................................................................................................................................................... 17

Food Consumption ......... ........ ........ ........ ......... ........ ........ ........ ......... ........ ........ ........ ........ ......... ........ ..... 17Table: FoodConsumption Indicators - Historical Data & Forecasts, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Confectionery ........................................................................................................................................ 19

Table: Confectionery Value/Volume Sales - Historical Data & Forecasts, 2011-2018 .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Dairy .. .. .. ............................................................................................................................................. 20

Table: Dairy Volume Sales & Production - Historical Data & Forecasts, 2011-2018 .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 21

Snack Foods .......................................................................................................................................... 22

Table: Snack Foods Volume Sales - Historical Data & Forecasts, 2011-2018 .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Drink .. .. .. .. .. .......................................................................................................................................... 22

Hot Drinks ............................................................................................................................................ 22

Table: Hot Drinks Value/Volume Sales - Historical & Forecasts, 2011-2018 .. . . .. . . .. . . .. . .. . . .. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . 23

Alcoholic Drinks .................................................................................................................................... 23

Table: AlcoholicDrinks Value/Volume Sales - Historical Data & Forecasts, 2011-2018 .. . .. . . .. . . .. . .. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . 26

Soft Drinks ............................................................................................................................................ 27

Table: Soft Drinks Value/Volume Sales - Historical Data & Forecasts, 2011-2018 ............ . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . 28

Mass GroceryRetail .. .. ............................................................................................................................ 29

Table: MGR Sales By Format - Historical Data & Forecasts, 2011-2018 .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Trade .................................................................................................................................................... 31

Table: Food &Drink Trade Indicators - Historical Data & Forecasts, 2011-2018 .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Macroeconomic Forecast ................................................................................................ 32

Economic Analysis . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .............................................. 32

Table: India - Economic Activity . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . 37

Industry Risk Reward Ratings .......................................................................................... 38

Asia Pacific Risk/Reward Ratings .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 38

Table: Asia Pacific Food & Drink Risk/Reward Ratings Q214 .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Table: Asia Pacific Food & Drink Risk/Reward Sub-Factor Ratings Q214 (scores out of 10) .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 42

India Food & Drink Risk/Reward Ratings .................................................................................................... 43

Market Overview ............................................................................................................... 44

Food ..................................................................................................................................................... 44

India Food & Drink Report Q2 2014

Business Monitor International Page 4
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Food Processing ........ ........ ........ ........ ......... ........ ........ ........ ........ ......... ........ ........ ........ ......... ........ ........ . 44

Food Consumption ....... ......... ........ ........ ........ ......... ........ ........ ........ ........ ......... ........ ........ ........ ......... ...... 44

Confectionery ........ ........ ........ ........ ........ ......... ........ ........ ........ ......... ........ ........ ........ ......... ........ ........ ..... 45

Canned Food ........................................................................................................................................ 47

Trade ................................................................................................................................................... 47

Agriculture .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 47

Rice . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 48

Dairy .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 48

Drink .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 50

Soft Drinks............................................................................................................................................ 50

Hot Drinks . .. ......................................................................................................................................... 51

Alcoholic Drinks .................................................................................................................................... 53

Mass Grocery Retail .. .. .. .. .. .. .. .. .. .............................................................................................................. 58

Table: Structure Of India's Mass Grocery Retail Market By Estimated Number Of Outlets, 2005-2011 .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 61

Table: Structure Of India'sMass Grocery Retail Market - Sales By Format (US$mn), 2005-2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Table: Structure Of India's Mass Grocery Retail Market - Sales By Format (INRmn), 2005-2011 .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 62

Table: Grocery Retail Sales By Format (%) - Historical Data & Forecasts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Industry Trends And Developments ................................................................................ 63

Food ..................................................................................................................................................... 63

Key Industry Trends And Developments ...... ......... ........ ........ ........ ......... ........ ........ ........ ........ ......... ........ ..... 63

Drink .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 67

Key Industry Trends And Developments ...... ......... ........ ........ ........ ......... ........ ........ ........ ........ ......... ........ ..... 67

Mass Grocery Retail ........ ........ ................................................................................................................ 71

Key Industry Trends And Developments ...... .... ... .... .... ... ... ........................................................................... 71

Competitive Landscape .................................................................................................... 73

Table: Key Players In India's Food & Drink Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Table: Key Players In India's Mass Grocery Retail Sector . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . 74

Company Profile ................................................................................................................ 75

Hindustan Unilever Limited .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 75

Gujarat Co-operative Milk Marketing Federation ........ ........ ......... ........ ........ ........ ......... ........ ........ ........ ........ 78

Britannia .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 80

PepsiCo India ........ ......... ........ ........ ........ ......... ........ ........ ........ ......... ........ ........ ........ ........ ......... ........ ..... 83

United Breweries ..................................................................................................................................... 86

Coca-Cola India ...................................................................................................................................... 89

SABMiller India ...................................................................................................................................... 92

RPG Retail .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 95

Pantaloon Retail India ........ ......... ........ ........ ........ ......... ........ ........ ........ ......... ........ ........ ........ ........ ......... .. 97

Global Industry Overview ................................................................................................ 101

Table: Food And Drink Core Views . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

Demographic Forecast ................................................................................................... 111

Demographic Outlook .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 111


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Table: India's Population By Age Group, 1990-2020 ('000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112

Table: India's Population By Age Group, 1990-2020 (% of total) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

Table: India's Key Population Ratios, 1990-2020 .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

Table: India's Rural And Urban Population, 1990-2020 .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

Glossary ........................................................................................................................... 115Food & Drink ...................................................................................................................................... 115

Mass Grocery Retail .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 115

Methodology .................................................................................................................... 117

Industry Forecast Methodology .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 117

Sector-Specific Methodology ....... ........ ........ ........ ......... ........ ........ ........ ......... ........ ........ ........ ........ ......... 118

Sources .............................................................................................................................................. 118

Risk/Reward Rating Methodology .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 119

Table: Food & Drink Risk/Reward Rating Indicators .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120

Table: Weighting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121


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BMI Industry View

BMI View:Over the long term, the Indian economy presents one of the best growth stories globally. The

Indian population is the second largest in the world and is forecast to continue to grow for decades. Real

GDP will also grow at an average of around 6% to 2023, with per capita incomes rising at a similar rate.

We forecast that inflation will average at around 4% over the longer term, which should be a sustainable

level for the economy. We maintain a bullish long-term outlook on food consumption within the country,

especially as multinationals penetrate the market with greater force, and industry regulation becomes more

favourable to foreign investors. However, the country will experience significant headwinds in the short

term, being affected by a general emerging markets slowdown and a weak Indian rupee. The country also

has one of the largest income inequalities in the world, as well as significant infrastructure and

bureaucratic issues. That said, the sheer size of the market will result in impressive growth across many

sectors over our forecast period.

Headline Industry Forecasts

2014 food consumption growth = +6.1%; compound annual growth rate (CAGR) 2014-2018 = +6.5%.

2014 alcoholic drink local currency value sales growth = +11.7%; CAGR 2014 to 2018 = +11.4%.

2014 soft drink local currency value sales growth = +16.2%; CAGR 2014 to 2018 = +14.7%.

2014 mass grocery local currency retail sales = +14.5%; CAGR 2014 to 2018 = +12.2%.

Key Company Trends

Ongoing Interest In Indian Fast Food: Valued at US$12bn according to the Financial Times (FT), there

remains a great deal of scope for growth within the Indian fast food sector, primarily from Western firms.

