The Impact of the 2017 Goods and service tax (GST) on packaged Food Industry in India

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1 The Impact of the 2017 Goods and service tax (GST) on packaged Food Industry in India August 2017 Price elasticity of staples higher compared to discretionary products due to lower income levels. Close to 89% of the population in India has income levels lower than US $3500. As a result, the discretionary spending habits of the population are directly linked to their income levels. Although the middle and upper class have the ability to trade up to better quality products; masses remain price sensitive due to lower income. Hence, price elasticity of staples such as fresh milk and edible oils continues to be higher compared to discretionary products such as ketch up and cookies in the country. Additionally, GST exemption on unpackaged food items could possibly lead to a shift from packaged market to unpackaged and from formal channel to informal channel. Any price hike due to GST on products with higher price elasticity masses most likely to downgrade or switch to substitute products.

2 2 Discretionary spending proportional to income level and affordability Close to 89% of the Indian population had income less than $3500 USD in 2016 Although middle and upper class have the ability to trade up to better quality products; masses remain price sensitive due to lower income Close to 45% of Indian consumer expenditure was on essentials with 30% spend on food and nonalcoholic beverages and another 15% on housing during 2016 Discretionary spending opportunity for masses directly proportional to their income levels and also on the affordability of the product Negative GST impact on average unit price of essential commodities such as food and non-alcoholic goods can have a drastic impact on consumption patterns of these products 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% India Population by Income Band % 42% 47% Disposable income > US$3500 > US$1000 to < US $3500 < US$ % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: Euromonitor International Share of Wallet % 7% 14% 15% 15% 15% 30% Consumer Expenditure Clothing and Footwear Health Goods and Medical Services Transport Others Miscellaneous Goods and Services Housing Food and Non- Alcoholic Beverages

3 3 Price elasticity of staples higher compared to discretionary products Full fat fresh milk Full fat fresh milk has the highest price elasticity of due to a significant price differential between full-fat and semi skimmed milk. Full fat fresh milk is an aspiration product for the masses compared to semi skimmed milk which is seen as a necessity. Any increase in average unit prices will have an adverse impact on volume consumption of full fat fresh milk. Consumers likely to downgrade or shift to more affordable substitutes such as semi skimmed fresh milk. Source: Euromonitor International Any price hike due to GST on products with higher price elasticity, masses most likely to downgrade or switch to substitute products Edible Oils Within edible oils, sunflower oil, typically priced higher compared to other edible oils, will be impacted the most. If there is a price increase due to GST, consumers are likely to shift to more affordable edible oils alternatives. Cooking fats Cooking fats (Ghee) are expected to be least impacted by fluctuations in average unit prices. These fats are consumed mainly by wealthy consumers and they are unlikely to shift to alternatives despite the price increase due to GST.

4 Revenue in INR Billion THE IMPACT OF THE 2017 GOODS AND SERVICE TAX (GST) ON PACKAGED FOOD INDUSTRY IN INDIA 4 Packaged and branded edible oil sales to get a boost post GST Edible oils overtook dairy to become the largest category in the Indian packaged foods market in the year 2016, as hygiene concerns and the growing interest in products offering health and wellness benefits drove the rapid shift from unpackaged to packaged oils. On the back of this trend, edible oils managed to register retail value growth of CAGR 27% between 2011 to Proposed GST rates for edible oils of 5% is significantly lower than prevailing rates of 12%. This is expected to help boost the branded edible oils market with the shift from unpackaged to packaged edible oils expected to further accelerate over the coming months Retail Value Sales Edible Oils Edible Oils Source: Euromonitor International

5 5 Packaged and branded edible oil sales to get a boost post GST Euromonitor s packaging data indicates that close to 88% of edible oils purchased during 2016 were of the pack size up to 1000ml indicating the consumption pattern in India. As income levels are low, masses usually buy smaller quantities of edible oils or in loose format. Lower GST levels is going to bring these consumers into the organised packaged edible oils market. A concern for edible oils players is that oilseeds have been levied a 5% tax under GST which would impact their margins. Oilseeds are the input for edible oil manufacturing and manufacturers will be able to only partially recover this amount in terms of GST refund. Opportunity For Premium Edible Oil Players Lower GST rates for edible oils is expected to boost premium edible oils brands. The growing health and wellness trend in India has led to edible oil players launching products on the health platform and charging a premium. More players are expected to launch products on the lines of Adani Wilmar s Fortune VIVO Diabetes Care Oil targeting people with type II diabetes, Ruchi Soya Industries Sunrich Sunflower Oil enriched with vitamins A and D, etc. and tap into the premiumisation trend. NOTE: Sales of edible oil in loose format and edible oil consumed by food processing industry and food service restaurants is excluded from Euromonitor s retail data coverage*

6 6 Branded butter, cooking fats face challenge from the unorganised market GST rates on branded butter, cooking fats and cheese have been fixed at 12%. This is higher compared to prevailing rates of 6% and is likely to impact their consumption. Additionally, unpackaged butter, cooking fats and cheese have been exempted from GST. This move would further widen the price differential between packaged and unpackaged milk products. Branded milk products players may have to face renewed challenge from the unpackaged market owing to substantial price differences due to GST. Branded butter and cooking fats which are usually consumed by the affluent classes have low price elasticity. Hence price hike due to higher GST rates is not expected to have much impact on consumption patterns. Consumers of these products are willing to spend more based on the value they perceive. Initial proposals to tax all dairy products including fresh milk under 18% GST bracket could have had a negative impact on the Indian dairy industry. India is the largest producer and consumer of fresh milk and employs over 10million dairy farmers. Any increase in tax rates on fresh milk would have a drastic impact on the livelihood of millions of people involved in this industry. Fresh milk which is the largest contributor to the dairy industry has been exempted from the finalised GST rates. However, UHT milk which has a niche share of the market has been brought under 5% GST. In the scenario of semi skimmed fresh milk being brought under a 5% GST rate similar to UHT milk consumption would drop 115million litres in 2018 with consumption dropping from pre-gst expected levels of million litres to post-gst consumption of million litres for the year.

