admin
September 14, 2007
THE GROWING BLIP ON SMALL SCREENS
It is just about taking off in India, but mobile marketing is getting a lot of attention. A special report on how marketers are planning to invade your mobile phones – and why.
The soft taps of thumbs on mobile phone number pads are getting louder for Rajiv Hiranandani, co-founder, Mobile2Win, a digital and mobile entertainment company. "Clicks in this medium are 5-8 per cent and outperform clicks in the internet," he says. He is talking about the short message service (SMS), the most widely-used messaging vehicle in mobile marketing. Mobile2win provides information and entertainment ranging from news, jokes and horoscopes to sports scores, stock info and mobile games through the ubiquitous headphone. Hiranandani is not the only one who can hear opportunity knocking. Telecom service providers too are hungrily looking at a market that can only explode – just 23 per cent of India’s 1.1 billion-population owns a cell phone. Marketers and advertisers are equally excited. So are media companies. But what exactly is mobile marketing?
As a generally-accepted definition, mobile marketing is the process of sending spam free, personalised, permission-based marketing messages to receptive consumers through their cell phones. Mobile marketing can be either push-based which refers to communication such as SMS and alerts sent to mobile phones. But to send pushbased messages, firms should have the consumer’s permission. The pull-type refers to information a user requests from a service provider or advertiser. While mobile marketing today is almost totally SMS-based, the increase in the number of large-screen phones and MMS enabled phones will shape the industry soon.
Mobile technology is witnessing new applications and services. This combined with the rapid integration of the internet, mobility and communications at the device, service and transport levels has created a new set of business opportunities. For consumers, mobile phones have become much more than entertainment handsets. Already experiencing a high-end electronics experience from state-of-the-art digital cameras, camcorders and game consoles, they are beginning to expect the same on their mobile phones – a broad range of compelling, interactive content. Therein lay the opportunity for marketers and advertisers. As a medium, the mobile phone screen has the potential to support brand building and strengthen consumer relationships. And marketers have been quick to cash in. One of the early selling points was the possibility of generating immediate responses from consumers at any time and from any location. But marketers and advertisers have proceeded with caution because nothing puts a consumer off than indiscriminate spam.
Operators are increasingly looking for applications that attract users to avail of the services offered. Value added services (VAS) have begun to add significantly to the bottom line of most telecom operators. Almost 10 per cent of an operator’s revenues come from VAS services and this figure is all set to grow. Business generated from VAS rose from Rs 2,851 crore in 2006 to Rs 3,700 crore in 2007 – up by 30 per cent. Marketers, agencies and media companies, especially mobile telephone service providers are facing a new environment. The mix of media channel has shifted from the one-way broadcast channel to two-way communication. Consumers, today, not only want to talk back to marketers and interact with marketing messages, they also want to share this message amongst like-minded communities.
This shift brings in more direct dialogue between marketers and consumers and is being facilitated by telecom companies. In the past, marketers could never get real-time feedback from end-users. Firms are developing powerful branding in the mobile arena. They are working out ways to clearly state how their business is relevant to the mobile world and how they can reach their customers, partners and suppliers, whether through clever messages or advertising. So far, most of the advertising on cell phones has been from phone companies themselves. That is changing. Car-makers, movie studios, financial service providers, FMCG companies and others are testing the waters vigorously. Research firms estimate the mobile advertising market at Rs 35 crore (not including revenues of media companies from SMS contests and the like) for 2007 and grow at 40 per cent over the next few years. That revenue is going to have to come from more areas other than the highly popular SMS, ringtones or wallpapers.
For now, mobile marketing – everything from ads to text-message voting campaigns seen on shows such as Indian Idol – remains limited in its appeal to advertisers. Mobile marketing is the best option for brands which wish to connect to the youth. "But currently all the major advertisers just allocate, say, 1 per cent of their marketing budgets to mobile marketing because of the limited options within the medium," says Viren Popli, senior vice president, STAR India. But he thinks it will get better. "As a medium, mobile is powerful. I can reach you wherever you are because the mobile is with you all the time," says Chaitanya Nallan, CEO, Gingersoft Media. The company owns mGinger, a service that provides advertisements on mobile phones. These are targeted at consumers who have opted for the service. When it comes to communicating with consumers on the move, the mobile phone is the most ubiquitous outlet. The different ways that mobile marketing can be used includes direct response, media interactivity, content downloads, sales promotions and coupons, advertising, customer service, and customer relationship management. So, what works best in a country like India?
