Hungry For More

In three years flat, tobacco-to-hotels-to-FMCG giant ITC has emerged as a major player in the packaged
foods market. Here's a look at how it is gobbling up market share.
By Venkatesha Babu

When chairman yogi c. Deveshwar declared that ITC's aim

was to become "the most trusted provider of food products in
the Indian market", it was met with polite sniggers. But that was
three-and-a-half years ago (on May 26, 2002, to be precise).
ITC had just entered the packaged and processed foods
business and analysts doubted its prospects in the fiercely
competitive sector. That's because building brands requires
humungous amounts of money. And razor-thin margins ensure
that returns often take years to materialise. Three years later,
they are eating their words (with ITC's biscuits and snacks as ITC's Naware: Getting the
accompaniments). chemistry right

"We entered the business only after conducting an extensive study on the prospects of the sector
and the value that ITC could bring to the table," says Ravi S. Naware, Head of ITC Foods, which
comprises four divisions-snacks (biscuits), rte (ready to eat; popularly called the heat-'n'-eat
segment), confectionery (candies and mints) and staples (atta or flour and salt).

Of these, snacks contribute more than half of ITC Foods' turnover of Rs 781 crore. This isn't
surprising, considering that snacks account for the single largest chunk of the Rs 15,000-20,000-
crore packaged foods market in India. Within this, biscuits make up a Rs 4,500-crore sub-set.
Therefore, it was imperative for ITC Foods to stake out a significant presence here. It was also
the most difficult market to break into. That's because Britannia, Parle and a host of smaller
regional brands had sewed up the market between themselves.

It needed some strategic thinking and nimble footwork to crack open this market. "We decided not
to play on our competitors' turf; our aim was to create new markets for ourselves. Thus, we
introduced an Orange Marie, a butterscotch cream biscuit, chilli flakes in a biscuit and even honey
flavour, under the Sunfeast brand," says Hemant Malik, Head of Marketing, ITC Foods. The
company invested Rs 12 crore on setting up an r&d facility to develop these new products.

Its strategy is paying off. ITC Foods has a 9 per cent share in the biscuits market, in spite of
having no presence whatsoever in the cookies, crackers, cheeselings and sweet-n-salt
categories. Predictably, forays into these sub-segments are on the anvil. The competition is,
however, putting up a brave front. "We are focussed on catering to the masses and our products
are available in the smallest markets," says a Parle spokesperson.

Meanwhile, ITC Foods has launched Sunfeast Pasta, creating a new market segment in the
process, and is believed to be considering the launch of instant noodles to take on Nestlé's
Maggi.

ITC has also carved out a significant share for itself in the rte segment. Its hotels division employs
some of the best chefs in the world. ITC Foods packaged some of their recipes in a ready to eat
format and launched the Kitchens of India range, targeted at the top end of the market; and
addressed the mass market with its umbrella Aashirvaad brand. Their combined market share: 25
per cent. It helped that there were no national players in the Rs 80-crore rte market which was
dominated by regional brands like MTR Foods and Tasty Bite.

ITC Foods currently has two brands in the candies and mint segments of the Rs 1,200-crore
confectionery market. Candyman, a hard-boiled candy available in a number of flavours, and Mint
O, ITC Foods' only acquisition in the packaged foods segment (it bought the brand from Candico
in 2003 for an undisclosed amount), together give it an 8 per cent market share in confectioneries.
Naware points out that ITC does not yet have any chewing gums, chocolates and lollipops in its
portfolio, a hint, perhaps, at where future growth will come from.
The truth is that this is one market that is proving difficult to
prise open. ITC is still a distant number four (behind Perfetti,
Nutrine and Parrys (i.e. Lotte). The grapevine, however, is
buzzing that it is eyeing Nutrine. Says Naware: "I will not
comment on specific acquisition plans; we are always looking
for acquisitions that make business sense. (But that) depends
on a right fit at the right price."

But it is in packaged atta that ITC has really come into its own.
"We purchase wheat directly from the farmers (using the e- "We decided not to play on
choupal network)," says Naware. The cost advantage apart, our competitors' turf; our aim
this direct link with the farm "enables us to supply atta that is was to create new markets"
superior to that sold by our competitors," he adds. Rivals will, Hemant Malik
obviously, not accept such subjective statements as a given, Head Of Marketing/ITC Foods
but the numbers tell their own story. ITC's Aashirvaad brand is
the clear leader in the Rs 600-crore packaged flour market with a share of around 40 per cent.
hll's Annapurna brand is in second spot with a market share of 18 per cent.

In the Rs 400-crore organised salt market, Tata Salt is the market leader with a share of 28 per
cent. Aashirvaad's share is less than 5 per cent. "Things will change once we start distributing it in
more markets," says Naware.

ITC Foods has also recently entered the Rs 700-crore branded spices (think powdered chilli,
coriander, turmeric, garam masala) market. There are no national brands in this segment, which
is dominated by regional players. "Aashirvaad is our umbrella brand for spices as well," he adds.

The Strategy

ITC's 5,400-strong e-choupal network covering 34,000 villages

"ITC's aim is to become the
most trusted provider of food
products in India"
Y C Deveshwar
Chairman/ITC
(the target: 25,000 e-choupals covering one lakh villages by
2010) gives it unparalleled procurement and distribution
muscle. Says Naware: "Wheat is the primary input in the atta
and biscuits segments, which contribute the bulk of our
revenues. It is also the commodity in which we have the
strongest presence. Our business model revolves around the
wheat vertical."
ITC Foods also uses its parent's well-oiled distribution channel
to cut its marketing bill. "We reach nearly 1.5 million retail
outlets," says Malik.

Interestingly, ITC Foods does not have any manufacturing facilities. All manufacturing is
outsourced, and the company only monitors quality through a system of checks. This can prove to
be its Achilles' heel. Says a competitor on the condition of anonymity: "Not having its own
manufacturing facilities may have lowered its entry costs, but it leads to quality problems; look at
how ITC had to withdraw Bischips (a flour-based baked snack) from the market." Counters Malik:
"Bischips wasn't withdrawn because of any quality problems. It was a product ahead of its time."
But ITC is moving to plug this obvious gap in its value chain. It is setting up a Rs 100-crore biscuit
manufacturing unit in Uttaranchal. "Work is in progress and the new plant will go on stream within
the next six months," says Naware.

Meanwhile, ITC Foods is aggressively building its brand. It has signed on Bollywood superstar
Shah Rukh Khan as the ambassador for its Sunfeast brand. It has also rolled out a school contact
programme to promote its biscuits, pastas and candies among kids. "We are devoting
considerable energy and expense on building our brand," says Malik. He, however, declines to
reveal any figures.

Competitors complain that ITC Foods is buying market share by offering unsustainably high
margins-15 per cent plus in some categories-to its channel partners. Malik dismisses this charge.
"We pay at par with the industry leaders or our nearest competitors," he says.

Even hardnosed business analysts are impressed by ITC Foods' performance. Says Nikhil Vora,
Vice President, Research, SSKI Securities: "I'm very bullish. Over the next couple of years, we
expect it to turn profitable." Incidentally, ITC is entering more fast moving consumer goods
(FMCG) segments. It plans to launch soaps and shampoos under the Superia brand name in
February.

What's next on the agenda? Naware laughs. "Our goal is to emerge as the largest player in the
processed foods segment." That means ITC Foods has just sounded the bugle. From here on, its
competitors are on notice.