Edible Oil - Industry Analysis

Competition & Strategy EPGP 2012 -13

Indian Institute of Management - Bangalore
Ashutosh Karandikar [1214014] Mukund Mani [1214033] Nachiket Marathe [1214034] Navneethakrishnan Sankaraiah [1214035] Pradnesh Deshmukh[1214044]

Table of contents
Edible Oil Industry An Introduction ........................................................................................................................3 Analysis of changes in industry structure over time ..................................................................................................4 Industry Boundary Definition ....................................................................................................................................5 Porters five forces framework - Analysis ..................................................................................................................6 Threat of Entry ...........................................................................................................................................................7 Threat from Substitutes .............................................................................................................................................8 Suppliers ....................................................................................................................................................................9 Buyers ......................................................................................................................................................................11 Rivalry among Competitors .....................................................................................................................................14 Complementors .......................................................................................................................................................15 Government regulation ...........................................................................................................................................16 Future scenario ........................................................................................................................................................17 Key Success Factors .................................................................................................................................................18 Exhibits ....................................................................................................................................................................19 References ...............................................................................................................................................................26

EPGP 2012-13

EDIBLE OIL - INDUSTRY ANALYSIS

EDIBLE OIL INDUSTRY AN INTRODUCTION

Edible oil has been one of the most essential commodities in India as it forms an important part of the food consumption basket. Broadly categorized into vegetable refined oil and hydrogenated oili, the importance of edible oil arises from the increasing dependence of Indian households on oil for cooking purposes. Edible oil industry has registered a growth of 6.33 % CAGR in past 6 years and is estimated to grow at a CAGR of 5.93 % for next 5 years xxv.

EPGP 2012-13

EDIBLE OIL - INDUSTRY ANALYSIS

ANALYSIS OF CHANGES IN INDUSTRY STRUCTURE OVER TIME

India till 1980s had been dependent on edible oil imports to meet its demands.ii Two major initiatives taken by the Government of India led to development of edible oil industry: 1. Establishment of Technology Mission of Oil Seeds and Pulses (TMOP): It was created by the Department of Agricultural Research and Education (DARE) in May 1986.iii Major objectives of the mission were: iii i. ii. iii. iv. Increase production of oilseed crops Make India self reliant in edible/non-edible oils Modernize and create awareness on the emerging technologies Priority to crops for edible oil Groundnut, Rapeseed-mustard, Soya-bean, Sunflower etc.

2. Trade liberalization Import restrictions on edible oil were reduced in the late 1990s in order to meet the demand supply deficits.ii Once import of edible oil was brought under the Open General License (OGL) the prices fell significantly in line with the prevailing international prices which affected the domestic oil seeds market. ii Today India imports almost 40% of its oil requirements and is one of the worlds largest edible oil economies with a per-capita consumption of 11.5kgs.i It is the fifth largest producer of oil seeds (behind US, China, Brazil and Argentina) forming 8% to 10% of the world oil seed production. i The industry is estimated to be Rs. 1, 00,000 Cr in FY 2011iv and is at an inflection point progressing from an undifferentiated commoditized industry to becoming an organized, branded products industry led by major players. This is in line with the growing demand of emerging upwardly mobile middle class.

EPGP 2012-13

EDIBLE OIL - INDUSTRY ANALYSIS

INDUSTRY BOUNDARY DEFINITION

Primary and intermediary Suppliers Oil Seeds producers/oil exporters act as the primary suppliers while the crushing and solvent extractors are the intermediary suppliers for the edible oil industry. Incumbent firms Edible oil refiners & marketers are the primary players of the industry who convert the supplies into marketable produce (branded or unbranded edible oil). Customers Household consumers form the primary customers of edible oil. Out of home customers such as restaurants and fast food joints have improved the consumption demand in recent years. The edible oil industry boundary is as outlined below:

EPGP 2012-13

EDIBLE OIL - INDUSTRY ANALYSIS

PORTERS FIVE FORCES FRAMEWORK - ANALYSIS

EPGP 2012-13

EDIBLE OIL - INDUSTRY ANALYSIS

THREAT OF ENTRY

Edible oil industry is characterized by low capital/technical requirements for setting up basic local expeller/crushing units and solvent extraction units.v Small Scale Industry (SSI) reservation for traditional oilseeds and sales tax incentives by various state governments protects the local oil processing units against takeovers/ consolidation.vi

ANALYSIS: In the edible oil industry small scale players have low capital requirements and low customer base which obviates the need for a complex distribution network. Hence small players have low barriers to entry. However, to setup and sustain as a full scale/integrated system, one needs a strong distribution network, symbiotic relationships with farmers/seed traders and refining units distributed across geographic locations. These require huge capital, strong management expertise and deep domain knowledge. These requirements along with the supply constraints set a steep target for a new entrant. Recent consolidation initiatives in the industry are more financial in nature and brand acquisitions between existing players are with no capacity addition. (E.g. Cargills buyout of Rath brand from Agrotech India, and Sweekar Brand from Marico).

