the market for confectionery products in india

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

The market for confectionery products in India

A report prepared for

The National Confectioners Association

CONTENTS

EXECUTIVE SUMMARY I

SECTION 1: INTRODUCTION 1

1.1 Objectives 1 1.2 Methodology 2 1.3 Report organization 2 1.4 Exchange rate used 2

SECTION 2: INDIA: COUNTRY BACKGROUND 4

2.1 General background 4 2.2 Economic development and reforms 5 2.3 Indias people 7

2.3.1 Population and main socio-economic indicators 7 2.3.2 Age 8 2.3.3 Income 9 2.3.4 Urbanization 11

2.4 Religion 12 2.5 Consumer spending and food purchasing behavior 13

SECTION 3: THE CONFECTIONERY MARKET IN INDIA TODAY 16

3.1 General background 16 3.2 The confectionery sector 17

3.2.1 Market size 17 3.2.2 Some specific market characteristics 19 3.2.3 Manufacturers and key players 20 3.2.4 Market snapshots for 2004 21 3.2.5 Market shares and brands 23

3.3 Market segments 26

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 Confectionery imports 33 3.4.1 General trade information 33 3.4.2 Key suppliers, types and brands of imported confectionery 34

3.5 Consumption 38 3.5.1 General information 38 3.5.2 Demographic and lifestyle considerations 39 3.5.3 Brand and origin awareness and perceptions 42

3.6 Pricing 43 3.7 Seasonality 44 3.8 Market forecast 44

SECTION 4: DISTRIBUTION CHANNELS 45

4.1 Overview 45 4.2 Domestic production 45 4.3 Imports 47

4.3.1 Ports of entry for imports 47 4.3.2 Geographical and logistical considerations 47 4.3.3 Handling of imports 48 4.3.4 Business relationships along the distribution chain 48

4.4 Wholesale and retail 50 4.4.1 Role and key players 50 4.4.2 Key retail players 52 4.4.3 Industry trends affecting or altering the structure of retail food sales 54 4.4.4 Types of product promotions used 55

SECTION 5: MARKET ENTRY 56

5.1 Tariffs, import and customs regulations 56 5.1.1 Import and custom regulations 56 5.1.2 Import tariffs 56 5.1.3 An example 58

5.2 Food safety, packaging, and labeling requirements 58

SECTION 6: CONCLUSIONS AND RECOMMENDATIONS 60

6.1 General prospects 60 6.2 Recommendations 61 6.3 Success stories 62

SECTION 7: INDUSTRY CONTACT INFORMATION 64

7.1 Confectionery importer-distributors and wholesalers 64 7.2 Key retail candy accounts across marketing channels 69

APPENDIX 1: INDIAN SWEETMEATS 73

APPENDIX 2: KEY MANUFACTURERS PROFILES 77

Cadbury India Limited 77 Nestle India Limited 79 Lotte India Corporation Ltd. 81 Nutrine Confectionery Co. Pvt Ltd 83 Candico India Limited 85 Perfetti van Melle India Pvt Ltd 87 Parle Products Pvt Ltd 89 Wrigley India Pvt Ltd and Joyco India Pvt Ltd 90 Gujarat Co-operative Milk Marketing Federation Ltd. 92 ITC Limited 94 Hindustan Lever Limited 95 The CAMPCO Ltd 97 Lotus Chocolate Company Limited 99

APPENDIX 3: TRADE INTERVIEWS 101

THE MARKET FOR CONFECTIONERY PRODUCTS IN INDIA

Executive summary

A socio-economic snapshot of India (2004) Total population 1.1 billion Annual population growth 1.4% GDP per capita (purchasing power parity) $2,900 People below the national poverty line 25% Life expectancy at birth (years) 64 Literacy rate, adult male 70.2% Literacy rate, adult female 48.3% People with access to safe drinking water 88% Labor force 472 million Unemployment rate 9.5% Source: CIA World Factbook, the World Bank

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 Indias 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 population lives in rural areas where unemployment rates are higher and incomes are significantly lower. In result, there is significant migration toward urban areas in search of work and better payment. The text box highlights some socio-economic indicators of India and illustrates the seriousness of the economic and social 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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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, Indias 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). 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), 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, Indias 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 at roughly 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 export and 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 Indias 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 one respondent 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 are looking 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, where brand and country of origin really matter to consumers when making purchasing decisions.

