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    The market for confectionery products

    in India

    A report prepared for

    The National Confectioners Association

    January, 2005

    Promar International

    1101 King Street, Suite 444

    Alexandria, VA 22314 USA

    Tel:(703) 739-9090

    Fax:(703) 739-9098

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    The market for confectionery products in India

    A report prepared for

    The National Confectioners Association

    CONTENTS

    EXECUTIVE SUMMARY I

    SECTION 1:

    1.1

    1.2

    1.3

    1.4

    SECTION 2:

    2.1

    2.2

    2.3

    2.4

    2.5

    SECTION 3:

    3.1

    3.2

    3.3

    INTRODUCTION

    Objectives

    Methodology

    Report organization

    Exchange rate used

    INDIA: COUNTRY BACKGROUND

    General background

    Economic development and reforms

    India's people2.3.1 Population and main socio-economic indicators

    2.3.2 Age

    2.3.3 Income

    2.3.4 Urbanization

    Religion

    Consumer spending and food purchasing behavior

    THE CONFECTIONERY MARKET IN INDIA TODAY

    General background

    The confectionery sector3.2.1 Market size

    3.2.2 Some specific market characteristics

    3.2.3 Manufacturers and key players

    3.2.4 Market snapshots for 2004 3.2.5

    Market shares and brands

    Market segments

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    12

    2

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    3.3.1 Chocolate confectionery 26

    3.3.2 Sugar confectionery 28

    3.3.3 Chewing gum 30

    3.3.4 Sugar-free confectionery 32

    3.4

    3.5

    3.6

    3.7

    3.8

    SECTION 4:

    4.14.2

    4.3

    4.4

    SECTION 5:

    5.1

    5.2

    SECTION 6:

    6.1

    6.2

    6.3

    SECTION 7:

    7.1

    7.2

    Confectionery imports

    3.4.1 General trade information

    3.4.2 Key suppliers, types and brands of imported confectioneryConsumption

    3.5.1 General information

    3.5.2 Demographic and lifestyle considerations

    3.5.3 Brand and origin awareness and perceptions

    Pricing

    Seasonality

    Market forecast

    DISTRIBUTION CHANNELS

    OverviewDomestic production

    Imports

    4.3.1 Ports of entry for imports

    4.3.2 Geographical and logistical considerations

    4.3.3 Handling of imports

    4.3.4 Business relationships along the distribution chain

    Wholesale and retail

    4.4.1 Role and key players

    4.4.2 Key retail players

    4.4.3 Industry trends affecting or altering the structure of retail food sales4.4.4 Types of product promotions used

    MARKET ENTRY

    Tariffs, import and customs regulations

    5.1.1 Import and custom regulations

    5.1.2 Import tariffs

    5.1.3 An example

    Food safety, packaging, and labeling requirements

    CONCLUSIONS AND RECOMMENDATIONS

    General prospects

    Recommendations

    Success stories

    INDUSTRY CONTACT INFORMATION

    Confectionery importer-distributors and wholesalers

    Key retail candy accounts across marketing channels

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    APPENDIX 1: INDIAN SWEETMEATS

    APPENDIX 2: KEY MANUFACTURERS' PROFILES

    Cadbury India Limited

    Nestle India Limited

    Lotte India Corporation Ltd.

    Nutrine Confectionery Co. Pvt LtdCandico India Limited

    Perfetti van Melle India Pvt Ltd

    Parle Products Pvt Ltd

    Wrigley India Pvt Ltd and Joyco India Pvt Ltd

    Gujarat Co-operative Milk Marketing Federation Ltd.

    ITC Limited

    Hindustan Lever Limited

    The CAMPCO Ltd

    Lotus Chocolate Company Limited

    APPENDIX 3: TRADE INTERVIEWS

    73

    77

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    8385

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    THE MARKET FOR CONFECTIONERY PRODUCTS IN INDIA

    Executive summary

    EXECUTIVE SUMMARY

    India: country background

    Diverse is the one word that describes India best. With an area approximately one-third the size of the

    USA, it is home to over one billion people of considerable economic, ethnic, linguistic, cultural, and

    religious diversity.

    After years of socialist-oriented economy and commercial relations oriented primarily to the

    Soviet block, in the mid-1980s India initiated economic reforms which started opening up its

    consumer markets to the western world. Overall, the country has managed to maintain

    economic growth even during the Asian crisis in 1998. Despite the reforms and economic

    growth, India continued to heavily restrict imports through the 1990s. However, in compliance with

    WTO commitments, in 2001 it removed all quantitative restrictions, which led to rapid increase

    of imports to the country. Nevertheless, the government continues to discourage imports

    through both tariff and non-tariff barriers.

    Despite the economic growth, a very large proportion of India's over 1 billion population

    continues to live in extreme poverty. On the other hand, it has the fastest growing middle class in

    the world and forecasts indicate rapid growth of the consuming class. There is serious

    disparity between the urban and rural

    population in India. About 70% of the A socio-economic snapshot of India (2004) Total population 1.1 billion

    population lives in rural areas where Annual population growth 1.4%

    unemployment rates are higher and

    GDP per capita (purchasing power parity) $2,900incomes are significantly lower. In

    result, there is significant migration

    toward urban areas in search of work

    and better payment. The text box

    People below the national poverty line Life expectancy at birth (years) Literacy rate, adult male Literacy rate, adult female

    25%6470.2%48.3%

    People with access to safe drinking water 88%highlights some socio-economic Labor force 472 millionindicators of India and illustrates the Unemployment rate 9.5%seriousness of the economic and Source: CIA World Factbook, the World Banksocial deprivation.

    Typical for poorer nations, Indian consumers spend a significant proportion of their income on food.

    However, consistent with the positive reports and forecasts for increasing incomes, consumer

    expenditure on food is increasing.

    The confectionery market in India

    The confectionery market in India has undergone major changes and growth since the opening up of the

    economy and liberalization of the investment regime in 1991. India became an attractive

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    THE MARKET FOR CONFECTIONERY PRODUCTS IN INDIA

    Executive summary

    place for foreign investment and several large multinational companies entered the market for

    confectionery products. This resulted in its steady growth and gradual transformation from a

    commodity market to a branded products market dominated by multinational companies.

    Despite its vast population, India's confectionery market is still very small. It is valued at close to US

    $450 million, and is estimated to be 138,000 MT. Sugar confectionery (candies and toffees) has the

    largest share (50%), followed by chocolate, (16%), and bubble gum, (10%).

    Over the 1998 - 2003 period, confectionery retail sales have grown more than 55% in value terms

    and 46% in volume terms, at an average annual rate of 9.5% and 8% respectively. There is a clear trend

    of faster sales growth in value terms, indicating that consumers are increasingly ready to pay a

    premium for higher value products. The chocolate segment is the fastest growing in value terms (9.8%

    average annual growth rate) closely followed by the gum segment (9.5%). In volume terms gums

    grow at the fastest rate (8.5%), followed by chocolate and sugar confectionery (7.8% each). Atthe same time, to put these figures in some perspective, while retail sales for 2003 in India are

    estimated to have been US$562 million (Rs. 26,220 million), US$26 billion worth of confectionery

    products were sold in the US. In volume terms these figures were 127,000 MT in India and 3.3

    million MT in the US.

    While growth rates in general look rather healthy, and all agree that there is still large potential for

    further growth of the confectionery sector in India, many individual players have experienced slower

    growth in their sales over the last few years. This trend is partly attributed to the economic

    slow down that India experienced in 2000-02 and resulting decline in consumer spending.

    Confectionery products are impulse purchases which would be among the first to be cut out.Companies are fighting this trend by broadening their consumer base from primarily children and

    teenagers, to adults as well. Most of the large multinationals active in India are also actively marketing

    to rural India, where penetration is lower than the average for the country.

    The organized confectionery segment in India segment is dominated by the multinational

    companies; however, domestic players are increasingly finding a prominent position in the

    market. Cadbury India, Ltd. is by far the market leader, followed by Perfetti Van Melle India, Ltd. and

    Nestle India, Ltd. Other important players are Lotte India Ltd, Nutrine Confectionery Co Pvt Ltd,

    Candico India Ltd, Parle Products Pvt Ltd, Wrigley India Pvt Ltd, Gujarat Coop., Milk Marketing

    Federation, ITC Foods, Hindustan Lever Ltd, CAMPCO Ltd, and Lotus Chocolates Co. Ltd.

    Since import restrictions were eased in 2001, imports of confectionery products have grown

    rapidly, although they remain tiny and only a small part of the overall confectionery market. Put into

    context, India's total imports for 2002-03 and 2003-04, combined, are less than 1% by volume

    and value of US confectionery imports in 2003 alone.

