Edible oils: Not oil, not fat, use refined!

Aarati Krishnan

FACED with plateauing demand for their conventional products, FMCG majors have been pinning their hopes on branded staple foods to deliver rapid topline expansion.

And branded edible oils is probably the only category within the much-hyped market that has been around for a decade now. A prolonged bear market, which has pushed edible oil prices to six-year lows, has fuelled healthy consumer demand. But thanks to the inherent inefficiencies of the domestic oil sector, the financials of the major companies in this business have lately not been showing signs of this promise.

Negative growth in the oils and fats business has been instrumental in restraining topline growth for the FMCG major Hindustan Lever in 2000. Godrej Foods, another player of long standing, chalked up a net loss of Rs 14.93 crore from operations in the first half of fiscal 2000-01 against a marginal net profit the previous corresponding period. Agro Tech Foods, fresh from a restructuring exercise and a foray into other food products, has managed a turnaround, racking up net profits of Rs 1.10 crore in the first half against a loss of Rs 7.70 crore in the previous period.

Marico Industries is probably the only company to report reasonable earnings growth in the sector with a 38 per cent growth in net profits in the first half of 2000-01. But this was largely because of the good performance of its hair oils division.

Improving vital signs

Better times could be in store for the industry's players. The edible oil sector has been receiving an unexpected helping hand from the Government. Since December last, import duties on edible oils have been hiked on three successive occasions (the latest on November 21), taking the effective rate of peak duty to 71.60 per cent from 16.5 per cent in nine months. Moreover, the serious implementation of the Edible Oils Packaging Order, 1998, by the State Governments, as and when it happens, could nudge consumers towards branded oils, boosting the offtake of listed players.

Further, the difficult business environment of the past few years also forced the major players in the business to streamline their own operations, reduce exposure to trading activities, tone up their supply chain management and generally keep a tighter rein on costs. This could bring about an improvement in the quality of earnings reported by the companies in this sector. However, the players' ability to translate these plus factors into better performance continues to hinge on factors outside their control. The shortfall in domestic oilseed availability and the dependence on imported crude oils for refining could continue to be the weak links in the business.

Expansion in demand

Boosted by population growth and higher per capita incomes, the per capita consumption of edible oils has grown from 8.5 kg in 1994-95 to 11.5 kg in 1999-2000. The total offtake over this period surged from 79.1 lakh tonnes to 116.40 lakh tonnes. Since edible oil demand is income-elastic, demand is likely to expand at a healthy pace.

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The marketers of branded edible oils can take heart from other statistics as well. The domestic output of edible oils met only 62 per cent of demand in the oil year (November-October) 1999-2000, with the shortfall bridged by imports of 47 lakh tonnes of both crude and refined oils. Ninety per cent of this oil is still produced by small and unorganised refiners and sold loose. Therefore, health concerns and regulatory changes are bound to persuade a larger number of consumers to shift to branded edible oils in the coming years.

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Healthy volume growth

This is already borne out by the healthy growth in business volumes reported by the major players over the past couple of years. Sweekar, Marico Industries sunflower oil brand, followed up 45 per cent volume growth in 1998-99 with 19 per cent growth in 1999-2000, and 11 per cent growth in the first nine months of this fiscal. Agro Tech Foods' brand, Sundrop, comfortably managed double-digit volume growth over the past couple of years.

Oilseed availability

However, the key constraint for domestic players in the edible oils market is the inadequate availability of oilseeds. Against the demand for 116 lakh tonnes of edible oils in 1999-2000 (oil year), the domestic oilseed output was 221 lakh tonnes, yielding just around 63 lakh tonnes of oil. An erratic monsoon in the just-concluded kharif and low rabi oilseed plantings are likely to further depress availability in the coming season. Kharif crop estimates from the oil trade in November suggest that the marketable surplus of sunflower seed for crushing has declined to 2.1 lakh tonnes this kharif from 2.9 lakh tonnes the previous year. Since the previous year's output represented a sharp decline, domestic input availability is likely to continue being a serious problem.

The import of oilseeds and oil-bearing material, though allowed in 1999, remains unviable because of the high import duties and quarantine restrictions. This could force branded oil marketers to lean further on imports of crude (unrefined) vegetable oils to keep their refining capacities operational in the current year. International vegetable oil prices are hovering at decade lows. Domestic crushing capacities are fragmented and lack scale economies. Therefore, the dependence on crude oil imports is set to continue for now, making for low value-addition in the final product.

Threats

Cheap imports: The most significant threat to the domestic refining industry has come from cheap imports of refined oils through the OGL (Open General Licence) route. Cheaper refined oils, such as RBD Palmolein, are replacing traditional oils such as groundnut oil and mustard oil and consumed by low-income groups. For instance, prior to the recent round of duty hikes, RBD Palmolein imports from Malaysia were coming in at a CIF (cost, insurance, freight) price of around $280 per tonne, far lower than the CIF of crude sunflower oil at $380 per tonne. The duty differential between crude and refined oils, introduced in December 1999, slowed imports of refined oils to a certain extent.

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However, traders have resorted to the import of unrefined oils instead. New small refining facilities, which have mushroomed at major ports, are posing a new threat to the domestic companies engaged in marketing branded products. The relentless onslaught of imports have steadily undermined domestic edible oil prices and forced major companies marketing branded products to prune selling prices. Domestic prices of refined sunflower oil have fallen by 35 per cent from their September 1998 peak, and branded players have pegged down prices 20 per cent to retain consumers. As a result, healthy volume growth has failed to translate into topline expansion for players such as Marico Industries, Agro Tech Foods and Hindustan Lever.

Mushrooming regional and local players: Given the lack of entry barriers in this business, the threat from local and regional players is also significant. Since such players have to contend with lower transportation costs and fewer logistics problems, they can effect quick changes in their selling prices depending on local market conditions. Brands such as Gold Winner in the South have managed to establish a strong consumer franchise through this pricing strategy and have the potential of weaning away price-sensitive consumers from national players and from the loose oil vendor.

Straddling price points

The mushrooming of regional brands has also forced the national players to launch specific products targetted at the lower price points. Both Agro Tech Foods and Godrej Foods now have a portfolio of brands straddling different price points. While Godrej Foods has Godrej Cooklite, Godrej Sunflower Oil and Godrej Shakti targetted at the premium, middle and mass market respectively, Agro Tech Foods has Sundrop, Crystal and Real Gold in the corresponding categories. The national players have entered into sub-contract manufacturing arrangements with regional refiners for this purpose and prices on lower-end products are revised frequently in tune with local market conditions. Meanwhile, Marico Industries has discontinued its lower-end variants of Sweekar and is only concentrating on the premium market.