admin
September 13, 2007
In recent years, sourcing and supply management has emerged as one of the greatest opportunity areas for retail business as well as for suppliers to leading retailers. At the same time, it is possibly also the one most prone to risk. This set of activities holds the key to improving service, product offer and overall profitability, and yet also provides some of the most difficult challenges of doing business globally. Certainly, you need to have winning products. Of course, you need to pick the best supply countries to source from and the best suppliers. Certainly negotiation and cost management are an important part. But the only way to achieve these many “bests” is by ensuring that sourcing is well and truly integrated within your overall business strategy, and that sourcing activities closely follow the direction set by overall business strategy.
Setting the Scene
Let us cast a quick glance over the major changes taking place in the textile and apparel trade globally. The of the most important questions in sourcing are “From where/whom?” and “How?”. They also provide most of the unpredictability and the risk that so characterises sourcing.
For this heavily protected trade, one of the most important
developments is the transition from the General Agreement on
Tariffs and Trade (GATT) to the World Trade Organisation (WTO).
Put simply, the WTO is driving towards increasing mutual market
access for producers in countries that are a part of the WTO.
The major aim is to remove quantitative restrictions, including
quotas, and to reduce import duties, which act as a barrier
to cross-border trade. If all goes as planned, 1 January 2005
will see a textile and clothing world trade free from quota
restrictions. That one element, which possibly guides apparel
and textile sourcing more than anything else, will cease to
exist. However, to minimise the “cliff effect”, quotas are being
phased out in four stages, rather than abolished at one stroke.
So, the WTO agreement should lead to greater supply and lower
prices due to lower import duties and no quota premium, and
make our lives simpler overall.
Thus, due to these factors, many more cost effective supply bases are developing quickly, adding to the complexity of choice. Many of these are low cost supply countries that now exist not only in Asia, but in Europe and the Americas as well. So which countries should you pick? Is Hungary better than the Hong Kong, the Caribbean better than Cambodia? Should you still be sourcing from the high-cost countries such as Italy, the UK etc. when there are so many low cost bases from which to choose?
Then there is the question of the sourcing method. Virtually every kind of relationship and business structure possible is included in the textile and apparel supply chain:Some of these methods are declining, some are increasing in popularity, while others are stable. Should you apply more than one? Should you differentiate depending on the supply country or should you adopt one as “the way” for your business?
Taking the Gamble Out of Sourcing
The problem, clearly, lies in the unpredictability about the benefits from each country and method of sourcing. And, simplistically, the solution lies in taking as much of the uncertainty out. The way to do that successfully is to ensure that your sourcing strategy, organisation and processes are led by your overall business strategy. Many organisations, retailers as well as suppliers, have built up highly successful businesses in the last few years by ensuring that sourcing is one of the core management areas of their business rather than an afterthought. But in many more, sourcing is relegated to the “back-room”, as something that happens mostly outside the company’s boundaries. How can you bring sourcing within the mainstream of your business?
Imagine the sourcing process. Some people might imagine conceiving a product, a style, putting together the fabric and trims, creating a sample, getting it produced within a given time and cost. Others would visualise it beginning with next season’s business plan, a plan to sell certain numbers of a product at a particular price, bought in at a certain cost with a planned profit and mark-down allowance. Still others might remember exchanging endless overseas telephone calls and faxes with their suppliers, the dreaded messages from the shipping company about late deliveries. All of those unpredictables that make sourcing a gamble.
Stop! If you are a retailer, I would ask you to now visualise your retail store, your catalogue, your website. If you are a manufacturer, I would ask you to visualise your customer and their consumers. That is where the sourcing process truly begins. Your business is defined by your consumer or customer, who has certain expectations – a product, a particular price, a time limit, a certain quality. Naturally these demands and expectations are what you are trying best to understand and fulfil. So should your associates who support the process.
No matter what you are, a retailer or a manufacturer, you need to focus on the consumer. The “push” system of supply is outdated – customers have greater, easier access to a much wider choice of goods and services, and expect ever-greater standards of quality, service and customisation. The sourcing and supply process must change too. Previously one end of the supply chain understood consumer demand, and translated that understanding into a product concept that was manufactured, shipped and sold to the consumer through retail stores. Increasingly now, the functions of Design, Development (production), Distribution and Display (retail) must link together to share skills, knowledge and capabilities that allow joint market analysis, product development, common measurement and accurate forecasting, and create a delighted rather than merely “satisfied” customer.
