Attractive Investment-The changing dynamics of GCC and Indian food sector

United Arab Emirates and Saudi Arabia have decided to make India as a base for food security for the countries and plan to invest in both organic and food processing industries. This development actually came at a time when India has recently announced an agricultural exports policy. India is expected to produce 290 million tonnes of agricultural products along with 310 million tonnes of horticultural products, according to advanced estimates.

India is already the largest producer of milk and the second largest producer of fruits which gives it a huge potential to export and the government has identified which product will be exported from which district and each district will be divided into clusters for that. For example, Nasik has been identified for grapes, Nagpur for oranges, Ratnagiri for mangoes etc. It is working with states to facilitate this arrangement.

The export policy has removed restrictions on the export of both organic and horticultural products and UAE and Saudi Arabia wants to invest in both kinds of products.

India and GCC’s dynamics

The Gulf Cooperation Council (GCC) is a political and economic alliance of six countries in the Arabian Peninsula: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. Established in 1981, the GCC promotes economic, security, cultural and social cooperation between the six states and holds a summit every year to discuss cooperation and regional affairs. Due to their geographic proximity, similar political systems and common sociocultural stances, the immediate goal was for these countries to protect themselves from threats after the Iran-Iraq War.

India’s relationship with the Gulf Cooperation Council (GCC) countries is growing like never before in the history as the progressive approaches are more satisfyingly expanding for both the parties in absolute terms as well as when compared it with Indian relations with other regional group of countries.

Indeed the changing dynamics of their relationship has gone much beyond energy security and traditional trade and commerce to the rich diaspora factor handsomely contributing in the form of remittances, which is an important contribution toward the substantial Indian foreign exchange reserve.

Among the other important factors are ongoing massive infrastructure development schemes with the involvement of the Indians living in the GCC countries and overall economic prosperity of India, for which the overseas Indians look up to their home government with so much of expectations like inclusive growth and violence-free India rather than divisive politics.

The rapid economic developments that exploded in the Gulf countries triggered by the spectacular oil price-rise in the early 1970s had major consequences for the Indians and it is therefore significant for the huge Indian diaspora in the GCC as it resulted in the movement of Indian manpower to these countries as the total number of overseas Indians there these is around seven million, with a strong 2.8 million community alone in Saudi Arabia.

Notably, Indians living in the Kingdom as one of the most preferred community due to their expertise, sense of discipline, law abiding and peace loving nature, constitutes the largest concentration of Indian passport holders anywhere in the world and largest number of expatriates in the Kingdom that contributes handsomely toward the ongoing developments in India with the highest contribution in remittances, which is well acknowledged.

Indians living in the GCC countries today constitute about 38 percent of the total expatriate population in the region, making them the largest expatriate community both cumulatively in the GCC as a whole and individually in each GCC country.

Notably, Yusuffali M.A., an Indian businessman and managing director of the Abu Dhabi-headquartered EMKE LuLu Group of companies that owns the Lulu Hypermarket chain in the GCC with an annual turnover of $ 4.5 billion globally has become a trusted name in the region. Yusuffali has carved a niche for himself as a leading businessman. His group employs the largest number of Indians outside India, especially in the GCC.

Living in any of the GCC countries one would know how vital the Indian community is to the logistics and mechanics of the daily functioning of life in each of the GCC countries — Saudi Arabia, the UAE, Qatar, Oman, Kuwait and Bahrain.

Interestingly, the processes which propelled such large numbers of Indians into the GCC countries took place organically responding to the laws of demand and supply with little or no governmental role in pushing them to the region for livelihood.

Furthermore, the diaspora factor and the growing economic interaction have resulted in another significant development that is the ever growing flight connectivity between India and the GCC countries.

Moreover, as close interaction between the Indians and the people of the Gulf region began with the dawn of history and dates back to several millenniums, India shares a historical heritage with the Arabian Peninsula, especially with Saudi Arabia, a major GCC country.  For century’s traders and sailors from India, especially spice traders from South India, sailed across the Arabian Sea in boats made of Malabar wood and traders from the Arabian Peninsula crossed the Hindukush and the Arabian Sea to exchange commodities and ideas.