Except for the top quality chocolates, consumers are usually not aware, and generally not 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 quality with good packaging. Imported brands are presented much better than Indian ones.

US brands are less known than European ones. Mars and Hersheys are the only US brand 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, Wrigleys, 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 Cadburys 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 imported products. 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. Indias 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 by supermarkets and hypermarkets has also increased, from roughly 6% to 8%. Indias 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 distribute products 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 USDAs 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 several years, 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 and promotional 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, will continue to increase.

The sugar confectionery will remain the largest confectionery segment. We expect to 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 and young 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 young consumer. 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 and distributors will require promotional support from manufacturers.

Recommendations

Potential exporters should carefully select trading partners from among the Indian importers 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. Thus U.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 select their 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 the success 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 the interest 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 are today and the future market conditions in India;

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

Contact information for importers and distributors to enable them to begin enquiries about 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 broad perspective 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 exporters interested 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).

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Introduction

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Figure 1: Average annual exchange rate: Rs per USD

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India: Country background

SECTION 2: 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. 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 countrys development, there are 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.

Figure 2: India

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 Indias people in a way that can be used in later sections to determine the potential market opportunities 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 Indias 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. The region 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, Indias 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), Indias focus was mainly toward developing commercial relations 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, Indias 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, Indias 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, the government 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, Indias 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 rate As seen from Figure 4, gross domestic product (GDP) has grown rapidly over the last 10 years. After dropping to a low 1.7% growth in 1991, the economy responded positively to the wide-ranging reform measures to grow at 4.2% in 1992 and to increase to 8% by 1995. Thereafter, growth has remained over 5%, reaching 6.2% in 1999 and 2000 (real GDP for 2000 was $459.2 Source: Datamonitor and World Bank (for 2002 and 2003)

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billion).1 In contrast to the rest of Asia, Indias 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 it will 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 has improved markedly in the past decade.

2.3 Indias 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 Indias national language. Various States also have their own official languages and 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 Indias 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 India data shows GDP growth to have dropped to 0.8% in 1991 and the World Bank shows growth of 7.5% in 1995. 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 other Asian countries.

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A socio-economic snapshot of India (2004) Total population 1.1 billion Annual population growth 1.4% GDP per capita (purchasing power parity) $2,900 Percent of population below the national poverty line 25% Life expectancy at birth (years) 64 Literacy rate, adult male 70.2% Literacy rate, adult female 48.3% Percent of population with access to safe drinking water (Year 2000) 88% Labor force 472 million Unemployment rate 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

Under 15 years32%

15 - 64 years63%

65 years and over5%

Source: CIA World Factbook

As life expectancy increases, population growth slows down, and the populations 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 countrys 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. Its reports 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 NCAERs report predicts that over 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 NCAERs 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 income between 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 is clearly 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 primarily by the underemployed 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, it is expected that the urban population will continue to grow at least 4% per annum, while the rural population will decline.

Source: United Nations

Figure 7: Population growth projections

0200400600800

1,0001,2001,4001,600

2000 2005 2010 2015 2020 2025 2030

Mill

ion

Rural 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, Indias largest management consulting company. This observation is confirmed by NCAERs research, which indicates that over half of the 10.7 million households with income of less than Rs. I million ($23,000) live in smaller cities. But even more, the report also indicates a big rise in number of the rich households with incomes of Rs. 1 to 5 million in the smaller cities. Overall, in the urban areas, most social-economic indicators are significantly better that nations average. The urban population is the most important target market for imported products for several reasons. Income is one of the most important factors and it is approximately much higher in the urban areas than in rural India. They are the exclusive market for various imported and more expensive products. According to a recent consumer survey conducted by KSA Technopak, urban consumers spent over US$ 30 billion on themselves in 2002, a 12% year-on-year increase.4 Even 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 the average 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 of retailers 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, and will 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 Religion Figure 8:

Religious breakdown of the Indian population

Source: CIA World Factbook

Hindu81%

Sikh2%

Christian2%

Muslim12%

Other3% Others, include

Buddhist, Jain, Parsi

Food habits in India are influenced by religious principles. As seen from Figure 8, Hinduism is dominant but India is also the home of a wide range 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.