7 7 Branded butter, cooking fats face challenge from the unorganised market Consumption of branded cheese which has a higher price elasticity is expected to decline to the tune of 1000tonnes in 2018 on the back of higher taxes under GST. Milk powder which has low price elasticity will witness marginal gains of increased consumption to the tune of 100tonnes in 2018 backed by lower GST rates. Post GST dairy market developments Gujarat Cooperative Milk Marketing Federation Ltd (Amul) Ghee prices increased by INR25-30 per kg As of now prices of cheese, butter, ice cream maintained Nestle India Ltd Announced, prices of milk powder to be reduced Company still working on determining post GST prices for its milk products range

8 8 Premium end of the biscuits market to benefit from revised GST rates Uniform tax slab of 18% levied under GST across plain biscuits, filled biscuits and cookies with the government doing away with variable tax structure within biscuits. Plain biscuits to be impacted most as taxes under GST set to become more than double compared to prevailing rates Plain biscuit manufacturers will be forced to increase prices due to rise in input costs and slim-margins within a highly competitive and price sensitive market. Some biscuit manufacturers also likely to maintain their prices at pre-gst level by reducing the quantity or size of biscuits. 100% 50% Share of Biscuits Market 15% 22% 20% 14% 30% 41% 71% 48% 39% 0% Plain Biscuits Cookies Filled Biscuits Source: Euromonitor International

9 9 Premium end of the biscuits market to benefit from revised GST rates Sales of smaller sized affordable packs consumed by masses to be hit due to price hike, impacting consumption. The share of plain biscuits which has been declining between 2006 to 2017 will witness steeper declines due to rise in average unit prices owing to GST and higher price elasticity. Impact on cookies and filled biscuits to be marginal as GST rates are on similar lines with existing tax rates. Consumers also likely to shift to consumption of pastries and biscuits available at local bakeries due to the higher price differential between packaged and unpackaged products. Opportunity For Premium Players GST likely to change biscuit consumption habits of consumers in India. Consumers most likely to shift from plain biscuits to cookies and filled biscuits based on price hikes and reduced price differential Players operating in the premium space have opportunities of portfolio expansion to tap into the opportunity presented by GST Leading players including Britannia Industries Ltd, ITC Group and Parle Products Pvt Ltd can focus on value add and premium biscuit range for higher value gains

10 10 Instant noodles to get huge boost post GST, branded rice impacted Branded Rice Branded rice was earlier either exempted from tax or carried a 5% VAT, depending on the state where it was sold. Under GST, across the country, all branded rice will be taxed at 5%. This move is expected to impact the profitability of the branded rice players. Additionally, branded players will now face increased competition from the unpackaged market due to rising price differentials. To counter this threat, branded rice players are expected to maintain prices and absorb the hike in costs due to GST. India Gate rice brand exempt from GST India Gate, the country s largest selling rice brand, is exempt from paying GST because the company did not get the brand name registered under the Trade Marks Act 1999.

11 Revenue in INR Billion THE IMPACT OF THE 2017 GOODS AND SERVICE TAX (GST) ON PACKAGED FOOD INDUSTRY IN INDIA 11 Instant noodles to get huge boost post GST, branded rice impacted 50 Retail Value Sales - Instant Noodles Instant Noodles The government had initially proposed a GST rate of 18% for instant noodles. Based on feedback from the industry, the tax rates for 66 items were revisited and revised. The GST rate for instant noodles was also revised down to 12% from initial proposal of 18% The instant noodles market in India faced its biggest challenge in 2015 due to regulatory issues which banned the largest brand in the market. This impacted the sales of the overall category leading to massive declines due to the ban and negative consumer sentiments. However, the instant noodles market did show a recovery in The big drop in tax rates for instant noodles from prevailing rates of 26% to 12% under GST is expected to significantly boost consumption. Overall gain projected for instant noodles consumption in 2018 is 4700 tonnes Instant Noodles Source: Euromonitor International

12 12 Foreseeable challenges for successfully implementing GST GST implementation could have an inflationary impact on economy in near short term Actual effects of GST on economy to be visible only after 6-12 months Possibilities of businesses and retailers adopting loopholes to avoid taxes Many businesses will have to standardise and rework long-term contracts with customers while migrating to GST Industry struggling with initial implementation and transition related issues. Industry yet to fully understand various provisions of GST and categorisation of goods and services Small-scale manufacturers and retailers with varying degrees of tax compliance may struggle to adapt to GST compliance. Businesses will have to align their existing software systems with the online GST tax portal GST rates for items such as noodles, pickles, incense sticks, etc. have already been altered by the government after getting feedback from the industry. A number of other sectors such as textile, branded rice, etc. have also been demanding similar roll backs and reductions in GST rates and demands may intensify in coming days Government taking measures to educate small business about GST process

13 Contact Details Shreyansh Kocheri, Senior Research Analyst

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