Now, India enjoys traditionally cordial relations and cooperation with the GCC. India’s historical ties with the GCC, coupled with increasing imports of oil and gas, growing trade and investment opportunities and presence of about seven million Indian workers in the region are of vital interest to India.

As India’s economic linkages with the GCC have increased steadily, especially due to the growth in oil imports and increasing diaspora, these continue to make steady progress to-date.

GCC Food industry

The GCC Food industry is expected to grow at a sustainable pace. This growth is primarily attributable to factors such as growing population, higher per capita income, and a vibrant tourism market, changing dietary habits and preferences, and increasing penetration of organised retail. Government as well as private sector investments are being channeled towards augmenting the domestic food production capacity and supply, even as securing food sources in other resource-rich countries remains a key priority.

Despite significant headwinds due to fall in oil prices, drop in infrastructure projects, job losses and attendant retail spend, the GCC Food Industry is forecasted to grow in the coming years. Food security remains a key priority for the GCC countries as the reliance on heavy imports continue owing to limited arable land, hot and arid climate, and fresh water shortage.

Also several government initiatives is aimed not only at enhancing domestic productivity, but also at investing in farmlands overseas to mitigate the risk. Despite this key challenge, the sector remains on the radar of investors who are looking at opportunities to enter the region or a specific country in the GCC to take advantage of what the sector has to offer. This has not only attracted new players to the market but also led to significant consolidation in the segment and we expect this trend to continue.

Industry Outlook

The GCC is expected to expand at a CAGR of 4.2% from an estimated 48.1 million MT in 2016 to 59.2 million MT in 2021. This growth is primarily attributable to increase in the consumer base coupled with a higher per capita income, as the GCC economies stage a sustained economic recovery from the recent downturn.

Respective share of most of the food categories in the overall consumption are anticipated to remain broadly unchanged through 2021 with cereals as the most consumed food category in the region.

Saudi Arabia and the UAE are likely to remain the major food consumption centres during the forecast period. The country-wise share in total GCC food consumption is anticipated to remain largely unchanged until 2021.

During the forecast period, food consumption in Saudi Arabia is expected to grow at an annualized average rate of 4.2% to 37.7 million MT and that in the UAE is projected to grow by 4.4% to 10.1 million MT. The expected growth rates largely mirror the population and GDP projections for the countries.

Growth drivers

The GCC population is expected to witness an addition of 6.5 million individuals between 2017 and 2021. The growing consumer base will continue to act as the chief contributor to the growth in food consumption in the region. A growing proportion of working couples has led to an increase in demand for packaged foods and ready meals.

Economic growth in the GCC is expected to gradually gather momentum in line with stability in the oil prices and expansion of the non-oil sectors. Subsequently, GDP per capita in the region is projected to expand annually by 3.7% between 2016 and 2020, a strong indicator of increasing food consumption.

The increasing influx of tourists into the GCC will also play a role in the growth of food consumption. Additionally, seasonal events such as Ramadan, shopping festivals, and food festivals will continue to boost food consumption in the region.

Increasing penetration of organised retail formats such as hypermarkets and supermarkets is likely to support the region’s demand for packaged, healthy, and processed foods.

To strengthen food security and build a sustainable supply, the GCC countries are looking at ways to boost the domestic produce. Such developments, if fruitful, are likely to augment the scale of the food sector and reduce import dependency.

Challenges

Hot and arid climatic conditions, limited arable land, and inadequate water resources in the GCC have resulted in a high dependency on food imports. This has exposed the regional economies to global food price fluctuations and geopolitical tensions. While efforts are being made to secure food supply by investing in farmlands abroad, establishing strong trade pacts, and boosting domestic produce, any disruptions pose a threat to the region’s food security.

Regional governments’ measures such as reduction in subsidy spend and public wages, tightening of liquidity and a subdued job market, are likely to affect consumer spending power and profitability of domestic food producers.

Inadequate number of warehouses and cold storages as well as shortage of transportation infrastructure in the GCC region has resulted in food wastage. With increasing quantity of food imports, the need for setting up a robust logistics infrastructure is being felt across the region.

Trends

Rising sales of packaged foods: Sale of packaged foods continues to rise amidst the busy working-class people in the GCC, who account for nearly half of the population.