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Religion Eating habits

Hinduism All income groups in upper castes are strict vegetarians Lower castes are mostly non-vegetarians Taboo on beef in all castes, as bovines are considered sacred

Islam Non-vegetarian Taboo on pork Preference for halal meat

Christianity Mostly non-vegetarian with no taboos

Sikhism Some sects are vegetarians, and some are not

Buddhism Mostly vegetarian

Jainism 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

( percent )

United States and Canada 31.5 5.2

Western Europe 28.7 6.4

East Asia and Pacific 21.4 32.9

Latin America and the Caribbean 6.7 8.5

Eastern Europe and Central Asia 3.3 7.9

South Asia 2.0 22.4

Australia and New Zealand 1.5 0.4

Middle East and North Africa 1.4 4.1

Sub-Saharan Africa 1.2 10.9

Source: the Worldwatch Institute

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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% of their 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 in the 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 and frozen 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)

1998 1999 2000 2001 2002 2003 Average 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 6 7 19%

Dairy products 41 44 48 53 59 65 10%

Sweet and savory snacks 4 4 5 6 6 7 12%

Snack bars - - - - - - -

5 Source: Euromonitor

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1998 1999 2000 2001 2002 2003 Average 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 1 1 0%

Frozen food 2 2 3 3 3 4 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 8 9 10 11 12 14 12%

Baby food 2 3 3 3 3 3 10%

Spreads 2 2 2 2 2 2 0%

Packaged food6 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%.7 Even considering 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 into sugar-boiled confectionery, chocolates, mints and chewing gums. Sugar-boiled confectionery, consisting of hard-boiled candy, toffees and other sugar-based candies, is the largest of the segments and, according to some key industry players we spoke to, it is valued at around Rs. 20,000 million. Some of the largest multinational companies active in the confectionery sector, like Cadbury, Nestle and Perfetti, have already invested in India and others keep entering the market (e.g. Lotte in 2004). Also, global mergers and acquisitions have

A note on data availability and accuracy We have made our best effort to provide as accurate and comprehensive data as possible. However, it should be kept in mind that official statistics about the confectionery sector in India are scarce and there is a large gray sector that is unaccounted for by official sources. Most of the numbers we quote in this report are based on estimates of some of the main industry players. In result, there are some inconsistencies.

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 the VNU, The Netherlands which belongs to AC Nielsen network of market research companies.

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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 Parrys). 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-economic changes in India, both per capita consumption and availability of higher quality products are expected to grow in the coming future. At the same time, Indias 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 very important 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, Indias 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 in Figure 9.

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Figure 9: The Indian confectionery market 138,000MT

Candies & Toffees 68,000 MT Chocolates 22,500 MT Breath Fresheners 7,000 MT Bubble Gum 14,000 MT Chewing Gum 3,350 MT Other Categories 23,150 MT

Other17%

Chewing gum2%

Bubble gum10%

Breath fresheners5%

Chocolates16%

Candies & toffees50%

Source: Industry experts and leading manufacturers estimates, Promars 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 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). 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

0

5

10

15

20

25

30

1998 1999 2000 2001 2002 2003

Billi

on R

s.

Chocolate confectionery Sugar confectionery Gum

0

20

40

60

80

100

120

140

1998 1999 2000 2001 2002 2003

Tho

usan

d M

T

Chocolate confectionery Sugar confectionery Gum

a) Value b) Volume

Source: Euromonitor

Figure 11: 1998 -2003 confectionery sales growth

7.8

9.1

7.8

9.58.5

9.4

7.9

9.

8

0

2

4

6

8

10

12

Value Volume

Perc

enta

ge

Chocolate confectionery Sugar confectionery Gum Confectionery

59.8

45.8

54.4

45.5

57.3

50.256.8

46.2

0

10

20

30

40

50

60

70

Value Volume

Perc

enta

ge

Chocolate confectionery Sugar confectionery Gum Confectionery

b) Total growth

a) Average annual growth rate

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-pack market.

