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Edible Oil - Industry Analysis

Competition & Strategy – EPGP 2012 -13
Indian Institute of Management - Bangalore
Ashutosh Karandikar [1214014] Mukund Mani [1214033] Nachiket Marathe [1214034] Navneethakrishnan Sankaraiah [1214035] Pradnesh Deshmukh[1214044]

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Table of contents
Edible Oil Industry – An Introduction ........................................................................................................................3 Analysis of changes in industry structure over time ..................................................................................................4 Industry Boundary Definition ....................................................................................................................................5 Porter’s five forces framework - Analysis ..................................................................................................................6 Threat of Entry ...........................................................................................................................................................7 Threat from Substitutes .............................................................................................................................................8 Suppliers ....................................................................................................................................................................9 Buyers ......................................................................................................................................................................11 Rivalry among Competitors .....................................................................................................................................14 Complementors .......................................................................................................................................................15 Government regulation ...........................................................................................................................................16 Future scenario ........................................................................................................................................................17 Key Success Factors .................................................................................................................................................18 Exhibits ....................................................................................................................................................................19 References ...............................................................................................................................................................26

EPGP 2012-13

EDIBLE OIL - INDUSTRY ANALYSIS

3 EDIBLE OIL INDUSTRY – AN INTRODUCTION Edible oil has been one of the most essential commodities in India as it forms an important part of the food consumption basket.INDUSTRY ANALYSIS .33 % CAGR in past 6 years and is estimated to grow at a CAGR of 5. EPGP 2012-13 EDIBLE OIL . the importance of edible oil arises from the increasing dependence of Indian households on oil for cooking purposes. Broadly categorized into vegetable refined oil and hydrogenated oili. Edible oil industry has registered a growth of 6.93 % for next 5 years xxv.

000 Cr in FY 2011iv and is at an inflection point progressing from an undifferentiated commoditized industry to becoming an organized.INDUSTRY ANALYSIS . 1. 2. China. iii. ii Today India imports almost 40% of its oil requirements and is one of the world’s largest edible oil economies with a per-capita consumption of 11. iv. EPGP 2012-13 EDIBLE OIL .iii Major objectives of the mission were: iii i. Increase production of oilseed crops Make India self reliant in edible/non-edible oils Modernize and create awareness on the emerging technologies Priority to crops for edible oil – Groundnut. This is in line with the growing demand of emerging upwardly mobile middle class.ii Two major initiatives taken by the Government of India led to development of edible oil industry: 1. 00. Soya-bean. Sunflower etc.ii Once import of edible oil was brought under the Open General License (OGL) the prices fell significantly in line with the prevailing international prices which affected the domestic oil seeds market. i The industry is estimated to be Rs. Brazil and Argentina) forming 8% to 10% of the world oil seed production.5kgs. branded products industry led by major players. ii.i It is the fifth largest producer of oil seeds (behind US.4 ANALYSIS OF CHANGES IN INDUSTRY STRUCTURE OVER TIME India till 1980’s had been dependent on edible oil imports to meet its demands. Establishment of Technology Mission of Oil Seeds and Pulses (TMOP): It was created by the Department of Agricultural Research and Education (DARE) in May 1986. Rapeseed-mustard. Trade liberalization Import restrictions on edible oil were reduced in the late 1990’s in order to meet the demand supply deficits.

Out of home customers such as restaurants and fast food joints have improved the consumption demand in recent years. The edible oil industry boundary is as outlined below: EPGP 2012-13 EDIBLE OIL .INDUSTRY ANALYSIS . Incumbent firms Edible oil refiners & marketers are the primary players of the industry who convert the supplies into marketable produce (branded or unbranded edible oil). Customers Household consumers form the primary customers of edible oil.5 INDUSTRY BOUNDARY DEFINITION Primary and intermediary Suppliers Oil Seeds producers/oil exporters act as the primary suppliers while the crushing and solvent extractors are the intermediary suppliers for the edible oil industry.

6 PORTER’S FIVE FORCES FRAMEWORK .ANALYSIS EPGP 2012-13 EDIBLE OIL .INDUSTRY ANALYSIS .

v Small Scale Industry (SSI) reservation for traditional oilseeds and sales tax incentives by various state governments protects the local oil processing units against takeovers/ consolidation. to setup and sustain as a full scale/integrated system. and Sweekar Brand from Marico). strong management expertise and deep domain knowledge. These require huge capital.vi • ANALYSIS: In the edible oil industry small scale players have low capital requirements and low customer base which obviates the need for a complex distribution network.7 THREAT OF ENTRY • Edible oil industry is characterized by low capital/technical requirements for setting up basic local expeller/crushing units and solvent extraction units. However. one needs a strong distribution network. Hence small players have low barriers to entry. symbiotic relationships with farmers/seed traders and refining units distributed across geographic locations. (E. Recent consolidation initiatives in the industry are more financial in nature and brand acquisitions between existing players are with no capacity addition. These requirements along with the supply constraints set a steep target for a new entrant. EPGP 2012-13 EDIBLE OIL .g.INDUSTRY ANALYSIS . Cargill’s buyout of Rath brand from Agrotech India.

