Ice Cream Market - India December 2008

Executive Summary Drivers: Opportunity to capitalize on low consumption levels; growing institutional sales Challenges: Competition with the unorganised sector on price and quality, and lack of well-developed cold chain facilities Market Drivers & Challenges Trends Competition Large investments in advertising Diversification of product portfolio targeting specific consumer segments Partnerships and franchises pursued to boost distribution Falling costs of raw materials offsetting rising milk and sugar prices GCMMF’s Amul brand is the market leader Mother Diary and Hindustan Unilever’s Kwality brand are other strong players The premium segment is dominated by Baskin Robbins Estimated worth USD 209 mn in 2008, expected to grow to USD 240 mn in 2009 North and west account for 70% of total sales High profit margins ranging between 30-50%

Drivers: Opportunity to capitalize on low consumption levels; growing institutional sales

Challenges: Competition with the unorganised sector on price and quality, and lack of well-developed cold chain facilities

Large investments in advertising

Diversification of product portfolio targeting specific consumer segments

Partnerships and franchises pursued to boost distribution

Falling costs of raw materials offsetting rising milk and sugar prices

GCMMF’s Amul brand is the market leader

Mother Diary and Hindustan Unilever’s Kwality brand are other strong players

The premium segment is dominated by Baskin Robbins

Estimated worth USD 209 mn in 2008, expected to grow to USD 240 mn in 2009

North and west account for 70% of total sales

High profit margins ranging between 30-50%

Market Overview Drivers & Challenges Trends Competition Key Developments

Market Overview

Drivers & Challenges

Trends

Competition

Key Developments

The industry is growing steadily with the northern and western regions accounting for the largest consumption Size and Growth Worth USD 209 mn in 2008 Growing at 12% p.a. in 2005-2008 Forecast to increase by 15% to reach USD 240 mn in 2009 Characteristics Northern and western regions together account for 70% of total market consumption Profit margins range from 30% to 50% depending on the product segment 60% of ice cream sales occur during the summer months of April-June 80% of sales is through street vendors Vanilla is the highest selling flavour and together with strawberry and chocolate it accounts for 70% of the market Overview Size and Growth 2005 USD mn 2006 2007 2008 e 2009 f +12% 40% West 30% North 10% East 20% South Source: The Economic Times “Showers upset regional sales targets of marketers”, May 2007; IBEF “FMCG companies target consumers in summer”, March 2008; India Environment Portal “Is our ice cream natural or synthetic?, August 2007; The Financial Express “Fire & Ice”, June 2008; 51Rainbow company website Geographic Distribution

Size and Growth

Worth USD 209 mn in 2008

Growing at 12% p.a. in 2005-2008

Forecast to increase by 15% to reach USD 240 mn in 2009

Characteristics

Northern and western regions together account for 70% of total market consumption

Profit margins range from 30% to 50% depending on the product segment

60% of ice cream sales occur during the summer months of April-June

80% of sales is through street vendors

Vanilla is the highest selling flavour and together with strawberry and chocolate it accounts for 70% of the market

Market Overview Drivers & Challenges Trends Competition Key Developments

Market Overview

Drivers & Challenges

Trends

Competition

Key Developments

Drivers & Challenges Developing institutional channel Low consumption levels Drivers Lack of cold chain facilities Low quality products and competitive pricing from unorganized sector Challenges

Low consumption levels and penetration, and a lucrative institutional sales channel are key growth drivers Per capita consumption levels are very low at 200-250 ml while penetration rate is estimated at 15% Significant scope for market growth by increasing either consumption levels or market penetration, or both National players are focusing on increasing per capita consumption or penetration to grow the market Vadilal is minimizing price, using promotions and marketing while HUL’s Kwality Walls specifically targets metros to increase per capita consumption Amul and Mother Dairy are increasing penetration by targeting rural markets, making their product more widely available, and minimizing price Low consumption levels Catering and institutional customers are identified as a growing opportunity Players are capitalizing on the revenue potential of impulse sales, which is an established trend in institutions such as malls and multiplexes Catering services and hotels are also a lucrative business opportunity for manufacturers Developing institutional channel 2000 2004 2008 ml Source: Economic Times “Vanilla prices shoot up on short supply”, October 2008; Business Today “The Branded Ice-Cream Tango Begins”, July 2000; Rediff “The ice-cream war hots up”, March 2004; Vadilal Annual Reports; Hindu “The Ice-cream Punch”, June 2004 Impact

