Third Eyesight - Articles and whitepapers - Retail ; Farm ; Horticulture ; Supply Chain

She has been walking an extra half kilometre to get her supply of fresh vegetables and fruits from a swank new retail outlet. Tandon, 50, is cook-cum-housekeeper to a busy professional couple in Delhi’s Saket locality, and it is part of her job to lay in the groceries. She has a tight schedule herself but Tandon doesn’t mind walking that extra stretch because she likes ‘the experience’ — an airconditioned store with attractively shelved wares and half a dozen uniformed assistants to attend on customers. But primarily, she goes there because fresh vegetables and fruits are 10-15 per cent cheaper there than at her usual street vendors.

“I no longer buy fruits and vegetables from the street, specially now when temperatures are scorching,” says Tandon. Even the veggies for her family come from this private outlet, although earlier she would patronise the stall set up by the Mother Dairy milk cooperative near her home.

It is a small but significant shift in buying patterns and offers a clue as to why the biggest names in corporate India, from Reliance Industries (RIL), the oil and petrochemicals behemoth, and the AV Birla group to the Mittals of telecom fame, Pantaloon Retail and RPG group to a host of smaller players have jumped into retailing of fresh vegetables and fruits along with other groceries. They have joined a clutch of slightly older firms like Mahindra Shubhlabh Services, Godrej Agrovet and R. Subramanian and associates who promote the standalone Subhiksha chain.

The food and grocery business offers a beguiling prospect, although estimates vary widely. The India Retail Report 2007, put together by leading Indian and foreign consultancies, estimates that the retail pie was worth Rs 1,200,000 crore in 2006, with food and groceries accounting for a whopping 63 per cent. But the share of organised retail in this sector was negligible.

According to Crisil Research, food and grocery (F&G) items account for a significant 74 per cent of total retail sales, which it places at Rs 12,80,000 crore (Rs 12.8 trillion) in 2006. However, F&G accounts for only 18 per cent of the total organised retail market, as the penetration of organised retail in the F&G vertical is a mere 1 per cent.

What it means is that the “opportunity in agriculture is very, very big” as Rakesh Bharti Mittal, vice chairman of Bharti Enterprises, says. The company, which revolutionised telecom in the 1990s by expanding its reach to millions of customers, is hoping to do the same with its foray into agriculture, specifically vegetables and fruits. It has launched FieldFresh Foods in partnership with ELRo Holdings India, an investment company of the Rothschild family, and expects a turnover of $1 billion (Rs 4,100 crore) in five years.

Mittal says he will be investing Rs 10,000 crore ($ 2.5 billion) to cover 10 million sq. ft. of retail space by 2015. By then, he hopes to cover all cities with a population of one million and above. The underlying philosophy, the company says, is to link Indian farms to the world “by creating the country’s first global outsourcing opportunity in fresh produce”. Its 300-acre farm leased from the Punjab Agricultural University has been experimenting with exotic vegetables destined for the European market. Snow peas, cherry tomatoes, bell peppers and sugar snap peas are being tested out at the Ladowal farm close to Ludhiana, which is the lynch pin of its farming initiative.

The numbers get bigger with RIL. Officials have refused to discuss its retail plans with media, but company sources say it is setting aside Rs 50,000 crore to build its farm-to-fork linkage. Reliance has drawn up plans for a presence in 784 towns and 6,000 mandi (wholesale market) towns with 1,600 rural business hubs to service these. It has already rolled out 177 Reliance Fresh stores across major towns in 11 states. According to a company report, RIL is targeting a turnover of Rs 40,000 crore in the next few years.

All of a sudden, the farmer is in demand. Retail chains want his produce — they also want his farm. Companies from DCM to the Tatas to Triveni are investing big to help the country’s notoriously inefficient and hamstrung agriculture to scale up production, modernise farm practices and persuade farmers to use the best seeds and improved irrigation system.

For most, one of the inspirations has been PepsiCo. The food subsidiary of the US soft drink company has been successful in transforming agriculture in a part of Punjab where Pepsi pioneered the concept of contract farming for bulk procurement of crops like potato, tomato, groundnut, chilli and paddy. In partnership with the Punjab Agriculture University and Punjab Agro Industries Corporation, it used location-specific R&D to boost yields of tomato and chilli by almost three times.

It is the same idea that is driving the latter-day corporate farm evangelists. Mittal says drip irrigation methods will be promoted to stop the wastage of water which he terms “an ecological nightmare”. Other good practices are part of the package that companies are offering farmers across the country: improved seeds, fertilisers and pesticides, technical support on multi-cropping, better irrigation methods, the works.