There is an increasing trend of purchasing these utensils however the volumes are low. which are consumed in minor quantities. Indian edible market is dominated by a highly price sensitive consumer segment with elastic demand for edible oil. EPGP 2012-13 EDIBLE OIL . grilled foods and milk fats (ghee) are some of the edible oil substitutes. sunflower and mustard oil by cheaper palm/soya-bean oilsvii.INDUSTRY ANALYSIS .8 THREAT FROM SUBSTITUTES So far there are no major substitutes to edible oil. Utensils are available which facilitate oil free cooking. ANALYSIS Baked. This leads to substitution of traditional oils like groundnut. There are no significant substitutes to edible oil.

x • ANALYSIS Even at the level of domestic production achieved in 2011.xii Consumption of edible oil estimated to grow at 4.0 MT in FY 16 driven by positive macroeconomic factors.08% respectively).INDUSTRY ANALYSIS . the industry is faced with a deficit domestic supply of up to 54%.5%). Malaysia.45% and 2. While the domestic production of edible oil will increase by just 1. Indonesia. This is attributed to lower growth in acreage under oilseeds. Indonesia.7 MT in FY 11 to 21.5% in next 5 years to reach from 15. The share of refined oil in the overall import of vegetable oil has recently increased from 13% in Nov 2011 to 35% in Feb 2012 due to the reduction in export duty on refined oil by the primary supplier. viii Growth in production & Sowed acreage in the last 11 years has been modest (4. modest production (volatility of climate.48 MT of oil seeds in 2011.25 MT in next five years. low productivity) and increased acreage under other EPGP 2012-13 EDIBLE OIL . Argentina and Brazil are major suppliers.9 SUPPLIERS Domestic • • Record production of 32.ix International • • • Import dependence has gradually increased from 48% to 54% in last 6 yearsx.xi Imports are primarily of crude oil due to 0% import duty (Duty on refined oil is 7.

Also.10 profitable cash crops resulting an increase in the quantum of imports. EPGP 2012-13 EDIBLE OIL . the edible oil demand will continue to grow and imports will continue to dominate supply in near future. However. with changes in export duties of Indonesia.INDUSTRY ANALYSIS . the domestic supply is plagued with fragmentation and thus the domestic suppliers have low bargaining power. However. thereby rendering domestic refining capacity idle and reducing profitability of manufacturers. crude oil import has become an unfavorable option.

xiii Different regions in the country have different preference for oilseeds. restaurants. etc. xv EPGP 2012-13 EDIBLE OIL . soybean-oil (16%) and mustard-oil (14%) have maximum consumption in India. xiv The Out-of-Home consumption comprises 30% of the overall consumption and caters to biscuit/chips manufacturers. Growth rate in out of home sector is 2 to 3 times more than the home consumption rate. hair oil manufacturers. fast food centers. ready-meal snacks.INDUSTRY ANALYSIS .11 BUYERS Edible Oil Industry has following Buyer segments: • • • Consumers with lower income (primarily rural) Consumers with higher income (primarily urban) Out of Home segment On a volume basis palm-oil (46%).

Urban consumers have strong preference for taste and are not easily induced to switch to different oil. Haldiram’s may enforce bargaining power. xiv.INDUSTRY ANALYSIS .12 Popularity of newer varieties of oil like sunflower and soy oil is rising in urban areas. bargaining power of retail consumers is low.vi 4. This makes it imperative for manufacturers to continuously pursue marketing activities and invest in a reliable supply chain to prevent stock outs. Consumers may easily switch between brands of oil in the same type and price range. xiv 2. xiv 3. Products addressing niche customer segments like health conscious and taste sensitive have been launched.3 kg/per year is markedly lower than the global average of 24 kg/year. However. xvi 1. EPGP 2012-13 EDIBLE OIL . ANALYSIS Since edible oil is an essential commodity and buyers are dispersed. Large corporate buyers such as Frito Lay. Current per-capita consumption of 13. Consumers in lower income groups (primarily rural) are sensitive to price increases and easily substitute their diet with cheaper oils. About 84% of the oil consumed in India is un-branded. Per capita consumption of oil is driven by improvement in income levels and living standards.

