India's recent foreign direct investment policy could mean accelerated growth in the modern grocery sector, the United States Department of Agriculture (USDA) reported.

Although modern food retail shops currently account for a modest 2% of India's total food retail sales, the sector has increased its market share in recent years.

While modern grocery retailers held 1% of the market in 2005, they grew to 2% or US$5.4 billion in value by 2011, the USDA indicated. This share and value remained the same in 2012.

Total food retail, including modern and traditional sales outlets, was valued at US$270 billion or 60% of total retail sales.

"Thousands of small traditional retail outlets continue to dominate the Indian food retail sector, accounting for 98 percent of sales," the USDA Global Agricultural Information Network (GAIN) report said.

"However, a number of modern retail chains offering a more consumer-friendly shopping experience are emerging and the number of stores has increased significantly over the past few years and now exceeds 3,000."

The USDA anticipated an impact from recent foreign direct investment amendments, which could encourage a greater business focus on grocery outlets and processed foods.

"The recent amendments to foreign direct investment in multi-brand retail could speed the development of the retail sector in states where investment is allowed. India is a small but growing market for imported consumer-ready food products, imports were $2.1 billion 2012, up from $1.0 billion in 2008," the USDA said.

In September 2012, the Indian government approved 51% foreign direct investment in multi-brand retail, establishing procedures for foreign retailers and hypermarkets to conduct business. These operations had previously been limited to wholesale.

In August, the union cabinet passed further amendments to define small industry and the location of retail outlets. British retailer Tesco was the first company to make multi-brand segment moves in India in December.

Potential growth in consumer preferences

At the moment, Indians continue to prefer traditional shopping outlets.

"Indian consumers still have very traditional habits when it comes to food shopping. They use a variety of small stores, such as bakeries and butchers, as well as push cart vendors, but most dry goods and household items are purchased from kirana stores, which are typically family-owned outlets found on almost every street corner," the report said.

Imported foods, however, are a new possibility for Indian consumers and are still gaining familiarity. Ten years ago, most imported food products were prohibited, the USDA explained.

"For many Indian consumers, even upper income consumers, the option to consume imported foods and foreign cuisines is a new experience. While consumers may be familiar with foreign foods in a restaurant setting or during international travel, many do not know how to prepare foreign foods at home," the report said.

Consumer education and product adaptation will be key to promote new production. The report highlighted the educational value of retail outlets.

"As India’s modern retail sector develops, it will likely become an increasingly important vehicle for introducing imported food product to consumers before moving those products to the traditional retail sector," the USDA said.

Most current imported fruit and nut sales occur outside of a retail format. The report estimated 90% are sold in roadside stands and open markets.

Main barriers to expanding the imported food market were outlined as high tariffs of between 30%-50%, cold chain and infrastructure limitations, stringent food laws for importers and diverse food habits across the nation.

Domestic production also creates steep competition due to quantity, low-cost labor, easy access to materials and protectionist tariffs.

"Many foreign multinationals opt to invest and manufacture in India rather than import food products. Consequently, a growing number of international brands are now made and marketed in India," the USDA said.

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