All of which would raise farm incomes by at least 30 per cent. Even better, farm employment would go up since horticulture is labour-intensive and would keep more people employed on the farm than other crops. Alongside, this would come an impressive network of infrastructure from pre-coolers and pack houses to cold stores and refrigerated trucks.

For Indian agriculture, this could be a Godsend as it struggles to move up the value chain. Horticulture growth rates in India have been dismal at 4 per cent for the last decade compared with a staggering 56 per cent globally. A 2 percent increase in growth of production in the last two years has brought total production to 184.8 million tonnes.

India is the second largest producer of fruits and vegetables (15 per cent and 11 percent respectively) but way behind China which accounts for 34 percent of world output.

Fortuitously for the farmers, retail interest is happening at the right time when the interests of big business, the farmer and the consumer are coinciding. And as it happened with the Green Revolution, a public-private partnership is falling into place. Since 2004, the agriculture ministry has been taking more than a cursory interest in this sector and set up the national horticulture mission to give the much needed thrust to the farm-to-fork campaign. S. K. Pattanayak, joint secretary in the agriculture ministry, says the basic effort is to help farmers equip them to meet domestic and export demand more efficiently. A star feature of this plan is the terminal market, a one-stop shop that will offer state-of-the art facilities for grading, storing and transport of perishables, besides banking.

The first of these is coming up in Chandigarh and Reliance is among the four companies that have been shortlisted by the Punjab agriculture department. Eight of these terminal markets are coming up in the country in an initiative that is being monitored by Yes Bank as the consultant to the project. For both farmers and the retail chains, these markets will be linked to a number of collection centres in key centres.

Why should the entry of big companies in F&G mean good news for the farmer, 75 per cent of whom are small and marginal cultivators with less than a hectare of land? The simple reason is that almost all of these companies are planning huge backend operations to create captive agricultural bases, either for their retail outlets or for supply. For starters, it means that farmers can sell directly to these retailers or aggregators such as Trikaya Agriculture and break free of the regulated mandis (see ‘Restrictive laws’). In this scheme of things, the farmer’s share in the retail price is as little as 12-15 per cent compared with 40 per cent for farmers in Thailand.

The World Bank believes that huge investments by the retail biggies in the supply chain infrastructure could usher in a service revolution that would shorten the distance that fresh produce travels to reach the consumer. In a supply chain analysis of 13 high value commodities that covered 1,400 farmers, 200 commission agents and 65 exporters across the country, the Bank found that high transport costs and multiple players in the linear supply chain were crippling horticulture. India is a large low-cost producer of fruits and vegetables but is unable to compete in the global market on account of what it terms the logistics tax on fresh farm produce. The inefficiencies in the system also mean that 25-30 per cent of the produce (valued at Rs 50,000-52,000 crore) is wasted, imposing additional burden on both the grower and the consumer.

Big retail’s plans to clean up the back-end may change all this. Trikaya Agriculture and Mahindra Shubhlabh are just waiting for organised agro-retail business to take off. According to the Central Potato Research Institute of India (CPRII), India produces 25 million tonnes of potatoes. For those who can link the supply chain from the farm to the shelf, a business worth Rs 2,500 crore is up for grabs. Mahindra Shubhlabh is upbeat about this development and is already testing different supply chain models to link agro-retail firms. It would either enable the transportation of farm products to a store or become what are known as “aggregators” of farm produce. This term is used when the retailer leases out a small section of a store to the aggregator, whose business is to collect produce from different farms and fill up empty shelves in the store.

The profit sharing margins on the particular space leased in the store would depend on the retailer. The aggregator could use a mix of warehouses, cold storage facilities and refrigerated trucks depending on the kind of product that is to be put on the shelf. He will also bear the loss in the case of perishable items when in transit. Tesco in Europe has 7 per cent of its $40 billion business being managed by ‘aggregators’ and ‘distributors’. “If this happens in India with agro-retail, there is a lot of money for us,” says Vikram Puri.

Mahindra Shubhlabh is already working in 100,000 acres of farmland, which includes contract farming. They have also leased 55 acres from farmers in Punjab for the same purpose.

In the process of setting up the retail networks, these large corporations are changing the domestic agricultural landscape. For starters, they are introducing the Indian farmer to better seeds, new technology, supply chain management and food processing. These companies have already brought in technology that increases the shelf life of fruits and vegetables.