Per capita consumption levels are very low at 200-250 ml while penetration rate is estimated at 15%

Significant scope for market growth by increasing either consumption levels or market penetration, or both

National players are focusing on increasing per capita consumption or penetration to grow the market

Vadilal is minimizing price, using promotions and marketing while HUL’s Kwality Walls specifically targets metros to increase per capita consumption

Amul and Mother Dairy are increasing penetration by targeting rural markets, making their product more widely available, and minimizing price

Catering and institutional customers are identified as a growing opportunity

Players are capitalizing on the revenue potential of impulse sales, which is an established trend in institutions such as malls and multiplexes

Catering services and hotels are also a lucrative business opportunity for manufacturers

Low quality products and price competition from unorganized players and lack of cold chain facilities hampering industry Low quality products and competitive pricing in the unorganized sector The lack of good cold chain facilities for transportation and storage is an impediment towards increasing market access and penetration Cold chain also constitutes the most to the total cost Players have been taking different approaches to address this issue: Baskin Robbins has outsourced its distribution and logistics Amul, through self financing schemes, has made refrigerators available to shops in rural areas Developing cold chain infrastructure is extremely crucial to increase market penetration and the challenge is shared by many other industries in the food & beverage sector Lack of cold chain facilities The market faces a threat from low-quality products Many regional players use synthetic substitutes and incorrectly label their products e.g. vanilla ice cream instead of artificially flavoured vanilla ice cream Smaller players have started injecting a higher percentage of air into ice cream thus compromising on quality Price difference between large and small players Small players rely on a volume-based, low price strategy, by taking advantage of strong distribution within a regional market Large players are at a competitive disadvantage compared to the unorganized players due to the low quality and pricing of the unorganized sector Source: Voice & Data “Baskin Robbins: India's Stunning Strides”, March 2007; Rediff “Ice-cream sells like hot cakes even in off-season”, November 2007 Impact

The lack of good cold chain facilities for transportation and storage is an impediment towards increasing market access and penetration

Cold chain also constitutes the most to the total cost

Players have been taking different approaches to address this issue:

Baskin Robbins has outsourced its distribution and logistics

Amul, through self financing schemes, has made refrigerators available to shops in rural areas

Developing cold chain infrastructure is extremely crucial to increase market penetration and the challenge is shared by many other industries in the food & beverage sector

The market faces a threat from low-quality products

Many regional players use synthetic substitutes and incorrectly label their products e.g. vanilla ice cream instead of artificially flavoured vanilla ice cream

Smaller players have started injecting a higher percentage of air into ice cream thus compromising on quality

Price difference between large and small players

Small players rely on a volume-based, low price strategy, by taking advantage of strong distribution within a regional market

Large players are at a competitive disadvantage compared to the unorganized players due to the low quality and pricing of the unorganized sector

Market Overview Drivers & Challenges Trends Competition Key Developments

Market Overview

Drivers & Challenges

Trends

Competition

Key Developments

Key Trends Trends Franchises and strategic partnerships to enhance distribution Benefits derived from falling costs Product diversification to target specific segments Large scale advertising

Large-scale advertising geared towards brand building and sales promotion Grew by 15% rise in 2008 compared to 2007 Average number of ads per day increased by 45% The top 3 ice cream brands advertised Kwality Walls Almond Praline Kwality Walls Paddle Pop Arun Ice Cream Grew by 58% rise since 2005 Gujarat accounted for 25% of the total advertising Maximum advertising in non-metros in the newspaper medium indicates organized sector’s targeting of rural areas and unorganized sector Non-metros: 57% Metros: 26% Mini –metros: 16% Advertising on Television: Jan-Apr 2008 Share of TV advertising Advertising in Print: Jan-Apr 2008 Share of Print advertising 78% Kwality Walls (HUL) 2% Karnataka Milk Federation Others Hatsun Agro 4% Metro Daily Ltd 14% 9% Havmor 3% 22% GCMMF Others 52% Dinshaws Vadilal Source: exchange4media.com “Snapshot of advertising by Ice Cream category in Print during Jan-Apr’ 08”; Indiatelevision.com “Snapshot of advertising by Ice Cream category in January-April 2008”, June 2008 Advertising is the primary method to increase consumption and penetration levels