New firms have been steadily entering into the market, though the Indian consumer's substantially different

food and cultural taste, as well as the country's poor infrastructure, remain significant stumbling blocks for

Western fast food retailers.

Western interest in the Indian fast food industry is as strong as ever, with Krispy Kreme,Burger King,

McDonald's and Yum! Brands'Taco Bell having all announced expansion plans or new openings in the

country in the past few months. According to the FT, the Indian fast food market is currently worth US

$12bn, with foreign brands making up only 5% of this. With the market dominated by local independents

providing traditional Indian cuisine, there is a great deal of room for multinational chains to establish

themselves.




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Walmart's Return To India Highlights Potential:US based grocery retailer Walmartwill re-enter the

Indian mass grocery retail (MGR) market with a new partner, having ended its deal with

BhartiEnterprisesin October 2013. The U-turn by Walmart highlights the massive potential offered by

the Indian MGR sector, outperforming that of all developed nations.

According to India's Ministry of Corporate Affairs, the retailer has registered a new company called Wal-

Mart India Pvt. Ltd, but has not announced who its new partner will be. India notoriously has strict rules

regarding foreign retail investment, allowing a maximum of 51% foreign control in its retail stores. As

Walmart parted ways with Bharti, the world's largest retailer said that it would review the foreign direct

investment policy in multi-brand retail before looking to enter the segment.

Multinational retailers have recently stepped up efforts to create a strong base in India. In December 2013,

UK retailer Tescosigned a deal with the TataGroupconglomerate for an investment of US$110mn,

despite the company deleveraging from many of its international operations over the past 12 months.

Similarly, French retailer Carrefourhas recently announced further investment into its Indian operations, at

a time when it is predominantly concentrating on its European business.

PepsiCo Commits US$5.5bn To India: PepsiCowill invest INR33,000 (US$5.5bn) into India by the end of

2020, CEO Indra Nooyi said on November 11 2013. The investment will go into all forms of the company's

Indian business, particularly concentrating on product innovation, manufacturing, infrastructure and

agriculture. Though The Coca-Cola Companyis the largest beverage provider in India, PepsiCo is the

largest combined food and drink business in the country, active across a diverse range of beverage and

snacks sub-sectors. In recent years, PepsiCo has extensively invested in India to remain ahead of its

multinational rivals. The company has developed many strategic partnerships in the region, such as that

with Tata Teain 2010, in order to develop local market knowledge and take advantage of supply chains.

Bharti & Walmart Call Off Joint Venture: US mass grocery retailer Walmartand Indian conglomerate

Bharti Enterpriseswill end their retail joint venture, Bharti-Walmart, in India. The move comes amid

several regulatory investigations and the Indian government's strict foreign investment regulations for the

retail sector. The two partners will dissolve Bharti-Walmart and focus on running independent businesses in

the country. Walmart will acquire Bharti's 50% stake in the Best Price Modern Wholesale cash-and-carry

division and continue to operate it in India, while Bharti will acquire complete ownership of the retailing

joint venture Easyday.




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SWOT

Food

SWOT Analysis

Strengths Foreign food companies continue to target the Indian market, with sub-sectors such

as edible oils benefiting from significant investment.

India's abundance of natural agricultural resources makes the market attractive toinvestors from all food sub-sectors.

The long-term story for Indian food consumption is promising, as a young and

increasing population, coupled with rising incomes, will drive growth.

Weaknesses The processed food industry is less developed than other comparable countries as a

result of logistical and distribution problems.

The country's agricultural industry, despite having huge potential, suffers from a lack

of investment and dependency on erratic climatic conditions.

Specific state-by-state legislation governing aspects of high-value business, such as

retail store opening hours, hinders nationwide business strategies and can be time-

consuming and cumbersome.

Agriculture remains inefficient and is vulnerable to climatic changes. Two-thirds of the

population depends on farming for its livelihood.

Despite rapid economic growth, India remains a very poor country.

Opportunities The government is actively seeking investment in the food processing and

agribusiness industries, suggesting that companies expressing an interest would be

granted a very liberal investment climate.

Rising disposable incomes and increasing urbanisation mean higher-value processed

foods are likely to experience strong growth rates, especially with the levels of

investment being committed by many multinational companies.




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SWOT Analysis - Continued

The immense size of India's population and landmass ensure that market maturity is a

distant prospect.

Although non-essential consumer goods are barely established at the mass-market

level, 'premiumisation' is already becoming a viable growth option, particularly among

younger consumers in major urban centres.

Threats Logistical problems, underdeveloped service networks and poor infrastructure hinder

development in fresh food industries, such as dairy.

The division between the urban rich and the rural poor is as great as ever, meaning

food manufacturers do not have access to the entire population, or even the majority

of it.




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Drink

SWOT Analysis

Strengths Foreign drink companies continue to target the Indian market, with sub-sectors such

as soft, alcoholic and hot beverages benefiting from significant investment.

India's abundance of natural agricultural resources makes the market attractive to

investors from all beverage sub-sectors.

India has an enormous and still-growing population of 1.2bn, with a rapidly expandingmiddle class.

Per capita consumption of alcoholic beverages is very low by global standards,

indicating plenty of room for growth.

Weaknesses Specific state-by-state legislation governing aspects of high-value business, such as

alcohol taxes, hinders nationwide business strategies and can be time-consuming

and cumbersome.

Alcoholic and soft drinks are still considered a luxury by a large percentage of the

population.

Poor infrastructure remains a significant deterrent to investment from multinational

companies.

Despite rapid economic growth, India remains a very poor country.

Companies have to invest large amounts in advertising, marketing and distribution

along with each new product launch.

Opportunities Rising disposable incomes and increasing urbanisation mean higher-value beverages

are likely to experience strong growth rates, especially with the levels of investment

being committed by many multinational corporations.

A number of drinks sectors offer substantial potential in India for further growth,

including bottled water, beer and soft drinks.




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The immense size of India's population and landmass ensure that market maturity is a

distant prospect.

Although non-essential consumer goods are barely established at the mass-market

level, premiumisation is already becoming a viable growth option, particularly among

younger consumers in major urban centres.

Threats The division between the urban rich and the rural poor is as great as ever, meaning

drink manufacturers do not have access to the entire population - in fact, not even the

majority of it.

India has experienced terrorist attacks, which have had a negative impact on tourism

levels and drinks sales, in particular alcoholic drinks. Any future attacks would

exacerbate the problem.




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For multinational corporations, the hypermarket sector is a good opportunity, with few

hypermarkets present owing to many local operators being unable to afford the higher

set-up costs of such outlets.

In the long term, well beyond the current forecast period, rural retailing represents an

opportunity for financially powerful firms that can afford to offer low prices.

India's emerging middle class will continue to drive demand for new goods and

services.

Threats Many consumers remain wary of modern retail owing to its perceived detrimental

impact on the role of traditional retail in society.

Low prices remain integral to luring shoppers away from traditional retail formats;

elevated operating costs could undermine retailers' efforts to offer these.

The government's previous move to backtrack on its decision to allow foreign direct

investment in India's multi-brand retail sector has sent out a negative message to

foreign investors about the lack of stability in the country's policymaking process and

could potentially deter foreign investments in the sector.