Emerging Private labels: In light of the increasing demand for packaged foods, grocery retailers are expanding their product portfolio and distribution network by introducing more packaged products under private labels, as they are more profitable and attract customers due to low price points.

Growing demand for healthy and organic foods: As people in the region become health conscious due to rising incidence of lifestyle diseases, demand for healthy and organic foods is on a rise.

An advancing food processing segment: The number of food processing units in the GCC is increasing, with rising imports and re-export potential. While Saudi Arabia and the UAE have already established themselves as the food processing hubs, their regional counterparts are also gradually catching up.

Rise of digital technologies: From influencing consumer tastes to changing the way food products are sold, served or manufactured, digital technologies are reshaping the food value chain. Online shopping is gathering steam in the GCC, particularly in the UAE, as signaled by the proliferation of several online grocery and food delivery platforms. In addition to using technology to track customer preferences and monitor market trends, manufacturers are also resorting to modern technologies for optimizing processes, reducing waste, managing costs, and improving logistics in order to enhance their overall production efficiency.

Food trucks – an emerging distribution channel: Operation of food trucks is also increasing in the GCC, with the opening of a new dedicated food truck park in the UAE and announcements by the regulators in Abu Dhabi and Qatar to grant licenses for operations. Increasing presence of food trucks in the region is likely to stimulate demand for speciality / gourmet food products.

Expanding halal food market: While global demand for halal food is growing, the sector faces structural and operational challenges due to lack of a unified global halal standard. Dubai has remained at the forefront of creating a global halal international accreditation network, which is likely to strengthen its position as a key global trading hub for halal food.

Popularity of International cuisines: Presence of people from various nationalities has carved a large market for international foods in the region. While multiple culinary options are available, the Japanese cuisine has been gaining popularity.

 

Financial Performance of food companies in the region

The GCC Food sector is primarily dominated by three companies – Savola Group, Almarai Co., and Kuwait Food Co. We have analysed the financial performance of a selected set of 22 listed food companies in the GCC for the report. The combined revenue of these 22 food companies in the GCC grew at an average of 3.1% in the last two years. The dairy and processed & frozen foods segments outperformed the overall industry, having registered an average revenue growth of ~5% during the period. The agri and agri-processing segment accounted for the largest share in the food industry by revenue.

Although economic activity dampened in the last couple of years, corrective measures being undertaken to mitigate the adverse impact, complemented with a gradual stability in oil prices, are charting a path for sustainable and balanced growth in the GCC. The expected improvement in the job market and consumer spending, coupled with an expanding consumer base, will support the growth of the region’s food sector.

India: An investment gateway

India is emerging as a top new investment destination for many Gulf businesses in general and the UAE in particular. Dubai has a vibrant dining and hospitality culture with restaurants popping up in almost every corner, yet most of the food served in these restaurants is imported. Food and beverage (F&B) products form a large chunk of imports as there is very little arable land in the Emirate to support domestic demand. Dubai imports almost 80-85% of its F&B products from around the world.

The F&B sector is turning out to be significant as the Dubai Government plans to enhance its exports and reduce its import dependency. Farm suppliers, farms, F&B processors, logistics, and retail outlets for food form the value chain. Frost & Sullivan predicts the emergence and explosive growth of the Halal food industry as a Mega Trend.

Farm supplies, such as animal feed and seeds, are mostly imported and only agricultural equipment and fertilizers are manufactured in Dubai. In order to expand the market, a large land bank is required for forage pressing, production plants, and milling plants.

Food processors have been operating in Dubai since the eighties and the sector is showing significant growth. An important reason for this is its highly developed infrastructure and markets which offer competitive advantages, even to new entrants. Strong FDI inflows into the sector, especially in the free zones, have also helped. The increasing focus on sharia compliant Halal foods and the proposed Dubai Industrial City (DIC), a 6 million-sq-foot halal cluster, is expected to capitalize on the food processing market in Dubai. Dubai’s vision of becoming the global capital of the Islamic economy and increasing global awareness about Halal foods is expected to boost the Halal food industry.

