Rising production costs, changing rural demand and higher freight charges are putting pressure on India’s food industry. Rajat K Baisya examines how these factors affect food processors, seafood exporters and small businesses, and why affordable products and sound business strategies matter. explains.
In the last issue of PFI, I discussed the impact of food inflation on the performance of the food processing industry. With the onion price at Rs 90 a kg and tomato at Rs 100 a kg, the cost of running the kitchen of an average household has increased by 33%. Consumers’ buying power with lesser disposable income has reduced demand for processed food.
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Challenges Faced by Food Industry
The cost of the product also increased due to higher raw material costs, resulting in a decline in sales volume. The food industry is going through difficult times. In addition to escalating prices of primary foods, there are issues like unemployment and climate change, with heat waves in the northern region and poor rainfall making it harder sustaining growth of food industry to achieve targeted growth compared to last year.
The financial year 2024 will thus be a difficult year for the food industry. Very small-scale and home food processors have already said that their cost of production has gone up by 30 per cent, and they are not increasing the selling price. Instead, they preferred to absorb the rising cost and operate with a much lower margin for fear of losing customers.
Rural Market Demand Recovery
In FY 2024-25, good rainfall in agriculture-rich states resulted in volume growth in the first quarter, driven by rural markets. Companies like Dabur, Marico, and Adani Wilmar reported growth due to rural demand recovery, surpassing urban demand. Intensive rural distribution by FMCG players like Dabur and Nestle is expected for sustaining this growth.
Rural market demand was lagging behind for several quarters on the back of patchy monsoon rains in key agricultural regions but has picked up pace since March 2024, surpassing the urban demand. Rural demand is moderate at the moment, but with a good monsoon, it is expected to be better. Intensive rural distribution of FMCG players like Dabur, HUL, and Nestle, having wider coverage of villages, will be able to sustain the growth and deliver improved performance in the current fiscal. Adequate rainfall is crucial for agriculture, which is the backbone of rural livelihoods and can significantly increase crop production, leading to increased farmers’ income and overall rural prosperity.
Varied Impact of Rainfall on Rural Income
Although variations in rainfall across regions can lead to differences in rural income growth, the overall outlook for the food industry appeared better than in the previous year. According to estimates from AC Nielsen, the rural sector recorded higher growth than the urban sector after two years. Crisil estimated FMCG revenue growth of 7–9% in FY 2025, compared with 5–7% in FY 2024, partly supported by the revival of rural demand. Parle Products also expected strong growth from rural regions. A good monsoon would be essential to sustaining this demand momentum.
If rural markets are to deliver the expected growth for the food industry, low-unit-price stock-keeping units (SKUs) will be in greater demand. Rural consumers are less likely to buy large packs. Manufacturers and marketers with affordable, small-pack products will have a natural advantage. For example, Parle-G sells its ₹5 pack in large volumes in rural markets. Producers will need to meet any increase in demand. Several other food brands also offer small packs aimed at lower-income consumer segments, including ₹5 potato chips and extruded snacks.
This focus on affordability is closely linked to consumer spending on processed food products, where small packs can help price-sensitive consumers make occasional purchases.
Products such as tomato ketchup and sauces are also sold in single-use pouches priced at ₹1 or ₹2 to encourage rural demand. The compound annual growth rate in villages between 2023 and 2024 was 3.4%, compared with 2.8% in urban areas, according to the report. Consumption-led growth in rural India was only 1.1%, accounting for around 30% of total rural market growth. According to market researcher Kantar, the remaining two-thirds of growth came from population increases. Some products may need to be priced as low as ₹1. At such price points, manufacturers must still ensure viable trade margins.
Challenges for Export-Oriented Industries
Some food industry categories will not benefit directly from rural demand growth. Export-oriented businesses, in particular, face the impact of inflation. They cannot easily pass higher costs on to overseas buyers. Exporters must remain competitive with suppliers from other countries, and holding stock for later sale is often not feasible because storage costs rise and product quality may deteriorate.
Merchant exporters may reduce purchases when market conditions are difficult. If a transaction is not profitable, they may avoid buying stock to prevent losses. Manufacturer-exporters, however, have less flexibility and may have to continue production and fulfil orders despite unfavourable conditions.
Indian seafood exporters appear to be going through a particularly difficult phase. They faced a five-fold increase in freight costs, which they could not pass on to buyers in the US and Japan, two major import markets for Indian seafood. The marine processing industry is exposed to fluctuations in production, prices and international demand, as well as regulatory and compliance requirements. Its fortunes can therefore change sharply.
Many large buyers’ agents visit India during the season with bulk letters of credit, known as master L/Cs, to purchase seafood from processors. They are familiar with the short-term difficulties faced by local processors and may use this knowledge to negotiate lower prices before opening letters of credit on favourable terms.
The unusual increase in freight costs was attributed to large-scale advance bookings by Chinese processors seeking to export before a rise in US import duties on Chinese goods scheduled to take effect on August 1. India’s US$7.3 billion seafood industry warned of a five-fold surge in shipping rates in less than two months, raising concerns about losses because exporters could not pass on the higher costs to buyers. Marine processors depend on refrigerated containers and cold-chain systems to ship their products while maintaining quality.
Challenges for Small and Medium-Scale Industries
According to the Seafood Exporters Association of India (SEAI), freight costs from Chennai to Los Angeles had risen by 255%, from US$2,950 to US$10,500 per container in May 2024. Processors could not hold stock because orders not executed on time could lapse and attract penalties. Product quality could also deteriorate during prolonged storage. Such sudden increases in freight costs leave processors with few ways to protect their margins.
Small and medium-sized industries tend to suffer most during difficult periods because they have less flexibility. Their product ranges are often limited, and they depend on fewer customers across smaller geographical areas. Businesses selling mainly in urban markets may not benefit from rising rural demand. Those based in rural areas, however, may gain from an improvement in local consumption.
These constraints are especially relevant to India’s food processing MSMEs, which often have fewer resources to absorb cost increases or invest in new distribution channels.
HUL reported a 3% increase in net profit in the first quarter ending June 2024, driven by a rise in rural demand. However, its portfolio includes personal care products as well as food. The food category contributed only 1.7% growth in revenue for HUL in the quarter ended June 2024.
Strategic Shifts and Market Adaptations
HUL does not keep any product or brand in its portfolio if it is not delivering the desired level of performance. In fact, they sold some of their food brands earlier, like Captain Cook salt and Annapurna Atta, for low profit and growth categories. The brands were sold to Uma Global Foods and Uma Consumer Products, which are subsidiaries of Reactivate Brands International and an affiliate of CSAW Aqbator (Singapore), for Rs 60.4 crore – a nearly 50% discount to the 2021-22 turnover of Rs 127 crore clocked for the salt brand. Annapurna brand was sold for an undisclosed amount to the same party.
HUL is known for building food business in India through acquisition, and they also are known to sell the brands and business which do not deliver the expected performance. But others have built their food business organically and have to face changing market environment to stay relevant to sustain their business. For them, growth is a key imperative.
*Author is the chairman of Strategic Consulting Group and served as Professor and Head of the Dept. of Management Studies, IIT Delhi. He can be reacheded at rkbaisya @ hotmail.com
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