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Industry Forecast

Consumer Outlook

Starting with the massive sell-off in the rupee, which began in May 2013, economic headwinds in India

have accumulated quickly and in a big way. We have therefore downgraded our growth expectations for

Asia's third largest economy. We now see full-year real GDP growth of 5.5% for 2014, although we expect

this to pick up over the following 2 years. This downgrade is not taking place in isolation, as we have made

similar revisions to the outlook for other emerging markets recently. While a recent slowdown in the rate of

inflation has allowed the Reserve Bank of India to increase interest rates recently, however prices are

expected to increase at a faster rate in the near future, which will put further stress on consumer spending.

We currently forecast inflation of 5.75% for 2014, down from 7.0% the previous year.

With these headwinds in mind, we have decided to downgrade our real growth projections for private

domestic demand (private consumption plus gross fixed capital formation). For 2014, our private

consumption growth forecast stands at 3.5% (from 4.5% previously), while our projection for fixed capital

formation has been taken down to a similar rate of 3.5% (from 6.0%). We have also downgraded our import

growth projection to 3.0% (from 4.0% previously).

In an attempt by the government to regain the support of the Indian voting public via expansionary fiscal

means, the 2013 National Food Security Bill passed the Lok Sabha (lower house) on August 26 2013 and

the Rajya Sabha (upper house) on September 2 2013. The US$20bn scheme, which aims to distribute

subsidised grains to around 800mn people, poses a downside risk to the country's fiscal stability, as the

resulting upside pressure on the government's subsidy bill could easily result in a blowout of its initial

expenditure plans. The bill will only moderately relieve malnutrition among the poorest sections of the

population, as it does not address some of the underlying causes of hunger in the country. Indeed, it has the

potential to increase the government's medium-term fiscal deficit by 0.5 percentage points.




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Rising Fiscal Burden

India - Food Subsidy In Central Budget

Source: BMI, Ministry of Finance (India)

Long-Term Outlook Promising

Despite the economic challenges, the long-term potential of the Indian food and drink market is undeniable.

Foreign consumer goods investors will, however, continue to face considerable challenges in expanding

their footprints. As one of the most dynamic consumer markets in the Asia Pacific region, there is plenty to

suggest that consumer-facing companies in India will do well over the longer term. Rapid income growth, ayoung and growing population and a continued influx of investments underline the potentially fruitful

opportunities on offer on the consumer side.

India has a young and rapidly growing population of more than 1.2bn. As the massive youth demographic

group gradually matures and climbs up the income ranks, opportunities provided by the mass-market are the

ones that catch the eye. Although India's 2012 estimated per capita GDP of US$1,680 suggests that

consumer spending is coming from an extremely low base, this translates into tremendous room for growth.




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Risk To Outlook

The stage is set for India's economy to make a comeback, but we stress that significant challenges remain.

Externally, India is less exposed to China than most, which is a positive versus the rest of the region.

However, it is tied to the eurozone economy and any relapse in the currency bloc would pose downside

commercial and financial risks to India.

The greatest challenges arguably come from within. Firstly, India's public finances remain in a precarious

position, meaning that fiscal consolidation will have to be addressed in 2014 to stave off the threat of a

ratings downgrade. While such a scenario would be negative for near-term growth, it would help to further

anchor inflation expectations and allow monetary easing to take place faster and with more aggression.

Failure to put the fiscal house back in order, therefore, is a key risk. Secondly, we noted recently (see

'Election Scenarios: The Good, The Bad, And The Ugly', December 4)thatIndia's elections could yet throw

up some surprises. The worst-case scenario of a 'Third Front' coalition made of smaller, regional parties

each with their own distinctive provincial priorities would dash any reform hopes and further hold back the

country's investment recovery.

Food

Food Consumption

Food consumption (local currency) growth for 2014 = +6.1%; compound annual growth rate (CAGR)

2014 to 2017 = +6.5%

Per capita food consumption growth for 2014 = +4.8%; CAGR 2014 to 2017 = +5.3%

Industry dynamism in the Indian food sector, the continued spread of organised retail and a very positive

long-term domestic demand outlook will ensure strong growth in food consumption levels over our forecast

period to 2018. While the majority of the Indian population will continue to load up their shopping baskets

with daily essentials and food staples, we expect a change of consumption habits over the long term as

rising purchasing power sees consumers trade up to more expensive foodstuffs and non-essential purchases.

We forecast real GDP per capita rising at an average annual rate of 5.1% between 2014 and 2018. However,

the Indian economy faces significant headwinds in the short term, and with this in mind, overall food

consumption levels are forecast to increase by a modest CAGR of 6.5% between 2014 and 2018.

The continued spread of organised retail will cater to this emerging consumer base as local operators look to

shore up their market share in preparation for the imminent arrival of overseas competition. The mass




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grocery retail industry is expected to help drive up food consumption by presenting consumers with a much

wider range of higher value products and encouraging purchases of items beyond those necessary.

The attractiveness of the Indian food market will maintain industry dynamism and drive food consumption

levels. A dynamic industry is likely to fuel competition, which would in turn heighten marketing and

promotional spending, and drive down the price of non-essential, added-value items. Such a trend would

drive food spending in value terms, with higher volume sales offsetting slightly lower per-unit sales prices.

The total growth of food consumption, in local currency terms, is not as considerable as one might expect

given the rapid rate of Indian economic growth. The inhibiting factor, at least for the foreseeable future, is

income inequality between India's wealthier urban residents and its rural poor.

Multinational consumer goods companies face difficulty in distributing their products to such a diversified

audience. PepsiCo, for example, has rolled out a new potato chips band 'Lehar', which is sold 40% cheaper

than its Lay's product. Domestic firms, with a greater understanding of regional markets, win the battle on

their pricing strategies. Domestic firm Balaji Wafers, which manufactures potato chips, sells its products

for as low as US$0.08.

As the Indian consumer reaps the fruits of the country's long term economic boom, this is likely to translate

into greater demand for eating out and for Western foodstuffs; McDonald'sand Jubilant Foodworksare

already capitalising on this trend. Indians have always been fond of eating out, driving an increase in the

number of bustling street food outlets across all big cities. What has changed over the past decade is that,

with more money to spend, middle-class Indians have been increasingly eating out at more expensive

restaurants, with casual dining in particular doing well.




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$43.8mn) for the fiscal year ending March 2012, which was used to establish production plants. These

expansionary efforts are likely to instil considerable additional dynamism in the market and further buoy

confectionery sales.

Table: Confectionery Value/Volume Sales - Historical Data & Forecasts, 2011-2018

2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Chocolate sales(tonnes) 67710.1 70403.9 74254.2 79127.1 84930.4 91529.9 98714.2 106163.8

Sugar confectionerysales (tonnes) 249110.9 256963.7 271089.4 287845.4 307100.6 328620.5 351983.5 376497.9

Gum sales (tonnes) 98853.7 101817.5 106049.2 111479.8 117960.4 125295.2 133201.8 141276.9

Confectionery sales(tonnes) 415674.8 429185.1 451392.8 478452.3 509991.4 545445.6 583899.5 623938.6

Confectionery salesgrowth, tonne, (y-o-y) 6.3 3.3 5.2 6.0 6.6 7.0 7.1 6.9

Chocolate sales(INRmn) 27084.1 30435.4 34346.9 38705.4 43413.7 48658.5 54576.9 61043.5

Sugar confectionerysales (INRmn) 36619.3 40823.6 46082.5 51744.4 57690.1 64202.0 71517.0 79557.8

Gum sales (INRmn) 26690.5 29710.4 33111.4 36808.4 40700.8 44960.9 49710.0 54832.5

Confectionery sales(INRmn) 90393.9 100969.5 113540.8 127258.2 141804.5 157821.4 175803.9 195433.8

Confectionery salesgrowth, INR, (y-o-y) 15.3 11.7 12.5 12.1 11.4 11.3 11.4 11.2

Chocolate sales (US$mn) 580.2 569.7 582.2 667.3 766.5 854.8 954.0 1061.7

Sugar confectionerysales (US$mn) 784.5 764.1 781.1 892.1 1018.5 1127.8 1250.1 1383.7

Gum sales (US$mn) 571.8 556.1 561.2 634.6 718.6 789.8 868.9 953.7

Confectionery sales(US$mn) 1936.6 1890.0 1924.4 2194.1 2503.6 2772.5 3073.0 3399.1

f = BMI forecast. Source: Central Statistical Organisation, Company information, BMI

Dairy

India is the largest consumer and producer of milk in the world, also having one of the largest per capita

figures at around 40kg per year. Half a century ago, India was the largest net importer of milk in the world,

but a drive spearheaded by Amul Dairy, dubbed 'the white revolution', has made India self-sufficient in its

dairy requirements.