EPGP 2012-13

EDIBLE OIL - INDUSTRY ANALYSIS

THREAT FROM SUBSTITUTES

So far there are no major substitutes to edible oil. Indian edible market is dominated by a highly price sensitive consumer segment with elastic demand for edible oil. This leads to substitution of traditional oils like groundnut, sunflower and mustard oil by cheaper palm/soya-bean oilsvii.

ANALYSIS Baked, grilled foods and milk fats (ghee) are some of the edible oil substitutes, which are consumed in minor quantities. Utensils are available which facilitate oil free cooking. There is an increasing trend of purchasing these utensils however the volumes are low. There are no significant substitutes to edible oil.

EPGP 2012-13

EDIBLE OIL - INDUSTRY ANALYSIS

SUPPLIERS

Domestic Record production of 32.48 MT of oil seeds in 2011. viii Growth in production & Sowed acreage in the last 11 years has been modest (4.45% and 2.08% respectively).ix

International Import dependence has gradually increased from 48% to 54% in last 6 yearsx. Indonesia, Malaysia, Argentina and Brazil are major suppliers.xi Imports are primarily of crude oil due to 0% import duty (Duty on refined oil is 7.5%). The share of refined oil in the overall import of vegetable oil has recently increased from 13% in Nov 2011 to 35% in Feb 2012 due to the reduction in export duty on refined oil by the primary supplier, Indonesia.xii Consumption of edible oil estimated to grow at 4.5% in next 5 years to reach from 15.7 MT in FY 11 to 21.0 MT in FY 16 driven by positive macroeconomic factors. While the domestic production of edible oil will increase by just 1.25 MT in next five years. x

ANALYSIS Even at the level of domestic production achieved in 2011, the industry is faced with a deficit domestic supply of up to 54%. This is attributed to lower growth in acreage under oilseeds, modest production (volatility of climate, low productivity) and increased acreage under other
EPGP 2012-13 EDIBLE OIL - INDUSTRY ANALYSIS

10

profitable cash crops resulting an increase in the quantum of imports. However, with changes in export duties of Indonesia, crude oil import has become an unfavorable option, thereby rendering domestic refining capacity idle and reducing profitability of manufacturers. Also, the domestic supply is plagued with fragmentation and thus the domestic suppliers have low bargaining power. However, the edible oil demand will continue to grow and imports will continue to dominate supply in near future.

EPGP 2012-13

EDIBLE OIL - INDUSTRY ANALYSIS

11

BUYERS

Edible Oil Industry has following Buyer segments: Consumers with lower income (primarily rural) Consumers with higher income (primarily urban) Out of Home segment

On a volume basis palm-oil (46%), soybean-oil (16%) and mustard-oil (14%) have maximum consumption in India. xiii Different regions in the country have different preference for oilseeds. xiv The Out-of-Home consumption comprises 30% of the overall consumption and caters to biscuit/chips manufacturers, ready-meal snacks, fast food centers, restaurants, hair oil manufacturers, etc. Growth rate in out of home sector is 2 to 3 times more than the home consumption rate. xv

EPGP 2012-13

EDIBLE OIL - INDUSTRY ANALYSIS

12

Popularity of newer varieties of oil like sunflower and soy oil is rising in urban areas. xvi 1. Urban consumers have strong preference for taste and are not easily induced to switch to different oil. xiv 2. Consumers in lower income groups (primarily rural) are sensitive to price increases and easily substitute their diet with cheaper oils. xiv 3. Per capita consumption of oil is driven by improvement in income levels and living standards. Current per-capita consumption of 13.3 kg/per year is markedly lower than the global average of 24 kg/year.vi 4. About 84% of the oil consumed in India is un-branded. xiv. ANALYSIS Since edible oil is an essential commodity and buyers are dispersed, bargaining power of retail consumers is low. Consumers may easily switch between brands of oil in the same type and price range. This makes it imperative for manufacturers to continuously pursue marketing activities and invest in a reliable supply chain to prevent stock outs. Large corporate buyers such as Frito Lay, Haldirams may enforce bargaining power. Products addressing niche customer segments like health conscious and taste sensitive have been launched. However,

EPGP 2012-13

EDIBLE OIL - INDUSTRY ANALYSIS

13

segment preferences are not strong amongst majority of consumers. Considering these factors, buyers have a low to medium bargaining power.

