Food Processing – Supply Chain Conflicts and Food Security (Video)

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February 9, 2017

This is a recording of a short, candid talk by Devangshu Dutta (chief executive, Third Eyesight) at the ASSOCHAM’s 8th Global Food Processing Summit in New Delhi, India.

He touched upon the inherent conflicts in the food supply chain we need to be aware of before formulating policies and practices, and strongly urged everyone to look at food security from the point of view of sustainability and risk-management. (Transcript below.)

TRANSCRIPT:

I’ll just take just few minutes to share a few thoughts with you on the sector.

The session was titled “Make in India: Platform for investment opportunity in food processing sector and 100 percent FDI in food retail”.

As we all know, whoever’s been following the news, there’s all this buzz around FDI into retail being allowed, not only for physical retail but also for e-commerce companies, and there are two very strong sets of drivers. On the one hand is the likes of Walmart and Tesco and people who want to actually set up food retail. and you know food is the largest consumption in our basket of consumer products, so they obviously want to tap into that demand. The second side is Amazon and the likes of it where again you know there are no barriers in terms of location, you are buying on the net, tapping into a consumer who’s looking for convenience, and there you need to actually service that demand with food and grocery which is packaged, so there is obviously a very strong push a very strong lobby for that to happen. At the same time there’s a very strong lobby against that because there are domestic retailers who invested a lot of money over the last maybe 10-15 years in setting up a lot of retail stores. In the recent years there have been a few e-commerce companies that have come up as well with domestic and foreign capital. So there is this conflict.

In this whole ecosystem of food production and supply and retail there are some fundamental conflicts that we need to be aware of, before we get into any kind of thinking about what should be done with the sector.

First of all is foreign vs. Indian; this is a conflict which is there the world over, and I think we will see that increase in Europe, in the US, and in other places. You know, “local versus foreign” is a conflict which we will keep seeing. I think we have moved a little bit away from that within, not only this government’s regime but also the earlier government’s regime, where we started to welcome foreigners back into the country and said, “let’s do trade together”.  I think it’s important to keep it in mind that local interests will always always be take predominance over foreign interests. If any government comes in and says, “I will give foreign interests precedence”, it’s going to not be there in power the next time, so that’s something which is to be kept in mind.

The second is this is a conflict between large and small…large retailers versus small retailers. A Reliance had to close shops in Uttar Pradesh, had to close shops in Kerala because they were impacting small retailers. So it’s not just about Walmart impacting small retailers, it’s also about the large Indian companies impacting smaller companies.

The third conflict is between traditional and modern, and this is happening again even in farming. Indian farmers tend to follow traditional practices, there are fragmented land holdings, and then you have modern entrepreneurial farmers, you have cooperatives which are adopting different techniques, and there is a conflict which happens at that level as well. At the local level it can get hugely political and then it starts raising barriers. So if you talk about the food supply chain, it’s not a simple thing to deal with.

Fourthly, the biggest biggest conflict – and that’s not really a conflict outright because these are people who are working together – but there are differences of interests and, therefore, there are conflicts…that is between retailer, supplier and the farmer, the interests are not aligned. A retailer wants lower prices, a supplier wants even lower prices, but the farmer wants higher yield and higher prices, so that conflict, just something on account of price and commercial terms and various other things, is bound to create friction in that supply chain.

Having understood that, I think we need to also acknowledge the fact that retailers are unlikely to invest in the supply chain and in farming. Amazon is not going to set up food processing. Amazon is not going to set up farms which are contract farming. Let’s face it, even Future Group hasn’t. Future Group has set up a food park. Future Group has taken over companies which are in food production companies but Future Group has has not set up, ground-up, contract farming. They’ve tried but it’s not their core competence, it’s not even their core interest. Reliance has done a little bit, ITC has done a few things but it’s not something which is fundamentally their business. They’re retailers, that’s what drives them, so what they can do is they can create an ecosystem.

Let’s take the example of McDonald’s or a Pizza Hut or say a Domino’s. These are foreign quick service restaurants which have come into the country. A McDonald’s had to actually build its supply chain from scratch to get the potato fries, to get the burgers done, to get the patties done and they created an ecosystem, in some cases they invested or co-invested with Indian partners, but in most cases they encouraged Indian partners to talk to their partners from Europe, US etc.