Too often sourcing decisions are made as a reaction to the immediate present and the recent past. Factors such as past relationships, past experience of individual buyers, gut feel and immediate price comparisons are commonly the driving forces. These are all internally focussed; the decisions based on what is available within the business (and its supply base), rather than what the consumer or customer wants.
Let us take business strategy first. Generally, three major
areas define and differentiate one business from another: Product,
Price and Service. A study by global management consultants,
Kurt Salmon Associates in 1998-99, showed that successful businesses
had a clear positioning in being focussed on a single or a combination
of two aspects. On the other hand, business that were not successful
financially, were generally fuzzy in their positioning, in their
definition of what the business stood for. Are you clear about
where your business stands and what is your platform, on which
you sell to your customers? If you are, you have taken the first
step to sourcing successfully.
What are the obvious links with sourcing? If you are price-oriented, surely your sourcing must be driven very much by sourcing cost. But not the FOB cost alone – you need to factor in import duties, transport costs, costs of rejections, costs of maintaining a supplier relationship, and many other factors that are often invisible. If, on the other hand, you are oriented towards Product and Service, surely you need infrastructure within your business or in your supply base to create innovative products, turn sampling around quickly, and ensuring that quality, accuracy and timeliness are the benchmarks used to measure success or failure.
So you now understand what your business is all about, and what your sourcing needs to be. Let us ask a third question, do your buyers, merchandisers, technologists, suppliers and logistics providers have the same understanding as you about the defining factors and the objectives? Unless you draw these links, and make sure that everyone around the business shares a common understanding, you will have to resign yourself to live with unpredictability.
A final point: there is a wide variety of suppliers and supply bases out there. While defining your business, you also should clearly define how much capability exists within your business to handle the sourcing process from concept to delivery. Define your competencies: can you conceive the product, can you design it, prototype it, define technical specifications, produce (or manage the production) and ship it? What are the things you absolutely wish to control, and what are the activities that you want your suppliers to carry out? Once you have done that, choices become simpler. The future direction for selecting supply countries becomes clearer and identifying the winning suppliers becomes a more rational process.
Yogi Berra is quoted as saying, “It’s tough to make predictions, especially about the future.” Certainly, sourcing is a lot about getting your predictions right – the right product, the right quantities and the right timing, the right supply base for future growth. But it helps to make sure that sourcing activity is led as much as possible by targets and business objectives, rather than only by short-term reactions to changes in the environment. Define your business and the business requirements, and let those define your sourcing – that’s the only way to get some of the unpredictability out of sourcing.
This article is based on a presentation to the Textile Institute’s London and South East England Chapter and draws on experiences with developing global sourcing strategies of a number of retailers and manufacturer-suppliers.
© Devangshu Dutta, 1998
admin
September 12, 2007
By Diwakar Kumar
Indiaretailing.com
It is being said that it might be easy to turn cash into inventory but the main challenge is to turn the inventory back into more cash. According to researchers and analysts, many retailers fail to make more money just because of inefficient utilisation of space, labour, or product assortment in their operations. Tracking Gross Margin, which indicates the additional amount that a customer pays to the company for its product over and above the costs that the company incurs to procure or make it, has thus become critical for modern day retailers.
Managing a sustainable gross margin poses many challenges to
a retailer. For any retailer, with limited space in a store, it
becomes difficult to attain margin goals because high-priced products
may fetch the business immediate gains – and higher gross
margin, but the retailer could lose out to more competitively-priced
retailers in the long run. In fact, a higher gross margin is not
always an accurate reflector of a retailer’s health.
Improving business efficiency
The efficiency of the business can be improved with careful steps
in the line of operation like highly efficient supply chain management,
inventory management, demand forecasting, leveraging on technology
etc. In an effort to generate sales from higher gross margin products,
retailers typically lean on private label development.
“Compared to the western retailers, the Indian retail
industry has much thinner gross margins and comparatively higher
operating costs (most importantly the rental costs), and there
is definitely a need to locate higher gross margins through areas
such as private labels (PL),” remarks Devangshu Dutta, chief
executive, Third Eyesight. This is one of the reasons behind retail
giants like Shoppers Stop, Trent, Pantaloon Retail, Reliance Retail,
Spencer’s Retail and Vishal Retail moving towards PLs to
address consumer needs and to increase profitability, he states.
The poll question and experts’ view
As a follow up on the subject, IndiaRetailing’s weekly poll
question — Is a retailer’s Gross Margin always an accurate
reflection of its health? — had 58.82 per cent of the respondents
supporting the theory, whereas 37.25 per cent of them negated
the same and the remaining 3.93 per cent preferred to stay neutral.