EPGP 2012-13

EDIBLE OIL - INDUSTRY ANALYSIS

14

RIVALRY AMONG COMPETITORS

Indian edible oil industry has around 15,000 oil mills, 600 solvent extractors, over 650 refining units and 250 Vanaspati units. Overall capacity utilization is lower than 30% for the industry. xvii Un-branded category of products forms around 85% of the industry and caters mostly to the price sensitive consumers.xviii Branded to Unbranded product ratio is around 1:4 amongst the top 5 players of the industry.xix ANALYSIS The edible oil industry is highly fragmented with no differentiation within products. Switching cost for the consumers from the lower strata is low as they seek unbranded varieties of low priced oil to save expenses (this is evident from the increase in the consumption of Palm Oil a cheaper substitute within the Edible Oils with the increase in price for other Oils). This leads to price competition among the market players and thereby results in lower profit margins [Refer Exhibit 5].

EPGP 2012-13

EDIBLE OIL - INDUSTRY ANALYSIS

15

COMPLEMENTORS

We feel that the allied hotel/restaurants industry serves as a complement as it directly impacts the consumption of edible oil in a positive way. Rising middle-class and economic growth stimulate the growth of this industry which in turns improves consumption of edible oil.

EPGP 2012-13

EDIBLE OIL - INDUSTRY ANALYSIS

16

GOVERNMENT REGULATION

Regulation Government banned export of all edible oils up to 30.9.2012.xx Tax Government has cut down import duties on edible oil since April 2008. The current duty differential between crude and refined oils stands at 7.5%. xxi Protection In order to provide relief to the poorer section of the society from the rising prices of edible oils, Government introduced a Scheme for Distribution of 10 lakh tons of edible oils at a subsidy of Rs. 15/- per kgxxii SSI Reservation (as detailed in Threat of Entry) ANALYSIS Industry profitability is dependent on policies formed at the center. Government could encourage industries to work with farmers on improving productivity by providing tax benefits for such efforts.

EPGP 2012-13

EDIBLE OIL - INDUSTRY ANALYSIS

17

FUTURE SCENARIO

Some Insights: i. Consumption is expected to grow further between CY11-CY15E to 21mt from 15.7 MT in CY 11.xxiii Consolidation and backward integration One of the major players, Ruchi Soya has strengthened its backward integration to de-risk against supply constraints and raw material costs. xxiv Growth of Out of Home consumer segment: xxv Fast food industry is growing at 40 % in India Growth rate in this sector is 2 to 3 times more than that in home consumption rate. 80 % of urban Indians eat out seven times/month.

ii.

iii.

Future estimates of growth in consumption and market shows a positive trend for growth in the industry but for the constraints on supply (domestic production, imports, climatic conditions, etc) and industry competition (price competition, differentiation, etc). We feel that the big players should focus on differentiation through branding exercises leading to premium pricing, which can give them a competitive advantage. More so, for sustainability/profitability they could also integrate forward and backwards. Fragmentation also calls for consolidation which the big players are better positioned to do. Current trend of FDI in this sector can be leveraged for the same. Also current brand buyouts and take-overs substantiate this trend. Growing health consciousness in consumers has resulted in preference for branded products which presents a positive trend. Companies could come up with products citing advantages of healthy oil. (E.g. Marico has introduced Saffola that has lower cholesterol levels). Leading players have diversified into ready-meal food industry to enhance their profitability. We feel that they could increase their presence in this market as it would lead to brand visibility. Option of venturing into fast food chain outlets could also be tried.

EPGP 2012-13

EDIBLE OIL - INDUSTRY ANALYSIS

18

KEY SUCCESS FACTORS

What are customers How do firms survive in Key success factors requirements? competitive environment? Low Price Import of crude oils Competition based Price Excess capacity on Differentiation through branding which yields price premium Forward integration(C&F agent, distributors, retailers, etc) Backward integration (plantations, refineries at ports, consolidation of extraction units, etc) Sourcing raw materials: Improve yields, get better quality oilseeds, ensure regular supplies - through symbiotic relationship with farmers Cost controls through hedging, streamlining, etc Risk management over trade exchanges.

Range of products catering to geographical needs Packaged/ branded/ healthy oil in urban areas.

EPGP 2012-13

EDIBLE OIL - INDUSTRY ANALYSIS

19

EXHIBITS
Exhibit 1. Edible oil demand, supply, import and export.