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    Executive summary

    Retail chocolates and sugar confectionery account for the greatest share of total confectionery

    imported into India. In 2003-04, imports of retail chocolate totaled close to US $5.7 million.

    Imports of sugar confectionery fell close behind, totaling US $3.3 million, but registered a growth rate of

    100% from the previous year. Imports of bulk chocolate and chewing gum remained very small atroughly US $500,000 and US $400,000, respectively. In addition to the regular import channels,

    Indian also has significant gray imports. As a result, actual imports are probably larger than that shown

    by official statistics. Nevertheless, they remain very small.

    In the last two years, Malaysia and Singapore have been the leading suppliers of confectionery to India

    in terms of both value and volume. In 2003-04, the two countries accounted for more than 20% in

    value and more than 30% in volume of the total confectionery import market in India. However, in

    the last year, imports from Singapore have shown decline, particularly in volume term, while imports

    from the third largest supplier, the UAE, have grown almost 60% in volume terms and almost 40%

    in value terms. The growing importance of the UAE and the port of Dubai as center for exportand re-export of confectionery products was confirmed by our suppliers, many of who indicated

    this as a preferred route. The US is a relatively small supplier of confectionery to India and

    accounted for only 4% in value and 3% in volume of India's confectionery imports in 2003-04.

    However, US confectionery exports to India experienced significant growth from 2002-03 and more

    than doubled in value and increased roughly 80% in volume, albeit from a tiny base. Other leading

    suppliers that experienced significant growth in exports to India in 2003-04 included Australia, Brazil,

    Spain, and the UK. Confectionery exports from Spain registered the largest growth, increasing more

    than 500% in value and more than twice in volume.

    Consumption

    Confectionery products have very low penetration in the Indian market. Estimates suggest that

    chocolate penetration has been only 5% in 2000, and of sugar boiled confectionery, 15%. Even

    considering the more developed urban market alone, the category reaches just 22% of the

    consumers. For comparison, cookies, considered to have only modest penetration, have reached 56%

    of Indian households. In result, annual per capita consumption is also very low. It is estimated

    to be just over 300g (0.7lb) for chocolate and around 600g (1.3lb) for sugar confectionery. For

    comparison, per capita consumption of confectionery products in the US is around 25lb.

    Almost all confectionery purchases in India are believed to be impulse driven. Experts indicate that

    sugar confectionery and gum products consumption are driven almost entirely by impulse

    purchasing. The figure is lower for chocolates (about 70%), because of its increasing popularity as a

    gift for various occasions and during the festival season. In result, in their effort to increase

    consumption and product penetration, marketers have started to promote some products as

    appropriate snacks, not just an indulgence.

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    Executive summary

    Brand and origin awareness

    While domestically manufactured brands dominate the market and consumers have general

    awareness about them, foreign products and brands are becoming increasingly known. This trend

    is particularly noticeable in the urban areas and among middle and upper class consumers. We were

    consistently hearing similar comments from our respondents from all categories -

    manufacturers, importers and distributors, and retailers. These can be summarized as follows:

    The urban market is brand conscious; the rural market is price conscious. As onerespondent put it, "in the metro areas consumers associate brand names with quality;

    in the rural areas, consumers associate higher prices with better quality."

    The upscale niche market is focused on brand and image quality. Consumers arelooking for known brands with good quality images. Swiss and Belgium chocolates are

    considered the crme de la crme. It is in the upscale niche market segment, wherebrand and country of origin really matter to consumers when making purchasing

    decisions.

    Except for the top quality chocolates, consumers are usually not aware, and generallynot interested in where a product has been manufactured as long as they are familiar with

    the brand. For example, Tiffany is a popular brand with mass appeal mostly

    manufactured in the UAE. However, consumers associate it with the UK. Indeed, many

    of the large multinational companies have production faculties throughout the world and

    various distribution arrangements for different countries/regions. Thus frequently the

    global brand products may be manufactured at various places without consumers being

    aware or interested in the actual place of origin.

    Products from SE Asia and South America are more oriented to the mass market,while European and US products cater to the upscale market segments. Imported

    products in general are considered to be of higher quality than the domestic ones.

    Attractive packaging is very important for the brand image. Indians associate qualitywith good packaging. Imported brands are presented much better than Indian ones.

    US brands are less known than European ones. Mars and Hershey's are the only USbrand names with broader recognition in India. Consumers as well as the trade have

    generally have a good perception about the quality of US products.Pricing

    The Indian market is very price sensitive. There is a clear distinction between the larger mass

    market where price pressure is significant and the upscale niche market, where although

    important, price is secondary to quality and brand image.

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    Executive summary

    Most confectionery brands of Nutrine, Lotte, Wrigley's, Perfetti, Candico, Parle, etc. are from the

    Rs. 0.25 to Rs. 1 price categories. Some chewing gum and bubble gums are in Re. 1, Rs. 2 and Rs. 5

    categories. Most major companies including Cadbury's and Nestle are strongly pushing sales of their Rs.

    5, Rs. 7, and Rs. 12 categories. There is big difference in the prices of domestic and importedproducts. The general rule is that domestic products are the cheapest. Then, there are different

    ranges of prices for imported products, depending on the brand, country of origin, and product

    itself. Asian and South American products are usually moderately priced, while European and US

    products are the most expensive. For example, from the top end products, 100gm Lindt chocolate

    sells for around Rs. 130.

    An important factor that affects the price of the products is the Central Excise Duty payable by the

    organized/registered manufacturers is as follows. For sugar confectionery (without cocoa), it is 8%

    (recently reduced from 16%); for chocolate confectionery, it is 16%.

    Market forecast

    The confectionery market in India is expected to continue to grow at healthy rates. Sugar

    confectionery will remain the largest segment, and new products like mints, lollipops and chewing gum,

    as well as boxed assortments will grow at the fastest rates.

    The mass market will continue to be very price sensitive pushing manufacturers to price

    discounting and offering smaller packages in order to continue penetrating the rural market. On the

    other hand, the niche for more upscale products will also offer new opportunities for branded

    products. Boxed chocolates show the greatest potential for growth within the chocolate

    category; chewing gum, medicated confectionery and power mints are also expected to grow rapidly,

    particularly among the young adults segment.

    Lollipops is a new category and has sparked lots of interest among children; the category is

    expected to continue growing in the coming years.

    Experts expect that the adult market will offer an additional niche for some products.

    As the market grows, so will imports. Nevertheless they will remain small and with limited

    impact on the total market. Imported confectionery products will play a role primarily in the urban

    areas, in the more upscale market segments.

    Distribution

    The Indian food distribution system is characterized by a large number of intermediaries and

    relatively poor infrastructure, such as transportation, storage, and refrigeration facilities. It has low

    levels of efficiency, with the costs of distribution being rather high. Manufacturers and

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    Executive summary

    importers rely heavily on the middle man for the distribution of confectionery products in India. Most

    importers rely on distributors or wholesalers to reach retail outlets and confectionery

    manufacturers often rely on C&F agents or dealers to work with the wholesalers and

    distributors.

    India's retail sector is highly unorganized, as small independent stores are the main outlet for

    consumer purchases. Nevertheless, the retail sector is changing and the organized sector is

    gaining ground with the emergence of supermarkets and hypermarkets in metropolitan India.

    Confectionery products are predominantly purchased in small independent food stores, known as

    kiranas. However, over the last five years, convenience stores, supermarkets, and

    hypermarkets have played an important role in the distribution of confectionery products. In 1998,

    confectionery retail sales in convenience stores were virtually non-existent, but today these

    stores account for 2% of confectionery sales. During the same period, the share of retail sales bysupermarkets and hypermarkets has also increased, from roughly 6% to 8%.

    India's organized retail sector remains the preferred distribution channel for branded and

    imported products, including confectionery. Although this sector is thought to be in its infancy, rapid

    growth is expected over the short to medium-term, creating greater opportunities for imported

    confectionery products.

    Importing confectionery in India is primarily dependent on the location of the importer and the

    markets they serve. Most of the importers operate warehouses near the major ports and, in many

    cases, this is the JNPT port at Mumbai. For many importers, JNPT is the easiest port to distributeproducts not only to Mumbai and Delhi, but also to other major commercial and metropolitan

    areas. If imported confectionery is destined primarily to South India or North India, importers may

    use the ports at Chennai and Kolkata.

    Most confectionery imports are imported into India by sea. However, two importers that we

    interviewed imported by air, though this is a more expensive option.

    Market access

    The import tariffs for confectionery products vary from 30% to 45%. In addition, there are 16%

    additional CVD duty and 2% Custom Educational Cess.