Primarily, there are three models being worked on by India Inc. First, a model farm like Bharti’s FieldFresh. Second, contract farming. Third, contact farming. In contract farming, the farmer is supplied seeds and other ingredients by the company. The contractor buys the entire farm produce at a pre-fixed price. However, in case there is a supply shortage and the price offered by the government is higher than the price contracted by the company, the farmer can sell it all to the government.

Contact farming is a more complicated. Here, a farmer takes land on lease from other farmers. He is generally paid Rs 15,000 per acre every year, while the marginal farmer is employed to work on his land for which he is paid a monthly salary. But Bharti says it is switching to contract farming because of the complexities of contact or collaborative farming.

Not surprisingly, Punjab is ground zero for both Bharti and Reliance’s food retail ventures. After all, Punjab is where the Green Revolution changed the face of Indian agriculture in the mid-1970s. Punjab is also the first state to set up the terminal market that will act as a major catalyst for farm growth.

In other parts of the country too, companies —like farmers — will be benefiting from the groundwork done by the government to promote precision farming in horticulture.

Companies from Mumbai are making a beeline for Tamil Nadu’s Dharmapuri village, which has made a signal success of its fruit and vegetable production, thanks to government support. It has corporates with big retail plans knocking on the doors. Officials from Reliance and the Aditya Birla group have visited the village, looking to source vegetables directly.

These retail chains are sourcing produce through three routes. One, from village markets or mandis. Second, from APMC yards. And, third, by linking directly with farmers. Food Bazaar has links with farmers growing potatoes and fruits. It has even gone on to link farmers in the dairy business with the help of a company called Dynamic Dairy in Maharashtra. It has also sourced produce from farmers growing exotic vegetables like red pepper, mushroom, etc.

In Ratnagiri, Maharashtra, farmers have formed cooperatives and regularly supply mangoes to retail chains. “We sold 35,000 tonnes of mangoes from Ratnagiri last year. The farmers managed to get 90 per cent of the original cost,” says Arvind Chaudhary, CEO Pantaloon Retail’s food business.

If they had gone to a mandi they would have realised only 70 per cent of the cost. This year, Pantaloon’s Food Bazaar is planning to buy 100,000 tonnes of mangoes. The supply chain is managed such that mangoes are transported to the store a week before they become ripe. Cold chain is used only in the case of potatoes, where 5,000 tonnes are stocked in UP. Pantaloons food business is growing at 25 per cent in the entire Big Bazaar chain, which also sells FMCG products.

However, there are certain issues that agro-retail chains will have to address before they can make the farmer smile. “Hurdles such as bad infrastructure, high cost logistics management, the middleman and the limiting APMC Act will have to be crossed if retail has to assist the farmer,” says Choudhary. Since the existing supply chain allows them to connect with only those farms that are nearest to the cities, those living in the hinterland still have no access to markets. Importantly, the best of these stores shy away from commenting on the investments.

Godrej Agrovet on the other hand has tactfully used its marketing experience in rural areas by opening advice centres called ‘Aadhar’. These centres will enable the farmer to increase his production from 40 tonnes per acre to 100 tonnes per acre. This year, the company will cover 2,500 villages and farms in these villages will be directly linked to its retail business, Nature’s Basket, in Mumbai. “The proposition here is to remove the intermediary who is adding more cost than value,” says C.K. Vaidya, managing director of Godrej Agrovet. Godrej too does not use the cold chain. A modern supply chain, including refrigerated trucks and warehouses, would come at a high cost and the burden is borne by the consumer. “The consumer should be prepared to pay this cost,” Vaidya says.

This development poses two challenges for retail firms. First, they would have to squeeze the supply chain in order to offer the best prices. Here, the farmer will have to bear the brunt and could end up sacrificing more than he can in terms of price realisation. Second, the consumer is left with no choice but to pay a higher cost for getting fresh farm products. This is an issue that retail stores will grapple with and only certain items such as oranges and potatoes will be stored in the cold chain. Importantly, they will stick to proximity. Access to farms within a 4-5 hour reach will determine pricing and the product mix in the agro-retail business.

This apart, there has been a call to set up an exchange market for agricultural produce. This free market principle, CEOs feel, will liberate the farmer in terms of actual price realisation and keep him out of debt for the coming season. The National Spot Exchange Limited, an exchange which is dedicated for agri-produce, is supposed to create a benchmark even for the small farmer who can sell only one quintal. “The price in the exchange will be determined by many buyers around the country and not the local trader,” says Anjani Sinha, managing director and CEO of NSEL. The NSEL is in the process of setting up 117 warehouses and cold chains of 700,000 metric tonnes capacity each to make the exchange operational.

