Spilling the beans

Meghna Maiti, Financial Chronicle

Mumbai, August 16, 2013

On the evening of July 13, an Apna Bazaar store, opened by the Maharashtra government in the Mumbai suburb of Andheri, ran out of vegetables in two hours flat. Ditto was the case with 100 similar outlets set up by the state government to sell vegetables at prices a third lower than the market.

Around the same time, in the Inorbit mall in nearby Malad, a supermarket was buzzing with shoppers. The aisles selling fancy imported foodstuff were busy but those selling fresh produce were nearly empty.

The contrasting scenes succinctly capture how futile organised retail’s attempts to sell daily needs like fruit and vegetables has been. Most organised retail ventures have none of the three pillars of the fresh produce business: direct procurement from farms, transport to outlets and cheap prices (at least cheap enough to draw in volumes).

For most, the back-end of the supply chain go no farther than local mandi or wholesale market. That’s why government-run outlets set up across Maharashtra, Kerala and Tamil Nadu to sell fresh produce at cheap rates are doing roaring business where organised retailers have failed — though both source produce from wholesalers such as the state-run agricultural produce market committees (APMCs).

Farm-to-fork is a strategy much vaunted but not practiced. Even farmers prefer to sell to wholesalers and in mandis where they get better prices. Mandis get business from organised retailers by offering them discounts.

Sanjay Pansare, director of Maharashtra APMC, says wholesalers offer organised retailers reasonable credit terms.

In states where the APMC Act is not in force, organised retailers are free to buy from farmers. But as Devangshu Dutta, CEO of Third Eyesight, another Delhi-based consultancy, says, the organised retailers buy from the mandis.

In western markets, produce is engineered for a long shelf life and transported in controlled temperature. Indian retail chains have yet to scale up so as to do this. “Modern Indian retailers sell highly perishable vegetables and fruits that may have been badly handled in the farm-to-store chain,” he adds.

Very few Indian retailers have successfully managed the farm-to-fork chain, according to Thomas Varghese, former CEO and MD of Aditya Birla Retail, and now head of the group’s textile business. Mother Dairy’s Safal is one of them. Organised retailers find it difficult to match the streetside vendor’s flexibility in terms of pricing, credit, he says.

The traditional farm-to-fork model is fraught with redundancies and inefficiencies. The market environment is hyper- competitive.

The local small retailer is no pushover, says Amitabh Mall, partner and director in Boston Consulting Group. This results in losses for the retailer, low price realisation for the producer and fluctuating prices for the consumer. “For the small farmer, the problems get compounded in absence of finance and technical knowhow, which limit him from growing his business,” argues Mall.

Experts say big retailers like Reliance Retail, HyperCity and Aditya Birla rely on middlemen after having failed to establish direct links with farmers. This despite the fact that Reliance Retail has set up three process centres in Hyderabad, Ahmedabad and Pataudi which cater to markets in the north, west and the east.

A Reliance Retail official, however, claimed that where the APMC Act is in force the company buys directly from farmers. Elsewhere, it is problematic. So is the farmer’s commitment. When market prices are low, they want to sell to the company but when prices are high, they sell in the mandis.

Plus, setting up collection centres close to the farms is not easy for lack of electricity and IT connectivity. “Then there is political pressure, vested interests, villagers campaigning against us and spreading rumours,” said the official who chose to remain anonymous.

Even with all this hassles, Reliance Retail, if this anonymous official is to be believed, has a fresh produce business contributing 20 per cent of its total revenue. In absence of official comment from the company, how truly the anonymous official’s claims reflect the reality is anybody’s guess.

Clearly, the grand hope expressed in the economic survey for logistics with forward and backward linkages to develop modern retail, agro-processing and cold chains has not materialized.

In Aditya Birla Retail too the farm-to-fork strategy has hit a roadblock. The company had decided to use the network of the Birla Shaktiman Krishi Seva Kendras and network of fertiliser outlets to source produce.

Part of the plan was to supply seeds and nutrients to farmers so that they could get better prices by selling produce in the company’s retail outlets or directly to their supermarket chain More. Well, things are not going the expected way.

“Back-end, logistics need huge investments. It takes time to make money (in this business),” rues Pranab Barua, business director for apparel and retail of the goup.

Back-end is where success lies. Walmart, the immensely successful American chain, is still in the process of investing in the back-end in India. To begin with, it is trying to make back-end supply chain management efficient so as to, in companyspeak, ‘maximise value for farmers, retailers, and consumers.’

The accent is on reducing waste in the supply chain, so that the benefit of lower prices can benefit our customers, says Arti Singh, Walmart India’s senior vice president for corporate affairs. The idea of what the company calls ‘direct farm programme’ is similar to what the Aditya Birla company intends to do, i.e, develop a supply chain, link farmers directly to consumers and introduce best farming practices.

The programme now includes over 12,500 farmers in Punjab, Uttar Pradedh, Delhi NCR, Haryana, Karnataka, Maharashtra, Himachal Pradesh, Andhra Pradesh and Rajasthan. They are all small or marginal farmers and supply up to 20variteies of fruit and vegetables. By 2015, the number of participants will go up to 35,000, says Singh.