Logistics operations in Dubai play a major role in the F&B sector as Dubai imports over three quarters of its F&B products. It is estimated that of the more than 10 million tons of food mobilized within the UAE each year, including imports and local production, about 3.27 million tons is wasted. So Dubai is now focusing on intelligent food logistics to maximize asset utilization and minimize food waste and costs.

Innovation is the need of the hour in Dubai’s arid environment as there is an ever increasing demand for quality food. Methods like indoor vertical farming, Hydroponics and Aquaponics can help to boost domestic produce. The Gulf Cooperation Council’s (GCC) first indoor vertical farm is now in operation in the Al Quoz area of Dubai.

The United Arab Emirates (UAE) is expected to become the second fastest growing food market in the GCC at a CAGR of 4.4% during 2017-2021.

Business tie-ups have bolstered on both sides – in the UAE and India as well. Both nations have taken strategic decisions to benefit from each other’s strengths and tap the full potential of business opportunities. The businesses are now exploring opportunities in key sectors like infrastructure, oil and gas exploration, storage and renewable energy, logistics hubs, food processing and industrial parks, healthcare, hospitality and information technology.

The comprehensive strategic partnership and the 13 other agreements that were recently signed between the UAE and India have the potential to significantly boost cooperation across several sectors and areas, including defence, energy, maritime transport, infrastructure, agriculture and food processing.

India’s share of the total investments into the GCC increased from 4.7 per cent in 2011 to 16.2 per cent in 2016 while GCC investments into India also continued to rise from 0.7 per cent in 2011 to 2.95 per cent in 2016. Sectors such as oil and gas, food processing, healthcare, education and infrastructure seem to be the top picks for investors looking towards GCC as an investment destination.

In India, sectors such as infrastructure, ICT, food processing and healthcare prove to be more attractive as investment opportunities for GCC companies and an increase in the flow of investments between the regions improving ties and regulatory environment. The country offers a spectrum of opportunities with over 1.3 billion consumer base and may sustain 7.7 per cent growth by 2021, making it a prominent consumer goods market.

The recent predictions that the Indo-UAE trade will cross $100 billion by 2020 are a new beginning towards a long lasting and mutually beneficial partnership between UAE & India. According to a survey on world investments prospects by the United Nations Conference on Trade and Development (UNCTAD), India emerged as the third most attractive FDI destinations for 2017-2019. Indian government has relaxed FDI limits in various sectors to boost FDI.

Annual FDI from the GCC to India stood at $1.4 billion in 2017, translating into a five-year CAGR of 41.2 per cent, faster than the FDI growth from India to the GCC. The rapid growth is mainly due to substantial inflows during 2016 across the GCC countries, barring Oman.

The GCC share in total FDI into India has increased over the years, but still remains low at 2.9 per cent. Investments by non-resident Indians (NRIs) in the GCC also play a major role in the investments into India. The stability of the Indian rupee over the years has supported remittances to the country. Although relations are progressing, India has not received large investments from the GCC countries, except the UAE – the 10th largest FDI investor in India.

India, as a fast growing and emerging economy, is in the process of upgrading infrastructure, creating a digitally empowered society, increasing local manufacturing and enhancing energy production. Such initiatives from both regions will create increased investment opportunities and further strengthen the relations between GCC and India.

India’s trade relations with UAE are more than century old and this relationship has become uch stronger due to cordial ties between the leaders of both countries. While India has emerged as a leading world power in manufacturing and services, UAE has+ emerged as gateway to global trade and investments.

Prominent NRI businessman and one of the major investors in India, Yusuffali MA sees tremendous push from UAE investors into India. Reacting on the latest easing of FDI norms by Modi government, Yusuffali predicts that an investment to the tune of $150 billion will flow into retail, aviation, tourism and manufacturing sectors from Gulf countries.

The recent top-level visits by the leaders of both nations coupled with newly announced initiatives has made India the most talked about FDI destination for investors in the Gulf region, which is looking to broaden its non-oil investments and revenue streams.

Yusuffali MA, who is the Chairman of $7.4-billion LuLu Group (and the only Indian to be elected to the Director Board of Abu Dhabi Chamber of Commerce) with major investments in retail, hospitality and food processing sectors in India is already investing in Gujarat, Uttar Pradesh, Kerala, Andhra Pradesh and Telangana.

