Food Retail ??

Reliance Fresh stores like this one will be everywhere !! In the outskirts of Aligarh , some 185 km from New Delhi, lies the nondescript, dusty township of Hathras. From its narrow crowded roads, chaotic traffic with cars, two-wheelers and cattle jostling for space and rows of small shops spilling into the road selling everything from groceries to vegetables to cycles and pressure cookers, you wouldn’t really think that there was anything unique about it. But visit its farms, which produce potatoes, chillies and wheat, and amidst which stands the imposing green and yellow building of Choupal Saagar (an ITC rural retail initiative) some six km off the main town centre, and you’ll get the surprise of your life. Spread over 4.28 acres, the local Choupal Saagar wholesale-cum-retail store has already become the one-stop shop that acts not only as the lightning rod for the aspirations of the region’s semi-urban and rural populace, but also as a catalyst that’s taken farming some way already along the gilt-paved road of high-technology. Inside, the Choupal Saagar’s shelves are crowded with groceries (not just from the ITC stable, but other brands as well), footwear (old-style Bata, still a favourite, competes with newer labels for attention), toys, apparel (John Players), and even video and audio systems, computers and mobile phones (Nokia phones seems like the obvious choice). The sense of flux you get is a little disorienting.

A few thousand kilometers away, the Chairman of Reliance Industries, Mukesh Ambani, is busy inaugurating another of the red and green Reliance Fresh stores in Hyderabad (there are 11 in all in the city)—another milestone in what is a massive agri-initiative. The 3,000 square feet store sells a range of vegetables (many exotic from the average Hyderabadi’s point of view) — leek, celery, Brussels, sprouts, zucchini, pak choy, Chinese cabbage and imported fruit like kiwi, avocado and grapefruit— at astonishingly affordable rates. The retail chain’s motto Grahak Devo Bhava (customer is God) could well have been emblazoned on the wall behind the counter. You realise an agri-retail revolution is well and truly under way.

This comes on top of a second Green Revolution that has brought reforms to the very heart of the economic hinterland—the fields where farmers have hitherto tilled their lands untouched by the onward march of modernity. Riding this wind of change are the bigwigs of India Inc, from the Reliance Group to the Bhartis to the Mahindras to the Godrejs to MNCs like PepsiCo. All of them major corporate players "We are creating a virtuous cycle of prosperity by bringing farmers, small shopkeepers and consumers in a win-win situation" Mukesh Ambani,
CMD, RIL

with enormous resources at their disposal and who have the know-how to remake the face of Indian agriculture. More importantly, with their big-ticket investments, these entrepreneur-farmers are all set to change the fortunes of an industry that has consistently lagged the GDP growth for decades but still employs 67% of the country’s population. These corporates are looking at all aspects of this value chain, from research and development to distribution of seeds, fertilisers and pesticides to helping farmers improve irrigation and avail the latest technologies to providing market information and credit facilities to contract farming to processing to setting up cold chains and warehouses to transporting to exporting and finally retailing the produce. And they are throwing in big money in what is being described as the "farm-firm-fork’’ triangle by most experts.

Reliance has plans to launch many more in-house brands to retail its own produce rather than too much of branded products. Right now its private label for grocery is Reliance Select and it will be shortly launching Fresh Plus, a bigger version of Reliance Fresh, which is to cater to food and grocery, pharmacy and apparel. Mukesh Ambani outlines his vision for the sector, saying: "Conceptually, Reliance is creating a virtuous cycle of prosperity by bringing farmers, small shopkeepers and consumers in a win-win situation. With our new initiative, Reliance will forge strong and enduring bonds with millions of farmers and transform the relationship with consumers to a new level.’’ Reliance’s "agri-intervention model’’ envisages establishing links with farms across several acres in Punjab, West Bengal, Maharashtra and elsewhere with rural centres (district centres) providing goods for farmers and handling their produce. Its new supply chain—which will include state-of-the art cold storage and refrigerated vans for transportation—promises to be a new pipeline that would bring the produce from the areas of cultivation to Reliance’s retail outlets. By 2010, the company plans to have its footprints in 784 towns and cities with 40 more stores slated for Hyderabad alone.