13 segment preferences are not strong amongst majority of consumers. buyers have a low to medium bargaining power.INDUSTRY ANALYSIS . EPGP 2012-13 EDIBLE OIL . Considering these factors.

xvii Un-branded category of products forms around 85% of the industry and caters mostly to the price sensitive consumers.14 RIVALRY AMONG COMPETITORS Indian edible oil industry has around 15.xix ANALYSIS The edible oil industry is highly fragmented with no differentiation within products.INDUSTRY ANALYSIS .xviii Branded to Unbranded product ratio is around 1:4 amongst the top 5 players of the industry. Switching cost for the consumers from the lower strata is low as they seek unbranded varieties of low priced oil to save expenses (this is evident from the increase in the consumption of Palm Oil – a cheaper substitute within the Edible Oils – with the increase in price for other Oils). 600 solvent extractors. EPGP 2012-13 EDIBLE OIL . Overall capacity utilization is lower than 30% for the industry. This leads to price competition among the market players and thereby results in lower profit margins [Refer Exhibit 5]. over 650 refining units and 250 Vanaspati units.000 oil mills.

EPGP 2012-13 EDIBLE OIL .INDUSTRY ANALYSIS . Rising middle-class and economic growth stimulate the growth of this industry which in turns improves consumption of edible oil.15 COMPLEMENTORS We feel that the allied hotel/restaurants industry serves as a complement as it directly impacts the consumption of edible oil in a positive way.

Government could encourage industries to work with farmers on improving productivity by providing tax benefits for such efforts.16 GOVERNMENT REGULATION Regulation Government banned export of all edible oils up to 30.xx Tax Government has cut down import duties on edible oil since April 2008.INDUSTRY ANALYSIS . The current duty differential between crude and refined oils stands at 7.per kgxxii SSI Reservation (as detailed in Threat of Entry) ANALYSIS Industry profitability is dependent on policies formed at the center.9.2012. EPGP 2012-13 EDIBLE OIL . Government introduced a Scheme for Distribution of 10 lakh tons of edible oils at a subsidy of Rs. xxi Protection In order to provide relief to the poorer section of the society from the rising prices of edible oils. 15/.5%.

climatic conditions. We feel that the big players should focus on differentiation through branding exercises leading to premium pricing. xxiv Growth of Out of Home consumer segment: xxv Fast food industry is growing at 40 % in India Growth rate in this sector is 2 to 3 times more than that in home consumption rate. Companies could come up with products citing advantages of healthy oil. iii. • • • Future estimates of growth in consumption and market shows a positive trend for growth in the industry but for the constraints on supply (domestic production. We feel that they could increase their presence in this market as it would lead to brand visibility. imports. differentiation. Growing health consciousness in consumers has resulted in preference for branded products which presents a positive trend. Option of venturing into fast food chain outlets could also be tried. etc).17 FUTURE SCENARIO Some Insights: i. for sustainability/profitability they could also integrate forward and backwards. Consumption is expected to grow further between CY11-CY15E to 21mt from 15. (E. 80 % of urban Indians eat out seven times/month. Current trend of FDI in this sector can be leveraged for the same. More so.INDUSTRY ANALYSIS . etc) and industry competition (price competition.g. ii.7 MT in CY 11. Leading players have diversified into ready-meal food industry to enhance their profitability. Ruchi Soya has strengthened its backward integration to de-risk against supply constraints and raw material costs. Also current brand buyouts and take-overs substantiate this trend. Marico has introduced “Saffola” that has lower cholesterol levels). EPGP 2012-13 EDIBLE OIL . Fragmentation also calls for consolidation which the big players are better positioned to do.xxiii Consolidation and backward integration – One of the major players. which can give them a competitive advantage.

refineries at ports. Range of products catering to geographical • needs Packaged/ branded/ healthy oil in urban areas. • • • • • • EPGP 2012-13 EDIBLE OIL . etc) Sourcing raw materials: Improve yields.through symbiotic relationship with farmers Cost controls through hedging. etc Risk management over trade exchanges. ensure regular supplies . streamlining. etc) Backward integration (plantations.INDUSTRY ANALYSIS . consolidation of extraction units. retailers. get better quality oilseeds. distributors.18 KEY SUCCESS FACTORS What are customer’s How do firms survive in Key success factors requirements? competitive environment? • • Low Price • • Import of crude oils Competition based Price Excess capacity • on Differentiation through branding which yields price premium Forward integration(C&F agent.

Edible oil demand. supply.19 EXHIBITS Exhibit 1. EPGP 2012-13 EDIBLE OIL . import and export.INDUSTRY ANALYSIS .

