DEMAND DRIVERS FOR SLECTED CATEGORIES

Rising commodity prices for necessities su as dairy products, vegetables and pulses

was one of the main factors which drive overall value sales in grocery in retailing in

India.

DAIRY:

Supply View: India, with its vast expanses of arable land, has plenty of room for

dairy farming. It has a national herd of dairy cows of more than 38mn head and is the

world's largest producer of raw milk. We foresee output growth to continue expanding

strongly following growth of 27.7% from 2004 to 2009. We have revised up our

estimate for milk production in 2009 to 110.00mn tonnes following a release from the

National Dairy Development Board. We have also raised up our forecast for 2010

production as above average rains in the final quarter of 2009 have improved pasture

conditions. We now forecast production to rise 3.7% year-on-year (y-o-y) to

114.02mn tonnes. Over our forecast period to 2014, we expect production to grow to

rise by 25.9% to138.45mn tonnes. We also expect production of value added dairy

products to grow in response to rising disposable incomes, with butter production

forecast to see growth of 39.6% to 2014.

Demand View: The ubiquity of cattle in India makes milk a major consumption

staple, particularly as rural inhabitants generally own at least one cow. Fluid milk

consumption in 2008 was an estimated 44.74mn tonnes. To 2014, it is forecasted this

to expand by 26.5% to 56.58mn tonnes. Growing per capita incomes will fuel

increased demand for high-value dairy products, such as yoghurt, cheese and butter.

Foreign investors and multinational firms such as Danone can provide the marketing

and packaging expertise to bring milk drinks and processed cheeses to the masses.

India is now among the world's largest and fastest growing markets for milk and milk

products, with market size in value terms, including the organized and unorganised

sector, at US$47.6bn, growing at nearly 7.5% annually.

The demand for value added dairy products, such as cheese, dahi (Indian yoghurt) and

probiotic drinks is increasing at a double digit rate. At present, India seems to be self-

sufficient in milk and milk products. However, given that demand is growing faster

than supply, there could be serious issues with respect to self-sufficiency in the near

future. Any increase in milk production is dependent on the farm gate price received

by producers. Farm gate prices have increased by more than 50% in the last three

years.

India has an insignificant share of the global dairy trade, less than 1%, despite being a

leading producer of milk. Most of the packed liquid-milk segment in India is

dominated by the co-operatives. The liquid milk contribution to total revenues of

dairy co-operatives ranges from around 60% to 80%. Private players, barring few, are

mainly focused on milk products other than packed liquid milk. There is huge

potential for processing and value addition in the organised sector, particularly in

ethnic Indian sweets, which are largely sold in unbranded form at markets. The key

differences between the organized and the unorganised sectors concern the level of

investment in preserving the quality of milk, the technology used for processing and

the compliance with food standards.

SUGAR:

Supply View: Sugar production capacity in India has increased dramatically since the

turn of the century. Indian plantation white sugar is renowned for its high quality.

Production in 2007/08, however, fell 7.0% year-on-year (y-o-y) to 28.63mn tonnes.

This fall continued in 2009 as poor weather delayed the start of the crushing season

by several weeks. This situation was exacerbated by a dispute between millers and the

state government in Uttar Pradesh, one of the major sugar producing states, over how

much they would have to pay cane growers for their produce. This situation has now

been made even worse by dry weather in Maharashtra and pest attacks in Uttar

Pradesh reducing cane yields as well as poor recovery rates. Many mills have been

forced to close or severely reduce output owing to lack of cane. Despite an increase in

the amount paid to farmers for cane, by September 2009 the area of cane planted for

the 2009/10 sugar crop was down 2.9% y-o-y as production was disrupted by the poor

weather conditions and we forecast a terrible year for sugar production. We have

revised down our forecast for production owing to reported lower than expected sugar

content in cane. It will be 2010/11, however, before sugar production returns toward

the 2008 level. Production then will be helped by the high prices farmers are receiving

for cane in the current season.

Demand View: It is forecasted Indian sugar demand to increase by 19.3% over the

three-year forecast period, with consumption projected at 28.87mn tonnes in 2014.

The majority of this growth is attributed to robust demand for confectionery and soft

drinks. It is forecasted volume sales of confectionery to rise 30.1% to 2014 while the

volume of soft drink sales will rise 51.0%. The predominant use of Indian sugar is for

human consumption, in contrast to the world's largest producer Brazil, where it is

estimated that 57% of cane is used for ethanol production.