IT MAKES GREAT BUSINESS SENSE
India has 267 million mobile phones. And the market is growing at the rate of five million phones per month. As a result, companies are quite busy leveraging the medium.
This dynamic platform has paved the way for the new credo: from massmedia push to mass-customization pull – pull in anyone, anytime, anywhere. Therefore, it has the potential to grow rapidly, providing brands, agencies and marketers the opportunity to connect with consumers beyond traditional and digital media. Onground reality could be different. And many questions arise. What are the mobile media channels or formats available to advertisers? How does a marketer optimise the effectiveness of a campaign and strengthen consumer satisfaction?
There are many sectors which are using the advantages a mobile phone offers, to good effect. The financial sector is one. Says Vishal Gupta, associate director, marketing, Aviva Life Insurance: "We have a database of policyholders to whom we send SMSes to remind them of due dates, initiatives and offerings." Just recently, makaan.com, the People Group’s online property site announced the launch of Makaan Mobile. According to the company, it is the country’s first pure SMS-based real estate mobile application. Developed by Mauj Mobile, the application is aimed at enhancing the overall consumer experience for property sellers who currently need to log on to the internet either to list their property or to view responses from interested buyers. Now, they can do it on their hand phones. Events like the IPL cricket series are heavensent opportunities for players in this arena. Indiatimes, one of the oldest in the field, used its short-code and asked people to predict the winner of the day by calling 58888 or sending an SMS on 58888 for the chance to win Rs 58,888 everyday. Indiatimes has in its portfolio, multimedia messaging, dating, chatting and email – all on mobile. Others are getting into the mood. Take Pizza Hut. For the first time, the pizza maker launched a mobile campaign in Delhi, Mumbai, Bangalore, Chennai, Hyderabad and Pune. Executed by mobile2win, the campaign includes promotions on both SMS and the mobile web (works on sets which are GPRS-enabled). The objective was to get people to register for the VIP Club, a virtual club, either on their mobiles or its WAP site. It entitles members to free coupons and a chance to win prizes and discounts. There are legal issues connected with SMS marketing. Only a few marketers follow the concept of permission-based messaging, whereby the customers register themselves with the advertiser pointing out their areas of interests.
The Telecom Regulatory Authority of India (TRAI) has issued stringent norms on tele and SMS marketing to avoid companies from spamming consumers indiscriminately. It has set up a national level registry where customers who do not want to be disturbed can register their numbers. All marketers need to adhere to this request. But if a mobile user is not registered on TRAI’s Do-not-disturb list, s/he is likely to be bombarded on the phone. The danger? It could put them off any kind of message from any marketer or brand.
Many firms are coming around and are taking care not to alienate consumer as they realise the value of the mobile as a direct medium. Especially because it is well-suited for a vital role in fully integrated cross-media campaign plans, including TV, print, radio, outdoor, cinema, online and direct mail.
One reason why the effectiveness of mobile marketing is pegged so high is because of its ability to reach the target demographics throughout the day instead of a particular time or when they are engaged in a specific activity – like watching TV. The other reason is that mobile marketing can leverage other media such as including a SMS short code on any other type of campaign (for instance, a TV ad could say, ‘SMS 12345 to get free information’). SMS has proved to be a boon to telecom operators since they get to take away a chunk in the revenue sharing. The deluge of responses – or voting, as the industry calls it – from viewers to shows such as Voice of India or STAR Parivaar Award are proof. "But I am afraid that if newer shows or new formats have to work, they have to put in more energy or think of innovative methods to seek higher consumer engagement," cautions Popli of STAR because the excitement or buzz around the SMS voting is sure to die down. The biggest reason for this mobile marketing push is that it is cost effective – the message reaches the audience directly. However, despite the growth potential, most brands don’t have a specific marketing strategy for mobile – it is yet, to be considered a serious supplement to conventional media plans. The most effective forms of messaging will be those that revolve around activities that build relationships with customers and deliver something of value to them, based on their interests and demographics. The marketing techniques in this scenario will depend on the software and device infrastructure, definition of the customer profile, data acquisition and customer segmentation. There are formats like WAP (wireless application protocol) – by which the user can access the internet – developing with the availability of new-age phones. But the biggest impediment is that the advertiser has to partner with mobile operators to deliver the message.