Though farmers are upbeat about selling directly, they are still wary. “They (corporate retail chains) wanted to ink a deal with us and were even talking about a partnership model. But we need a fixed price over a certain period,” they say.

Right now, companies are mostly dealing with farmers on the periphery of cities but analysts say they would ultimately have to invest in cold chains and move into the interiors. Whether companies — except for those with deep pockets like Reliance — will have the courage to do that is in question. According to the confederation of Indian industry, if India has to double fruits and vegetables production to 300 million tones by 2012, it would require pumping in close to Rs 20,000 crore. But analysts warn that such investment may not pay dividend since it doubles the cost of transportation.

So, how will retail chains be able to pay the farmer a higher price, subsidise the cold chain and yet give it cheap to consumers in the long run? Most vegetables and several fruits don’t need cold chains, says S. Sivakumar, ITC’s chief executive, agri businesses. “Vegetables are grown in the periphery of towns and they can move in ambient chains. What’s required is better coordination along the chain to minimise wastage.”

But, for the moment, retail chains continue to side-step the key question: Will farmers benefit? “It is competition that will bring down the margins but the savings will be pocketed by the retailers themselves. But the savings could very well be pocketed by the retailers themselves,” concedes Siva Kumar.

Behind the squeaky clean showrooms of the new food retail outlets that are dotting the cityscape, dirty wars are being fought. There is poaching of staff and suppliers, and aggressive price discounting as rival retail chains try to win custom and destroy competition. Most of the grubby skirmishes are over farmers - and their produce. Suddenly, the humble grower of veggies and fruits is being sought out and wooed as corporate India 's biggest names try to secure enough supplies to feed their rapidly proliferating chains.

In this mad scramble, loyalty is at a discount. That's what the cooperative sector giant Mother Dairy is discovering to its chagrin. The milk cooperative, which diversified into fruits and vegetables (F & V) in the 1980s, is losing its traditional suppliers as retail chains with deep pockets woo them with hefty premiums. Increasingly, Mother Dairy's back end, built up painstakingly over the past two decades, is coming under strain. The farmers who have been growing F & V specifically for its Safal outlets have been selling their produce to the new chains which are ready to pay that much more.

This has come as a rude shock for Mother Dairy which has cast itself in the role of the farmer's saviour. An old hand of the National Dairy Development Board (NDDB), Mother Dairy's parent organisation, laments farmers' collectives that were put together after "years of blood, sweat and tears". NDDB set up the Safal F & V unit in 1988, using the milk model to bring good quality vegetables at low prices to Delhi consumers. The turnover on this was Rs 200 crore last year.

Over the years, it has cobbled together a network of 10,000 famers on the periphery of Delhi to form associations that supply 350 tonnes of F&V to the city. These are mainly marginal farmers with an average holding of three acres. The farmers work to a monthly crop plan prepared by Safal's procurement team and are given seeds and fertilizer from a support division which also send out extension workers to the farms.

So far the system has worked well. Farmers tend to be loyal because Mother Dairy is an assured buyer. "We never say no to farmers, whatever they bring," says Sunil Bansal, the new CEO of the F&V unit. If there is a glut, a median price is struck, ensuring that the farmer is not put to a loss while ensuring that consumers benefit from the low prices. But things are changing for the cooperative enterprise. Private players, desperate for supplies and footfalls are offering big premiums to farmers coupled with hefty discounts to customers.

Sometimes, the supply of a certain vegetable or fruit just doesn't reach the collection centres; it is bought up by the corporate rivals. At other times, Safal is unable to match the price offered by the new chains. This in turn would affect its turnover and, subsequently, its ability to pay the farmer. What can Safal do in the circumstances?

Nothing much really. Bansal might claim that farmers will largely remain loyal to an organisation that has stood by them through thick and thin and that the farmer will "see through the entry strategy" that the corporate chains are employing. The reality is that supplies cannot be guaranteed unless buyers have some kind of lien on the crop, say the experts. In short, contract farming. (Corporate farming on a commercial is ruled out for the moment given India 's laws on land holdings and usage).