When we talk about people like Future Group, it has done a lot in being a platform for Indian companies to come on board and sometimes international companies as well. They’re a platform for them to launch and grow their business. So what the retailer can do is create the ecosystem, create the demand pipeline. Beyond that it is up to the food producer, it is up to the farmer, to take that opportunity and move on. It’s not for the retailer to handhold from scratch all the way to selling on the shelves.

In terms of the practices that we need to adopt I’d like to say this, that while we keep talking about international standards, food is a very local thing. We may be going into a world where 50 years down the line all of us will be having a white-gray powder which has no flavour and that’s what the future of food…I hope not!…The fact is the food is a very local thing because of tastes, because of cultures, because of the environment that you are in. And we are actually losing a lot. People who are here from farming, if you look back not, even very far – maybe 20-25 years – certainly, if you look back 50 years, what was being farmed we’ve lost probably 30-40 percent of that produce, because there is no demand, because it is difficult to grow, because it’s seasonal, because it is difficult to process,  difficult to sell. If you go to the sabziwala today versus if we went to the sabziwala 10 years ago, you will find that the variety of produce has actually diminished. So while we are talking about food processing, what is happening is…and I’d like to mention this…You know, sometimes we come to conferences like this and we run our businesses, we run with a split personality. We do what is convenient for the business, we do what is good for the business in terms of cost, in terms of ease of processing, in terms of ease of selling etc. When it comes to us as consumers, we want fresh, we want variety, we want flavor, we want colour, we want all of it. Why do we have the split personality? Why can’t we actually combine the two and do what is right for us as consumers, our children as consumers, the environment, and the future as well?

Sustainability is should be a big driver and we forget that the kind of food processing which is going on right now, by and large the kind of plants which are being put up, are based on technology which was developed in North America and Europe between 1900 and say 1960-70. That’s been the most wasteful part of the last century in terms of energy, in terms of water, in terms of labour, in terms of anything. It’s resource intensive. Now imagine even if 20% of India – over 200 million people – started to live and depend on that kind of a lifestyle and that kind of an industrial structure! This country will be finished, certainly! The world would be finished! We cannot do that, so we’ve got to do stuff which is good for us as consumers, the environment as a whole, and good for the business. It can’t just be one. We cannot be uni-dimensional in our thinking.

Last point: I think diversity is a very, very important part of the food supply chain and diversity means that there are “many”. We tend to look at large companies as being the standard and, therefore, large being good. But the fact is that if you take food which is an integral part of our lives…You cannot live without air, you can live without food and water for a few days, you can’t survive. You can live without clothes for your entire life.

If let’s say the food supply chain and even the processing, the acquisition and everything else, if it gets consolidated beyond a certain point it becomes extremely vulnerable. Anybody who’s looked at financial services risk management or any any kind of risk assessment, you would know that it is good to have a diversified basket. From the point-of-view of farming, from the point-of-view of manufacturing, from the point-of-view of retail, consolidation beyond a certain point is actually detrimental to quality and to safety. So if you’re looking at food safety, if you’re looking at sustainability, we need to actually encourage many, many, many entrepreneurs, many small businesses.

For that…I don’t know if anybody is there from the government sitting in this audience…but Make in India will only happen if we make it easier. Today all of us who are in business know that India is one of the most hostile environments to do business of any sort. It does not matter whether you are in manufacturing, whether you’re a truck driver, whether you are running a consulting business. With all the regulations…we don’t lack regulation, there’s too much regulation…we don’t have an environment where it is easy to do business. If that can happen we will find that we will have an extremely diverse and vibrant ecosystem which will grow and we can actually be the standard, the international standard which can be followed by everybody else. I think what we should do is try and get the government to work in that direction. If we can do that, if that’s one outcome we can achieve out of this conference I’ll be really, really, really happy.

Thank you so much!

For QSRs, India isn’t a quick-fix but a long game

Devangshu Dutta

December 27, 2016

Dominos India

When American fast food standard bearers McDonald’s and Domino’s Pizza stepped into India in the mid-1990s, the market was just ripe enough for take-off.

McDonald’s and later Domino’s Pizza can be credited with not just growing the consumer appetite for fast food but also for fostering an entire food service ecosystem, including fresh produce, baked goods, sauces and condiments, and cold chain technology.

India has been typically difficult for business models driven by scale, replicability and predictability. The customer is price sensitive, operating costs are high and non-compliance of business standards is a frequent occurrence. In this environment, these brands have reinvented the meaning of meals, snacks and treats.