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 market while this trend is yet to pick up in India.

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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 occur at 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 retail base.

Instead of chewing on paan (betel nut leaf) to freshen ones breath or using spices such 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 young people.

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 are expected 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 and malted food products.

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

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

Nutrine Confectionery Co Pvt Ltd is a manufacture and marketer of sugar boiled 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 based confectionery 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 boiled confectionery, and cocoa and milk based toffees.

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

Gujarat Cooperative Milk Marketing Federation is India's largest food products 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 year 2002.

Hindustan Lever Ltd, Indias leading FMGC company, has a presence in the confectionery market since 2001.

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

Lotus Chocolates Co. Ltd is another processor of cocoa and cocoa based industrial 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 of Parrys Confectionery Ltd from the Chennai-based Murugappa Group. Also in September 2004, Parrys Confectionery Ltd officially became Lotte India Corporation Ltd.

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January 2004 - Wm Wrigley Jr Cos global acquisition of Spanish major Joyco

Group 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 to open 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 additional investment 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 multinational confectionery company to setup a manufacturing unit in Tanzania with an investment of US$1million.

October 2004 - Cadbury India Ltd announced its foray into the confectionery sector with the re-launch of Adams Halls and Clorets lozenges, formerly Warner Lambert 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. 750m joint 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 of Rs. 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 30 29.6

Perfetti Van Melle India Ltd 14.2 14.4

Nestl India Ltd 9.8 10.2

Nutrine Confectionery Co Ltd 7.5 7.4

Joyco India Ltd 5.7 5.8

Parle Products Ltd 4.7 4.6

Parry's Confectionery Ltd9 4.6 4.5

Ravalgaon Sugar Farms Ltd 2.1 2.1

Hindustan Lever Ltd 1.7 1.7

Gujarat Co-op Milk Marketing Federation Ltd 1.4 1.5

Warner-Lambert India Pvt Ltd 1.2 1.2

Candico India Ltd 1.1 0.9

Wrigley India Pte Ltd 0.4 0.4

Agro Tech Foods Ltd - 0.2

Ferrero SpA 0.1 0.1

Private Label 0.6 0.6

Others 14.8 14.6

Total 100 100

Source: Euromonitor

More detailed profiles of the main players are given in Appendix 2. From a bulk market for confectionery products, India is quickly transforming into a market for branded products. Todays 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 to Lotte India Corporation Ltd.

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through creative marketing and advertising strategies. Cadbury Indias brands have by far a leading position in terms of sales; it has four brands among the top 10 selling brands. Cadburys 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, Perfettis Alpenliebe. The following table shows the leading chocolate and confectionery brands in India.

Confectionery brands shares (percentage of retail value) Company Brand 2001 2002

Cadbury's Dairy Milk 12.4% 12.3%

Cadbury's Dairy Milk clairs 4.1% 4%

Cadbury's 5 Star 4% 3.9%

Cadbury's Perk 3.6% 3.5%

Cadbury's Celebrations 1.9% 2%

Cadbury's Gems 1.5% 1.4%

Googly 0.2% 0.3%

Cadbury's Mr Pops 0.3% 0.3%

Cadbury India Ltd

Trebor 0.3% 0.3%

Halls 1% 1% Warner-Lambert India Pvt Ltd10

Clorets 0.2% 0.2%

Total for Cadburys brands 29.5% 29.2%

Alpenliebe 4.8% 4.7%

Big Babol 4% 4%

Center 1.8% 1.9%

Cofitos 1.4% 1.3%

Chlor-Mint 1% 1.1%

Mentos 0.7% 0.7%

Fruit-tella 0.5% 0.5%

Perfetti Van Melle India Ltd

Marbels 0.1% 0.1%

Total for Perfettis brands 14.3% 14.3%

Kit Kat 4% 4%

Nestl Classic 2.1% 2.3%

Polo 1% 1%

Milkybar 0.7% 0.7%

Munch 0.4% 0.6%

Nestl Bar One 0.4% 0.4%

Nestl India Ltd

Soothers 0.3% 0.3%

10 Warner Lamberts brands are currently part of Cadburys portfolio, a result of the purchase of Pfizers confectionery business in 2002.