    All imported products should fulfill the requirements of the Indian Food Law and the Standards of

    Weights and Measures Act. The latest issue of USDA's FAS report on India Food and

    Agricultural Import Regulations and Standards from July 2004 (GAIN report # IN4077) provides

    excellent background and all necessary information. The report can be viewed at:

    http://www.fas.usda.gov/gainfiles/200407/146107003.pdf

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    Executive summary

    Overall, the best approach for any potential exporter to India is to establish contacts and work with

    experienced importers and distributors, who would be able to provide the necessary guidance.

    Conclusions

    The Indian market for confectionery products has undergone significant changes over recent years.

    While penetration and consumption levels are still very low, overall sales, and particularly sales of

    higher value premium products have increased. The availability of imported products has also been

    rapidly rising since India liberalized its imports regime in 2001. Nevertheless, they are still very small

    leaving ample opportunities for further growth.

    The distribution channels have also undergone substantial changes. Supermarkets have emerged and

    started to gain power over other retail formats. With these changes in mind, we expect

    that:

    The share of imported confectionery will continue to increase over the next severalyears, although overall sales will remain modest. Indians' taste will continue to

    become more westernized and more quality conscious. This trend will be more

    obvious in the urban areas among middle and upper class consumers, offering higher- end

    foreign brands growth opportunities. While most domestic companies also focus

    their new product development efforts on the mass market, a few have products

    targeting premium products. Nevertheless, Indians associate imported products with

    higher quality, and therefore respond positively to confectionery imports. The

    United States along with Western Europe are perceived as offering highest quality,

    although there is very low awareness of US confectionery products and brands.

    Indian confectioners are increasing their efforts in product development andpromotional activities, and exporters will face stiffer competition from the domestic

    sector. On the other hand, the very low penetration and consumption levels provide

    ample opportunities for growth and make competition less of a constraint.

    However, for US exporters competition will be an important factor in the upscale

    niche segments, where European brands, particularly for chocolate are considered to the

    best.

    The popularity of chocolate products, particularly boxed assortments for gifts, willcontinue to increase.

    The sugar confectionery will remain the largest confectionery segment. We expectto see growth of new and novelty products, such as mint and medicated

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    Executive summary

    confectionery (with added vitamins and/or other minerals), as well as the new to the

    country sugar-free confectionery categories.

    While the traditional targets for confectionery products have been children andyoung people, increasing number of marketers have seen growth opportunities in

    targeting the adult consumer segment. This will lead to new products and marketing

    strategies aimed at them.

    There will continue to be opportunities for new products that appeal to the youngconsumer. The ever-present stimulus of novelty and fashion, encouraged by

    continuing exposure to western culture will keep the doors open for new products and

    new suppliers.

    Marketing and promotion expenditures for confectionery products will increase anddistributors will require promotional support from manufacturers.

    Recommendations

    Potential exporters should carefully select trading partners from among the Indianimporters and distributors, as they will be critical to ensuring presence of their

    products on retail shelves. Importing is a relatively new business in India, and many

    importers may lack the knowledge and experience to ensure successful distribution of

    the products they deal with. Therefore, it is of critical importance to select the right

    partner.

    Importers and distributors may have limited financial and human resources. ThusU.S. exporters should be willing to offer as much as possible support, particularly in the

    initial phase of market entry.

    U.S. exporters may directly contact potential importers and distributors to selecttheir partner(s). They may use the list of industry contacts provided in Section 6 or

    obtain contact through the US Embassy in New Delhi. The typical way of

    introduction is to send them company brochures, product catalogues, product

    samples, and price lists. A proper, formal introduction is important for a new

    entrant to make effective and productive contacts at potential partner firms.

    Mumbai and/or New Delhi are the most appropriate entry markets for US exporters.These cosmopolitan cities, with a larger number of affluent consumers exposed to

    western influences, as well as better developed infrastructure, are most appropriate for

    introduction of new US products that are generally higher priced than domestic and

    some imported products.

    India remains a very price sensitive market and appropriate pricing is key to thesuccess of new products. US exporters should carefully discuss their product pricing and

    positioning with their chosen partners in India.

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    Introduction

    SECTION 1: INTRODUCTION

    The Indian population represents roughly one-fifth of the global population. Many are poor and

    suffer deprivation. Despite this, by opening up its trade policy regime, India has attracted theinterest of many seeking new investment and market opportunities in food and agriculture.

    Moreover, there are a number of factors suggesting more opportunities in India in the future, such

    as the changing trade policy climate, consistent economic growth, rapidly growing middle class,

    increasing urbanization, and modernization of the retail sector. Though change is relatively slow, there

    are clear signs of movement in the food systems and indications that the potential market is

    immense, and while still immature, growing rapidly.

    However, consumption of confectionery products is relatively low and product penetration is still

    very limited. At the same time, observers have noticed opportunities for growth of the market

    and increasing potential for imported chocolate and other confectionery products.

    For these reasons, the decision of the National Confectioners Association (NCA) to research the

    Indian market for confectionery products and look at the opportunities for US exporters in India

    seems appropriate and timely. This report aims to provide description and understanding of the

    Indian market. We review the general economic and commercial environment and the developing

    situation in the Indian market for confectionery products. We also examine the competitive

    market conditions and review the general prospects for US products and potential entry strategies for

    US exporters.

    1.1 Objectives

    The specific objective of this research has been to provide US confectionery manufacturers and

    potential exporters to India with:

    A clear understanding of the Indian markets for confectionery products as they aretoday and the future market conditions in India;

    Market information necessary for making informed decisions regarding marketopportunities for their products; and

    Contact information for importers and distributors to enable them to begin enquiriesabout exporting opportunities.

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    Introduction

    1.2 Methodology

    We have used a combination of desk research and trade interviews. The core of the study has been

    based on personal interviews with various representatives of the trade. These gave us a very broadperspective of the market, market system, and the way it works. Overall, we had face-to-face

    interviews with 24 executives, as follows: 5 leading manufacturers, 13 leading importers, and 6

    retailers, including major candy chain stores and supermarkets. A full list of contacts is given in

    Appendix 3.

    Our interviews covered a wide range of issues. In particular, we gained a view of the status quo in the

    market, the key players, the bases of competition, and the forces for change.

    1.3 Report organization

    The report is organized as follows:

    Section 2 provides general background information about India; Section 3 reviews the Indian confectionery market by sector; Section 4 look at the distribution of confectionery products in India; Section 5 reviews the market access issues, such as tariffs and duties, food safety,

    packaging, and label requirements;

    Section 6 provides our conclusions and recommendations for US exportersinterested in the Indian market for confectionery products; and

    Section 7 lists some important industry contacts.Additional information is provided in the report appendices as follows:

    Appendix 1: brief description of the Indian market for sweetmeats; Appendix 2: profiles of the main players in the Indian confectionery market; and Appendix 3: list of the respondents to our trade interviews.

    1.4 Exchange rate used

    In the report we have presented data in US dollars when it refers to total market and includes

    imports. For descriptions of domestic market developments we provide values in Indian Rupees (Rs).

    2

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    Introduction

    Figure 1:

    During December 2004, there were 45

    Rupees to 1 US dollar. In 1995 the

    value was 32 and this has steadilydecreased over time (see Figure 1).

    The peak was in 2002, when the value of

    I US dollar was almost 47 rupees. At the

    time of writing this report, it is about

    43.5 Rs.

    60

    50

    40

    30

    20

    10

    0

    Average annual exchange rate: Rs per USD

    1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

    3

    Rs/US

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    SECTION 2:

    THE MARKET FOR CONFECTIONERY PRODUCTS IN INDIA

    India: Country background

    INDIA: COUNTRY BACKGROUND

    Diverse is the one word that describes IndiaFigure 2: India

    best. With an area approximately one-thirdthe size of the USA, it is home to over one

    billion people of considerable economic,

    ethnic, linguistic, cultural, and religious

    diversity. Scale alone catches the attention of

    any company looking for opportunities of new

    investment or exporting. Food consumption

    differences between religions, regions and

    income strata are simply too diverse for quick

    and simple categorization and generalization. At

    this stage in the country's development, thereare relatively few food products consumed

    by the entire Indian population. In short, the

    Indian food market has several layers of

    complexity, which need to be fully understood

    by the outsider.

    Despite this diversity in food consumption, some market segments in India are sufficiently large to

    attract the attention of companies willing to export to India or invest in the country. This section

    provides a brief description of the Indian economy today and depicts the diversity of India's

    people in a way that can be used in later sections to determine the potential marketopportunities for US confectionery products. Figure 3: India - political map

    2.1 General background

    India occupies a land territory of 2,973,190 sq. km

    (1,148,000 sq miles) in Southern Asia, bordering the Arabian

    Sea and the Bay of Bengal. By land it shares borders with

    Pakistan, Bangladesh, China, Nepal, Bhutan, and Burma

    (Myanmar).