Grew by 15% rise in 2008 compared to 2007

Average number of ads per day increased by 45%

The top 3 ice cream brands advertised

Kwality Walls Almond Praline

Kwality Walls Paddle Pop

Arun Ice Cream

Grew by 58% rise since 2005

Gujarat accounted for 25% of the total advertising

Maximum advertising in non-metros in the newspaper medium indicates organized sector’s targeting of rural areas and unorganized sector

Non-metros: 57%

Metros: 26%

Mini –metros: 16%

New products such as traditional dessert, natural flavours and low-sugar ice cream is being used to target specific consumer segments Source: Financial Express “Ice cream war begins as HUL, Amul oil plans”, February 2008 Producers have launched flavoured “kulfi” – the traditional Indian dessert – ice cream which is the favoured dessert in the non-metros Mother Dairy’s initiated their kulfi range with flavours such as Kesar, Pista, Badam and Mango Amul is planning to introduce new brands such as Dates with Honey, “Koolfi cone” Naturally flavoured ice cream i.e. without any artificial or synthetic flavour has been introduced for the premium segment Mother Dairy launched the Fruit Classic range which is ice cream without any artificial flavours as well as two Natural Vanilla flavours – Choco Fudge Cake and 100 percent Natural Vanilla Gelato, an ice cream produced only using natural ingredients, introduced for the premium segment. The primary difference being that the ratio of ice cream and air is 70:30 in Gelato vs.30:70 in other ice cream Players are capitalizing on the market which has become extremely health conscious Product diversification to target specific segments Capitalizing on demand from a niche markets Low sugar and fat content Diet Mother Dairy Increases immunity, help in digestion, prevents diarrhoea and growth of colon cancer Probiotic range – Amul Prolife GCMMF High calcium content, low calorie and fat Moo Hindustan Unilever (HUL) Health Benefits Product Company

Producers have launched flavoured “kulfi” – the traditional Indian dessert – ice cream which is the favoured dessert in the non-metros

Mother Dairy’s initiated their kulfi range with flavours such as Kesar, Pista, Badam and Mango

Amul is planning to introduce new brands such as Dates with Honey, “Koolfi cone”

Naturally flavoured ice cream i.e. without any artificial or synthetic flavour has been introduced for the premium segment

Mother Dairy launched the Fruit Classic range which is ice cream without any artificial flavours as well as two Natural Vanilla flavours – Choco Fudge Cake and 100 percent Natural Vanilla

Gelato, an ice cream produced only using natural ingredients, introduced for the premium segment. The primary difference being that the ratio of ice cream and air is 70:30 in Gelato vs.30:70 in other ice cream

Players are capitalizing on the market which has become extremely health conscious

Companies are setting up franchises or entering into partnership to develop their distributional network Enhancing network through franchises and strategic partnerships Partnerships Franchising Strengthens marketing, sales and distribution. Source: FnBnews “Coops, the mainstay of India's dairy model”, October 2008; Business Standard “Ice-cream makers add healthy flavours”, April 2008; FoodIndustryIndia “Gelato ice creams is a hit at AAHAR”, March 2008 1000 outlets in southern and central India by 2009, counters at corporate campuses Milkway Express Outlets in malls and multiplexes Baskin Robbins Premium ice cream outlet – Arun Ice Cream Unlimited Hatsun Agro Increase Amul Parlours from 1,800 to 3,000 in 2008 and 10,000 by 2009, Cyber stores in 100 cities, Cyber clubs in 125 cities GCMMF Kiosks - Swirls HUL Projects Company Retail stores at petrol stations Indian Oil Corporation (IOC) HUL Re-launch brand in Mumbai, Delhi, Bangalore, Hyderabad, Kolkata and Chennai Rhapsody Foods & Beverages Movenpick Targeting the southern market Spencer Retail Ltd and Foodworld Milkway Express Exclusive retailing Lifestyle, Coca-Cola, ICICI credit cards and Cox & Kings Baskin Robbins Mobile kiosks at petrol stations Bharat Petroleum Corporation Ltd (BPCL) GCMMF Marketing via scratch and win contests Oxicash Purpose Affiliation Company

Falling prices of raw materials reducing production costs assisted by government policy has benefited the players Source: The Economic Times “Vanilla prices shoot up on short supply”, October 2008; Budget 2006-07 Vanilla prices have fallen drastically to INR 100 per kg from INR 3500 per kg in 2003 Vanilla being the most preferred flavour in the market allows players to maximise profits In February 2006, the government removed the 16% excise duty on ice cream, which offset the rise in milk and sugar prices in 2006 and 2007 Falling input costs offsetting milk and sugar price rises Cost incentives has made investments attractive