Their growth has set the stage for other international players and also set business aspirational standards for Indian food entrepreneurs and conglomerates alike.

Product experimentation has also been an important part of their success; it keeps excitement in the brand alive and help improve footfall. However, how far a product sustains and whether it becomes a menu staple can’t be predicted accurately. New products also need significant investment in both supply chain and front-of-house changes in standardisation-oriented QSRs, so the new product launch cannot be undertaken lightly. This is one reason these successful QSR formats don’t overhaul their menus drastically but make changes incrementally.

For these market leaders, future scale and deeper penetration is only feasible with higher visit frequency. For growth in middle-income India, they need to become a significantly cost-competitive option to be seen as more than a ‘treat’ or celebration destination.

So, while both McDonald’s and Domino’s Pizza have invested significantly in Indian flavours and menu offerings, perhaps it’s also best for them to reconcile with the fact that there will be a significant part of the consumer’s heart, stomach and wallet that will remain dedicated to indigenous offerings.

In a global environment that’s turning hostile to fast food, India isn’t a quick-fix growth market, but it’s certainly one to stay invested in, for the longer term.

And I have no doubt that as much as these companies aim to change India, over time India will also change them.

(Also published in Brand Wagon, The Financial Express)

Heat Spots in the Cold Chain

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August 1, 2016

The cold chain sector is expanding quickly due to increased investments from Indian and international organisations going towards both modernisation of the existing facilities and establishment of new ventures. Over the last few years cold-chain has gained a buzz, finding its way not only into industry presentations but also into budget speeches in Parliament. It is widely reported that India needs to build more cold chain capacity, especially to reduce the enormous amount of waste of food products in the chain from farm to consumer.

India is one of the largest producers of agro-products i.e. fresh fruits and vegetables, milk and related products, fishery products and meat. However, due to lack of the required facilities, spoilage of products is comparatively high.

In recent years, significantly incentivised both by business logic and by tax breaks, there has been a fair amount on investment in cold storages. However, the sector is still highly fragmented; there is inequitable distribution of cold storages, interlinkages between storages is also very poor and many facilities are also operating below capacity.

The National Centre for Cold Chain Development (NCCD) reported that as of December 2014, 70% capacity was utilised, where the total number of cold storages available in India was around 5300 and approximately 6000+ vehicles, providing about 30 Million Metric Tonnes capacity of storage. Most of these facilities are located in the states of Uttar Pradesh, Uttaranchal, Punjab, Maharashtra and West Bengal.

Storage and transportation capacity is only the very first step in strengthening cold chain capabilities but, unfortunately, that is where many entrepreneurs and investors in cold-chain are stopping their thought process. Many players in the industry have been using obsolete machinery, and storages are majorly for a single commodity. The result, predictably, is underutilisation of capacity or mishandling of food products leading to operational problems, cost escalations, spoilage and other losses. Just to mention a simple example that many seem to forget: even domestic refrigerators have at least 3-4 temperature-humidity zones: the freezer, the chill tray, the large cool area, and a vegetable tray. In comparison, many cold stores are built without adequate thought to the various influencing factors. It’s important to recognise that in developing a cold chain capability, the products to be handled, the environment in which the cold chain will operate, not only storage but intake, handling and transportation, all have a role to play.

With a fragmented operating environment, both in terms of production as well as distribution, often a single investor or company may not be able to create the business logic to set up a cold chain facility. Collaboration between multiple individuals and agencies may be a way out.

An example of successful use of integrated cold chain is the Tamil Nadu Bananas Growers Federation. Banana growers in the Tamil Nadu belt were diminishing due to lack of appropriate storage facilities, and farmers were forced to sell produce at throw away prices. With introduction of integrated cold chain solutions, the federation of farmers from Tamil Nadu has now managed to gain a hold of the banana market again. They have managed to increase their income manifold by growing better qualities and storing bananas for longer period of time in the integrated cold chains.

Cold chain logistics in the true sense begin with harvesting and post-harvest handling, going on to controlled atmosphere vehicles, cold storages, sorting and grading facilities, modern pack houses and controlled atmosphere retail stores. Most importantly, even operational know-how is something that is not made part of the investment plan, leading to unviable, unprofitable cold chain facilities.

The focus should be to integrate the cold chain, and also build capacities in all areas. As per NCCD (December 2014), India has approximately 6,000 reefer vehicles against a requirement of 60,000. Similarly the number of pack houses available is 250 and the projected requirement is for 70,000. Hence, the need for a more balanced investment in terms of modern pack-houses, refrigerated transport units and ripening chambers is evident and will bring far better results, both operationally and financially.