THE HOW AND THE WHY
The universe of mobile phone subscribers is the newest mass media platform. But techniques which succeed on television or the internet can’t simply be transferred to the phone. On TV as well as the internet, advertising grew alongside – and with – the genre. In this case, the marketer has to hit the ground running. The budding channel carries outsized expectations. "There will be more event and community specific campaign initiation," says Harish Bijoor, a brand consultant. "There will be more direct targeting of the consumer through various channels – age, demographics, individual statistics and preferences," he adds. One of the big boys in this space is mKhoj. It calls itself a ‘mobile advertising marketplace’ that gives advertisers a targeted way to reach out to consumers directly on their cell phones around the globe. It also claims to give mobile publishers a way to monetise their traffic. Advertisers can use this precise medium to create a strong brand and generate leads. Publishers use mKhoj to get contextual ads for its customers. But, what are the options available to marketers currently?
Nothing reflects the impact of the SMSvoting frenzy more startlingly than Indian Idol, the show that went on Sony Entertainment Television in October 2004. Between November 2004 and March 2005, it saw more than 55 million votes via SMS, each message cost the voter Rs 3. It was boom time for the mobile operator followed by the channel. A close cousin to SMS is MMS or multimedia messaging service. MMS supports graphics, pictures, audio and video. As a result, it provides mobile marketers with additional tools on this format. "But the biggest limitation is the MMSenabled handsets used by mobile-phone users," feels Raj Singh, co-founder and executive director, ActiveMedia Technologies. This perhaps is the reason for the popularity of SMS, which is simpler to use and can be sent in the regional languages too. "Also," says Gupta of Aviva Life Insurance, "Since all SMS replies are track-able, evaluating effectiveness is much better this way."
The benefits
1. Extending marketing communications beyond traditional media
2. Complementing traditional media in order to increase awareness
3. Allowing companies to target specific audiences
4. Encouraging the audience to take action as soon as it sees an ad or promo, rather than waiting until later.
5. Providing opportunities to generate revenues every time users interact with messaging.
THE 5C IMPACT FOR SUCCESSFUL MOBILE ADVERTISING
Content, cross-media marketing, campaign management, customer database and carrier cooperation are vital for the success of mobile advertising efforts. Though, at the moment mobile advertising value chain is fragmented. For mobile marketing to succeed, business models that can capture the synergy of two existing industries, advertising and telecommunications must be conceived. In any future sustainable business model, all players will have to reach a consensus on the structure of the value chain and on the importance of each player in that value chain.
WAP and Mobile Web
Wireless Application Protocol (WAP) is a technology platform used to create websites that can be easily accessed from mobile handsets, especially those with a small screen and limited processing power. Today, WAP 2.0 is standard supported by most mid-level models. Moreover, WAP allows mobile phone users to access a wide range of content and services, including streaming audio and video. Considering that WAP supports banner advertising, traditional marketers see it as the closest clone to internet. Says Hiranandani of mobile2win: "With news and information being the two most widelyaccessed features by WAP-users, marketers need to look at producing content focused to go with this genre." Even so, wallpapers, games and applications are the most widely-used mobile content that is delivered using WAP-push. "The trick with WAP-enabled services is to keep the number of steps taken to achieve the end-result to the minimum," says Singh. Even assuming that mobile internet access is becoming easier, the cost of accessing WAP still does not justify reasons for cell phone users to opt for these. Once costs of services fall further, this one has the potential to sweep in the internet users from PCs to phones.
The benefits
1. Mobile WAP can be a fairly cost-effective way to extend mobile and online marketing efforts.
2. It can support consumer’s needs to browse and pre-select key content on the desktop for access later on
3. WAP banner advertisement is now a viable way to reach consumers
4. A WAP page can be pushed to a consumer’s phone, making the site discovery process easy
Downloadable Content
Downloadable content is often used to entice consumers to participate in a mobile marketing campaign. For instance, the download may be a song, a ringtone, theme or wallpaper, video, game or any other application. "Technology to support this format is still inaccessible to the critical mass, but it is encouraging to note the number of people using GPRS," says Manoj Dawane, CEO, Mauj Telecom. GPRS (General Packet Radio Service) is a technology necessary for WAP to function on phones. "When using mobile campaigns brands need to educate consumers about how to participate in such events to get the best results," feels Jagdeep Kapoor, CMD, Samsika Marketing. This brings in its share of complications. For instance, it demands download instructions that are easy to understand. Downloadable content has been the next most successful tactic for mobile marketing, after SMS. But there are technology issues which force a tie-up between mobile providers and marketers. There are adaptability problems when it comes to handsets. Says Gupta: "Sometimes, it is effective to tie up with an operator or a third party service provider who will manage the campaign across telecom service providers that is supported across handsets." But, experts agree that simplicity in mobile is the key to effective mobile marketing. That’s the one lesson that can be learnt from SMS-driven VAS.