    After almost two hundred years of British colonial rule,

    India gained its independence in 1947. Today, it has 28

    states and 7 union territories (see Figure 3) with New

    Delhi being the capital. India considers itself the largest

    democracy in the world. It is a

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    parliamentary federal state with a president who is elected for a five-year term by the elected

    members of the federal and state parliaments. In theory, the president has full executive power, but

    that power is actually exercised by the prime minister (head of the majority party in the federal

    Parliament) and his council of ministers, who are appointed by the president.

    Despite India's impressive gains in economic development, investment, and output, there are also some

    serious concerns. These include the ongoing dispute with Pakistan over Kashmir, serious

    overpopulation, environmental problems, extensive poverty, and ethnic and religious strife.

    The Indian north is more populous than the rest of the country, with Uttar Pradesh being the most

    populous state in India. The north has predominantly agricultural activity, and Punjab is the leading

    agricultural state in the country. Industrial development is moderate.

    The India south is well developed and relatively affluent with strong agriculture and industry. Theregion is the leader of the Indian IT sector, and Bangalore and Hyderabad are considered the

    Indian equivalents of the US Silicon Valley. It also has good coastal and land transportation

    infrastructure. This combined with the relatively higher incomes make the Indian South a typical entry

    point for new imported products, as well as a favorite test marketing region.

    The India west is the best developed part of the country with comparatively higher per capita

    incomes. The states Maharashtra and Gujarat are considered the industrial hub of India and

    attract most foreign investment. Mumbai, the capital of Maharashtra, is the financial capital of the

    country and a very important center for industrial activity.

    Opposite to the Indian west, the east and northeast regions are the least developed and poorest with a

    huge gap between the urban and rural populations. On the other hand this region is the major source

    for some natural mineral resources, such as coal, iron, and bauxite.

    2.2 Economic development and reforms

    Until the mid-1980s, India's inward looking socialist-oriented economic policies gave it a minor

    presence on the world economic stage. Despite being a founding member of the General

    Agreement on Tariffs and Trade (GATT), India's focus was mainly toward developing commercialrelations and trade with the Soviet bloc.

    The turnaround and reform of the Indian economy began in 1986 when the government initiated

    policies, which started opening its consumer markets to the western world. The reforms started with

    some tentative steps to open up the Indian marketplace to western products - both industrial

    and consumer. Restrictions on imports were relaxed, although very slightly. As a

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    result, trade with the western world started increasing, while trade with the Soviet bloc fell.

    However, with the sharp rise of imports by 1990, India's external debt almost tripled and its foreign

    exchange reserves dwindled to below US$1 billion.

    Rigidities in the domestic economy resulted in a serious slowdown in growth and a crisis of

    confidence. However, this crisis provided the much-needed stimulus for structural adjustment and

    reform. In the early 1990s, India's highly regulated industrial policy was changed drastically as controls

    were scaled down. Imports were further liberalized, and foreign investment was allowed in a

    wide range of sectors. The momentum of liberalization slowed as a result of scandal, which

    undermined the credibility of the government and their reforms. The voters elected a new

    government in 1996, the beginning of another phase of development.

    The new government was not particularly reform-oriented, but it realized early on that the

    economic policy changes that had been made could not be reversed. Nonetheless, thegovernment since 1996 has moved more cautiously on reforms - encouraged in part by the Asian crisis

    of 1998 - consolidating and institutionalizing the positive aspects and reworking the negative

    ones.

    The environment for domestic and foreign investment and trade has been progressively

    liberalized. Prior to the economic reforms in 1991, foreign investment in India was only $125

    million. Furthermore, India's imports were $27.9 billion and exports were $18.5 billion.

    However, between 1996 and 1997, foreign investment reached almost $6 billion and in 2000,

    imports and exports reached $50.5 billion and $42.3 billion, respectively. Since that date, they will

    have grown further.

    Import tariffs have been curbed per World Trade Organizations (WTO) commitments. In April 2001,

    all remaining quantitative import restrictions were removed. Nonetheless, the government continues to

    discourage imports through both tariff and non-tariff barriers. Today the import duties for most

    consumer food products range from 31% to 52%.

    Figure 4: GDP growth rateAs seen from Figure 4, gross domestic

    9

    product (GDP) has grown rapidly over

    the last 10 years. After dropping to a

    low 1.7% growth in 1991, the economyresponded positively to the wide-

    ranging reform measures to grow at

    4.2% in 1992 and to increase to 8% by

    876543210

    1995. Thereafter, growth has remained19

    9

    119

    9

    219

    9

    319

    9

    419

    9

    519

    9

    619

    9

    719

    9

    819

    9

    920

    0

    020

    0

    2 3200 4(es

    t. )

    over 5%, reaching 6.2% in 1999 and

    2000 (real GDP for 2000 was $459.2

    20

    0Source: Datamonitor and World Bank (for 2002 and 2003)

    6

    percen

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    billion).1 In contrast to the rest of Asia, India's economy suffered little from the economic

    meltdown in 1998. In fact, in that year, it experienced an estimated real growth rate of 5.8%,

    compared with the decline experienced in most other Asian economies (e.g. Indonesia -13.1%, Korea

    -5.8%, and Thailand -10%). In 2003, GDP growth increased to 8% and estimates for 2004 suggest that itwill be about 8.3%.

    In sum, India has managed to maintain economic growth despite surrounding economic turmoil, and

    this growth has not been at the expense of unruly inflation. While the country consistently carries a

    trade deficit, growth in exports has been significant. In addition, liberalization has encouraged

    foreign investment in the country, although such is the political environment that this wind blows hot

    and cold.

    However, despite these encouraging signs, with a per capita GDP of roughly $545 per annum, many

    in India are not reaping substantial economic rewards, although the overall situation in the country hasimproved markedly in the past decade.

    2.3 India's people

    2.3.1 Population and main socio-economic indicators

    The Indian population is close to 1.1 billion people, representing one-fifth of global population.

    There are more than 1,000 languages spoken in the country, nearly 400 of which are spoken by more

    than 200,000 people. However, only 18 are officially recognized, and Hindi, the primary tongue of

    30% of the population, is India's national language. Various States also have their own official languagesand some of the most widely spoken ones are Punjabi, Bengali, Tamil, Gujarati, Urdu, Telugu, and

    Marathi. In addition, English which enjoys associate status is the most important language for

    international and commercial communication.

    India also has a very large proportion of poor people. More than 400 million live with less than $1 per

    day, without the resources to buy even basic foods. Almost 40% of India's people are illiterate.

    The text box below highlights some socio-economic indicators of India and illustrates the

    seriousness of the economic and social deprivation.

    1 Different sources give slightly different figures for the GDP growth. For example, Reserve Bank of Indiadata shows GDP growth to have dropped to 0.8% in 1991 and the World Bank shows growth of 7.5% in1995. Despite the differences the trend is clear, India has shown a healthy growth over the last 10 years

    and even during the Asian crisis managed to maintain much better economic indicators than many otherAsian countries.

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    A socio-economic snapshot of India (2004)

    Total population

    Annual population growth

    GDP per capita (purchasing power parity)

    Percent of population below the national poverty line

    Life expectancy at birth (years)

    Literacy rate, adult male

    Literacy rate, adult female

    1.1 billion

    1.4%

    $2,900

    25%

    64

    70.2%

    48.3%

    Percent of population with access to safe drinking water (Year 2000) 88%

    Labor force

    Unemployment rate

    472 million

    9.5%

    Source: CIA World Factbook, the World Bank

    2.3.2 Age

    The Indian population is young. As seen from Figure 5,

    only 5% of the population is older than 65 and over

    30% is under 15 years of age. Indeed, the US Census

    Bureau International Database indicates that just over

    50% of the population is younger than 25. Generational

    differences can often be translated into eating patterns.

    The younger generation of Indians is more westernized

    in their eating habits than older generations,

    particularly those in higher income groups. Younger

    professionals are more open to experimenting with

    food products, as their lifestyles resemble their

    counterparts in western societies. They consume

    more packaged, processed foods and

    give greater importance to quality, time, and convenience.

    Figure 5: Population distribution by age

    65 years and over

    5%Under 15 years

    32%

    15 - 64 years63%

    Source: CIA World Factbook

    As life expectancy increases, population growth slows down, and the population's economic

    conditions continue to improve, the Indian population will gradually start to age. Nevertheless, as

    seen from the graphs in Figure 6, India will remain a predominantly young nation for the

    foreseeable future, although by 2025 the proportion of the population younger than 25 is

    expected to be down from 50% to about 40%.

