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. Venkatesh 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 has 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 accompaniments).

“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.

It’s strategy is paying off. ITC Foods has a 9% 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 focused 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 Nestle’s Maggie.

ITC has also carved out a significant share for itself in the RTE segment. It’s hotel division employs some of the best chefs in the world. ITC Foods packaged some of the 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. They combined market share: 25%. 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% 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 the 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 comment on specific acquisition plan; we are always looking for acquisitions that make business sense. (But that) depends on a right fit at the right place.”

But it is in packaged atta that ITC has really come into its own. “We purchase wheat directly from the farmers (using the e-choupal network),” says Naware. The cost advantage apart, this direct link with the farm “enables us to supply atta that is superior to that sold by our competitors,” he adds. Rivals will, obviously, not accept such subjective statements as a given, 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 the 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 (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.