The benefits
1. Relatively inexpensive for certain type of content, especially when you have a web campaign ready.
2. As a mobile phone with cutting-edge is hip, the brand reaching this class is perceived to have a higher recall.
3. Easiest to supplement an existing web campaign.
Though the above are the most widely-used delivery mechanisms to reach consumers, technology helps the latter receive and manage some of the content via Bluetooth and infrared delivery mechanisms. Two years ago, Lee became the first brand in India to use Bluecasting – marketing through Bluetooth technology – to promote its new catalogue. Bluetooth devices were installed in Lee’s stores in Mumbai and Bangalore. Walking by, the customer’s phone beeped a simple quiz in which they were offered discount coupons. Lee claimed to have a click-through of 27 per cent. Makemytrip, Bookmyshow and STAR Plus are a few who have done Bluetooth marketing. Technology-enablers help manage mobile phone content on a laptop or desktop. The challenge here is to make the consumer aware of these technologies. Considering that a mobile ad can reach the consumer at a fraction of the cost of a billboard, marketers need to do the needful and, at the same time, make sure that they don’t alienate consumers.
PUTTING THE JIGSAW TOGETHER
Traditional advertising players such as ad and media agencies have not been the first movers in this category. So, who is involved?
On the face of it, it would seem that there are two different and quite distinct components making up the mobile marketing industry – marketing-advertising and telecom. But it is actually the mobile marketing firms and technology providers who have driven the emergence of this medium.
Mobile marketing was born of the internet revolution. Today, there are more mobile phone subscribers in India than there are landlines or even TV sets. "With the mobile phone becoming a primary means of communication, not only for voice but also for digital services, email, digital photos and navigation, it is an important medium for marketing," says Singh of ActiveMedia. While traditional advertising and telecommunications are well-established and have their own revenue models, mobile marketing and advertising has failed to integrate these two different industries. To analyse the mobile marketing medium, it is necessary to understand who the key players are. According to the MMA Global (an industry trade association for companies involved in mobile marketing), the mobile marketing ecosystem comprises four interconnecting strategic spheres – product & services (brands, content owners and marketing agencies), applications (discrete application providers and mobile (ASPs) Active Server Pages technology), connection (aggregators and wireless operators) and media and retail (media properties, "brick ‘n’ mortar" and virtual retail stores).
"However," says Devangshu Dutta, chief executive, Third Eyesight, a Gurgaon-based marketing consulting company, "The main players in the value chain are the advertisers, the mobile marketing companies, the media owners, the traditional ad agencies, the network operators/carriers, the technology providers and the customers." The mobile operator has a unique place in the mobile marketing value chain. Never before has one player had such a big influence on the development of a new marketing channel. "It is as if the print shop would rule the world of print advertising," comments Singh of ActiveMedia. To understand mobile marketing better, it is pertinent to consider three segments that drive it – the marketing, connection and the enabling clusters. "Integration across these helps get a clear sense on how each fits into the value chain," says Dutta.
The players in the marketing cluster focus on, well, marketing. Their activities include customer identification, managing the brand, promoting a product or service, creating the content that is disseminated to the end-users, developing the applications used to stage, launches and report on mobile marketing campaigns.
This cluster consists of application providers, network aggregators and telecom operators who create the ‘medium’ used to connect and deliver mobile marketing content to the enduser. "This cluster manages the network infrastructure, thereby connecting the marketer with the customer, and enables the one-to-one relationship which is the hallmark of mobile marketing," sums up Dutta.
Overall, the role of the telecom operator is the most important one. For instance, as enabler, the mobile operator needs to demonstrate his reach for advertisers to be interested in the media. In order to make this happen it is very important that telecom operators strive to set common commercial and technical standards, not just nurturing their own revenues.
In the initial phase, the value-added services from mobile operators were restricting. They were on offer only to those on their networks. "The services are now uniform across operators, with some customisation, but the look and feel is uniform," says Hiranandani. For the service provider to grow, standards and formats have to co-exist for the development of the industry.
As advertisers, with access to a wide customer base, mobile operators have demonstrated their effectiveness. "From simple billing plans to pushing new VAS, they have demonstrated it all for marketers to be convinced of the advertising success," says Dutta. After all, if the mobile operators themselves aren’t using mobile marketing, who else would?
It is dawning on mobile operators that there might be a new revenue stream in mobile advertising. Their portals will have to provide the best reach and detailed segmentation information for advertisers to make the latter interested.
The mobile operators’ contribution is necessary to continue to drive mobile marketing and advertising forward. But to reach full potential, they must not only get the above three roles working internally but must also work together.
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.”