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    Figure 6: Population pyramids in India (1995 - 2050)

    2.3.3 Income

    Despite the progress in reducing poverty over the last years, India remains a very poor country with

    vast disparities between the different income groups in India. The good news, however, is that the

    high income class is expanding fast, middle income classes are bulging in size (especially in rural India),

    and the low income class is shrinking rapidly.

    In a recent publication, The Indian Consumer Market 1997 to 2007, the National Center of

    Applied Economic Research (NCAER) in India has very good news for the country's economy.2 It

    concludes that for the covered period the very rich will grow six fold, the consuming class will triple,

    and the economic destitute will decline three fold. The NCAER breaks the population into five

    groups: Rich (high income), Survivors (upper middle income), Climbers (middle income), Aspirants

    (lower middle income), and Deprived (low income and poor). The consuming class comprises the

    first four categories.

    Each segment of the Indian population offers distinct growth and marketing opportunities.

    According to the NCAER, the top four segments of the population constituted a market of over 200

    million people (about 20% of the population) in 1997. Based on its forecast, this group

    2 The NCAER is an old and highly respected institution in India, known for the accuracy of its forecasts. Itsreports are widely used for decisions made by marketers, economists, analysts, and investors.

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    should grow to well over half a billion people by 2007. This 'consuming class' segment is the focus of

    attention for aspiring branded food and beverage companies. A major portion of the Indian

    population has very low incomes. Today, roughly one-quarter of the population is living below the

    nationally defined poverty line, down from over 30% in 1998. The NCAER's report predicts thatover the reviewed period the number of aspirants and deprived will decrease significantly as

    people shift up and into the growing ranks of the consuming class. The decline of the number of

    poorest people observed over the last five years is a positive sign in this direction.

    NCAER forecasts are made on the basis of the following assumptions: the economy will be

    growing by 7%; the average Indian household has 5.7 members; and electricity is available in most

    households. Many have found it hard to believe that the economy will touch and stay at 7%

    (although it has exceeded this figure in 2003 and 2004), or that electricity can be a presumed a

    stable service (although power sector reforms which are currently underway can bring in

    efficiencies). Going by NCAER's assumptions, in the year 2007:

    40% of the house-holds will have washing machines; 100% will have more than one wrist watch; 77% will have refrigerators; 94%, pressure cookers; 57%, color televisions; and 61%, two wheelers.

    This expected prosperity, will not simply be the result of investments, creation of jobs, and the

    consequent rise in disposable incomes. Simultaneous with the rise in economic growth, is a

    predicted fall in population growth. In the 1990s the population grew at about 2.2%, while it has now

    declined 1.4%.3 The combination of all these factors has resulted in higher per capita income.

    In summary, the punch-line of the NCAER forecast might well be the following:

    By the year 2007, the combined numbers of the upper-classes (annual incomebetween Rs.45,000 and Rs.215,000) and the 'very rich' (Rs.215,000+) will outnumber

    the households with less than Rs.45,000 a year!

    The development of a market segment with the economic resources to express a choice

    represents an opportunity for US exporters of products.

    3 Depending on the source, this figure varies from 1.4 to 1.7%. Nevertheless, the downward trend isclearly visible.

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    2.3.4 Urbanization

    One of the most significant demographic

    developments in India is the shift of the

    rural population to urban centers, caused 1,600

    Figure 7: Population growth projections

    primarily by the underemployed 1,4001,200

    agricultural laborers who move to towns

    and cities in search of work. However,

    despite the rapid growth of urban

    population, India is still a primarily rural

    country with about 70% of the population

    living in rural villages. As Figure 7 shows,

    1,000800600400200

    0

    2000 2005 2010 2015 2020 2025 2030

    it is expected that the urban populationwill continue to grow at least 4% per

    annum, while the rural population will decline.

    RuralSource: United Nations

    Urban

    The migration towards the urban centers has also expanded smaller towns and cities resulting in their

    growth and further development. Today there are about 35 Indian cities with a population exceeding

    one million, compared to about 25 cities in 1997. The rapidly developing economy is reaching smaller

    cities creating a "swelling base of affluent, upwardly, mobile consumer with the same needs, wants, and

    desires as the residents of bigger cities", according to KSA Technopak,

    India's largest management consulting company. This observation is confirmed by NCAER's

    research, which indicates that over half of the 10.7 million households with income of less than Rs. Imillion ($23,000) live in smaller cities. But even more, the report also indicates a big rise in number of

    the rich households with incomes of Rs. 1 to 5 million in the smaller cities. Overall,

    in the urban areas, most social-economic indicators are significantly better that nation's average.

    The urban population is the most important target market for imported products for several

    reasons. Income is one of the most important factors and it is approximately much higher in the urban

    areas than in rural India. They are the exclusive market for various imported and more expensive

    products. According to a recent consumer survey conducted by KSA Technopak, urban consumers

    spent over US$ 30 billion on themselves in 2002, a 12% year-on-year increase.4Even more, the

    company predicts that annual increase in consumer spending will jump to over 15% by 2008.

    In addition, the major urban areas have a more developed food distribution system, another

    reason for being an important target for imported food products. Large cities have a variety of

    4 The survey is based on a sample of 10,000 four-member families with earnings slightly higher than theaverage in 20 Indian cities.

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    restaurants, including westernized chain restaurants and some large chain grocery retailers.

    Indeed, Knight Frank, India, a major real estate and property management company, ranks India fifth in

    the list of 30 emerging retail markets globally, and predicts 20% growth for the segment by 2010. The

    "brand-conscious urban population", which "forms the largest segment of demand for the majority ofretailers has grown over 3% a year over the past decade," according to Knight Frank, India who also

    says that the organized retail segment is expected to grow from a mere 2% to 20% by the end of the

    decade. This is not surprising, considering that the organized retail sector is growing at 8.5% per

    annum.

    Despite its deprived position compared to the urban market, rural markets are also growing.

    Although on a smaller scale, the economic development has had its impact on rural areas as well. In

    addition, infrastructural development (including of the service sector) and the improved

    performance of the agricultural sector will contribute to the further growth of this market

    segment. However, unlike the increasingly 'brand conscious' urban consumers, rural consumers are, andwill remain extremely price sensitive. Thus, although they are an increasingly important target for

    domestic FMCG, including confectionery products, the focus of marketers of imported goods remains

    on the more affluent and westernized urban segment.

    2.4 ReligionFigure 8:

    Food habits in India are influenced by religious Religious breakdown of the Indian population

    principles. As seen from Figure 8, Hinduism isChristian Sikh Other

    dominant but India is also the home of a widerange of other religions.

    Despite the common belief that most Indians

    are vegetarians, over 75% of the population

    eats meat. However, there are some taboos on

    the specific foods and meat in particular. The

    table below outlines some of the eating

    practices of the major Indian religions.

    2%Muslim

    12%

    2%

    3%

    Hindu81%

    Others, includeBuddhist, Jain, Parsi

    Source: CIA World Factbook

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    Religion

    Hinduism

    Islam

    Christianity

    Sikhism

    Buddhism

    Jainism

    Eating habits

    All income groups in upper castes are strict vegetarians

    Lower castes are mostly non-vegetariansTaboo on beef in all castes, as bovines are considered sacred

    Non-vegetarian

    Taboo on pork

    Preference for halal meat

    Mostly non-vegetarian with no taboos

    Some sects are vegetarians, and some are not

    Mostly vegetarian

    Strict vegetarians

    2.5 Consumer spending and food purchasing behavior

    Although it is the second most populous country in the world and despite the positive forecasts for

    economic development and increasing incomes, India is still a very poor country. This reflects

    on the levels of consumer spending and as seen from the table below, South Asia accounts for

    only a small percentage of the overall global consumer spending despite the large proportion of

    population it represents.

    Consumer Spending and Population, by Region, 2000

    Region

    Share of

    World Private

    Consumption

    Expenditures

    Share of

    World

    Population

    United States and Canada

    Western Europe

    East Asia and Pacific

    Latin America and the Caribbean

    Eastern Europe and Central Asia

    South Asia

    Australia and New Zealand

    Middle East and North Africa

    Sub-Saharan Africa

    Source: the Worldwatch Institute

    31.5

    28.7

    21.4

    6.7

    3.3

    2.0

    1.5

    1.4

    1.2

    ( percent )

    5.2

    6.4

    32.9

    8.5

    7.9

    22.4

    0.4

    4.1

    10.9

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    Typical for poorer nations, Indian consumers spend a significant proportion of their income on food.