EPGP 2012-13

EDIBLE OIL - INDUSTRY ANALYSIS

20

Exhibit3: Percentage Composition of Food Basket in an average Indian Family.

Exhibit4: Percentage share of Edible Oils in the Indian market.

EPGP 2012-13

EDIBLE OIL - INDUSTRY ANALYSIS

21

EPGP 2012-13

EDIBLE OIL - INDUSTRY ANALYSIS

22

Exhibit 5: Financials of leading companies

EPGP 2012-13

EDIBLE OIL - INDUSTRY ANALYSIS

23

EPGP 2012-13

EDIBLE OIL - INDUSTRY ANALYSIS

24

Industry Fact Sheets

[Source: Role of India in Edible Oil Complex, Outlook for demand and import of edible oils by Dr. BV Mehta, Executive Director, The Solvent Extractors Association of India]

Oil Seed Sector 2010 2011

Area under oil seed cultivation: 26 27 Mn Ha Average Yield (Per Hectare): 950 1000 kg

EPGP 2012-13

EDIBLE OIL - INDUSTRY ANALYSIS

25

Edible Oil Demand and Import Projection (Excluding non-edible oils)

* Based on 4% growth

EPGP 2012-13

EDIBLE OIL - INDUSTRY ANALYSIS

26

REFERENCES
i

Ministry of Food Processing Industries http://mofpi.nic.in/ContentPage.aspx?CategoryId=687 ii Indian Edible Oils Industry: Key Trends and Credit Implications http://www.icra.in/Files/ticker/Indian_Edible_Oils-note11072011.pdf iii Department of Agriculture and Cooperation Ministry of Agriculture, Government of India http://agricoop.nic.in/tmop&m/1Background&Objectives.pdf iv Role of India in Edible Oil Complex, Outlook for demand and import of Edible Oils http://www.seaofindia.com/images/67/BVM_Presentation_J_P_Morgan_Jan__2011.pdf v Indian Edible Oils Industry: Key Trends and Credit Implications ICRA Rating Feature vi Indian Edible Oils Industry: Key Trends and Credit Implications ICRA Rating Feature vii http://www.mcxindia.com/Uploads/Products/16/English_Crude_Palm_Oil.pdf viii http://indiabudget.nic.in/es2011-12/echap-08.pdf ix http://indiabudget.nic.in/es2011-12/echap-08.pdf x Consumer Trend in India with respect to Palm Oil - GovindBhai G. Patel http://www.seaofindia.com/images/67/GGPatel_Presentation_PIPOC%202011.pdf xi Analyst report on Ruchi Soya Industries - Systematix, Instituitional Research xii http://www.business-standard.com/india/news/veg-oil-refineries-in-doldrums-want-protection/470844/ xiii Indian Edible Oils Industry: Key Trends and Credit Implications. July 2011, ICRA Rating Services. www.icra.in xiv Impact of Trade Liberalization on Indias Oilseed and Edible oils sector. A Report prepared for IGIDR-ERS/USDA Project: Indian Agricultural Markets and Policy February 2, 2005 by P.V. Srinivasan Indira Gandhi Institute of Development Research (IGIDR) xv Solvent Extraction Association (SEA) -GGN Research paper, Consumer Trend In India With Reference To Palm Oil xvi http://www.portal.euromonitor.com/Portal/Pages/Search/SearchResultsList.aspx xvii Systematix Institutional Research Paper on Ruchi Soya Industries xviii KS Oils : http://www.ksoils.com/pdf/presentation-dec-06.pdf xix Annual Reports of KS Oil, Ruchi Soya and Agrotech Foods Pvt Ltd. xx Department of Food and Public Distribution http://dfpd.nic.in/?q=node/197 xxi Indian Edible Oils Industry: Key Trends and Credit Implications http://www.icra.in/Files/ticker/Indian_Edible_Oils-note11072011.pdf xxii http://fcamin.nic.in/dfpd/EventDetails.asp?EventId=568&Section=edible%20oil&ParentID=0&Parent=1&check=0 xxiii th Systematix Institutional Research Ruchi Soya Industries Ltd. (July 6 2011) xxiv Annual Report 2010 2011 Ruchi Soya Industries Ltd http://www.ruchisoya.com/Ruchi%20Soya%20AR%202010-11.pdf xxv Consumer Trend in India with reference to Palm Oil by Govindbhai G. Patel, G.G. Patel & Nikhil Research Company http://www.seaofindia.com/images/67/GGPatel_Presentation_PIPOC%202011.pdf

EPGP 2012-13

EDIBLE OIL - INDUSTRY ANALYSIS