GRAINS:

Supply View: Indian grain production goes almost entirely to meeting domestic

demand. Corn production is expected to show the greatest gains over our forecast

period, growing by 26.8% from its 2009 level to reach 24.46mn tonnes by the end of

2014, driven mainly by increasing demand from the livestock sector. Wheat

production in 2008/09 came in at a record 80.58mn tonnes, an increase on our

previous estimate owing to better than expected yields. For 2009/10, we have revised

up our production forecast for wheat owing to good rains in the final quarter of 2009.

We now forecast production to grow 0.5% year-on-year (y-o-y). We expect growth in

wheat production of 6.5% over our five-year forecast period to 2014 as production

responds to population growth-led demand. Sorghum is projected to see robust growth

as an alternative to wheat and a hardier crop to cultivate during the climatic extremes

of monsoons and droughts, although with 9.05mn tonnes predicted for 2014,

production will remain minor compared to the aforementioned grains.

In 2009, we had expected production of both sorghum and corn to be down as poor

rainfall led to large reductions in the kharif winter harvested crop. According to the

Agricultural Statistics Division, kharif production was down 24.6% y-o-y for sorghum

and 8.0% y-o-y for corn. Estimates show that full-year sorghum production, as

expected, fell, dropping 7.8% y-o-y to 7.31mn tonnes. Contrary to our previous

expectation, full-year corn production actually rose, growing 1.7% y-o-y to 19.29mn

tonnes. This was due to a larger than anticipated rabi harvest, up 40% y-o-y owing to

high yields. For the 2010 kharif crops of both corn and sorghum, the area planted was

slightly up on a year-on-year basis. Despite this, we expect corn output to fall as

yields are hit by the dry conditions. Sorghum output should, however, increase.

Demand View: Wheat is one of India's staple consumption grains. We forecast

consumption growth, at 15.7% to 2014, to outpace population growth over the same

period as rising incomes allow consumers to spend more on food. Growth in

consumption will be aided by the increase in interest in Western bakery goods in the

cities and by the spread of wheat consumption throughout the country from its

traditional base in more northern states. In 2010, we expect wheat consumption to see

strong growth following the fall in consumption in 2009. Demand will be boosted by

the shortage of rice, for which the price is expected to rise next year.

RICE:

Supply View: India is a massive rice producer, second only to China. In 2008 the

government started buying stocks early as it looked to be a poor harvest. In the end

production for harvesting year 2007/08 came in at 96.69mn tonnes, a 3.6% year-on-

year (y-o-y) expansion. We feel that better access to pesticides and fertilisers will play

a role in improving crop yields and boosting production 22.3% from 2009 to 2014 to

reach 121.27mn tonnes. This would put India on target to meet the government's aim

of annual rice production of 140mn tonnes by 2025.

In 2008/09 production is estimated to have grown 2.5% y-o-y to a record 99.15mn

tonnes on the back of good weather conditions. In 2009/10, we now expect production

to fall sharply owing to a decline in yields and a fall in the area planted. Poor rains

have severely disrupted sowing and the area planted for the main kharif crop is well

down. The government in its first advance estimate released in December put the

kharif crop at 71.65mn tonnes, down 15.3%. This is somewhat better than expected

owing to the good rains in the final quarter of 2009. We have revised up our forecast

to reflect this. We now forecast production to fall 14.4% y-o-y to 84.84mn tonnes, up

from a previous forecast of 82.66mn tonnes.

Demand View: Rice is the staple food for the majority of the population and the

government works to ensure that the whole population has access to enough. As such,

the crop is bought in bulk by the Food Corporation of India (FCI) and sold at

subsidised rates. In light of this, we believe that rice consumption will be relatively

inelastic to GDP and likely to closer reflect population expansion. Despite this, in

2010, tight supplies and rising prices will see consumption fall. Rice prices, along

with the price of other staple foods rose rapidly in the final months of 2009. By mid-

December, the Ministry of Commerce and Industry's index of food prices was up by

almost 20% y-o-y. Consumption should recover in 2011 as production returns to a

more normal level. To 2014, we forecast rice consumption to increase by 10.1% to

2014 to 102.55mn tonnes. In the longer term, we expect per capita rice consumption

to fall as rising

incomes allow Indian consumers to vary their diets more and eat more high-protein

foods such as meat and dairy.

As a massive rice producer, India has the potential to be the world's largest exporter.