Walmart has tied up with a logistics company in north India to transport fresh produce to its stores by refrigerated trucks. Fresh produce accounts for nearly 30 per cent of Walmart’s sales in India.

But a consumer consultant based in Delhi thinks Walmart’s farm- to- fork strategy has failed because it has been spreading out to too many random locations too fast.

Bharti Walmart, the Indian joint venture with the Bharti Group, is into wholesale cash- and- carry business, not a front-end retail operation. It has 20 stores in eight Indian states. Fresh fruit and vegetables is critical to its business, claims Singh.

Pradipta Kumar Sahoo, horticulture business head of Mother Dairy, agrees that most retailers buy from wholesalers. Mother Dairy has been in the business of selling fruit and vegetables and partnering with farmers for long a time. It has sired 110 farmers associations in 15 cities and a huge distribution centre around Delhi.

Metro cash & carry has local fruit and vegetable collection centres in Malur in Karnataka, Vontimamidi in Andhra Pradesh, Malerkotla in Punjab, Manchar in Maharashtra and Barasat in West Bengal (Barasat). But, according to a company spokesperson, imparting collection and waste education to farmers is still a challenge.

The Future Group and Spencers of the RPG group declined comment.

Logistics is a big headache for organised retail. Both warehousing and cold chains, where they exist do so not in a chain but spurts, bedevil the supply chains of all retailers. The quality of warehouses is poor. So wastage is inevitable,” says Arvind Singhal, CEO of Technopak Advisors. Big food retailers must investment more in cold chains. Also needed are specialised third- party agencies which could also invest in the back end, he suggests.

Back-end infrastructure typically includes warehouses, processing plants, cold chains and logistical support.

The government allows organized retail to buy directly from farmers to remove the middleman and to create infrastructure. A study of the Indian Council for Research on International Economic Relations in 2008 said farmers get 25 per cent higher prices for their produce when sold to organised retail. The thrust of the five- year plans has been on creating regulated markets, warehouses and cold storages, grading facilities, processing units and collating market intelligence – but all this mainly in the cooperative sector.

Retailers who Financial Chronicle spoke to said off the record that they are forced to sell vegetables at subsidised rates. If they didn’t do that, they risked cancellation of their direct marketing licences.

“We do not have any choice but to sell at low prices. This does not increase our margins or footfalls. So vegetables earn very little revenue and almost no profit,” says a Mumbai-based retailer.

Organised retail find it an enormous task to ensure quality and maintain freshness. Equally difficult is to expose the customer to innovative technologies.

Add to that location and space, says Sushmita Paul, marketing head of Star Bazaar. Indians don’t travel big distances to do their daily shopping, preferring the nearby store or vendor.

What of kind of back-end Star Bazaar has is something she refused to share. But she did say Star Bazaar looks at buyer behaviour before laying out stores.

Nothing unique about that: every organised retailer worth his/her salt claims to do exactly that – but still ends up looking sorry.

Here’s a consumer perspective: Sohini Sengupta, 34, a software person in Kolkata, does not buy fruit and vegetables from supermarkets because they are not always fresh. Even pricewise, they are not attractive.

“Instead, it is more convenient to buy from the roadside vendors. In the evening you can actually get a better bargain,” she points out.

Piyush K Sinha, professor of marketing at IIM Ahmedabad, speaks of the shoddy way fresh fruit and vegetables arte stocked in organized chains. “Inconsistent supplies often mean stockouts are common, irritating the customer.”

Govind Shrikhande, CEO of Shoppers Stop, agrees. In the fresh produce business demand outstrips supply and gives less than 20 per cent of the revenue of HyperCity, the supermarket chain of the Raheja group.

Problems identified by Mark Ashman, CEO of HyperCity, are: getting consistent quality, getting imported quality stuff and dealing with perishable products. Getting profits too is not easy, for HyperCity, it seems. It was in a loss in April-June last year; and in a bigger loss the same quarter this year.

For all their warts, retail chains remain upbeat about the fresh produce business. Why? Barua answers: “Fresh fruits and vegetables are a key for footfalls, frequency of purchase and the image of freshness and quality a store can convey.”

For Walmart too fresh produce is critical. Its ‘best price’ modern wholesale stores have significant membership in the fruit and vegetable category from business- members such as hotels, restaurants, caterers, institutions and small resellers. “We offer them better prices too,” claims the Bharti Walmart spokesperson.

Senthil Natarajan, MD of Kovai Pazhamudir Nilayam in Chennai, is not worried about government stores selling cheap. “Our target customer is different. We cater to the middle and upper middle classes who want a variety in what they eat. The government stores sell just essential stuff,” he exults.

May be that’s the way to go. The retail supply chain needs to add variety in terms of niche products which would bring in committed customers.

(With inputs from Trushna Udgirkar in Hyderabad, Sangeetha G in Chennai, Vikas Srivastav in Mumbai, Michael Gonsalves in Pune)