    However, consistent with the positive reports and forecasts for increasing incomes consumer

    expenditure on food is estimated to have been close to Rs. 6 billion in 2002, a 6.6% current value

    growth over 2001.5 Also, it has been estimated that Indian consumers have spent just under 40% oftheir annual income on food, down from 44% in 2000. Most of this is spent on basic food items, such

    as grains, pulses, vegetable, oils, sugar; however, in recent years an increased spending on higher

    value products has been a noticeable trend.

    Indians have a very strong preference for fresh products which are generally perceived to be

    healthier, as well as for traditional spices and ingredients. Indians are notoriously conservative about

    food and many strictly follow traditional ethnic and dietary habits which is a barrier to the growth of

    the packaged foods sector. The generally higher prices of packaged foods, also put them beyond

    reach for a large proportion of the population. Hence, the according to trade experts, packaged

    foods account for only about 5% of the total food consumption in India. Sales are generated mostly inthe urban areas, and in 2003 have accounted for about three quarters of the total sales of packaged

    foods in India.

    However, with rising incomes and changing lifestyles (e.g. more westernized younger consumers, more

    women entering the workforce, less time available for cooking from scratch) sales of packaged

    foods are expected to increase, although at relatively slow rates. It is also expected that rural India

    will contribute to this growth as average incomes rise and the distribution network and

    infrastructure develop.

    The table below shows the retail sales of packaged foods for the 1998 - 2003 period. Ice cream andfrozen foods have been the fastest growing categories, but bakery products are the largest category,

    accounting for about a third of the total sales of packaged foods. Although sales have been modest,

    the confectionery products segment has been growing at a healthy rate.

    Retail sales of packaged foods (in billion Rupees)

    Average

    1998 1999 2000 2001 2002 2003 annual

    growth

    Confectionery 17 18 20 22 24 26 9%

    Bakery products 72 79 87 96 104 113 9%Ice cream 3 4 5 5 67 19% Dairyproducts 41 44 48 53 59 65

    10% Sweet and savory snacks 4 45 66 7 12% Snack bars -- -- -- -5 Source: Euromonitor

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    Average

    1998 1999 2000 2001 2002 2003 annual

    growth

    Meal replacement products 3

    3

    3

    3

    4

    4

    7%Ready meals - - - - - - -Soup 0.3 0.3 0.3 0.4 0.4 0.4 7%

    Pasta - - - - - - -Noodles 2 2 2 2 3 3 10% Canned food 1 1 1 1 11 0% Frozen food 2 2 3 3 34 17% Dried food 14 15 17 19 21

    23 10% Chilled food - - - -- - -Oils and fats 56 59 62 66

    69 73 5% Sauces, dressings, condiments 89 10 11 12 14 12% Baby food 23 3 3 3 3 10% Spreads 22 2 2 2 2 0%Packaged food 6 225 245 266 291 316 342 9

    %

    Source: Euromonitor

    6 The sum of sectors does not equal the total packaged foods because of double counting. For example,canned soups are included in soups and canned food.

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    The confectionery market in India today

    SECTION 3: THE CONFECTIONERY MARKET IN INDIA TODAY

    3.1 General background

    The chocolate and confectionery market in India has undergone major changes and growth since the

    opening up of the economy and liberalization of the investment regime in 1991. India became an

    attractive place for foreign investment and several large multinational companies entered the market

    for confectionery products. This resulted in its steady growth and gradual transformation from a

    commodity market to a branded products market dominated by multinational companies.

    Compared to the conventional fast moving consumer goods (FMCG), the confectionery segment in

    India offers significantly higher potential for growth. For example, over the past five years toilet

    soaps and detergents reached over 90% of the Indian households, while according to ORG- MARG

    estimates, chocolate penetration in 2000 was 5% and of sugar boiled confectionery, 15%.7Evenconsidering the urban market alone, the category reaches just 22% of the urban consumers. For

    comparison, cookies, considered to have modest penetration have reached 56% of the Indian

    households. Clearly the confectionery sector, which has been showing healthy growth over the last

    years, still has considerable potential to grow before it reaches saturation point, as have traditional

    FMCG products such as soaps and detergents. Indeed, the confectionery market in India is

    witnessing tremendous activity. Regular product launches, high decibel media activity, consumer

    promotions and trade promotions make this one of the most hyperactive categories in the Indian

    market.

    The Indian confectionery market is segmented A note on data availability and accuracyinto sugar-boiled confectionery, chocolates, mintsWe have made our best effort to provide as

    and chewing gums. Sugar-boiled confectionery,accurate and comprehensive data as possible.

    consisting of hard-boiled candy, toffees and otherHowever, it should be kept in mind that

    sugar-based candies, is the largest of the segmentsofficial statistics about the confectionery

    and, according to some key industry players wesector in India are scarce and there is a large

    spoke to, it is valued at around Rs. 20,000 million.'gray' sector that is unaccounted for by officialsources. Most of the numbers we quote in

    Some of the largest multinational companiesthis report are based on estimates of some of

    active in the confectionery sector, like Cadbury,the main industry players. In result, there are

    Nestle and Perfetti, have already invested in India some inconsistencies.and others keep entering the market (e.g. Lotte in2004). Also, global mergers and acquisitions have

    7 ORG-MARG is a Mumbai based market research company specializing in consumer behavior,entertainment information, media information and precision marketing. It also has exclusive professional

    alliances with international leaders in a number of specialist areas of market research and is part of theVNU, The Netherlands - which belongs to AC Nielsen network of market research companies.

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    The confectionery market in India today

    resulted in consolidation of some of the major players in this segment in India (e.g. Perfetti with Van

    Melle, Joyco with Wrigley, and Lotte with Parry's). Some large Indian companies have also entered the

    confectionery market by leveraging their overall brand equity and distribution infrastructure for

    their existing product lines. In result of these active developments and the positive socio-economicchanges in India, both per capita consumption and availability of higher quality products are expected

    to grow in the coming future.

    At the same time, India's confectionery market is very price-sensitive, which makes it difficult for

    marketers to raise prices. This price sensitivity plays to the advantage of a large unorganized

    production sector in India. These are numerous small scale/backyard operators who are not

    registered and do not pay excise duties to the government. At the same time they maintain very low

    operational costs. These factors allow them to sell at very low prices and to achieve

    significantly higher margins than the organized sector.

    However, there are clear signs for a growing market segment for higher value products. With the

    growth of the middle class, increasing number of consumers are willing to pay a premium for quality,

    which has given a boost to product and packaging innovation. Brand consciousness is growing in this

    category as well.

    Last but not least, any review of the Indian confectionery sector should take into account the

    traditional sweetmeat sector. While not directly included in the scope of this study, Indians have

    strongly ingrained traditions and tastes, and frequently prefer and seek the traditional sweetmeats they

    are used to instead of a chocolate or other confectionery product. Thus, sweetmeats directly

    compete for consumer stomach share. In addition, sweetmeats are generally cheaper, a veryimportant factor in the price sensitive Indian market. A brief description of the sweetmeat market is

    given in Appendix 1.

    3.2 The confectionery sector

    3.2.1 Market size

    Despite its vast population, India's confectionery market is still very small. With a population about

    five times larger than the US, the volume size of its confectionery market is more than 20 times

    smaller. It is valued at close to US $450 million, and is estimated to be 138,000MT, as illustrated inFigure 9.

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    Figure 9: The Indian confectionery market - 138,000MT

    Other17%

    Candies & Toffees

    Chocolates

    Breath Fresheners

    Bubble Gum

    Chewing Gum

    Other Categories

    68,000 MT

    22,500 MT

    7,000 MT

    14,000 MT

    3,350 MT

    23,150 MT

    Chewing gum2%

    Bubble gum10%

    Breath fresheners5

    %

    Candies & toffees50%

    Chocolates16%

    Source: Industry experts and leading manufacturers estimates, Promar's trade interviews

    As seen from Figures 10 and 11 below, retail sales have shown healthy growth over the last

    several years. Indeed, over the 1998-2003 period overall sales have grown more than 55% in valueterms and 46% in volume terms, at an average annual rate of 9.5% and 8%, respectively. There is a

    clear trend of faster sales growth in value terms, indicating that consumers are increasingly

    ready to pay a premium for higher value products. The chocolate segment is the fastest growing in

    value terms (9.8% average annual growth rate) closely followed by the gum segment (9.5%). In

    volume terms, gums grow at the fastest rate (8.5%), followed by chocolate

    and sugar confectionery (7.8% each). At the same time, to put these figures in some

    perspective, while retail sales for 2003 in India are estimated to have been US$562 million (Rs.