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We forecast per capita consumption of processed liquid milk to grow 13.7% between 2014 and 2018,

reaching a figure of 47.0kg by the end of our forecast period. Encouragingly, we forecast liquid milk

production to just outpace demand as a result of government incentives to keep the country self- sufficient

in its dairy requirements.

Continued Strong Growth In Milk

Liquid Milk Consumption - Total (000 tonnes) & Per Capita (kg)

Liquid Milk Consumption, '000 tonnes (LHS)

Liquid Milk Consumption, kg per capita (RHS)

2008

2009

2010

2011

2012

2013

2014f

2015f

2016f

2017f

2018f

0

25,000

50,000

75,000

0

20

40

60

f= BMI forecast. Sources: FAPRI, BMI

Table: Dairy Volume Sales & Production - Historical Data & Forecasts, 2011-2018

2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Processed liquid milk production, mn tonnes 117.02 120.88 124.95 129.69 135.27 141.51 148.26 155.42

Processed liquid milk sales, mn tonnes 48.24 49.50 50.67 52.40 54.57 57.06 59.72 62.34

Processed liquid milk sales, kg per capita 39.50 40.03 40.47 41.34 42.55 44.00 45.54 47.02

f = BMI forecast. Source: FAPRI, BMI




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Snack Foods

Snack goods are set to be one of the fastest growing sectors in the Indian food industry. We forecast

crispbread volume sales to increase by 48.8% between 2014 and 2018, as younger, richer Indian consumers

gain better access to the market. Multinational firm PepsiCodominates the market, though between 2008

and 2012 lost 12.9% of its market share. Domestic players such as Balaji Wafersand Prakash Snacks

have developed their offerings and are well placed to take advantage of this growing market.

Table: Snack Foods Volume Sales - Historical Data & Forecasts, 2011-2018

2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Crispbreads sales, '000 tonnes 1,700 1,863 2,036 2,237 2,474 2,739 3,026 3,330

Crispbreads sales, kg per capita 1.39 1.51 1.63 1.77 1.93 2.11 2.31 2.51

Sweet biscuits sales, '000 tonnes 1,010 1,047 1,080 1,119 1,163 1,214 1,267 1,325

Sweet biscuits sales, kg per capita 0.83 0.85 0.86 0.88 0.91 0.94 0.97 1.00

f = BMI forecast. Source: UN Industrial Commodity Statistics Database, UN Comtrade, BMI/ BMI Calculation

Drink

Hot Drinks

Coffee volume sales growth for 2014 = +7.7%; compound annual growth rate (CAGR) 2014 to 2018=

+8.9%

Coffee value sales growth (in local currency terms) for 2014= +13.9%; CAGR 2014 to 2018= 13.4%

Tea volume sales growth for 2014 = +5.3%; CAGR 2014 to 2018 = +6.1%

Tea value sales growth (in local currency terms) for 2014= +11.3%; CAGR 2014 to 2018= +10.4%

The Indian tea sector is fairly mature given the presence of major tea manufacturers such as Tata Global

Beveragesand Apeejay. Between 2014 and 2018, BMIis forecasting volume sales to grow by a modest

compound annual rate of 6.1%, at which point tea volume sales will reach 1.44mn tonnes (1.1kg per capita).

Value sales are forecast to rise at a faster rate, with a CAGR to 2018 of 10.4%. This represents good

growth, especially given the developed nature of the Indian tea sector. Local tea manufacturers, however,

are beginning to look abroad for future growth opportunities, with the specialty tea markets of the US and

the UK proving particularly attractive.




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The outlook for the Indian coffee sector is much more attractive as a result of lower levels of market

saturation and continued industry dynamism. BMIis forecasting a CAGR of 13.4% to 2018, in local

currency terms, as the country's rapidly expanding middle class embraces caf culture.

Sustained high levels of investment in the Indian coffee sector are another key driver behind our coffee

forecast. Fresh & Honest's recent espresso partnership with Illyand the entrance of Costa Coffeeshow a

clear trend towards premiumisation in the industry. Local players have also entered the high-growth caf

sector, with domestic chain CafCoffee Daythe largest in the country.

Table: Hot Drinks Value/Volume Sales - Historical & Forecasts, 2011-2018

2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Coffeesales(tonnes) 109,252.0 116,589.4 123,932.0 133,500.1 145,087.4 158,394.2 172,951.7 188,052.4

Coffeesales(INRmn) 37,145.7 42,841.1 48,726.9 55,506.9 63,039.3 71,573.9 81,278.1 91,909.6

Coffeesales(US$mn) 795.8 801.9 825.9 957.0 1,113.0 1,257.3 1,420.7 1,598.6

Tea

sales(tonnes) 993,200.0 1,040,172.1 1,087,653.1 1,145,058.6 1,211,543.6 1,285,866.4 1,366,063.8 1,449,151.8

Teasales(INRmn) 364,504.4 412,566.3 461,596.8 513,902.2 568,209.0 627,188.7 692,957.7 764,509.6

Teasales(US$mn) 7,809.1 7,722.5 7,823.7 8,860.4 10,031.7 11,017.9 12,112.7 13,296.9


Alcoholic Drinks

Alcoholic drinks value sales growth in local currency terms for 2014 = +11.7%; CAGR 2014 to 2018 =

+11.4%.

Alcoholic drinks volume sales growth for 2014 = +5.5 %; CAGR 2014 to 2018 = +6.9%.

Beer value sales growth in local currency terms for 2014 = +11.5%; CAGR 2014 to 2018= +11.1%

Spirits value sales growth in local currency terms for 2014 = +11.9%; CAGR 2014 to 2018= +11.7%

Wine value sales growth in local currency terms for 2014 = +14.9%; CAGR 2014 to 2018= +13.1%




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The alcoholic beverages industry in India is dominated in equal parts by beer and spirits, with the wine

market a distant and undeveloped third. In 2013, beer sales were estimated to have come in at INR370.5bn

(US$6.3bn), with spirits sales estimated to have been just higher at INR407.0bn (US$6.9bn). While both

significant amounts, this is only due to the sheer size of the Indian market. Per capita consumption of beer

in 2013 is estimated to be only 1.6 litres per capita, with annual spirits sales of only 0.3 litres per capita in

the same year. Despite large gains across the Indian food and beverage market, the alcoholic drinks market

is not forecast to deliver growth that would be expected in a fairly undeveloped market with a growing,

young and economically active consumer base. We forecast per capita sales of beer and spirits to rise to

only 2.1 litres and 0.4 litres respectively by 2018.