Other corporates are not lagging behind. Bharti’s Fieldfresh too has ambitious plans to set up retail outlets in the country, although they remain extremely tightlipped about it. However, the future could see FieldFresh stores selling veggies and fruits at prices that are comparable with those on the streets—the local sabzi-wala. It could also have cold chains and is likely to lease refrigerated trucks for transporting fruits and vegetables. But as of now, the focus is clearly on exports. Says Rakesh Bharti Mittal, Vice-Chairman, Bharti Enterprises and Director, FieldFresh: "Currently, we are looking at exporting 10% of our total produce, which will largely happen from the Amritsar airport. The logistics for this operation are being developed. In two-to-three years, we should be exporting as much as around 50% of our produce."

ITC’s International Business Division has plans to develop Choupal Fresh, a fresh "Organised retailing is growing very rapidly. We see a tremendous future in the specialty food retail business" Adi Godrej, Chairman, Godrej Group of Companies

food fruit and vegetable initiative for sophisticated metro dwellers. Says S Sivakumar, Chief Executive Officer, ITC’s International Business Division, which is managing the Choupal initiative: "Choupal Fresh is a new and unique format. These stores operate as wholesale stores between 5 am and 7 am and is open for the retail customers for the rest of the day.’’ ITC’s vast experience in backward integration with farmers and managing supply chain dynamics, courtesy its e-Choupal rural initiative, should help make it a grand success. Says Y C Deveshwar, Chairman, ITC, of this potent weapon in his arsenal: "The e-Choupal infrastructure is potentially an efficient delivery channel for rural development and an instrument for converting villages into vibrant economic units." Having already set up stores in Hyderabad, Pune and Chandigarh, the company is now looking at the other metros like Kolkata. And the model will be something akin to Choupal Saagar story, with all the cold chains and associated farmer clusters.

Godrej Agrovet, a part of the Godrej group, was the first off the block to sell fresh fruits and vegetables in the urban market through its Nature’s Basket retail outlets. These outlets, in turn, started sourcing some of their products from Aadhar, Godrej’s rural outlet. Not only does Aadhar act as a retail outlet for the farmers—selling animal feeds, agricultural appliances, pesticides, fertilisers and consumer durables—but it also is a sourcing base of fruits and vegetables from nearby villages.

The group has ambitious agri-business plans. Says Adi Godrej, Chairman, Godrej Group of Companies: "Organised retailing is growing very rapidly. Consumers find it very comfortable and convenient mode of shopping. We see a tremendous future in speciality food retail."

The fruits and vegetables sold in Aadhar are procured mainly through tie-ups with farmers, who come to Godrej Agrovet’s distribution centre, do all the sorting and grading of these fruits and vegetables that are then transported to the Aadhar outlets.

There is, however, no written contract with the farmers, but it works on the basis of mutual interest and on the demand and supply system. Explains C K Vaidya, Managing Director, Godrej Agrovet: "We have a system of generating estimates of demand, which is then converted into orders for the farmers and brought to the distribution centre. The company, which has 30 Aadhars all over Maharashtra, Gujarat, Punjab and Haryana, plans to ramp it up to 1,000 in the next five to seven years.’’


Facelift for the farm

The change is a welcome one. "We are de-risking the farmer’s life in every possible way,’’ points out a visibly enthusiastic Rohtash Mal, Chief Executive Officer, FieldFresh Products. By tying up with hundreds of farmers, (signing a lease) the company is not only assuring them a fixed return, but also promising to buy up all their produce at pre-determined prices. Better still, the company always pays a little more than the prevailing mandi price for the produce. This ensures that the farmers never get a raw deal. "And since it is our business to get the produce to the market, even the logistics problems that used to dog the farmer are taken care of,’’ adds Mal.

"Currently, we are looking at exporting 10% of our total produce. In 2-3 years, we should be exporting 50% of the produce" Rakesh Mittal,
Dir., FieldFresh

All these improvements are more than what the government itself has been able to offer the sector. By moving in and taking over the supply chain in agriculture, corporate India is also breaking the stranglehold of middlemen and loan sharks who not only exploited the farmers, but also routinely marked up prices by as much as 60% without actually adding any value. The modern distribution channels, warehousing and cold storage facilities will also ensure that the produce remains fresh and reaches retail outlets faster. Over the years, they could eliminate the wastages that have for long plagued the procurement system. In the bargain, they open up export possibilities in crops currently beyond the country’s horizon.