    26,220 million), close to US$26 billion worth of confectionery products were sold in the US. 8 In

    volume terms these figures were 127,000 MT in India and 3.3 million MT in the US.

    While growth rates in general look rather healthy, and all agree that there is still large potential for

    further growth of the confectionery sector in India, many individual players have experienced slower

    growth in their sales over the last few years. This trend is partly attributed to the economic

    slow down that India experienced in 2000-2002 and resulting decline in consumer spending.

    Confectionery products are impulse purchases which would be among the first to be cut out.

    Companies are fighting this trend by broadening their consumer base from primarily children and

    teenagers, to adults as well. Most of the large multinationals active in India are also actively marketing

    to rural India, where penetration is even lower than the average for the country.

    8 The average exchange rate for 2003 was Rs. 46.66 for US$1.

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    Figure 10: Retail sales of confectionery products

    30

    25

    20

    15

    10

    50

    a) Value

    140

    120

    100

    80

    60

    40

    20

    0

    b) Volume

    1998 1999 2000 2001 2002 2003 1998 1999 2000 2001 2002 2003

    Chocolate confectionery Sugar confectionery Gum Chocolate confectionery Sugar confectionery Gum

    Source: Euromonitor

    Figure 11: 1998 -2003 confectionery sales growth

    12

    10

    a) Average annual growth rate

    9.8

    70

    6059.8

    b) Total growth

    86420

    9.1 9.5 9.47.8 7.8

    8.57.9

    50

    40

    30

    20

    10

    0

    54.4 57.3 56.845.8 45.5

    50.246.2

    Value Volume Value Volume

    Chocolate confectionery Sugar confectionery Gum Confectionery Chocolate confectionery Sugar confectionery Gum Confectionery

    Source: Euromonitor

    3.2.2 Some specific market characteristics

    Some specific characteristics of the Indian confectionery market, compared to the developed

    western markets are:

    India is primarily a mono-pack market while the market worldwide is a multi-packmarket.

    While the trade and distribution in western countries is mostly organized, in India,retail outlets like paan shops and kirana outlets account for the bulk of the sales and

    organized trade still has only an insignificant share in overall confectionery sales.

    Functional products and sugar free confectionery dominate the worldwide marketwhile this trend is yet to pick up in India.

    19

    Thousand

    Billion

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    Percenta

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    Sugar confectionery will remain the largest confectionery type. As younger children are traditionally the key consumer group for confectionery,

    pricing strategies play a significant role in shaping purchasing decisions.

    50 paise is the most popular price-point and around 85% of confectionery sales occurat this price point - but there are some products in the rural markets that are

    available at 25 paise. The Re 1 price-point is not very popular.

    Gum confectionery will be the fastest growing category, albeit from a smaller retailbase.

    Instead of chewing on paan (betel nut leaf) to freshen one's breath or using spicessuch as fennel to aid digestion, the local population is increasingly turning to branded

    confectionery products such as chewing gum and mints. Consuming products such as

    mint and medicated confectionery conveys a sophisticated image, which appeals to youngpeople.

    Manufacturers are increasingly looking to create a shift from manufacturing low-margin products like toffees and boiled sweets to higher-margin products such as gum

    and chocolates confectionery.

    There is strong growth potential for chocolate; sales of chocolate confectionery areexpected to continue to grow by more than 8% per year in value terms. This is due to

    the low penetration of chocolate confectionery in rural areas as well as the general

    low consumption of such products among adults.

    3.2.3 Manufacturers and key players

    The organized confectionery segment in India segment is dominated by the multinational

    companies; however, domestic players are increasingly finding a prominent position in the

    market. The key players in the confectionery sector in India today are:

    Cadbury India Ltd is the largest manufacturer of chocolate, confectionery andmalted food products.

    Nestle India Ltd is a manufacturer and marketer of coffee, tea, malted beverages,instant baby cereals & foods, milk products, chocolates and confectionery, instantfoods and culinary products.

    Lotte India Corporation Ltd is primarily a manufacturer and marketer of sugarboiled confectionery, cocoa and milk based toffees, candies and mints.

    Nutrine Confectionery Co Pvt Ltd is a manufacture and marketer of sugarboiled confectionery, cocoa & milk based toffees, candies, clairs and fruit bars.

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    Candico India Ltd is a manufacturer and marketer of sugar boiled confectionery,candies, gums, mints and toffees. They are also the largest contract manufacturer for

    various Indian and overseas confectionery companies.

    Perfetti Van Melle India Ltd is a manufacturer and marketer of sugar basedconfectionery and is a leader in the candy and gum segments of the confectionery

    market.

    Parle Products Pvt Ltd is a manufacturer and marketer of cookies, sugar boiledconfectionery, and cocoa and milk based toffees.

    Wrigley India Pvt Ltd is a manufacturer and marketer of chewing gum (Wrigleybrands) and sugar based confectionery, bubble gum, chewing gum and candy (Joyco

    brands).

    Gujarat Cooperative Milk Marketing Federation is India's largest foodproducts marketing organization and manufacturer of milk and milk products, ice

    creams, chocolate and confectionery, and ready to eat products.

    ITC Foods, a division of ITC Ltd made a foray in the confectionery market in year2002.

    Hindustan Lever Ltd, India's leading FMGC company, has a presence in theconfectionery market since 2001.

    The CAMPCO Ltd is a leading processor of cocoa and cocoa based industrialproducts and has a small presence in the branded chocolate sector.

    Lotus Chocolates Co. Ltd is another processor of cocoa and cocoa basedindustrial products with a small presence in the branded chocolate sector.

    In addition, India also has a large unorganized manufacturing sector, of small producers offering

    very low priced products. There are no statistics about the size of the unorganized sector, but

    according to some industry sources, the unorganized sector can account for up to 50% of the

    market. We believe that this figure is exaggerated, but the main point is that the unorganized

    sector still plays a very important role in India, although it will gradually begin to decline.

    3.2.4 Market snapshots for 2004

    The confectionery industry in India has experienced some hectic activity in the year 2004.

    January 2004 - Lotte Confectionery Co Ltd, Korea acquired a 60.39% stake ofParry's Confectionery Ltd from the Chennai-based Murugappa Group. Also in

    September 2004, Parry's Confectionery Ltd officially became Lotte India Corporation Ltd.

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    January 2004 - Wm Wrigley Jr Co's global acquisition of Spanish major JoycoGroup saw a significant restructuring of operations involving the two Indian

    companies, Joyco India Pvt Limited and Wrigley India Private Limited. In May 2004, the

    Wrigley-Joyco combination in India announced that they will operate as a single entity,Wrigley India Pvt Ltd, and will consolidate and market brands of both companies in

    India.

    April 2004 - Sweet World, a Mumbai based candy chain announced their plans toopen 20 outlets across India by 2005. The candy market in India set to experience

    significant action and innovation.

    June 2004 - Effem India Pvt Ltd., a wholly owned subsidiary of Mars Inc., USA,announced that it is consolidating the presence of its flagship chocolate brands Mars, Twix,

    Snickers and Bounty in India through imports. Imports commenced in August 2004.

    September 2004 - Perfetti van Melle India Pvt Ltd announced an additionalinvestment of Rs. 2000m in India to increase its manufacturing capacity for marketing and

    brand building. Parfetti also announced the upgrading of the Van Melle unit, which it

    had acquired after the global acquisition of Van Melle in 2002. The Chennai unit will

    increase production of the former Van Melle brands - Marbels, Mentos and Fruittella.

    October 2004 - Candico India Ltd became the 1st Indian multinationalconfectionery company to setup a manufacturing unit in Tanzania with an investment of

    US$1million.

    October 2004 - Cadbury India Ltd announced its foray into the confectionerysector with the re-launch of Adam's Halls and Clorets lozenges, formerly WarnerLambert India Pvt Ltd brands. This was consequent to the acquisition of the global non-

    chocolate confectionery business of Pfizer Inc., USA by Cadbury Schweppes plc., UK, in

    2002. Cadbury India Ltd announced that it will strengthen its position in the

    confectionery sector with the launch of gums in 2005.

    November 2004 - The Rs. 7500m Delhi based DS Group announced a Rs. 750mjoint venture with Lotte Company Japan, to manufacture chewing gum, chocolate,

    candy and other confectionery in India by setting up a new plant by 2005.

    December 2004 - Nutrine Confectionery Co. Pvt Ltd announced an investment ofRs. 100m to install a new candy process line for manufacturing deposit candies.