Disappointing Growth

Per Capita Alcoholic Drinks Sales & Growth (% y-o-y)

Alcoholic drinks sales, litres per capita (LHS)

Alcoholic drink sales, litres~ % chg y-o-y (RHS)

2008

2009

2010

2011

2012e

2013e

2014f

2015f

2016f

2017f

2018f

0

1

2

3

0

5

10

15

20

Sources: Central Statistical Organisation, Company information, BMI/BMI calculation

Given the consumer dynamics in India, the beer industry could have been expected to take off in a big way

over the past decade. Incomes in the country have increased strongly, and in many emerging economies this

middle-class consumer has propelled the global beer industry just as Western markets have started to cool

down. India also ticks a lot of boxes in terms of its demographics, namely its huge population. However,

perhaps more so than any of the other BRIC countries of Brazil, Russia, India and China, India has posed




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real challenges to multinational beer companies. Although India's spirits industry has boomed, the same has

not been seen in the beer segment. We highlight a number of reasons for beer's underperformance, the main

ones being:

Culture: Beer consumption is not widespread, and advertising is not without its regulatory hurdles. It is

not easy to advertise beer through conventional channels such as television; United Breweries Group has

advertised its Kingfisher brand on its namesake airline, for example.

Taxation: India generally taxes beer heavily, which prices out much of the potential consumer market.

Access: It is not easy to buy beer across much of the country. Permits are needed in some states, and in

many cities on/off trade outlets are often not readily accessible.

Price: Beer is relatively very expensive in India. As mentioned previously, it is taxed heavily and as a

result taxes comprise a large chunk of the commercial price of beer. Without the scale that one would

assume for a market of India's size, it has been difficult for companies to generate strong profit margins.

Low Profit Margins: Indeed, because of the high taxes, lack of real scale and high operating costs

(including distribution and power outages), profit margins on beer are generally relatively low in India.

Despite all this, in our view the sheer scale of the Indian consumer market is so tempting that foreign beer

companies will continue to see the country as a major opportunity. United Breweries, which is 40.7%

owned by Heineken, dominates the market with its Kingfisher beer. Somewhat uniquely, Kingfisher is

successful across the market, from low- to middle-income consumers to high-income Indians drinking beer

in expensive hotels. United Breweries, and by extension Heineken, has done very well over the past few

years.

Similarly to United Breweries, India's largest spirits manufacturer, United Spirits, has attracted interest

from multinational firms. UK-based Diageois currently in the process of buying a majority stake in the

company following a breakdown in talks during 2008. As said, the spirits market has experienced and is

forecast to continue successful growth. In our view, the spirits sector will outperform the alcoholic drinks

market, due to its inherently premium nature. In this way, distillers can target the ever-growing high-income

segment of the Indian population in a way that brewers cannot. In November 2013 Diageo announced that

its growth strategy within India would revolve around marketing premium spirits rather than providing to

the mass market.

The wine sector in India is small, yet not insignificant, and is forecast to grow faster than both beer and

spirits in both volume and value sales. That said, it must be noted that wine sales are coming from a much

smaller base, with per capita consumption barely registering at 0.02 litres per year.




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Table: Alcoholic Drinks Value/Volume Sales - Historical Data & Forecasts, 2011-2018

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

Alcoholicdrinkssales(mn litres) 2,256.9 2,338.5 2,428.5 2,561.6 2,729.0 2,921.7 3,127.3 3,330.4

Alcoholicsalesgrowth,litres,(y-o-y) 4.2 3.6 3.8 5.5 6.5 7.1 7.0 6.5

Winesales(mn litres) 17.2 18.2 19.9 21.6 23.5 25.5 27.7 30.1

Beer sales(mn litres) 1,889.7 1,955.9 2,028.2 2,137.6 2,275.4 2,433.7 2,602.2 2,767.9

Spiritssales(mn litres) 350.0 364.4 380.3 402.4 430.1 462.6 497.4 532.4

Alcoholicdrinkssales(INRmn) 631,953.9 709,336.2 790,296.9 882,995.5 984,672.5 1,098,679.7 1,225,733.9 1,360,861.4

Alcoholicsalesgrowth,INR,

(y-o-y) 13.4 12.2 11.4 11.7 11.5 11.6 11.6 11.0Winesales(INRmn) 9,524.7 10,901.1 12,757.1 14,654.9 16,625.2 18,777.2 21,215.5 23,979.3

Beer sales(INRmn) 298,577.8 333,979.9 370,580.8 413,022.5 459,433.2 511,038.5 568,283.4 628,642.5

Spiritssales(INRmn) 323,851.4 364,455.3 406,959.0 455,318.2 508,614.1 568,864.0 636,234.9 708,239.6

Alcoholicdrinkssales(US$mn) 12,183.1 13,539.0 13,277.5 14,112.4 16,351.8 17,858.5 19,827.0 22,009.8

Winesales(US$mn) 204.1 204.0 216.2 252.7 293.5 329.9 370.8 417.1

Beersales(US$mn) 6,396.7 6,251.5 6,281.0 7,121.1 8,111.3 8,977.5 9,933.4 10,933.8

Spiritssales(US$mn) 6,938.2 6,821.9 6,897.6 7,850.3 8,979.6 9,993.3 11,121.2 12,318.3

e/f = BMI estimate/forecast. Source: Central Statistical Organisation, Company information, BMI




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the market, has been eager to hop on the innovation bandwagon as well and recently launched its range of

Minute Maid 100% juices.

Both Coca-Cola and PepsiCo are extremely optimistic about the Indian soft drinks market, with both

companies pledging significant investments in the region. Coca-Cola has reiterated its plans, first

announced in 2012, to invest US$5bn into its regional operations before 2020. Similarly, PepsiCo has

committed US$5.5bn to be invested into all forms of the company's Indian business by the end of 2020.

Such large sums of capital highlight the opportunity which exists within the sector, as well as a sign of

consolidation and production expansion for the future.

Table: Soft Drinks Value/Volume Sales - Historical Data & Forecasts, 2011-2018

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

Carbonatessales(mn litres) 3,120.0 3,215.0 3,436.7 3,672.4 3,923.0 4,189.4 4,472.7 4,773.7

Fruit/ VegetableJuice drinksales(mn litres) 1,497.1 1,584.2 1,717.6 1,880.6 2,073.3 2,294.7 2,541.6 2,807.6

Bottled Watersales

(mn litres) 1,116.5 1,186.6 1,278.6 1,393.2 1,529.7 1,686.6 1,860.6 2,046.1

Functional drinksales(mn litres) 786.4 856.9 942.4 1,050.0 1,178.4 1,321.1 1,476.8 1,644.8

RTD Tea/Coffeesales(mn litres) 57.5 60.4 63.3 67.2 71.9 77.3 83.1 89.0

Soft drinks sales(mn litres) 6,515.8 6,908.0 7,309.8 7,795.1 8,354.4 8,976.9 9,654.9 10,366.7

Soft drink salesgrowth, litres,(y-o-y) 7.0 6.0 5.8 6.6 7.2 7.5 7.6 7.4

Carbonatessales (INRmn) 78,110.2 88,964.6 103,100.0 119,066.7 136,096.0 153,696.6 171,471.0 190,331.4

Fruit/ VegetableJuice drink sales(INRmn) 89,826.9 102,729.4 119,172.0 137,982.6 158,968.3 182,982.4 210,779.0 242,155.4

