Daybreak - Tata and ITC are harvesting what small organic-food brands cultivated for years

Episode Date: December 10, 2024

A couple years ago the biggest challenge for an organic food brand was convincing consumers that their products were worth the premium they were paying for them. It was naturally a gargantuan task, particularly in a price sensitive market like India. But for the brands that stood their ground, believing that the Indian market would one day come around to organic eating, well, their moment has finally arrived. And how. There is a growing market for organic products, here in India. This space is actually more exciting than it has ever been before. In fact, big FMCG brands like Tata and ITC have now swept in for a slice of the vegan, cruelty free pie. On one hand, this helped the Indian organic food market to grow at an average rate of 25 per cent annually. But on the other, it has intensified competition in this space. And in the process, smaller, new-age brands seem to be getting the short end of the stick. Is there room for everyone? Tune in. Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.Listen to the latest episode of Two by Two here

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A couple years ago, the biggest challenge for an organic food brand was convincing consumers that their products were worth the premium they were paying for them. It was naturally a huge task, particularly in a price-sensitive market like India. But for the brands that stood their ground, believing that the Indian market would one day come around to organic eating, Well, their moment has finally arrived. And how?

There is a growing market for organic products today here in India. The space is actually more exciting than it has ever been before. Some say it's because of the health frenzy that the pandemic triggered. They say that the whole ordeal made everyone far more conscious about what they were eating. They may be on to something because now the Indian consumer is finally willing to pay a premium, not just for the natural ingredients that go into these products, but also for that warm, fuzzy feeling of supporting sustainable practices. In many ways, this is the ideal scenario for any organic brand.

Except now, everyone wants a slice of that vegan, gluten-free, cruelty-free pie, which means it's also harder than ever to be an organic brand, particularly a young, new one. Yeah, but what happens is, large conglomerates like ITC or Tata consumer have now entered the picture. So they've sort of seen what kind of demand exists for these products and they've either added organic variants of their offerings or they've created separate organic brands altogether.

Now large conglomerates come with large capital. They come with the support of their large capital. And new age brands, which are smaller in size, they have revenues anywhere between 80 to 300 cro. that they have to jostle with these giants for a space on that shelf. That was my colleague, the Ken reporter, Srishti Achar. Sushche says in the process, the Indian organic food market has grown at an average rate of 25% annually.

But the flip side is that the bigger FMCG players seem to be profiting off of all the hard work done by smaller brands over the years. These are the brands that went out of their way to educate consumers and really nurture this market. But in the middle of all of this, they seem to be getting the short end of the stick. So, is there really room for everyone here? Welcome to Daybreak, a business podcast from the Ken. I'm your host Rahil Philippos, and I'll be joining my colleagues, Niktha Sharma,

every week to bring you one business story that is worth understanding and worth your time. Today is Wednesday, the 11th of December. In January this year, Tata acquired Organic India, one of the most well-known organic brands in the country. Now, if you needed a sign that the market for organic foods was heating up, this was it. There was a huge bidding war leading up to the acquisition. From Nestle to ITC, some of the biggest FMCG giants were ready and willing to acquire this 27-year-old brand. They had all recognized that this base was a gold mine.

Just take Organic India, for instance. It has generated a revenue of $324 crore rupees in FY23. Let's talk about how it got there. Starting as one of the early entrance in the sector with just one product, Tulsi Tea, it eventually expanded its range to also include spices and pulses. Initially, it was selling primarily through Fab India stores. Fab India actually had a 40% stake in the company. It also sold wire general retailers and then eventually ventured into the e-commerce space.

In many ways, organic India has had nothing short of a dream run. But the thing is, when well-known companies like the Tata's or Amul enter the picture with their robust capital expenditures, smaller players tend to pay the price. Because this is by no means a level playing field. Scaling their businesses is a huge task. Just take the case of 24 Mantra. Now, this is a 20-year-old packaged organic food brand owned by Sreshta Natural Bio Products. It's one of the biggest players in the packaged organic food industry. In fact, back in 2022, it filed its draft herring prospectus.