There is one school of thought which believes there is a certain inevitability to contract farming. "The agriculture model has to change because the stakes are so high," says Devangshu Dutta , chief executive, Third Eyesight, a Delhi -based consultancy focussed on retail and consumer products. And going by the experience, he thinks that contract farming is the solution since it has worked well for a number of companies in several crops, such as wheat, gherkins, tomatoes and potatoes.

Not everyone agrees the contract farming is the only way forward. S. Sivakumar, ITC's chief executive, agribusiness, says that while contracting does help, it is not a precondition. "If the prices are volatile, and the products have a ready market, then contracts tend to fail because one party gains by reneging," he points out. Setting up buying centres closer to villages would be the best option for most companies.

But then not everyone has ITC's rural pedigree: 100 years of tobacco farming and another 30 years in oilseeds. This has given ITC enviable farm linkages. To feed its initial foray into retail - that's just three cash and carry stores in Hyderabad, Pune and Chandigarh - the agri division works with 600 farmers spread across the same three clusters on everyday vegetables such as tomato, gourds, cabbage, cauliflower, brinjal and potato. For its export business ITC works with grape and mango farmers, some 3,000 in all to procure about 25,000 tonnes. This number will go up as the stores expand.

The more stunning numbers are to be found in the non-perishables that go into ITC's branded foods business. In spices and wheat, it partners with 100,000 farmers (for 700,000 tonnes) and an even larger number for its grain & oilseed exports: three million farmers for procuring two million tones.

With such experience behind it, it is easy for ITC to maintain that contract farming is not important. But for new entrants in the retail food business which includes every big name from the petroleum giant Reliance Industries to the telecom biggie Mittal contract farming, such figures provide an indication of the scale of operations that are required. As companies look at the challenges of managing the rural environment it is prompting them to seek more safeguards for their nascent enterprises.

This has increased the pressure on states to amend the state Agricultural Produce Marketing Committee (APMC) Act that would not only enable the farmers to sell their produce directly but also facilitate contract farming. So far only three states have eased the rules on this.

This is a political hot potato since the Left opposes contract farming ideologically, while the Congress has remained ambivalent. Those who champion it say that India is ideally placed to pursue contract farming since the market is changing from a supply-dictated production system to demand-driven value chains. However, the debate has tended to get stuck on the contract violations that have taken place in the past. Both the contracting company and the farmer are known to have reneged on contracts on account of market fluctuations. While corporate clients are known to have backtracked on paying the agreed price when the markets have slumped, farmers have also been guilty of refusing to make the contracted supplies when the markets have shown an upswing.

But there have been excellent success stories, too. The seed industry and poultry are good examples of farmers and agri-related businesses working well without a written contract. And that has operated for three decades. It is commonsense that contract farming succeeds when there is "natural reciprocal dependency between the contracting parties", says Siva Kumar, who is regarded as the guru of agribusiness. The basic caveat: never let it become a zero sum game.

His formula for successful contract farming includes the following enablers:

* market institutions that provide risk transfer mechanisms (again, the game is not zero sum)

* protection through crop/weather insurance (this increases the risk-taking ability of the contracting parties by spreading the same to the market)

* an environment does not allow one party to exploit the disadvantaged counterparty.

All of this means that government would have a significant role to play. It would have to set up a regulatory framework to facilitate registration of contracts and quick resolution of disputes. Siva Kumar, in fact, believes the government should be a party to the contracts so that farmers are not taken for a ride.

But the fact is there is no law on contract farming, only a model regulation under the APMC Act that the ministry of agriculture has offered as a guideline for the states. Some state governments have allowed the companies to increase the lease of farms from 11 months to 30 months but none of them has so far thought of bringing the farmer into the debate on contract farming. It is largely the companies that are pushing the drive for a more liberal approach to this initiative -and for a simple reason.

For companies, contract farming would be part of their cost structure and as such their focus will be on minimising the costs. According to one reckoning, such an enterprise is unlikely to be a profit centre for corporate investors since it would take as long as 7-9 years for them to recoup their costs.

For the farmers, on the other hand, it could very well be a life and death matter. That's why agriculture minister Sharad Pawar needs to give some attention to this issue and prod state governments to take the right measures to protect the small cultivator. So while contract farming offers a great opportunity to transform several hundred million from subsistence farmers to partners in a prosperous endeavour, the authorities need to ensure they are guarded from the hidden traps.

With some thought, Dutta says the government can help create what he calls a wave of Agriculture Product Outsourcing as it pushes its farm-to-fork initiative. But he warns that there are no quick fixes.

"It's going to be a struggle and will take quite a few years for things to stabilise."