By Hemendra Mathur
The upswing in India’s domestic organic foods market makes it a promising destination for investors
Until recently, India’s organic food industry has relied, to an extent, on export demand issuing from overseas markets such as the US, Europe, Japan and the Middle East. Organic foods made up for almost 60 percent of the total food and non food organic exports from India (USD 400 to 600 mn) this financial year. But now the domestic market, previously branded as niche, is finally taking wings, with current domestic organic food sales revenue estimated at USD 200 mn, and a growth rate of 30 to 40 percent CAGR.
Drivers for Growth of Organic Foods
Consumers in India are increasingly becoming aware of the benefits of buying natural, healthy, and safe goods and produce. This is driving the demand for organic food. With print, electronic and social media repeatedly reporting incidences of food adulteration and its impact on health, consumers are more aware of the repercussions of the choices they make. The new food safety legislation is also working towards improving safety standards for food. Furthermore, with an increasing number of families having access to disposable incomes and improved availability of organic foods, consumer willingness to pay for organic foods is higher than ever before.
“Opportunity in the Indian organic food sector would scale from the current USD 500 mn to USD 2 bn (approx USD 1 bn catering to the domestic market and USD 1 bn catering to exports) by 2020. This indicates that investment required in the organic supply chain would be approximately USD 300 mn, out of which approx USD 100 to 150 mn is likely to come in the form of private equity over the next 5 years”
The number of categories of organic products sold in India has grown up to more than 200. Now, the sector is miles ahead of the domestic organic market that started in the late 90s with organic tea and spices. Today, companies are selling organic flour, breakfast cereals, organic ghee, organic fruits, vegetables, milk, honey and so much more.
E-commerce is another key factor behind the recent burst of growth in the organic sector. It has proven to be particularly helpful to organic companies, typically SMEs; companies are finding new ways to use technology to reach out to their end consumers. Today, there are more than 25 e-commerce platforms selling organic foods online. These include general grocery portals such as Big Basket and PepperTap, which also sell organic categories, as well as specialised organic retailers such as I Say Organic, Joy By Nature, EkGaon, and others.
It takes about three years to convert a field from conventional to organic farming. Generally, a company works with a group of farmers (400-500). These farmers constitute the Internal Control System (ICS). The company provides them with the support, inputs and training on practices for growing organic; they also assure the buyback of crops. It is important to note that the organic certification is awarded in the name of the company and not the individual farmer. So, any farmer will necessarily have to go through the company in order to sell their organic produce. However, companies also buy back the produce from the organic farmers during the three years that it takes a farm to be fully certified organic.
Improving engagement with farmers is crucial for companies. Another way to improve engagement with farmers is by increasing the number of crops one gets from them. Most farmers who are invested in the sector want their farms to be certified organic. Once the farm is certified, it means that everything grown there is organic. While previously, companies were selective in their organic purchases—acquiring single organic crops like organic cotton or soy from specialised organic farms, and other crops from farms that were not organic—with ever-increasing consumer acceptance of organic products of a greater variety, organic companies are now more open to source, process and sell multiple crops as organic.
Needless to say, the certification is a crucial aspect of the supply chain management. Different importing countries have different set of approved certifications. Any company involved in the business needs to set its standards of organic farming accordingly and choose an appropriate agency for certification. The certifications followed by exporting companies are typically USDA, EU organic and OU Kosher. The Government of India has implemented the National Programme for Organic Production (NPOP) to be at par with the standards of the importing country. The Indian Government has also launched PGS-India (Participatory Guarantee System of India), which is a quality assurance initiative that is locally relevant, and emphasises the participation of stakeholders, including producers and consumers, and operates outside the frame of third-party organic certification.
Private Equity in Organic Foods
Interest in the organic sector is not a new development. Theorganic foods segment has seen many deals in the recent past. Among the more prominent deals have been SEAF India Agribusiness Fund and Sarona Capital’s investment in Khyati Foods; Ventureast and Peepul Capital’s investment in 24 Letter Mantra; Nexus Capital’s investment in Suminter India Organics; Fabindia’s invesment in Organic India and SIDBI Samridhi Fund’s investment in Natureland. The typical size of the deal has been USD 3 to 10 mn and typical turnovers of the companies at the time of investment have been in the range of USD 5 to 10 mn. We are also witnessing venture funding in start-ups and early stage organic companies.
So why are investors bullish about investing in Indian organic foods? First and foremost, if we look at the entire food basket and plot each food category on a graph with scale opportunity as one axis and margin opportunity as another, we will find that organic foods is one of the few categories that will fall into a high scale, high margin opportunity. High scale is driven by the fact that organic food consumption is not even a 0.1 percent of India’s USD 300 bn annual food consumption. Likewise India’s share in global organic food consumption of USD 100 bn is less than 0.2 percent. As discussed above, the scale opportunity is also driven by the fact that there is more depth and variety in organic categories currently. The emergence of e-commerce as a channel to sell only adds to the growth.
Two things drive margin opportunity: typically there is 15 to 50 percent premium on organic products, which in a stable organic business can translate to 10 to 25 percent EBITDA margins. Margins are also driven by immense branding opportunity in organic products. Indian commodities like pulses, staples, vegetables, which have poor branding history, are apt for organic branding. Another reason for investor interest is that typical organic supply chain is more efficient as compared to conventional agribusiness as there are few intermediaries and better control on quality, cost and traceability of the product. Last but not the least, the exit opportunity—a key concern for most investors—is brewing with many investors from Europe, Japan and US, evincing interest in investing in Indian organic supply chain.
In a nutshell, there is a good chance that Indian organic opportunity can scale from current USD 500 mn to about USD 2 bn (approx USD 1 bn catering to domestic market and USD 1 bn catering to exports market) by 2020. This would mean that investment required in organic supply chain would be approximately USD 300 mn, out of which about USD 100 to 150 mn is likely to come in the form of private equity over next 5 years, translating to about 10 to 15 deals in the organic sector in this period. The investment will be utilised by companies mostly for expanding the farmer base, certification, value addition, distribution and branding of organic products. This presents a unique opportunity for investors in agribusinesses to not only invest but also accelerate the growth momentum of organic foods in India.
At the time of writing, the author was Managing Director of SEAF India Investment Advisors
This article was published in the April 2016 issue of Pure & Eco India