Vanilla prices have fallen drastically to INR 100 per kg from INR 3500 per kg in 2003

Vanilla being the most preferred flavour in the market allows players to maximise profits

In February 2006, the government removed the 16% excise duty on ice cream, which offset the rise in milk and sugar prices in 2006 and 2007

Market Overview Drivers & Challenges Trends Competition Key Developments

Market Overview

Drivers & Challenges

Trends

Competition

Key Developments

GCMMF is the market leader with strong competition from HUL, Vadilal and Mother Dairy Fiercely competitive due to attractive economics with profit margins ranging between 30-50% Organized sector comprises GCMMF’s Amul, HUL’s Kwality Walls, Mother Diary, Baskin Robbins and a number of regional brands Amul is the market leader and is at the forefront of targeting the rural market For most national players viz. GCMMF, HUL and Mother Diary, revenue from ice cream accounts for a small portion of their total revenues Premium segment: Baskin Robbins is the single largest premium ice cream brand New entrants include Amul, Movenpick, Haagen Dazs and Snowberry Major Players Market share Source: Business Line “Bringing in the creamy layer”, August 2008; magindia.com “Amul to launch new ice cream range”, October 2008 A well established unorganized sector creates a fiercely competitive environment for the larger players 16% GCMMF 37% Vadilal 15% Mother Diary 14% HUL 13% Baskin Robbins 5% Others 16% 55% Unorganized 45% Organized

Fiercely competitive due to attractive economics with profit margins ranging between 30-50%

Organized sector comprises GCMMF’s Amul, HUL’s Kwality Walls, Mother Diary, Baskin Robbins and a number of regional brands

Amul is the market leader and is at the forefront of targeting the rural market

For most national players viz. GCMMF, HUL and Mother Diary, revenue from ice cream accounts for a small portion of their total revenues

Premium segment:

Baskin Robbins is the single largest premium ice cream brand

New entrants include Amul, Movenpick, Haagen Dazs and Snowberry

Market Overview Drivers & Challenges Trends Competition Key Developments

Market Overview

Drivers & Challenges

Trends

Competition

Key Developments

Key Developments Source: Business Standard “US' Snowberry to start India biz with $50 mn” December 2008; The Economic Times “RJ Corp takes 100% in ice-cream venture Cream Bell”, July 2008; andhranews.net “First ever Ice cream factory in Kashmir Valley” June 2008; Business Line “Movenpick re-entering India”, May 2008; rediff news “NZ Natural plans 100 ice cream outlets by 2009”, June 2007; Express Hospitality “Dominos set to foray into branded ice cream segment”, July 2007 Snowberry USA, an American ice cream retailer, is planning to enter the Indian ice cream industry with an investment of USD 50 mn in 2010 through a franchise known as Snowberry India Private Limited. 15-Dec- 08 New Zealand Natural, a global ice cream parlour chain, has tied up with Manju Enterprises to launch 100 outlets in the country by 2009. Taking an aggressive strategy, New Zealand Natural is offering its franchisees a margin of 50 per cent. 18-June-07 Dominoes Pizza is also planning to enter the ice cream segment in India. The company will introduce ice creams in vanilla, strawberry and chocolate flavours. Their product will be made available in dining and home delivery concepts. 31-July-07 Movenpick, a Switzerland-based company, through a distribution arrangement with Rhapsody Foods & Beverages, re-launched their brand in Mumbai, Delhi, Bangalore, Hyderabad, Kolkata and Chennai. They are planning to develop retail or kiosk outlets in other cities by 2009. 13-May-08 Dairy Foods set up the first ever ice cream factory in the Kashmir Valley. They have invested USD 0.5 million on this project. 24-June-08 In July 2008 Devyani Food International, owned by RJ Corp, acquired Cream Bell. Cream Bell which was valued at USD 29 million in 2007 today stands at around USD 95–106 million. Cream Bell has launched four new flavours in 2008 namely Belgian Chocolate, Chocolate Coffee, Almond Fudge and Strawberry. RJ Corp has decided to set up a production facility in Goa with an investment of USD 8.5 million. The plant will have a capacity of 6 million litres. This will allow them to cater to the southern and western markets in the country. They have invested USD 21.3 million towards capacity creation this year. 23-July-08 Development Date

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