Monday, January 19, 2009


During the last 6 months world economy has been battered by the financial turmoils originating from USA and no country or no sector was able to insulate itself from the shock waves and chain effects of this mega happenings. The GDP growth is predicted to slump drastically and in many countries negative growth is anticipated. Food sector world over is no exception to this economic melt down. In a country like USA the adverse effect is on a wider scale because the proportion of processed foods consumption is much more than what one can see in less affluent countries like India.

Many factors have contributed to the growth of food manufacturing sector during the last 10 years. These include increased number of twin income earning families, lesser time at home for cooking, shrinking kitchen size in new homes, more take home purchases, increased frequency of eating out practices and availability of exciting range of ready to 'serve or/and eat' food items on the super market shelves. With loss of millions of jobs due to recession many families have lost fully or partially their earlier buying power calling for readjustments in the monthly budget. The net effect is lesser demand for processed foods which are considered more expensive and preference for basic foods over premium ones. This has affected the manufacturing sector's ability to sustain the market, necessitating cut backs on jobs, delaying expansion and diversification plans and postponing investments on new technology, equipment and machinery. Further there will be large scale reduction in promotional investments which, in turn, will have depressing effect on already shrinking demand The effect is expected to be more drastic in small scale industry with practically no cushion for such a contingency.

Unbearable increase in the cost of fuels has manifested in higher cost of inputs to the industry and this in turn had a cascading effect on the consumer price. Every increase in consumer price tends to decrease the demand, adding to the woes of the industry. Though GOI figures on inflation says one story, the ground realities are totally different. The single biggest reason for lower inflation figure is the tumbling of the price of petroleum crude from a peak of $147 a barrel in June 2008 to less than $50 a barrel to day but the cost of raw materials to the industry, which had risen sky high, has not come down dramatically as expected. The reckless increase of salaries to its ministers, legislative members, government personnel, public sector employees cannot be justified if the figures for inflation are to be believed. Just because IT sector personnel get disproportionately high salaries, mostly in foreign companies and foreign dependent Indian entities, it does not justify making these aberrations applicable to other sectors. On industry's part an introspection is necessary as to whether their existing pricing models can really foster growth or depress the demand in the coming months. It does not make any sense how one can justify a product like corn flakes being priced at Rs Rs 300 a kg when the basic raw material, maize costs only about Rs 15 a kg! Consumer is bewildered as to whether this is value addition or profit inflation!. There are many anomalies like this which need to be rectified and prices brought down significantly to stimulate demand for processed foods in the country.

The phenomenal rise in small size packs in India during the last one decade, to some extent, will provide a cushion to the food industry, especially those having their products in the price range Rs 1-5 per pack as consumers will increasingly opt out for them to reduce the economic burden to some extent. Probably more players may enter the fray through this proven route to sustain existing level of production, let alone expanding it. Logically high priced branded products like break fast cereals, chocolate confectionery, branded snacks, RTE foods etc are likely to suffer major set backs as these products are not considered essential to the survival of a family and sacrificing them, at least for some time, will make it eminently logical. However, in the long run the government employees and government 'dependent' population, public sector industries, IT sector with huge salary earnings, may still save the processed food industry from any knock down punch!. After all food purchase constitutes less than 10-20% of their take home pay. If food vector maintains some discipline in the price front, they may be able to, probably, weather this storm and come out unscathed.

Restaurant sector is already feeling the pinch as customers who use to flock their outlets are shying away due to their decreased ability to pay the sky high prices any more. When there was as boom time, the customers became price insensitive and did not mind spending, in exchange for some convenience and relaxation, unjustifiable amounts for good food and ambiance. The fast rising income made even the caterers feel buoyant and led them to believe that they can get away with such irrational increases in the prices of their items on the menu. The price of a cup of coffee soaring to Rs 35 a cup in many restaurants is nothing but scandalous. Same is true with all items of foods offered, the prices demanded being 200-300 % of the input cost! Average meal cost rose by 100% in less than 2 years which has no rationality. As is said, whatever goes up too high and too fast has to come down at the same pace and this applies to the current costs of restaurant foods. There must be a sane and rational pricing formula which the hoteliers must impose on themselves voluntarily instead of any price control policy, government may be forced to put in place. One must not forget that consumer is the King and pushing him too much can be at one's own peril!


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