India Packaged Food Forecast Upgraded as Consumer Spending Power Improves

The quarterly update of the Packaged Food Forecast Model that took place in November 2015 has resulted in an upgrade of the Passport baseline forecasts for retail volume growth in India. The growth is expected to improve by 0.3 percentage points from 6.8% CAGR to 7.1 % CAGR between 2015 and 2020.

This is a result of stronger GDP forecasts (between 2015 and 2020) for India at the end of Q4 2015. The Packaged Food Forecast Model can be used to understand the effects of improved/slower economic output at various time periods and compare it to the Passport baseline forecasts. Hence for India, with improved economic conditions, an additional 567,000 tonnes of packaged food is expected to be sold by the end of 2020.

GDP Per Capita Forecasts, India: 2015-2020

GDP-Per-Capita-Forecasts-India-2015-2020

Source: Euromonitor International Industry Forecast Model

Dairy – the largest category – will benefit the most

In 2015, dairy accounted for a 56% retail volume share of total packaged food in India. Since products such as milk and yoghurt are tracked under dairy and these are key staples, it will continue to be the largest category within packaged food throughout the forecast period. Although difference between the quarterly update and Passport baseline retail volume for 2020 is 1.3%, the large size of Indian dairy means that this improvement still equals 281,000 tonnes. It is also important to note that oils and fats (another staple) has the second largest revision, but this only amounts to a volume addition of 86,000 tonnes.

Retail Volume Sales, ‘000 Tonnes, 2020

Retail-Volume-Sales-'000-Tonnes-2020

Source: Euromonitor International Industry Forecast Model

Highest growth rate revisions are linked to discretionary spending

Looking beyond staples like dairy and oils and fats, the top categories with some of the highest growth rate revisions are processed food, breakfast cereals and ice cream and frozen desserts. These products are typically associated with higher discretionary spending and/or indulgence. It indicates that when consumers have more money, this leads to a changed lifestyle, resulting in more indulgence. Consumers will be willing to pay more for convenience and added value. It is important to note that the highest revision swing is +0.62 percentage point for processed meat and seafood and the lowest is for rice, pasta and noodles, at +0.14 percentage points.

Retail-Volume-Sales-'000-tonnes-2015-2020-y-o-y-growth-percent

Source: Euromonitor International Industry Forecast Model

This becomes more pronounced when the five year (2015-2020) income elasticities are reviewed, by isolating the effect of GDP per capita. Rice, pasta and noodles has the lowest income elasticity (0.28) followed by dairy (0.49).This is indicative of the likelihood that, even if consumers have more money, it is unlikely they will spend this on staples. Staples will continue to be volume driven.

Manufacturers can focus on value added products and premium pricing in categories with high income elasticity, as consumers will spend on these products when they earn more. It will dictate a change in their lifestyle leading to growth of value driven products rather than simply shifting retail volumes.

retail-volume-sales-'000-tonnes-2015-2020-cagr-percent

Source: Euromonitor International Industry Forecast Model

A major downturn could lead to growth downgrade, even in India

Another key feature of the industry forecast model is the ability to simulate hypothetical macro scenarios and generate a resultant forecast. For example, we can understand the impact of a major downturn in India on the growth prospects of packaged food. The image below provides the change in forecast if there is a major economic downturn in India at the end of Q3 2016, with GDP growth for the year ahead reduced by 2.1 percentage points relative to our latest Quarterly Update GDP forecast. The probability for this occurring is currently given at 15%.

retail-volume-sales-'000-tonnes-2015-2020-y-o-y-growth-percentage

Source: Euromonitor International Industry Forecast Model

The impact of a major downturn will be directly related to income elasticity. Categories with higher income elasticity will be most impacted first when the income of consumers is reduced. In the event of a major downturn in India, the largest retail volume growth downgrades (-0.78 percentage points) will be witnessed by processed meat and seafood. This industry is still in the nascent stage in India and unit prices of processed food remain high. As such, it is likely that even consumers that use processed food will switch back to fresh food as price becomes a key purchase differentiator and motivator. Staples such as rice, pasta and noodles will also witness growth downgrade, however declining by 0.18 percentage points – a much smaller factor owing to their more staple status.

In a country like India, where growth opportunities are substantial, it is right to believe that the prospect for industries such as packaged food is immense. However, it becomes essential to understand the risks involved as manufactures plan for the future. The industry forecast model provides a holistic view of growth opportunities combined with effects of possible risks, which will help futureproof strategies.