While the group is investing around Dh550 million and Dh2.5 billion in Uttar Pradesh and Kerala respectively, setting up shopping malls, five-star hotel and convention centre, and IT parks, another Dh1.46 billion will be spent in Telangana to set up a state-of-the-art Food Processing Unit, an integrated food processing plant and a modern shopping mall in Hyderabad. Once completed, these projects will generate an employment opportunity for more than 40,000 people.

Another big project will be a Convention Centre and five-star hotel planned in Vishakhapatnam, Andhra Pradesh, where LuLu will team up with the local government to set the world-class facility at a cost of Dh410 million.

Apart from India, the LuLu Group has ambitious plans for Far East markets where it recently opened hypermarkets in Malaysia and Indonesia, and plans to invest around Dh2.2 billion in next five years.

Closer home in the GCC region, the group enjoys around 32 per cent market share of the organised retail sector with 142 stores. LuLu plans to add another 23 new hypermarkets by the end of 2018 including in the UAE, KSA, Oman and Kuwait.

Saudi Arabia is looking to invest in the Indian food sector, predominantly in packaging, storage and transportation sector, as India is one of the largest exporters of food grains and vegetables to the desert kingdom.

This will have a mutual benefit for both the countries as India faces 30 per cent wastage in the Indian farm sector due to bottlenecks in storage, packaging and transportation, and investment by Saudi Arabia would benefit both the countries.

Projecting a 10 per cent increase in bilateral trade between the two countries this fiscal (2018-19) from $27.5 billion last fiscal (2017-18), Saudi’s ambassador to India Saud bin Mohammed Al-Sati, said there was immense scope to boost it further by investing in agriculture, chemicals, fertilizers and tourism.

Calling upon India Inc. to explore business opportunities in his country, the envoy told the Karnataka members of the Confederation of Indian Industry (CII) apex body to invest in the education and IT sectors to benefit the 3 million Indian expats in the kingdom.

As relations between the two countries were robust and vibrant, there is huge potential to expand the cooperation in unexplored areas. India can be a strong partner in Saudi Arabia’s expansion process.

India-Oman bilateral trade has registered a growth from US$ 4131.69 million in 2014-15 to US$ 6703.76 million in 2017-18. India’s export to Oman has grown from US$ 2379.44 million to US$ 2439.46 million in 2017-18. The total FDI from Oman into India from April 2000 to March, 2018 was of the order of US$ 469.20 million with Oman ranking 31st in terms of Foreign Direct Investment in India.

In 2017-18 India’s top items of exports were petroleum (crude and products), products of iron & steel, rice-basmati, iron and steel, ceramic products, organic chemicals, copper and products made of copper, electronic components, industrial machinery for dairy. India’s top imports from Oman were petroleum (crude), fertilizers manufactured, petroleum products, aircraft, spacecraft and parts, organic chemicals, aluminium products, bulk minerals and ores, processed plastic raw materials and mineral

Conclusion

The gulf food processing industry is ripe for investment as India continues to strengthen its historic economic ties with GCC.  Last year, nearly 85 per cent of overall Indian investment in GCC went to the UAE, where it is the third biggest corporate spender after UK and US.

Due to GCC’s strategic location bridging Asia with the west, the region is increasing becoming the gateways for Indian companies to market of gulf and former soviet bloc. As a result, the UAE and Oman have developed themselves as re-export hubs and their potential has been increasing with the growing cross border trade.

And with an average GDP per capita of US $ 61,559 in terms of purchasing parity, most GCC nation rank in worlds top ten richest countries.

In the food processing sector, snack, spreads, prepared meal, and ready to drink beverages makeup the four most promising food and beverage categories for investment in GCC.

The global professional service firms research department found that highly innovative firms are not yet present yet in large numbers in GCC and those that are should be seen as targets for acquisitions and joint ventures.

In fact 40 per cent of the top most innovative snack companies in the region characterized by the new products they launch had no presence in Saudi Arabia, and for RTD beverages, meal and spreads, that number increases to 74%, 80% and 84% respectively. The food and beverage industry in GCC is at inflection point and Indian food companies are targeting their investments smartly, so as to capitalise on the unique opportunity.

 

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