Some companies have already begun to seize this opportunity. For instance, at FieldFresh’s 300-acre research centre at Ladhowal (near Ludhiana), womenfolk from nearby villages of Birmi and Phillaur, are growing okra, brinjal, baby corn and chillies, which are being sold not just in other parts of India (in itself an achievement), but in the difficult-to-crack European markets. Not just that, FieldFresh has tie-ups in place with agri companies overseas to help it grow the best-quality European carrot (Sumick of Australia) and baby corn and snap peas (Bomford of UK). "By 2008, we expect to be exporting as much as around 40% of our total produce,’’ says Mal.

FieldFresh’s Ladhowal initiative has also demonstrated to farmers that crop diversification helps retain the fertility of top soil, arrest water depletion (Punjab is losing two feet of groundwater every year) and generate higher incomes for farmers. "Farmers can increase their annual income by a minimum of 30% if they shift from rice and paddy to horticulture. Besides, they have the advantage of raising three crops a year," says Mittal. The company has already tied up with more than 100 big farmers, each of whom work with several smaller farmers to make contract farming happen. Adds Abhiram Seth, Executive Director, Exports & External Affairs, PepsiCo India: "Potatoes alone can double the return for the farmer, if he decides to switch to them from growing wheat and rice. Chillies too are a more paying alternative." Seth should know, since it was his company that initiated the concept of corporate farming in India way back in 1989. PepsiCo is currently growing citrus near Jalandhar, the seeds for which operation come from Tropicana (a Pepsi company) in the United States. Says Seth: "This operation will not only sustain our orange juice business within India but will act as a supply source to our markets in the neighbouring countries, and even in Europe.’’ By 2011, the food and beverages multinational’s India arm will also be able to process its home-grown oranges. The company’s exports from India totaled $40 million last year.

Corporate farming, most experts acknowledge, could be the answer to India "Our group has a
successful partnership template for Indian corporates to bring value to the farmer via agro-engineering" Anand Mahindra, VC & MD, M&M

agricultural crisis. After all, it involves involvement at every point in the value chain of corporates more capable of running risks and sustaining losses than small farmers—from the supply of high-quality seeds to fertilisers to the transfer of technology with the promise of buying the produce at a pre-determined price. One good instance of how corporate involvement helps raise farmers’ incomes comes from Bipin Solanki, Deputy Managing Director of Mahyco Monsanto Biotech. He estimates that the farmers who had planted BT cotton in 2006 are likely to earn an additional Rs 7,026.5 crore on around 8.6 million acres planted with the seeds. He points out that this would be a 36% rise over the Rs 2,100 crore income the same acreage generated in 2005.

Others such as the Global Green Company, an LM Thapar Group company that is engaged in contract farming, have joined the export bandwagon and are raking in big bucks from international markets. Global Green, which vaulted to the position of the third-biggest pickle maker in the world after acquiring Belgium-based Intergarden Group (it was ranked number 10 before) in August this year, has contracts in place with 12,000 farmers in the southern states of Tamil Nadu, Karnataka and Andhra Pradesh. The company has been exporting gherkins, silver onions and jalapenos to 23 countries through 15 global retail chains and is looking to expand its activities further. Says Vineet Chhabra, Managing Director, Global Green: "We are looking at investing in drip irrigation in a bigger way as the product portfolio has grown from being limited to only gherkins to include jalapenos, beans and tomatoes, which enables crop rotation.’’

Also in the game is Mahindra Agri-Business (formerly Mahindra Shubhlabh Services), which is targeting the international market through its contract model. The company plans to get farmers who have been using overstrained potato seeds for several generations to switch to high-yield ones and to extend this to cover 300 acres (it has 22 acres under the crop currently). "This will help produce 6,000 tonnes of potatoes that we plan to export to Pakistan, Bangladesh, Afghanistan and Middle East. We have a price advantage of $100-150 per tonne over potatoes that come from European nations," says Vikram Puri, the company’s Chief Executive Officer.


Roads to change

Of all the changes that have been part of this new green revolution, perhaps the one that has made the biggest difference to the lives of the smaller farmers has been the induction of information technology. It was cigarette major ITC’s e-Choupal model that broke new ground in the early 2000s, showcasing the power of IT to the farmers. By delivering real-time information about market prices and customised knowledge and resolving the crop-related problems of farmers through its IT kiosks and information database, it has managed to build tremendous equity among farmers across the country. In addition, the new storage and handling system offered as part of the initiative preserves the identity of different varieties right through "the farm gate to the dinner plate".