Commenting on the poll question, Dutta underscores that
net margin should be the only true reflection of a retailer’s
health. “Gross margin is only the starting point. The maximum
potential gross margin, to me, is the difference between the cost
of the product and the highest price the consumer is willing to
pay. A retailer has to decide on balancing the two sides of the
equation. The first one denotes the maximum price that the customer
would be willing to pay, and the other is the lowest possible
sourcing cost without affecting the quality of the product itself,”
he analyses.
“Obviously, a higher gross margin allows the retailer
much more scope in deciding the operating costs. However, there
are businesses with a high gross margin on products but slow inventory
turn and high markdowns as well,” underlines Dutta.
admin
August 30, 2007
With the sector expected to create at least 2mn direct jobs
in 5 years, there is a rash of grooming courses.
Mint (partner to the Wall Street Journal), New Delhi,
August 30, 2007
When Shoppers’ Stop Ltd was planning to roll out its
first department store in Mumbai in 1991, less than 10 candidates
showed up for a job advertisement for a dozen openings. One
of the front-end employees quit soon after as his fiancée’s
family objected to their would be son-in-law being a store associate.
“So he decided to change (jobs) because he wanted to marry
the girl,” says B.S. Nagesh, managing director of Shoppers’
Stop that currently runs 22 department stores and is India’s
second biggest listed retail firm.
Today, thousands of job seekers troop to the offices of Nagesh’s
company, and other modern retailers in many Indian cities every
month. Most of the jobs on offer are for front-end positions.
As several companies roll out hundreds of branded stores,
retailers say they have turned the corner in their ability to
make the sector respectable from the employment point of view.
“Acceptability has gone up like anything…nobody
raises an eyebrow when you say you work for a retail store now,”
Nagesh says.
Some people say that thanks to companies such as Shoppers’
Stop and India’s largest listed retailer Pantaloon Retail
(India) Ltd, retail jobs have gained some sort of acceptability
in the last decade.
“ It took a while for Shoppers’ Stop to
gain the visibility, Pantaloon was not considered a great place
to work at,” says Devangshu Dutta, chief executive of
Third Eyesight, a retail consultancy firm. “The whole
visibility of retail itself and the brands and the large retailers
has been written about and talked about so much, that itself
has brought a lot of desirability to the sector,” he adds.
In recent years, several large Indian companies, including
Reliance Industries Ltd, the Aditya Birla Group, Bharti Enterprises,
and Wadia Group, among others, have lined up ambitious multi-billion
dollar plans to open supermarkets and hypermarkets across the
country in the coming years.
In India, retail jobs were once synonymous with sales staff
and delivery boys that toiled at millions of small shops, known
as kirana stores that dot every nook and corner of India. Even
today, modern retailers control only 3% of India’s $300
billion annual retail business, but their share is expected
to swell 20% in the next eight years.
Many parents are beginning to encourage their sons and daughters
to look for a career in retail to cash in on the expected boom.
New Delhi stockbroker Prem Prakash Saluja asked his 20-year-old
daughter, Kanika, to do a retail management course after finishing
her graduation later this year in economics from Delhi University.
“I felt that India will have the same (kind of) retail
industry as Europe and America and I told her this sector will
grow very fast,” says the 44-year-old Saluja. “Earlier,
retail jobs were only salesman and it was unorganized and that’s
why it was considered low-profile…in the coming years,
it will be a very respectable job and will get big money,”
he adds.
Market watchers say the industry will create more than two
million direct jobs in the next three-five years and several
institutes, government agencies and non-profit groups have jumped
in to provide weeks- to years-long retail courses to fill the
gap.
Dutta of Third Eyesight says organized retail in the
country is currently at the same stage technology outsourcing
was five years ago. India’s IT and back-office companies
have redefined the country’s image globally and created
more than a million jobs over the last several years.
“ Even just saying (some one is) working in
a software company raises the platform (of respectability),”
Dutta says. India’s retail sector has a long way to go
to reach that stage, yet. “Just saying I am in retail
doesn’t do that,” adds Dutta.
Nagesh of Shoppers’ Stop says that although the sector is attracting a lot of interest, in the “social ladder, the hierarchy of the role and the job and the designation… it’s (a retail job) still in the bottom three…but it is changing very fast.”