24



Company Brand 2001 2002

After Eight 0.2% 0.2%

Frutips 0.1% 0.1%

Total for Nestls brands 9.2% 9.6%

Maha Lacto 3.1% 3%

Nutrine 2% 2%

Koka Naka 1% 1%

Nutrine Confectionery Co Ltd

Naturo Fruit Bar 0.4% 0.4%

Total for Nurines brands 6.5% 6.4%

Boomer 3.8% 3.8%

Pim Pom 1.6% 1.6%

Bonkers 0.2% 0.2%

Joyco India Ltd

Trex 0.1% 0.1%

Wrigley India Pte Ltd Doublemint 0.3% 0.3%

Total for Wrigley/Joycos brands11 6% 6%

Kismi 2.7% 2.7%

Parle Mango Bite 0.8% 0.8%

Parle Poppins 0.5% 0.5%

Parle Orange Candy 0.2% 0.2%

Parle Products Ltd

Parle Mint Extra Strong 0.1% 0.1%

Total Parles brands 4.3% 4.3%

Coffy Bite 2.5% 2.5% Parry's Confectionery Ltd

Lacto King 1.4% 1.3%

Total for Parrys (Lotte)12 brands 3.9% 3.8%

Hindustan Lever Ltd Max 1.7% 1.7%

Gujarat Co-op Milk Marketing Amul 1.4% 1.5%

Private Label 0.6% 0.6%

Others 22.6% 22.4%

Total 100% 100%

Source: Euromonitor

11 In 2004 Wm. Wrigley acquired the confectionery business of Joyco Group, Spain, of which Joyco India was a fully owned subsidiary. 12 In 2004, the Muragappa Group, owner of Parrys Confectionery Ltd. sold 60.4% of Parrys to Lotte Confectionery 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.

25



3.3 Market segments

3.3.1 Chocolate confectionery

Although chocolate confectionery represents less than 20% of the total confectionery market in India in 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. Tablets also 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).

Plain milk75%

Plain white4%

Plain dark8%

Filled13%

Figure 12: Tablet chocolate sales by type

Source: Euromonitor

Figure 13: Chocolate confectionery retail sales

0.00

2.00

4.00

6.00

8.00

10.00

12.00

1998 1999 2000 2001 2002 2003

Billi

on R

s.

Tablets CountlinesBagged selflines/softlines Boxed assortmentsOther chocolate confectionery

0

5

10

15

20

25

30

1998 1999 2000 2001 2002 2003

Tho

usan

d M

T

Tablets CountlinesBagged selflines/softlines Boxed assortmentsOther chocolate confectionery

a) Value

b) Volume

Source: Euromonitor

26



Figure 14: 1998 2003 chocolate confectionery sales growth

a) Average annual growth rate

10.1

7.9

9.5

7.7

5.7

10.19.0

9.8

7.87.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Value Volume

Perc

enta

ge

Tablets Countlines Bagged selflines/softlinesBoxed assortments Chocolate confectionery

62

46 4545

32

5460

46

5862

0

10

20

30

40

50

60

70

Value Volume

Perc

enta

ge

Tablets Countlines Bagged selflines/softlinesBoxed assortments Chocolate confectionery

b) Total growth

Source: Euromonitor

As seen in Figure 15, Cadbury and Nestle completely dominate the chocolate market segment. Cadbury is a very strong number one, but in recent years Nestle has toughened the competition by launching new products and targeting the mass market with lower priced products. In result, Nestle is gradually earning some additional market share (from 20% in 2001 to over 21% in 2002). Despite the gains, Cadburys leading position seems to be unthreatened for the foreseeable future. The Gujarat Milk Cooperative Marketing Federation, Ltd. (GCMMF) is a distant number three; it has found it difficult to leverage its leading position in the dairy sector into the confectionery market. However, it has also started a major effort to broaden its reach by launching new products and targeting the children and teens consumer segment. Finally, the respondents to our trade survey reported that some imported brands have started gaining popularity in India. In the upscale niche market segment these are mostly Swiss and Belgium chocolates, while in the mass market there is a broader spectrum of brands manufactured in Malaysia, Thailand, Argentina, and other countries.