Bottled Watersales (INRmn) 20,597.0 23,732.6 27,636.9 32,220.9 37,412.3 43,106.3 49,457.1 56,561.4

Functional drinksales (INRmn) 62,908.3 74,086.4 87,187.4 102,720.1 120,473.2 140,458.1 163,295.6 189,151.4

RTD Tea/Coffeesales (INRmn) 3,714.8 4,228.7 4,792.3 5,441.2 6,155.6 6,911.5 7,727.0 8,608.6




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Soft Drinks Value/Volume Sales - Historical Data & Forecasts, 2011-2018 - Continued

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

Soft drinks sales(INRmn) 255,157.2 293,741.5 341,888.6 397,431.6 459,105.4 527,154.9 602,729.8 686,808.2

Soft drink salesgrowth, INR,(y-o-y) 19.7 15.1 16.4 16.2 15.5 14.8 14.3 13.9

Carbonatessales (US$mn) 1,673.4 1,665.3 1,747.5 2,052.9 2,402.8 2,700.0 2,997.3 3,310.4

Vegetable andFruit Juice drinksales(US$mn) 1,924.5 1,922.9 2,019.9 2,379.0 2,806.6 3,214.5 3,684.4 4,211.8

Bottled Watersales (US$mn) 441.3 444.2 468.4 555.5 660.5 757.3 864.5 983.8

Functional drinksales (US$mn) 1,347.7 1,386.8 1,477.8 1,771.0 2,127.0 2,467.4 2,854.4 3,289.9

RTD Tea/Coffeesales (US$mn) 79.6 79.2 81.2 93.8 108.7 121.4 135.1 149.7

Soft drinks sales(US$mn) 5,466.5 5,498.3 5,794.7 6,852.3 8,105.5 9,260.6 10,535.6 11,945.5


Mass Grocery Retail

Mass grocery retail 2014 sales growth (local currency) = +14.5%; compound annual growth rate

(CAGR) 2014 to 2018 = +12.2%.

Over the long term, India is one of the most exciting mass grocery retail (MGR) opportunities in the Asia

Pacific region. Indian consumers are still largely familiarising themselves with the concept of modern retail,

which accounts for less than 10% of overall grocery retail sales, according to BMIestimates. Nonetheless,

there are going to be tremendous opportunities for growth given the underdeveloped nature of the MGR

sector.

India's MGR sector remains dominated by small-scale traditional retail outlets. All four key modern formats

(supermarkets, hypermarkets, convenience and discount stores) are already present within India's MGR

market, but these stores are largely operated by a handful of local retailers, with the dominant ones being

Pantaloon Retail, Reliance Retail, Subhikshaand Big Bazaar.

The relatively slow pace of MGR growth in India can be largely attributed to two key factors: massive

income inequalities and tough foreign direct investment regulations. India's GDP per capita is forecast to be




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around US$1,607 in 2014, which is somewhat low compared with that of China, for example. Given this

low purchasing power, Indian consumers have been relatively slow to adopt modern retailing methods.

As affluence in India rises steadily over the coming years, consumers are expected to increase their

spending and turn to modern retail formats in search of the convenience and quality that they now desire

and can increasingly afford, which in turn presents positive implications for MGR sales.

BMI believes that supermarket and hypermarket sales will outperform other store formats in MGR, with

sales in local currency terms growing by 58.3% and 66.3% respectively between 2014 and 2018. By 2018,

we forecast hypermarket sales to account for just under a third of total MGR sales. The sector will still be

dominated, however, by the supermarket format, which will continue to represent about half of all MGR

sales in India.

Table: MGR Sales By Format - Historical Data & Forecasts, 2011-2018

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

Supermarkets (INRbn) 629.9 734.9 845.6 976.8 1116.9 1254.7 1396.5 1546.0

Hypermarkets (INRbn) 374.0 445.9 511.5 589.5 674.1 767.7 871.3 980.6

Discount stores (INRbn) 147.3 163.2 178.6 197.4 218.2 240.9 265.2 290.3

Convenience stores (INRbn) 118.7 132.8 145.7 161.0 177.6 195.9 216.3 237.7

Total mass grocery retail sector (INRbn) 1269.9 1476.8 1681.4 1924.8 2186.8 2459.2 2749.3 3054.5

Total mass grocery retail sector growth, INR,(y-o-y) 21.5 16.3 13.9 14.5 13.6 12.5 11.8 11.1

Supermarkets (US$bn) 13.5 13.8 14.3 16.8 19.7 22.0 24.4 26.9

Hypermarkets (US$bn) 8.0 8.3 8.7 10.2 11.9 13.5 15.2 17.1

Discount stores (US$bn) 3.2 3.1 3.0 3.4 3.9 4.2 4.6 5.0

Convenience stores (US$bn) 2.5 2.5 2.5 2.8 3.1 3.4 3.8 4.1

Total mass grocery retail sector(US$bn) 27.2 27.6 28.5 33.2 38.6 43.2 48.1 53.1





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Trade

Exports growth (US$) for 2014 = +12.0%; compound annual growth rate (CAGR) forecast 2014 to 2018

= +12.2%.

Imports growth (US$) for 2014 = +10.8%; CAGR forecast 2014 to 2018 = +11.2%.

BMIexpects that India's food and drink trade balance will grow increasingly positive over the forecast

period as the government continues to prioritise the agricultural industry and actively seeks investment in

this sector. India benefits from its immense landmass and is a major producer of several key agricultural

commodities, including tea and milk.

Despite these advantages, a number of major challenges remain, including underdeveloped production,

harvesting and storage infrastructure. Nevertheless, we are forecasting a CAGR of 12.2% in food exports, in

US dollar terms, between 2014 and 2018, to reach a value of US$36.0n. BMIalso expects the demand for

imported food products in the country to remain strong over the forecast period, growing by a CAGR of

11.2% to reach US$19.6bn in 2018. Demand among a population with rising purchasing power will

contribute to the need for more foreign-sourced products. In particular, Westernised consumption habits and

the need for ingredients that are not widely produced on a local level will stimulate imports.

India possesses a very positive food and drink trade balance given its natural resources. Crucially, we see

the country increasingly taking advantage of its endowments and increasing this trade balance across our

forecast period, from US$9.9bn in 2014, to US$16.4bn in 2018.

Table: Food & Drink Trade Indicators - Historical Data & Forecasts, 2011-2018

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

Exports (US$mn) 18,538.2 18,389.6 20,362.0 22,796.6 25,615.3 28,699.1 32,198.5 36,034.3

Imports (US$mn) 10,883.5 10,931.3 11,596.9 12,851.7 14,352.8 15,995.6 17,785.3 19,641.4

Balance (US$mn) 7,654.7 7,458.3 8,765.1 9,944.9 11,262.5 12,703.6 14,413.2 16,393.0

e/f = BMI estimate/forecast. Source: UNCTAD, BMI




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Macroeconomic Forecast

Economic Analysis

BMI View:India's painful process of external rebalancing is almost complete, and this will set the stage for

an economic growth revival in FY2014/15 (April-March). The pace of recovery will depend on the timing of

monetary easing, as well as a decisive and business-friendly outcome to the 2014 general elections. We are

optimistic on both these fronts and expect investment activity to pick up materially over the course of the

year. Our constructive outlook is reflected in our real GDP growth forecast of 5.6%, which sits above

consensus expectations of 5.4%.

