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Slowdown to impact 80% food processing output as MSMEs in biscuits, chocolates, savouries to take hit

Sandeep Soni
FMCG growth, FMCG sector in India, FMCG value growth, nielsen, rural demand

The impact of economic slowdown cascading onto different sectors is perhaps beginning to hit the food sector -- probably the last sector to get hit since food is a basic commodity. Even as biscuit giant Parle reportedly may lay off 8k-10k people due to consumption slowdown, other large food processing players such as Britannia and Hindustan Unilever also reported a slump in their volumes. And because around 80 per cent of the processed food in FMCG comes from the MSME sector, the latter is set to take a hit in business.

“It is not just Parle, there is an overall slowdown in the industry under the economic slowdown. Historically food is the last sector to get impacted as it is a necessity. A lot of these large companies have third party manufacturers that are MSMEs and around 80 per cent of their processed food comes from these MSMEs. When the demand goes down, the idle capacity kicks in and the business is straddled with a high fixed cost and there is a cascading effect that makes MSMEs the biggest sufferers,” Vikas Jain, Chair, ASSOCHAM Council on Food Processing and Value Addition told Financial Express Online.

However, Jain cautions that it is too early to quantify the slowdown impact as it is only seen in the first quarter of FY19 and business would wait for the festive season to decipher whether the demand picks during the season or remain subdued. Britannia’s annual volume growth in the FY19 first quarter reportedly went down half to 6 per cent vis-a-vis the year-ago period while Hindustan Unilever’s volume growth was also down from 12 per cent to 5 per cent.

Nonetheless, categories such as staples may not have a higher impact of slowdown because  “people will have to buy staples as they are need-based but products such as biscuit, namkeens, chocolates, which are choice-based will get a bigger hit. Apart from contract manufacturing, MSMEs could be helping large food processing companies in their new product development and trials as well but due to the slump, this will also be impacted,” said Jain. Even if the growth is flat, MSMEs will get their margins hit because of “higher commodity prices and they may also have to lay off people.”

The processed food market is likely to grow at 14.6 per cent CAGR to $543 billion by 2020 from $322 billion in 2016. The sector contributes 32 per cent share of India’s food market and 11.60 per cent share to the sector’s employment. Food processing market is expected to attract $33 billion investments and generate jobs for 9 million people by 2024, according to Invest India platform.