More recently, the company entered the processed food space. "We have a tie-up with the Kitchens of India and Aashirvaad (both ITC operations) to supply for their ready-to-eat lines of business and Choupal Fresh cash and carry stores for fresh fruits and vegetables,’’ says ITC’s Sivakumar. The company has lined up mega plans for the future. By 2010, the company hopes establish 20,000 e-Choupals in 100,000 villages involving 10 million farmers. The cost: Rs 5,000 crore in the next five years.


COGS IN THE WHEEL: Food transport logistics is in a state of flux

Although fertiliser major Tata Chemicals has also taken the contract farming route—it has 45,000 acres under contract in Punjab, Haryana, Uttar Pradesh, West Bengal and Jharkhand—it follows a different model. Under the terms of the contract, the company acts as a technology provider and facilitator of cultivation, while allowing buyers to buy the crop directly to the farmers. For the services rendered, both the farmers and the buyers have to pay a fee to Tata Chemicals. Since the fee is small, the parties involved have taken to the service in a big way. Says Kapil Mehan, Chief Executive Officer (Fertiliser Business), Tata Chemicals: "The retention rate among farmers, which used to be 20-25% a couple of years ago, has risen to 50-60% with the new model’s introduction.’’


A tectonic shift

The factors that have triggered this onrush of investment are many and varied. Foremost among them being the realisation by India Inc that agriculture is a big business in the developed world, involving huge value creation, before the products reached shop-shelves. In sheer potential, India could become the food basket to the world—a supplier of high-value food products that fetch revenues running into billions. After all, the country has all the cultivable land (52% of the total land is under cultivation compared to the global average of 11%) required, the climatic conditions appropriate, and then, of course, there is the labour cost advantage.

To unlock the full potential of this business, the country would require huge dollops of investment in a number of areas. One such choke point is the storage system. While the country produces around 134.5 million tonnes of fruits and vegetables—it is the second-biggest in the world—cold storage facilities exist only for 10% of the total produce. This results in enormous loss through wastages. Fixing this chink in the country’s supply chain alone could alter the sector’s dynamics radically.

Further, the globalisation of trade along with the rising need of most food retailers in the country for high-speed transportation, means the emergence of a huge market for companies that specialise in supply logistics. That of companies sourcing millions of dollars worth of fruits and vegetables all the year round. This has sparked off a boom in food transport logistics business: a storage centre for perishables at Jawaharlal Nehru Port Trust in Kandla; announcement of plans by National Agricultural Cooperative Marketing Federation of India (NAFED) to set up packing houses and warehouses in central and western India; Mitsubishi move to put together a fleet of cold chain trucks, and Reliance’s moves to set up its own supply chain backbone are all a pointer to that.

There are major (regulatory) hurdles to surmount yet before really big-time investments from India Inc can happen in the agri-sector. Even in Punjab, which leads the field among the states, corporates cannot lease land for more than 30 months, which poses uncertainties for corporate investors. As Mittal of FieldFresh explains: "Drip irrigation costs Rs 50,000 per acre and if one wants to use it on 1,000 acres, it will cost no less than Rs 5 crore. We feel that to make the best of drip irrigation, which saves water substantially, collaborative farmers should get some subsidy as well." The fact that agriculture is a state subject further complicates the field. "We don’t deal with one regulatory system, but 28 of them. So this creates problems in having a clear-cut strategy," says Mahindra Agri-Business’ Puri. Then there is the fact that the debate on opening up the agriculture sector is far from closed. Is it the answer to India’s ongoing agrarian crisis? Critics point to the fact that agriculture growth in the last nine years (1997 to 2006) have been just around 2%. Says CPI(M) Politburo Member and Member of Parliament, Nilotpal Basu, "If companies start dictating not only what the farmer should produce and how much, but control the supply chain, farmers will have little freedom of choice. It could result in what are effectively procurement monopolies."

These clouds on the horizon have failed to dampen the sunny spirits of India Inc’s new farmers. They are in the game for the long run—and the stakes are too high for them to let small things get in the way. They are intent on remaking the face of Indian agriculture and have the werewithals to accomplish their objectives. In doing so, they will generate enormous spinoffs for a large number associated with the agricultural sector, even if the numbers run into a few lakh rather than a few crore initially. Alongside employment generation, the initiatives of Bharti, Reliance and others like them would result ultimately in economies of scale and crop diversification—gains that have eluded successive governments over the past six decades.

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