In addition, there has to be a significant improvement in developing the know-how and skills sets available to the sector. While the country is faced with large-scale unemployment annually, a well-thought out development of the cold chain sector including due investment in knowledge-based initiatives can create significant numbers of better paying jobs around the country, especially in rural areas from where the produce is sourced.

With development of the consumer and retail sector supporting its growth, integrated cold chain development should be at the top of the agenda for government as well as for private business.

Café Coffee Day – steaming or sputtering?

Devangshu Dutta

April 24, 2016

(Published in the Financial Express, 10 May 2016)

In about 20 years, Café Coffee Day (CCD) has grown from one ‘cyber café’ in Bengaluru to the leading chain of cafés in the country by far.

In its early years, it was a conservative, almost sleepy, business. The launch of Barista in the late 1990s and its rapid growth was the wake-up call for CCD — and wake up it did!

CCD then expanded aggressively. It focussed on the young and more affluent customers. Affordability was a keystone in its strategy and it largely remains the most competitively priced among the national chains.

Its outlets ranged widely in size — and while this caused inconsistency in the brand’s image — it left competitors far behind in terms of market coverage. However, the market hasn’t stayed the same over the years and CCD now has tough competition.

CCD competes today with not only domestic cafés such as Barista or imports such as Costa and Starbucks, but also quick-service restaurants (QSRs) such as McDonald’s and Dunkin’ Donuts. In the last couple of years, in large cities, even the positioning of being a ‘hang-out place’ is threatened by a competitor as unlikely as the alcoholic beverage-focussed chain Beer Café.

CCD is certainly way ahead of other cafés in outlet numbers and visibility in over 200 cities. It has an advantage over QSRs with the focus on beverage and meetings, rather than meals. Food in CCD is mostly pre-prepared rather than in-store (unlike McD’s and Dunkin’) resulting in lower capex and training costs, as well as greater control since it’s not depending on store staff to prepare everything. However, rapid expansion stretches product and service delivery and high attrition of front-end staff is a major operational stress point. Upmarket initiatives Lounge and Square, which could improve its average billing, are still a small part of its business.

Delivery (begun in December 2015) and app-orders seem logical to capture busy consumers, and to sweat the assets invested in outlets. However, for now, I’m questioning the incremental value both for the consumer and the company’s ROI once all costs (including management time and effort) are accounted for. The delivery partner is another variable (and risk) in the customer’s experience of the brand. Increasing the density through kiosks and improving the quality of beverage dispensed could possibly do more for the brand across the board.

The biggest advantage for CCD is that India is a nascent market for cafés. The café culture has not even scratched the surface in the smaller markets and in travel-related locations. The challenge for CCD is to act as an aggressive leader in newer locations, while becoming more sophisticated in its positioning in large cities. It certainly needs to allocate capex on both fronts but larger cities need more frequent refreshment of the menu and retraining of staff.

An anonymous Turkish poet wrote: “Not the coffee, nor the coffeehouse is the longing of the soul. A friend is what the soul longs for, coffee is just the excuse.” There are still many millions of friends in India for whom the coffee-house remains unexplored territory, whom CCD could bring together.

Opportunities & Challenges for Dutch (Semi-)Processed Food Companies in India

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May 12, 2015

A seminar was organised on the 12th of May in Zeist (the Netherlands) on “the Opportunities & Challenges for Dutch (Semi-) Processed Food Companies in India”. Highlights of a report and other insights were presented by Devangshu Dutta, chief executive of Third Eyesight. Other entrepreneurs who also shared their experiences in India, and the Dutch agricultural counsellor, Wouter Verhey, was present at the event.

The sessions included:

  • Welcome and opening remarks by Wouter Verhey, Agricultural Counselor India & Sri Lanka at the Embassy of The Netherlands in New Delhi.
  • The market for processed food in India by Devangshu Dutta of Third Eyesight, India.
  • Entrepreneurial challenges in the food sector in India by Peter Uyttewaal, Partner India of Larive International. The characteristics and strengths of the Dutch Food and Grocery Industry by Sekhar Lahiri of FNLI.
  • Discovering the Pot of Gold in India by Sumit Saran of Future Consumer Enterprise Limited, India.

You can download a summary of the report via this link: India – Opportunities Challenges for Dutch Processed Food Companies