EPGP 2012-13 EDIBLE OIL .INDUSTRY ANALYSIS . Exhibit4: Percentage share of Edible Oils in the Indian market.20 Exhibit3: Percentage Composition of Food Basket in an average Indian Family.

21 EPGP 2012-13 EDIBLE OIL .INDUSTRY ANALYSIS .

22 Exhibit 5: Financials of leading companies EPGP 2012-13 EDIBLE OIL .INDUSTRY ANALYSIS .

23 EPGP 2012-13 EDIBLE OIL .INDUSTRY ANALYSIS .

Executive Director.INDUSTRY ANALYSIS . Outlook for demand and import of edible oils” by Dr. BV Mehta.24 Industry Fact Sheets [Source: “Role of India in Edible Oil Complex. The Solvent Extractor’s Association of India] Oil Seed Sector 2010 – 2011 Area under oil seed cultivation: 26 – 27 Mn Ha Average Yield (Per Hectare): 950 – 1000 kg EPGP 2012-13 EDIBLE OIL .

25 Edible Oil Demand and Import Projection (Excluding non-edible oils) * Based on 4% growth EPGP 2012-13 EDIBLE OIL .INDUSTRY ANALYSIS .

com/Portal/Pages/Search/SearchResultsList.com/images/67/GGPatel_Presentation_PIPOC%202011. Consumer Trend In India With Reference To Palm Oil xvi http://www.Systematix.nic.seaofindia.G.in/ContentPage.com/images/67/GGPatel_Presentation_PIPOC%202011.com/pdf/presentation-dec-06.pdf viii http://indiabudget. Government of India http://agricoop.com/india/news/veg-oil-refineries-in-doldrums-want-protection/470844/ xiii Indian Edible Oils Industry: Key Trends and Credit Implications. 2005 by P.icra. (July 6 2011) xxiv Annual Report 2010 – 2011 – Ruchi Soya Industries Ltd http://www.nic. Patel.icra. A Report prepared for IGIDR-ERS/USDA Project: Indian Agricultural Markets and Policy February 2.pdf iv Role of India in Edible Oil Complex.nic.pdf x Consumer Trend in India with respect to Palm Oil .nic. Outlook for demand and import of Edible Oils http://www.mcxindia.asp?EventId=568&Section=edible%20oil&ParentID=0&Parent=1&check=0 xxiii th Systematix Institutional Research – Ruchi Soya Industries Ltd. G.com/Uploads/Products/16/English_Crude_Palm_Oil.com/images/67/BVM_Presentation_J_P_Morgan_Jan__2011.26 REFERENCES i Ministry of Food Processing Industries http://mofpi.in xiv Impact of Trade Liberalization on India’s Oilseed and Edible oils sector.in/dfpd/EventDetails.in/?q=node/197 xxi Indian Edible Oils Industry: Key Trends and Credit Implications http://www.nic.INDUSTRY ANALYSIS .seaofindia.aspx xvii Systematix Institutional Research Paper on Ruchi Soya Industries xviii KS Oils : http://www. Instituitional Research xii http://www.in/Files/ticker/Indian_Edible_Oils-note11072011. Ruchi Soya and Agrotech Foods Pvt Ltd.in/es2011-12/echap-08.seaofindia. www.business-standard. xx Department of Food and Public Distribution http://dfpd.pdf xxv Consumer Trend in India with reference to Palm Oil by Govindbhai G. July 2011. Srinivasan Indira Gandhi Institute of Development Research (IGIDR) xv Solvent Extraction Association (SEA) -GGN Research paper.pdf v Indian Edible Oils Industry: Key Trends and Credit Implications – ICRA Rating Feature vi Indian Edible Oils Industry: Key Trends and Credit Implications – ICRA Rating Feature vii http://www. Patel & Nikhil Research Company http://www.pdf ix http://indiabudget.ksoils.aspx?CategoryId=687 ii Indian Edible Oils Industry: Key Trends and Credit Implications http://www.pdf xi Analyst report on Ruchi Soya Industries .pdf EPGP 2012-13 EDIBLE OIL .in/es2011-12/echap-08.GovindBhai G.in/Files/ticker/Indian_Edible_Oils-note11072011.nic.euromonitor.com/Ruchi%20Soya%20AR%202010-11.pdf xxii http://fcamin. Patel http://www.pdf iii Department of Agriculture and Cooperation – Ministry of Agriculture.portal.icra.in/tmop&m/1Background&Objectives.pdf xix Annual Reports of KS Oil.ruchisoya.V. ICRA Rating Services.