Meanwhile, Saluja is asking his clients to invest in retail companies. “In 1991, I advised a lot of my friends to buy shares of technology companies and they made crores,” he says. “Now, I recommend them to buy retail sharesand if they can hold it for four-five years, it (the prices) will at least go up by eight to ten times.”
admin
July 9, 2007
FARM RETAIL
The New Middle Man
In recent weeks, Usha Tandon’s routine has changed slightly.
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.
If India Inc is expected to invest more in agriculture, many of the existing acts need to be amended. Till the Agricultural Produce Marketing Committee (APMC) Act is amended, farmers cannot sell their produce in the open market, but only in the mandis (wholesale markets). The mandi is controlled by the arthiyas (commission agents) and mashokars (middle men) who pay a fee to the government for the upkeep of the market and improving the infrastructure.
So far, 16 states have amended the Act but until these states frame the rules under the amended Act it remains a legislative exercise that does not change ground realities. Delhi has once again extended the deadline to March 2008 for all 29 states to amend the law.Till that happens, India will remain one of the most fragmented markets for agriculture produce.
The amendment of the Act has paved the way for contract farming in a numbers of states although there is a restriction on the lease period. Under the model law on contract farming, a farmer can lease out his land for a minimum of 11 months and a maximum of 30 months. Companies getting into retail complain that 30 months is too short a time to recoup investments. Farmers are wary of longer leases because they fear they would lose their land rights. The corporate entrants have been seeking an amendment in the Revenue Act so that they can lease land for up to 10 years. Says Rakesh Mittal: “We need to amend the law so that farmers can lease land on long tenure without alienating their ownership rights.”
Currently, only three states — Punjab,
Haryana and Maharashtra allow farmers to lease land. Here
too, farmers are now leasing out their land for 30 months.
In the wake of the agitation against the special economic
zones however, companies are finding it impossible to pick
up land for agricultural purposes.
Anup Jairam
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.
“It’s a different universe out there,” says he. “Companies need to empathise with the farmer and build relationships on a win-win wicket. Otherwise, it just won’t work.” 
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
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
Over the years, it has cobbled
together a network of 10,000 famers on the periphery of
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
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
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
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:
* protection through crop/weather
insurance (this increases the risk-taking ability of the contracting
parties by spreading the same to the market)
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.”
admin
June 20, 2007
OUTLOOK BUSINESS , 20 Jun 2007
Ranjana Kaushal
Veering to the left of the Hero Honda roundabout in Manesar,
Gurgoan is a nondescript road. A 100 meters down this path stands
a building, which symbolises the rising global acceptance of
India’s fashion design industry—the 3,50,000-square
feet designing and manufacturing unit of Orient Craft, one of
India’s largest export houses. On the ground floor of this
Rs 750-crore company, in a glass cabin overlooking the work
stations of 100 associates, 42-year-old Anoop Thatai, Joint
Managing Director & CEO of the company, is busy discussing
the new spring collection for a US customer. Finally, after
hours of discussions, a few cuts, silhouettes and fabrics are
short-listed. Then the design team of around 100, along with
a support staff of 700, begins work on rolling out the products.
Says Anoop Thatai: "The team has to complete the project
in the next 14 days. Then we begin work for a major European
retail brand. I am running at full capacity. Besides manufacturing
prototypes, we are developing our own design lines."
For Orient Craft, it has been an eventful journey, for, just 10 years back it was manufacturing apparel for international clients with little value addition. But the company has climbed up the value chain. Says Sudhir Dhingra, Chairman and Managing Director, Orient Craft: "Out of the 65% women’s wear produced by us, almost 40% have our own design input and we produce 2,000 design samples a day. This differentiates us from competition and certain clients get back to us for particular designs."
The design element in the apparels and accessories industry—apparel alone is a Rs 30,000-crore market—has risen by almost 80%. Graduating from assembly line operations for Western labels, Indian design firms are now creating their own lines based on strong in-house R&D capabilities. Says Devangshu Dutta, Chief Executive, Third Eyesight, a Delhi-based fashion consulting firm: "The days of cut, copy, paste are coming to an end as every exporter looks for a distinct image. This is possible only if you innovate in design."
While big export houses like Orient Craft are enhancing their businesses by emphasising on design, international firms are looking at India as an outsourcing hub. This is spawning many start-ups, such as Bangalore-based Munch Design and Delhi-based Bricolage, which are developing lines of apparel and accessories for global brands like Nike, Reebok, Esprit, Adidas, Zara, Guess, Macy’s and Gucci. Says Narinder Mahajan, Founder, Bricolage: "Clients depend on us for forecasts and trends. Right from deciding on the theme-based collection names to the final sampling, everything is done by us." Bricolage is now developing a casual clothing division for Reebok and a range of shirts and tees for Benetton.