Stage one of India's macroeconomic rehabilitation - the painful process of external rebalancing - isalmost complete. Admittedly, this has taken longer than we had previously anticipated. However, with the

country's current account shortfall narrowing to just 1.2% of GDP in Q313 - a rapid turnaround from the

6.5% deficit that spooked investors just two quarters earlier - India can no longer be described as externally

vulnerable either cyclically or structurally. Monetary tightening and currency depreciation, coupled with the

added bonus of rejuvenated EU import demand, have all helped to put India's external position back onto

the straight and narrow, which bodes well for the country's medium-term macroeconomic prospects.




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Positive Market Signals

India - 2s-10s Spread & BSE Capital Goods Index

Source: BMI

Risks To Outlook

The stage is set for India's economy to make a comeback, but we stress that significant challenges continue

to lie in wait. Externally, India is less exposed to China than most, which is a positive versus the rest of the

region. However, it is tied to the eurozone economy and any relapse in the currency bloc would pose

downside commercial and financial risks to India.

The greatest challenges arguably come from within. Firstly, India's public finances remain a precarious

position (see 'Another Year Of Fiscal Disappointment', November 13), meaning that fiscal consolidation

will have to be addressed in 2014 to stave off the threat of a ratings downgrade. While such a scenario

would be near-term negative for growth, it would help to further anchor inflation expectations and allow

monetary easing to take place faster and with more aggression. Failure to put the fiscal house back in order,

therefore, is a key risk. Secondly, we noted recently (see 'Election Scenarios: The Good, The Bad, And The

Ugly', December 4), India's elections could yet throw up some surprises. The worst case scenario of a 'Third

Front' coalition made of smaller, regional parties each with their own distinctive provincial priorities would

dash any reform hopes and further retard the country's investment recovery.




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Table: India - Economic Activity

2009 2010 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

Nominal GDP,INRbn 1,6 61,089 72,670 83,535 94,610 105,808 118,105 131,077 145,217 161,039 178,530

Nominal GDP,US$bn 2,6 1,293 1,596 1,835 2,078 1,793 2,036 2,314 2,551 2,815 3,105

Real GDPgrowth, % y-o-y 3,6 8.6 9.3 6.2 5 5 5.6 6.2 6.5 6.6 6.6

GDP percapita, US$ 6 1,087 1,324 1,503 1,680 1,432 1,607 1,805 1,967 2,146 2,342

Population,mn 7 1,190 1,206 1,221 1,237 1,252 1,267 1,282 1,297 1,312 1,326

Industrial

production, %y-o-y, ave 4,6 5.3 8.3 3.1 1.2 3.5 5 7.2 8 7.5 7

Unemployment, % oflabour force,eop 5,8 10.7 10.8 8 10.5 10.5 9.5 8 8 8 8

Notes: eBMI estimates. fBMI forecasts. 1GDP @ Factor Cost, Fiscal years ending March 31 (1990=1990/91); 2

2011=FY2011/12, GDP @ Factor Cost, f=BMI forecast; 32011=FY2011/12, Factor Cost, f=BMI forecast; 4New seriesused from 2005/06 onwards; 5No official time series data on Indian unemployment; CIA Factbook offers best alternativeproxy. National Sample Survey Organization (NSSO) also calculates unemployment rate, but surveys conducted every 5years. Labour bureau published first employment su. Sources: 6Central Statistics Organisation/BMI; 7World Bank/UN/BMI; 8CIA World Factbook.




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Industry Risk Reward Ratings

Asia Pacific Risk/Reward Ratings

BMI'sFood & Drink Risk/Reward Ratings assess a market's attractiveness to industry investors in

comparison with its peers. The reward part of the rating takes into account market size, current consumption

levels, future industry growth prospects (based on our five-year industry forecasts), market fragmentation

(with greater fragmentation indicating higher opportunities) and the size of the youth population.

Meanwhile, the risk part of the rating takes into account the legislative environment, the level of

development of the organised retail sector (with higher development leading to lower risks), as well as

relevant aspects of the economic and political environment.

Japan holds onto its leading position in our Food & Drink Risk/Reward Ratings for Asia Pacific in Q214,

while China moves up our rankings, regaining its second place from South Korea. As markets across the

region continue to pursue economic growth and stability, the gap between the highest performers and those

languishing at the bottom remains wide, pointing to the continued challenges facing Pakistan, Malaysia and

the Philippines in particular.

Unlike in more developed markets, there remain ample opportunities for countries in the Asia Pacific region

to build upon strong reward profiles. However, given the dominance of more developed Asian players, there

remain significant obstacles ahead for less developed countries. Japan retains the excellent risk score

achieved in previous quarters, which continues to secure its leading position in our rankings. Though other

countries, including Australia, South Korea and Singapore, possess similarly strong risk scores, the size of

Japan's population and high average incomes result in a higher reward rating.

While our ratings do favour countries with stronger growth outlooks (with the reward portion carrying a

60% weight), the fact that countries with the five best risk profiles make up the top six of our rankings

illustrates the nuanced nature of our ratings as a comparative tool. Though the appeal of sizeable markets

such as Indonesia and India remains alluring, sizeable operating risks are present which must be considered.




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Table: Asia Pacific Food & Drink Risk/Reward Ratings Q214

RewardIndustryReward

CountryReward Risk

IndustryRisk

CountryRisk

Food & DrinkRating Ranking

Japan 46.3 32 60.7 77.3 80 74.5 58.7 1

China 58.3 62 54.7 57.8 55 60.7 58.1 2

Australia 42.2 32 52.3 75.7 75 76.3 55.6 3

South Korea 41.3 42 40.7 76.0 80 71.9 55.2 4

Singapore 35.7 30 41.3 84.0 80 88.0 55.0 5

Hong Kong 38.8 40 37.7 75.2 75 75.4 53.4 6

Indonesia 62.2 64 60.3 39.5 25 53.9 53.1 7

Vietnam 55.0 68 42.0 45.6 30 61.2 51.2 8

Thailand 49.7 62 37.3 53.1 40 66.2 51.0 9

India 59.0 54 64.0 38.3 20 56.7 50.7 10

Taiwan 40.3 40 40.7 63.5 50 76.9 49.6 11

Philippines 51.2 42 60.3 45.3 30 60.6 48.8 12

Pakistan 60.2 60 60.3 29.8 10 49.6 48.0 13

Malaysia 43.2 40 46.3 53.9 40 67.8 47.5 14

Scores out of 100, with 100 highest. The Food & Drink Risk/Reward Rating is the principal rating. It comprises two sub-

ratings, 'reward' and 'risk', which have a 60% and 40% weighting respectively. In turn, the 'reward' rating comprises'industry reward' and 'country reward', which have equal weighting and are based upon growth/size of food/alcohol andsoft drinks industry (market) and the broader economic/socio-demographic environment (country). The 'risk' ratingcomprises 'industry risk' and 'country risk', which both have 20% weightings respectively and are based on a subjectiveevaluation of industry regulatory and competitive issues (market) and the industry's broader country risk exposure(country), which is based on BMI's proprietary Country Risk Ratings. Source: BMI.

The six factors that make up the reward score in our ratings are: food consumption per capita, market

fragmentation, per capita food consumption (five-year compound annual growth), population size, GDP per

capita, and youth population.

The first indicator, food consumption per capita, reflects the existing spending power of the Japanese

consumer (the country scores 10 out of 10 on this metric), with South Korea, Australia, Singapore, Hong

Kong and Taiwan also achieving high scores. Although these countries show high levels of spending, the

performance of other countries is markedly different, pointing to a clear division between regional peers.