Except, it eventually had to abandon its IPO plans because investors were really dragging their feet with it. There were other pretty significant factors that also slowed down 24-month-as operations. But we are going to get to that in a little while. Rajeshika Reddy Seelam, the founder of the company, said scaling the business beyond 200 to 300 crore in revenue in the domestic market has been very, very, very, very.

difficult. Particularly because persuading customers to make a purchase is a really slow process. That's mainly because of affordability issues. But added to that is the longer consumer adoption cycle for organic products. Like Selem said, sure, the number of families using organic products has shot up considerably, but the basket size is still pretty small. People only buy one or two products either regularly or occasionally. And things are even more complicated now that FMCG companies have entered the market. Because generally, consumer confidence gets swayed towards the bigger brands. They enjoy a high recall value among consumers. Now, added to all of this is quick commerce and e-commerce, which in many ways has been a game changer and a double-edged

sword for newer entrance in the market. The challenge stays the same. How do you scale beyond a point? More on that in the next segment. Today, organic food brands are being built on e-commerce and quick commerce. That's what Gaurav Manchanda told the Ken reporter, Srishti. Gorev is the founder and director of Nimedia Group, the parent company of a nine-year-old organic food and personal care brand called Organic World. He said that once they hit a certain threshold of revenue, say between 50 to 60 crore and are able to build their customer base and brand loyalty, they can then push into the offline market. That has been true in the case of organic world. It has managed to set up 23 stores,

and plans to grow to 100 by 2025. Manchanta also wants to leverage quick commerce platforms to deliver his products within a two-hour window. But he agrees that scaling is where the plans hit a wall. Remember, we are talking about organic food here. Organic crop yields are lower than those of conventional farming since they skip the fertilizers that usually boost harvest. So for these brands,

they have to figure out how to turn the farm to table cycle fast, without a lot of waste. And the way to do that is through their distribution channels. For brands like 24 Mantra that have a longer inventory and supply chain, the online distribution and reach of department stores have enabled them to penetrate markets beyond the metro cities. As a result, 24 Mantra is now present in nearly 500 cities across the country. While it sold 15% of its inventory online before COVID,

the share has almost tripled now, according to 6%. But it also comes at a cost. They invest in these platforms, but it doesn't always give returns. Because for the platform, their focus is offering the cheapest products and giving more offers to consumers than the other. See what I mean by double ed's word?

Some of these brands end up spending as much as one-fifth of their revenue on marketing. Also, remember, dark stores have the capacity to store limited SKUs, which means more investment by these brands, to ensure their products are always visible to consumers. On top of all this, there are regulatory hiccups that have really slowed down the organic food market. You see, here in India, regulations go well beyond

just the certification of organic products. There are massive storage and transportation hassles associated with them as well. Cross-contamination is a real risk, which can easily happen when processed food items containing preservatives are kept alongside organic products, which have to remain free of chemicals. Regulations try to prevent instances like these, but the challenge is complying with them.

Most people in the space will agree that there is a process issue. But this mess of regulations is most evident when products are exported. In 2023 to 24, India's export of organic products fell by 30% from the previous years levels. For companies like 24 mantra that export to countries like the US, the regulatory blocks can be a painful hit to revenue. So now for brands like 24 Mantra and other new age organic food brands, the hope is that the quality of their products will do the talking for them. But by the time a fickle customer turns into a loyal one,

a big-time FMCG would replicate the offering and undercut the price with its scale, reach and marketing muscle. That seems to be the cycle that the organic food market in India is in. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters and podcast extras. Head to the Ken.com and click on the red subscribe button on the top of the website. Today's episode was hosted by Rahil Filippo's, produced by me, Snigda Sharma, and edited by Rajiv Sien.