At present, domestic consumption absorbs the vast majority of output. Over the past

five years, surplus production has been around 3mn to 6mn tonnes. We expect this to

increase over our forecast period as production growth outpaces growth in

consumption. In 2010, however, the fall in production will leave India with a large

deficit, which will be covered by domestic stocks.

POULTRY:

Supply view: It is forecasted poultry production to expand by 40.7% to 2014 to reach

3.59mn tonnes from its 2009 level of 2.55mn tonnes. All of this extra production will

be destined for the domestic market as demand for meat rises along with incomes.

The slaughter of cattle is taboo among many of India's 80% Hindu population, yet

analysts’ forsee robust expansion of 28.8% to 3.43mn tonnes in 2014 reflecting the

rising prevalence of buffalo meat consumption.

Demand View: Buffalo meat is becoming more popular in India as a source of

protein, particularly as it is now cheaper locally than some pulses. We forecast

consumption to grow by 28.2% to 2014 to reflect this dynamic, while poultry

consumption is projected to absorb the whole of domestic production, growing 40.7%

over the forecast period. This growth will be driven by rising incomes allowing Indian

consumers to increase their intake of high-protein food such as meat. Increasing

interest in Western-style fast food will also contribute to robust growth in meat

consumption. In December Yum! Brands said it hopes to increase the number of its

KFC fried chicken outlets in India to 500 by 2014 from its current 72. Other

international brands as well as local imitators are sure to follow.

EDIBLE OIL

India is fortunate in having a wide range of oilseeds crops grown in its Different agro

climate zones. Groundnuts, mustard/rapeseed, sesame, safflower, linseed, Niger seed/

castor are the major traditionally oilseeds. Soya been and sunflower have also

assumed importance in recent years. Coconut is most important amongst the

plantation crops. Efforts are being made to grow oil palm in Andhra Pradesh,

Karnataka, Tamil Nadu in addition to Kerala and Andaman and Nicobar Islands.

Among the non-conventional oils, rice bran oil and cottonseed oil are the most

important. In additional, oilseeds of tree and forest origin, which grow mostly in tribal

inhabited areas, are also a significant source of oils.

Problem: India consumes approximately 10 million tonnes of oil a year. It has the

world’s fourth largest edible oil economy. Yet, about 43 per cent of edible oil

available in India is imported. Displacing China, India has been ranked as the world’s

largest importer of edible oils since 1999.

SPICES:

The important spices produced in India are black pepper, cardamom, ginger, turmeric,

chilly, garlic, coriander, cumin, fennel, fenugreek, celery, clove, nutmeg, cinnamon,

tamarind, kokum, garcinia, curry leaf, saffron, vanilla and mint.

The south Indian foods are popular for their non steaming spices such as cinnamon,

cardamom, ginger, clove garlic, cumin, coriander and turmeric.

With an increasing awareness of brands, consumers are moving towards various

brands of spices and its products in India. Leading brands of spices and its products in

Delhi are MTR, MDH, Badshah, Everest, Swastik etc. all the leading brands have a

constant and steadily maintained quality and uniqueness which attract consumers to

use them repeatedly and creating a brand loyalty.

Recent developments in this sector are brought by prominent multifarious players like

ITC entering with its Aashirwad brand, introduction of organically grown spices by

the existing big brands in market.

Wholesaling of branded spices is generally carried out through dealers or distributors.

Discussion with the convenient sampled wholesalers resulted in following findings:

Products are seldom pushed into the retail chain. It is a pull based selling chain though

higher margins play an important role in influencing the retailers. Usually

wholesalers’ margin is calculated on billing price.

Computerized and standard packing, reputation, well maintained quality and good

terms of trade are the factors that they look for in a new entrant.

Table: Sales By Format -- Historical Data And Forecasts

2005 2006 2007 2008 2009 2010 2011 2012f 2013f 2014f

Supermarkets (INRbn)

44.13 57.37 74.58 93.22 106.51 124.43 144.76 166.78 191.63 219.22

Hypermarkets (INRbn)

4.07 10.17 25.43 50.86 61.08 74.75 90.29 107.47 126.87 148.40

Discount stores (INRbn)

9.27 12.98 18.17 25.44 29.40 34.63 40.36 47.08 54.63 63.03

Convenience stores (INRbn)

9.17 11.92 15.50 20.15 23.17 26.94 31.24 35.99 41.36 47.31

Total mass grocery retail sector (INRbn)

66.64 92.45 133.69 189.68 220.16 260.76 306.66 357.32 414.49 477.96