M&A to drive food and agribusiness consolidation in India

All signs are pointing towards a consolidation of the food and agribusiness sector in India, according to Hemendra Mathur, managing director at a private equity firm focusing on investment into SMEs.

All signs are pointing towards a consolidation of the food and agribusiness sector in India as both local and international companies look for partnerships, according to Hemendra Mathur, managing director, SEAF India Investment Advisors, the private equity firm focusing on investment into small and medium enterprises (SMEs).

Hemendra Mathur
Hemendra Mathur

The Indian food and agribusiness sector saw a kind of inflection point between 2007 and 2014. The example that I often use is Amul, one of the largest dairy companies in India, which took 37 years to reach an annual turnover of $1 billion in 2007 but tripled turnover to more than $3 billion by 2014.

This inflection point over the last 7 years is also reflected in the successful launch of various new food products such as flavoured yogurt, packaged oats, UHT milk, olive oil, probiotic milk, a variety of sauces and ketchups, mayonnaise and a pick-up in some dormant categories such as frozen foods and soy milk.

There were other fundamental changes in the sector during this period:

  • The distribution of food expanded into new channels such as modern trade, e-commerce and Horeca (although local, independent “mom and pop” stores still dominate).
  • The food supply chain saw an integration of technology as hand-held devices enabled farmers to input data, in turn enabling small- and medium-sized agribusinesses to start planning more around the resources available to them.
  • Product innovation and research and development integrated into the business model.
  • There was increasing focus on disintermediation through direct procurement from farmers to save costs.
  • Water and energy efficiencies became the new buzzwords among rural SMEs.

All these changes have put India on a strong platform to cater to non-linear demand growth driven by changing demographics and food consumption patterns in the country.

So, what next? The answer is consolidation. With more than 90 percent of enterprises in the sector below $20 million in annual revenue, fragmentation is the norm. An aggregation of farmers and farm produce is already gathering pace although processing continues to be fragmented across cereal milling, solvent extraction of oilseeds or the processing of fruit and vegetables. But an imminent need for scale, efficiency and margin improvements will drive enterprises to consolidate the businesses. The advantages of consolidation are manifold:

  • Better bargaining power with suppliers, vendors and customers.
  • Access to new markets (regional as well as global) and multiple routes to market.
  • Access to technology.
  • Acquisition of brands (mostly local and regional).

Some recent examples of notable joint ventures or acquisitions are:

Joint Venture /Acquisition Key Driver
Fine Zeelandia: 50/50 joint venture between Zeelandia (Netherlands) and Fine Organics (India) Access to innovative range of baking and patisserie ingredients for Fine Organics and access to South Asian market for Zeelandia
Dr Oetker (Germany): acquisition of Fun Foods Access to Indian market as well established brands in the condiments category
Orkla Foods (Norway): acquisition of MTR Brand, distribution in the ready-to-eat segment & Indian recipes
ITC (India): acquisition of B natural Entry into high-growth fruit juices category through established brand
McCormick (USA): stake acquisition in Eastern Condiments Access to high growth spices & seasoning market in India for McCormick and access to global know-how for Eastern
Mitsubishi  (Japan): stake increase in Nissin Foods Strategic interest in high-growth instant noodles market

This is not an exhaustive list but it is representative of the growing strategic interest in the sector by multinationals as well as large Indian corporates. Inorganic growth has become a norm with most large corporates on the lookout for scalable businesses; many of them have set up in-house M&A teams.

Challenges to the M&A market remain. The majority of targets are family-owned businesses which can take some time to align with in terms of governance and strategy. An over-dependence of some businesses on their current owner or promoter is another common challenge.

Businesses managed by professional teams and funded by private equity and venture capital funds have higher success rates in attracting strategic players.

So to sum up, unprecedented growth in the demand for food, need for scale and access to market distribution, branding and technology, will continue to drive more M&A in the sector. And what are the sectors to watch for more deals? My favourites are dairy, fresh produce, wheat milling, animal feed, fertilisers, seeds and cold chain logistics.