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    3.2.5 Market shares and brands

    Cadbury India, Ltd. has by far the largest market share in the confectionery sector. Although other

    players are catching up, its leading position will remain unthreatened for the coming years. The

    following table specifies the sales market shares of the leading companies in India for 2001 and 2002.

    Confectionery companies shares

    Company 2001 2002

    (% retail value)

    Cadbury India Ltd

    Perfetti Van Melle India Ltd

    Nestl India Ltd

    Nutrine Confectionery Co Ltd

    Joyco India LtdParle Products Ltd

    30

    14.2

    9.8

    7.5

    5.74.7

    29.6

    14.4

    10.2

    7.4

    5.84.6

    Parry's Confectionery Ltd 9 4.6 4.5

    Ravalgaon Sugar Farms Ltd

    Hindustan Lever Ltd

    Gujarat Co-op Milk Marketing Federation Ltd

    Warner-Lambert India Pvt Ltd

    Candico India Ltd

    Wrigley India Pte Ltd

    Agro Tech Foods Ltd

    Ferrero SpA

    Private Label

    Others Total

    Source: Euromonitor

    More detailed profiles of the main players are given in Appendix 2.

    2.1

    1.7

    1.4

    1.2

    1.1

    0.4

    -0.1

    0.6

    14.8

    100

    2.1

    1.7

    1.5

    1.2

    0.9

    0.4

    0.2

    0.1

    0.6

    14.6

    100

    From a bulk market for confectionery products, India is quickly transforming into a market for

    branded products. Today's consumers, particularly from the middle and upper classes, are brand aware

    and to a great extent their perceptions about the quality and value of any given product is based on

    the image of the brand rather than on the country of origin or other factors. In result, all leading

    companies in the sector are focused on developing and promoting their main brands

    9 After being purchased by Lotte Confectionery Co Ltd. Korea in 2004, the company was renamed toLotte India Corporation Ltd.

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    through creative marketing and advertising strategies. Cadbury India's brands have by far a leading

    position in terms of sales; it has four brands among the top 10 selling brands. Cadbury's Dairy Milk

    brand is the most popular in India, with sales share (in value terms) of over 12%, far ahead of the

    second best seller, Perfetti's Alpenliebe. The following table shows the leading chocolate andconfectionery brands in India.

    Confectionery brands shares (percentage of retail value)

    Company Brand 2001 2002

    Cadbury India Ltd

    Warner-Lambert India Pvt Ltd 10

    Cadbury's Dairy Milk

    Cadbury's Dairy Milk clairs

    Cadbury's 5 Star

    Cadbury's Perk

    Cadbury's Celebrations

    Cadbury's GemsGoogly

    Cadbury's Mr Pops

    Trebor

    Halls

    Clorets

    12.4%

    4.1

    %

    4

    %

    3.6%

    1.9

    %

    1.5

    %

    0.2

    %

    0.3

    %0.3

    %

    1

    %

    0.2

    %

    12.3%

    4

    %

    3.9%

    3.5%

    2%

    1.4%

    0.3%

    0.3%

    0.3%

    1

    %

    0.2%

    Total for Cadbury's brands

    Perfetti Van Melle India Ltd

    Total for Perfetti's brands

    Nestl India Ltd

    Alpenliebe

    Big Babol

    Center

    Cofitos

    Chlor-Mint

    Mentos

    Fruit-tella

    Marbels

    Kit Kat

    Nestl Classic

    PoloMilkybar

    M

    u

    n

    c

    h

    Nestl

    Bar

    One

    S

    o

    o

    th

    er

    s

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    29.5%

    4.8%

    4%

    1.8% 1.4%

    1%

    0.7% 0.5% 0.1%

    14.3%4%

    2.1%

    1%

    0.7% 0.4% 0.4% 0.3%

    29.2%

    4.7%

    4%

    1.9% 1.3%

    1.1% 0.7%

    0.5% 0.1%

    14.3%4%

    2.3%

    1%

    0.7% 0.6%

    0.4% 0.3%

    10 Warner Lambert's brands are currently part of Cadbury's portfolio, a result of the purchase of Pfizer'sconfectionery business in 2002.

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    Company Brand 2001 2002

    After Eight 0.2% 0.2%

    Frutips 0.1% 0.1%

    Total for Nestl's brands 9.2% 9.6% NutrineConfectionery Co Ltd Maha Lacto 3.1% 3%

    Nutrine 2% 2%

    Koka Naka 1% 1%

    Total for Nurine's brands

    Joyco India Ltd

    Wrigley India Pte Ltd

    Total for Wrigley/Joyco's brands

    Parle Products Ltd

    Total Parle's brands

    Parry's Confectionery Ltd

    11

    Naturo Fruit Bar

    Boomer

    Pim Pom

    Bonkers

    Trex

    Doublemint

    Kismi

    Parle Mango Bite

    Parle Poppins

    Parle Orange Candy

    Parle Mint Extra Strong

    Coffy Bite

    Lacto King

    0.4

    %

    6.5

    %

    3.8

    %

    1.6

    %

    0.2

    %

    0.1

    %

    0.3

    %

    6

    %2.7

    %

    0.8

    %

    0.5

    %

    0.2

    %

    0.1

    %

    4.3

    %

    2.5

    %

    1.4

    %

    0.4%

    6.4%

    3.8%

    1.6%

    0.2%

    0.1%

    0.3%

    6

    %

    2.7%

    0.8%

    0.5%

    0.2%

    0.1%

    4.3%

    2.5%1.3%

    Total for Parry's (Lotte) brands 12

    Hindustan Lever Ltd

    Gujarat Co-op Milk MarketingS

    our

    ce

    :E

    ur

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    omonitor

    Max

    Amul

    Private Label

    Others

    Total

    3.9%

    1.7%

    1.4%

    0.6%

    22.6%

    100%

    3.8%

    1.7%

    1.5%

    0.6%

    22.4%

    100%

    11 In 2004 Wm. Wrigley acquired the confectionery business of Joyco Group, Spain, of which Joyco Indiawas a fully owned subsidiary.12 In 2004, the Muragappa Group, owner of Parry's Confectionery Ltd. sold 60.4% of Parry's to LotteConfectionery Co Ltd., Korea and the company was renamed to Lotte, India, Ltd. Lotte Korea is expected

    to acquire the remaining shares in the near future.

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    3.3 Market segments

    3.3.1 Chocolate confectionery

    Although chocolate confectionery represents less than 20% of the total confectionery market in Indiain volume terms, its share in value terms is about 40%. It is also the fastest growing

    confectionery segment in value terms with average annual growth close to 10% (see Figures 10 and

    11). However, it should be noted that despite the healthy growth potential, this is still a very small

    market with sales concentrated primarily in the better-off urban areas.

    As seen from Figure 13 below, chocolate tablets

    dominate the market, accounting for about half of all

    chocolate sales of about Rs. 10 billion (27 thousand

    MT) in India. Countlines is the second largest

    segment, followed by boxed assortments. Tabletsalso have shown strongest average annual growth

    rate (Figure 14). This however, is matched by the

    growth rate for the various boxed assortments

    which are becoming increasingly popular to be given as

    gifts. Milk chocolate is strongly preferred to dark and

    bitterer chocolates. It is estimated that about 75% of

    the volume of tablet chocolate sold is plain milk,

    while dark or white chocolates account for about

    8% and 4% respectively, with the remainder being

    various filled chocolates (Figure 12).

    Figure 12: Tablet chocolate sales

    by type

    Filled13%

    Plain white4%

    Plain dark8

    %

    Plain milk75%

    Source: Euromonitor

    Figure 13: Chocolate confectionery retail sales

    12.00

    10.00

    8.00

    6.00

    4.00

    2.00

    0.00

    a) Value

    30

    25

    20

    15

    10

    5

    0

    b) Volume

    1998 1999 2000 2001 2002 2003 1998 1999 2000 2001 2002 2003

    Tablets Countlines Tablets Countlines

    Bagged selflines/softlines Boxed assortments Bagged selflines/softlines Boxed assortments

    Other chocolate confectionery Other chocolate confectionery

    Source: Euromonitor

    26

    Thousand

    Billion

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    Figure 14: 1998 - 2003 chocolate confectionery sales growth

    a) Average annual growth rate b) Total growth

    12.0 70

    10.0

    8.0

    6.0

    4.0

    2.0

    0.0

    10.19.5

    7.7

    10.1 9.8

    7.9 7.7

    5.7

    9.0

    7.8

    60

    50

    40

    30

    20

    10

    0

    6258

    45

    62 60

    46 45

    32

    54

    46

    Value Volume Value Volume

    Tablets Countlines Bagged selflines/softlines Tablets Countlines Bagged selflines/softlines

    Boxed assortments