China, for example, scores only 5, indicating scope for income growth. India, Pakistan and Vietnam each

have the lowest score of 1, highlighting even more potential for acceleration despite the current low reward

marking.




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markets score well here, including Australia, Singapore and Japan. India, which has very recently initiated

efforts to open up its food retailing sector to multinationals, scores very poorly (1/10). Conversely, China is

much further along in the development of organised retailing channels when compared with other low

scorers such as Vietnam and Malaysia.

The second factor, regulatory environment, evaluates the complexity of things such as labelling and

nutrition requirements. It also can be used to gauge the state of the overall business environment. The more

developed and mature markets usually score better here, and that is once again the case in Q214, with

Pakistan, India and Vietnam scoring poorly, highlighting persisting food regulatory hurdles, particularly for

non-domestic producers. Notably, however, China and the Philippines score fairly impressively in this

metric, hinting that future growth will be encouraged by both of these countries' strong regulatory

environments.

The third factor, short-term economic risk rating, assesses the degree to which the country approximates

the ideal of non-inflationary growth with falling unemployment, contained fiscal and external deficits and

manageable debt ratios. It is principally the candidates towards the top of our ratings that do well on this

criterion, underlining the link between economic stability and the overall attractiveness of the consumer

market. Pakistan's position as the lowest scorer across the region points to continued investor concern, with

its score failing to increase over recent quarters. Again, South Korea posts a very favourable rating here.

The fourth factor, income distribution, is measured by the proportion of private consumption accounted for

by the middle 60% of earners. Unsurprisingly, countries such as Japan, Singapore and South Korea lead the

pack, though developing markets also score relatively well in this regard.

Lack of bureaucracy, our fifth indicator, is a measure of the hurdles that any producer is likely to face in

areas such as starting and closing businesses, paying taxes, dealing with licences and registering property.

Here India continues to score poorly, with its draconian bureaucracy highlighted in the press regarding

multinational grocery retailers. This is paired with our sixth factor, market orientation, which measures

how business-orientated an economy is and measures the level of foreign direct investment protectionism,

tax rates and the level of government intervention. Another low score for India points to the continued

difficulties facing investors looking to enter this market in particular.

Our final risk factor, physical infrastructure, measures the ease and cost of operating in a market from an

infrastructure perspective. Some of our favourite regional economies have a lot of work to do here, with the

reward profiles of high-growth markets such as China and Indonesia facing poor scores. Paired with factors




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such as market orientation, regulatory environment and MGR penetration, countries will have to perform

well here if they are to challenge the continuing ratings dominance of Japan.

Table: Asia Pacific Food & Drink Risk/Reward Sub-Factor Ratings Q214 (scores out of 10)

Reward Japan China South Korea India Philippines

Food consumption per capita 10 5 9 1 3

Market fragmentation 1 8 2 9 5

Per capita food consumption, five-year compoundannual growth 2 5 4 4 4

Population size 8 10 5 10 7

GDP per capita, US$ 9 4 7 2 2

Youth population, % 2 2 1 6 8

Risk

MGR penetration 9 5 8 1 1

Regulatory environment 7 6 8 3 5

Short-term economic risk rating 7 9 9 6 7

Income distribution 9 7 9 7 7

Lack of bureaucracy 8 5 5 4 4

Market orientation 6 4 6 4 6

Physical infrastructure 8 5 7 7 6

Source: BMI




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India Food & Drink Risk/Reward Ratings

India's massive domestic demand potential warrants its reputation as one of the most exciting consumer

plays in the region, though is ranked 10th out of 14 countries included in BMI's Q214 Food & Drink Risk/

Reward Ratings for Asia Pacific. The country has an impressive rewards score of 59.0, rating it above

China and Indonesia on this metric. However, this potential remains difficult to exploit, particularly for

foreign consumer goods investors, with market challenges such as poor infrastructure and restrictive

regulations dampening India's overall investment attractiveness.

The immaturity of India's consumer-facing sectors, favourable demographics and sturdy long-term outlook

are major pluses for foreign consumer goods investors operating in India. The relatively undeveloped and

immature nature of the Indian food and drink industry means that foreign investors are likely to face fewercompetitive headwinds when expanding their presence in the country.

A restrictive regulatory climate is one of the major hurdles faced by foreign consumer players. In September

2012, India finally opened up its retail industry to foreign investors. The new legislation has been met very

favourably by the pro-business lobby, which had grown frustrated at how long it had taken India to pass this

legislation. In August 2013, the Indian government further relaxed its foreign investment mandate, giving

foreign retailers five years to source 30% of their products from domestic firms, instead of requiring this

immediately as before. Though foreign investment in India has grown by leaps and bounds in the last few

years, strict controls remain. In October 2013, the world's largest grocery retailer Walmartdissolved its

partnership with Indian firm Bharti Enterprises, partly as a result of these tight controls.

Poor distribution infrastructure is another major issue of concern. Poor roads, ports and railways are

commonly viewed as a key factor preventing the country from achieving the high growth rates seen in

China and other East Asian nations. This is further compounded by the lack of a formal food retailing

sector, frustrating retailers' efforts to distribute their products to the end-consumer market.




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strong. These traditional consumer patterns have mitigated sales of processed foods through multinational

operators. However, manufacturers are becoming increasingly aware of the need to tailor their product

offerings to the local market and are acting accordingly.

Overall consumption of poultry stood at an estimated 2,784,000 tonnes in 2011. This is expected to continue

growing aided by increased domestic production, particularly at the mass-market rather than small-scale

level. This has driven down prices and encouraged wider consumer participation. Poultry sales are further

boosted by the cultural and religious avoidance of red meat among large sections of the population and the

low availability of fish outside of major coastal areas. Per capita processed poultry consumption might

remain at relatively low levels - restricted by price and the lack of household cold-storage facilities - but it is

still estimated to be growing at 10-15% per year. Strong economic growth and an ever-increasing middle

class have increased the affordability of processed meat while also dramatically boosting demand thanks to

an ongoing desire for convenience.

Confectionery

India's confectionery market is becoming increasingly competitive, especially as raw ingredients, including

sugar, milk and cocoa, can be sourced locally. Currently, India's chocolate industry is dominated by low-

cost, economy brands. More recent entrants, such as Swiss company Barry Callebaut,will have to contend

with competition from industry giants Cadbury, Nestl and Hershey, and local majors such as Balaji

Wafersand Parle Products.

Cadbury is the market leader, with an estimated share of around 32% of the confectionery market and 58%

of the chocolate market. American food firm Kraft Foods had long been keen to launch its chocolate and

biscuit brands in the country, independently or via a joint venture, but had been unable to find a partner that

would give it the instant scale and distribution network required to achieve success in this vast industry.

Following Kraft's agreed takeover of Cadbury the US firm now has a major foothold in the local market,

having secured a wide-reaching distribution network that caters to the uniqueness of India by penetrating

the country's hundreds of thousands of independent retail outlets. Furthermore, Kraft will benefit from

Cadbury's upstream investments and the progress it has made in improving domestic cocoa output, thus

improving the security and cost-effectiveness of its supply chain.

Other key players include American firm Hershey, which recently entered India via the US$60mn

acquisition of a stake in Godrej Beverages & Foods, subsequently renamed Godrej Hershey Foods and

Beverages. Partnering with Godrej will allow Hershey to benefit from the local company's distribution

network, a major advantage in such a massive market with a highly fragmented retail sector.




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Mondelez Internationalis to build the largest chocolate manufacturing plant in India as part of its

emerging markets investment

india food & drink 2014 q2 report

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