edible oil industry analysis submitted

1

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]

2

EPGP 2012-13 EDIBLE OIL - INDUSTRY ANALYSIS

Table of contents

Edible Oil Industry – An Introduction ........................................................................................................................ 3

Analysis of changes in industry structure over time .................................................................................................. 4

Industry Boundary Definition .................................................................................................................................... 5

Porter’s 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

3


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

.

4


ANALYSIS OF CHANGES IN INDUSTRY STRUCTURE OVER TIME

India till 1980’s 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. Increase production of oilseed crops

ii. Make India self reliant in edible/non-edible oils

iii. Modernize and create awareness on the emerging technologies

iv. 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 1990’s 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 world’s 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.

5


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:

6


PORTER’S FIVE FORCES FRAMEWORK - ANALYSIS

7


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. Cargill’s buyout

of Rath brand from Agrotech India, and Sweekar Brand from Marico).

8


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.

9


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

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.

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

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, Haldiram’s may enforce bargaining power. Products addressing niche

customer segments like health conscious and taste sensitive have been launched. However,

13


segment preferences are not strong amongst majority of consumers. Considering these factors,

buyers have a low to medium bargaining power.

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].

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.

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.

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

ii. 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

iii. 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.

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.

18


KEY SUCCESS FACTORS

What are customer’s

requirements?

How do firms survive in

competitive environment?

Key success factors

• Low Price

• Range of products

catering to geographical

needs

• Packaged/ branded/

healthy oil in urban

areas.

• Import of crude oils

• Competition based on

Price

• Excess capacity

• 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.

19


EXHIBITS

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

20


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

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

21


22


Exhibit 5: Financials of leading companies

23


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 Extractor’s Association of India]

Oil Seed Sector 2010 – 2011

� Area under oil seed cultivation: 26 – 27 Mn Ha

� Average Yield (Per Hectare): 950 – 1000 kg

25


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

* Based on 4% growth

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

xivImpact of Trade Liberalization on India’s 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

Systematix Institutional Research – Ruchi Soya Industries Ltd. (July 6th

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

edible oil industry analysis submitted

Documents