Figure 15: Companies retail value share in the chocolate confectionery sector

Others9.4%

Cadbury India Ltd66.2%

GCMMF3.8%

Nestl India Ltd20.3%

Ferrero SpA0.3%

GCMMF4.0%

Others9.4%

Ferrero SpA0.3%

Nestl India Ltd21.4%

Cadbury India Ltd64.9%

a) 2001

b) 2002

Source: Euromonitor

27



Cadburys Dairy Milk is the leading chocolate brand with about 32% share of the value of retail sales. Nestls Kit Kat is second with just over 10% share, closely followed by Cadburys 5 Star, and Cadburys Perk. Other brands with noticeable market presence are Nestle Classic, Cadburys Celebrations, Amul (of GCMMF), Cadburys Gems, Munch (Nestle), Nestle Bar One, After Eight (Nestle), Ferrero Rocher (Ferrero SpA), Nestle Choco, Stick, and Cadburys Chocki. In addition to the major companies, there are numerous small chocolates manufacturers operating in India taking advantage of the premium end segment. A few, worth mentioning are:

Mumbai based Fantasie Chocolates

New Delhi and Bangalore based Choco Swiss

New Delhi based Belgique Chocolates

Also, many housewives have taken the business of chocolate making seriously and operate during the festival season (for e.g. Rakhi, Diwali, Christmas, New Year). Trade estimates suggest that there are about 15,000 20,000 housewives in India who are making chocolates professionally, not just as a hobby or for home consumption. According to a major manufacturer of bulk chocolate, the bulk chocolate market in India is about 8,000 10,000 MT, and a major part of this is utilized by the homemade chocolate segment, in addition to the bakery, and ice cream industries. Many of these home-based operations market and sell chocolates online and frequently they claim to be using Belgian and Swiss ingredients. According to the respondents to our survey, this is a relatively new trend that was not seen five years ago. 3.3.2 Sugar confectionery

This is the largest confectionery sector in India both in value and volume terms. Accounting for about half of the total confectionery market, the sugar confectionery segment is also showing healthy growth, primarily due to the low-price strategies and discounts offered by the main players. As seen from Figure 16, the toffees/caramels/nougats segment is by far the largest, followed by sugar boiled sweets and mints. In terms of growth however, mints sales have been growing the fastest over the last 5 years (Figure 17). Lollipops are a new product in the Indian market which first registered noticeable presence in the market in 2002, but for the 2002-03 period, they have also registered growth of over 10%, the same as mints. Forecasts show that lollipops will continue to strengthen their market position.

28



Figure 16: Sugar confectionery retail sales

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

1998 1999 2000 2001 2002 2003

Billi

on R

s.

Toffees, caramels, nougat Boiled sweetsMints Pastilles, gums, jellies, chewsMedicated confectionery Lollipops

0102030405060708090

1998 1999 2000 2001 2002 2003

Tho

usan

d M

T

Toffees, caramels and nougat Boiled sweetsMints Pastilles, gums, jellies and chewsLollipops Medicated confectionery

b) Volume a) Value

Source: Euromonitor

Figure 17: Sugar confectionary sales 1998 2003 growth

9.89.38.18

7.2

5.1

6.7

4.6

9.17.8

11.5

6.8

0

2

4

6

8

10

12

14

Value Volume

Perc

enta

ge

Mints Medicated confectioneryToffees, caramels and nougat Pastilles, gums, jellies and chewsBoiled sweets Sugar confectionery

59.756.347.946.8

41.4

28.2

38.6

25

54.4

45.5

72.2

39.3

0

1020

3040

50

6070

80

Value Volume

Perc

enta

ge

Mints Medicated confectioneryToffees, caramels and nougat Pastilles, gums, jellies and chewsBoiled sweets Sugar confectionery

a) Average annual growth

b) Total growth

Source: Euromonitor

the market for confectionery products in india

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