Quality of spoken English worries BPOs
The fast-changing consumer landscape in tier-II and tier-III cities has now got global recognition. Regional brands in the processed-food business are the latest buzz in the private equity (PE) circles.
Sensing huge potential in domestic consumption, PE players are increasingly looking at funding local food and beverage brands that have a strong presence in smaller markets across the country.
Recently, Vadodara-headquartered Manpasand Beverages attracted $10 million from PE fund Saif Partners. Manpasand, which manufactures and markets juice brand Mango Sip, has a strong presence in tier-II cities and rural markets. It also supplies its products to major retail chains like Big Bazaar and D-Mart.
In June, PE major Sequoia Capital invested $30 million in Indore-based Prakash Snacks. The snacks maker, whose products include potato chips, wafers, biscuits and fruit juices, offers packaged food under the brand Yellow Diamond.
?India has few locally developed brands in the food business, and we think it offers a huge investment opportunity with snacks being the fastest growing category.
We see a great opportunity for Prakash Snacks to grow as a pan-Indian brand in the next three to four years,? said VT Bharadwaj, managing director, Sequoia Capital. ?The food and beverage business is one of the fastest growing industries in India. We see massive untapped potential in this segment. We believe that snacks is an over $1.5-billion market growing at 25-30% per year,? added Bharadwaj.
Over the last few years, food businesses in India have been able to attract a lot of interest among international and domestic PE players. Last year, leading PE firm Carlyle Group infused R110 crore in Hyderabad-headquartered Tirumala Milk Products that has outlets across south India. Motilal Oswal Private Equity Advisors also picked up a stake in Ludhiana-based Cremica, the maker of biscuits, condiments and sauces. Motilal Oswal had picked up a stake in Pune-based dairy products maker Parag Milk in 2008. In 2007, Norway?s Orkla Group snapped up Bangalore?s MTR Foods.
With an increase in disposable income and brand awareness among consumers, smaller cities and towns have opened up a new opportunity for local food companies. Half of the households earning over R1 lakh in India are located in small towns. It is expected that the overall number of middle-class households will increase by four times in the next two decades and many of them will be located in small towns, making them attractive markets.
?There seems to be a clear trend in investing in foods and beverages businesses that target consumers in tier-II and-III towns. Domino?s Pizza is seeing explosive growth in the smaller towns,? says Kanwaljit Singh, managing director, Helion Advisors, which is also evaluating deals in the food space.
Today, entrepreneurs are no longer constrained by his/her choice of location for their enterprise. Experts point out that the cost of setting up a business in non-metros is much lower than in the metros and this works to the advantage of start-ups. ?With the proliferation of efficient communication technologies, businesses are increasingly becoming location agnostic. At Sequoia Capital, we are continuing to see a lot many investment opportunities in towns outside the metros,? says Bharadwaj.
Experts point out that opportunities in traditional markets come with their own valuation challenges, which have prompted PE players to look for options in smaller markets. ?Coupled with advisors and bankers who are looking for similar opportunities, the deal flow for PEs from non-traditional markets has improved. More importantly, entrepreneurs in smaller towns are slowly overcoming traditional mindsets about capital options in their pursuit for growth, which has opened the door for PE financing,? said NV Sivakumar, leader, retail, consumer and industrial products, PwC.
For Bangalore-based organic foods company Pro Nature Foods Organic, tier-II and-III towns are important for revenue generation. About 12% of its annual revenue comes from the tier-II cities. ?At present we generate about R70,000-80,000 per month in revenue from Mysore without any display or advertisement spend. With more marketing spend, we can expect sales of about R2.5 lakh per month from the city,? says Pro Nature Foods Organic CEO Varun Gupta. Currently, Pro Nature has presence in Erode, Guntur, Sivakasi, Tirupur, Trichur, Calicut, Kasargode, Goldsouk and Pattom, among other smaller cities.
With the majority of the food market in India dominated by unorganised players, increasingly organised retail penetration is expected to fuel the growth of the processed foods market. Demand for frozen food products, dairy products, snacks and beverages are expected to see a significant growth in the years ahead.