A Cut Above The Rest
Design in apparel as a key differentiator comes at a premium. According to industry sources, a prototype consignment of 10,000 shirts to the US would cost $10 per shirt. But with elements of design like embroidery, embellishments and cuts, the same shirt would cost $20 or more. Says Vijay Agarwal, President of Apparel Export Promotion Council: "India’s strength is design, whereas China is a mass producer. We need to balance the two—numbers and design innovation—for enhancing exports."
However, not just exports, the design element is slowly creeping into the lives of domestic consumers too. No more the plain shirts for the Indian male. The choice has widened to embroidered, pleated, crushed, crystal-laden and metallic shirts. For women though, there’s practically no end to the need for choice.
Homegrown companies like Pantaloon and Madura Garments are busy satiating the design needs of Indian consumers. Says Hemchandra Javeri, Senior Executive President, Madura Garments Lifestyle Brands and Retail: "The importance of design will be further heightened in future as Indian consumers get more in sync with global trends. Indian companies will have to compete in design, branding and retail. I see these as the key differentiators of the future." Madura Garments owns brands like Allen Solly, Allen Solly Womens, Peter England, Van Heusen, SF Jeans, Louis Philippe, Byford, Elements and San Frisco. "We try to balance fashion, innovation and commercial logic," he adds.
Pantaloon Retail too offers a variety of apparel and accessories targeted at men, women and kids. Says 43-year-old Kishore Biyani, MD of Pantaloon Retail: "We are a design-centric company. Right from kids wear—the Gini and Jony range to middle class brands like Big Bazaar to high-end fashion like Pantaloon—each product has a strong design element. This, I would say, is the biggest value add-on."
Points out Kailash Bhatia, CEO, Apparel Line: "Designers travel a lot, get customer feedback from surveys and marketing before launching a line for a particular season." Bhatia is aided by a team of 30-inhouse designers. For global players with a presence in India, apparel design is a key element. Says Manjala Tiwari, Brand Head, Esprit India: "Our business has grown three-fold over the past two years. We present the same range in India as overseas. We cannot present a six-month-old Western line in India."
Sums up fashion designer Ritu Beri: "When I joined the industry in 1990, fashion was a diversion for a small elite. Now, it’s more about being well dressed all the time."
More To The Design
The impact of design has spread to bags, shoes, hair clips and even interior furnishings. This has resulted in institutes such as NIFT launching courses to address this new market segment. Says Jatin Bhatt, Professor, Department of Fashion & Lifestyle Accessories, NIFT: "Seeing the market demand for trained accessory and interior designers, a four-year degree course, called Fashion and Lifestyle accessories, was launched. We now train students in leather, metal, jewellery and interior designing."
At Magppie, one of the first branded steel accessory players, products are designed by 10 designers in India and 28 overseas. Says Vinod Jain, MD of Magppie: "For an accessory player like us, design is the only differentiator. Consumers are ready to pay a premium for better designed products."
Agrees V Govind Raj, Vice-President, Tanishq: "9 out of our 10 customers prefer designs in terms of jewellery." Every season, the Rs 3,000-crore company introduces a new collection developed by its in-house team of designers. "We also promote our designs through cinema. Actress Rani Mukherjee adorns our jewellery in the movie Paheli. The soon-to-be-released Jodha-Akbar too will have our collection," he says. Earlier, Madura Garments had promoted its range of formal wear for men and women through the film Corporate.
Handbags and purses have also undergone changes over the years. From being a utility item, these have assumed the status of a style statement. Global brand LVMH (Moet Hennessy Louis Vuitton) is looking to acquire 20% stake in the Pondicherry-based leather goods maker Hidesign. Dilip Kapoor, Founder and MD, Hidesign reveals: "We will retain our brand identity and not be the outsourcing destination for LVMH. My team of nine designers is working closely with the team of LVMH to develop new collections."
The old idiom ‘A man is best known by the shoes he wears,’ stands true even today, as shoemakers Bata, Liberty, M&B, Nike, Reebok, Mirza Tanners and Adidas invest heavily in the Rs 11,000-crore domestic shoe market. Points out Bhupinder Kharbanda, ex-Head of Design, M&B: "The concept of having multiple pairs of shoes of different designs for different occasions is new in India. People are now paying more for a better-designed product than they were five years back. However, we are still at the tip of the iceberg."
With international and Indian consumers becoming more design-savvy,
the dynamics of design is sure to change in the coming times.
