ifpri ashok gulati

Transforming Agri-food System: Role of Organized Retail in India

Ashok GulatiDirector in Asia

International Food Policy Research Institute, New Delhi

Keynote Address at first Annual Conference of the Indian Society of Agri Business Management

Bangalore

25th September, 2008

Key Issues

Demand patterns are changing (plate is driving the plough)

Agri-food system is transformingo Organized retail (food & grocery) is rapidly expandingo Other front end players (processors, logistic suppliers, etc)

are respondingo But, the farm sector is fragmenting

Challenge lies in… making retail lift the tail creating opportunities for mainstream participation

What are the next steps??

Changing Complexion of the Indian Food Basket

Items

Expenditure as percent of total food

Rural Urban

1983 2004-05 1983 2004-05

Cereals and pulses 55.3 38.7 38.6 29.0

Milk & products 11.5 15.4 15.7 18.6

Egg, fish & meat 4.6 6.0 6.1 6.4

Vegetables 7.2 11.1 8.4 10.5

Fruits & nuts 2.1 3.4 3.6 5.3

Other food items 19.3 25.4 27.6 30.2

Total 100.0 100.0 100.0 100.0Expenditure on food as a percent of total expenditure

65.6 55.0 59.1 42.5

Source: NSS0 2006

Changing Production Basket~ All India

TE2006-07

16.7%

24.7%

27.8%

4.4%

26.4%Fruits&Vegetables

Foodgrains

Other Crops

Livestock

Fishery

TE1982-83

14.1%

31.7%

31.1%

2.7%20.3%

Fruits&Vegetables

Foodgrains

Other Crops

Livestock

Fishery

Source: Calculations based on 1999-2000 price series obtained from National Accounts Statistics (back series 1950/51-1999/2000), 2007 & National Accounts Statistics 2008, Central Statistical Organization, Government of India

Transforming Agri-food System

RBHs

Source: Gulati & Gupta, 2008

emer

ging

link

ages

emerging linkages

Organized Retail in India~unfolding revolution

Total retail ($322 bn in 2006/07) likely to grow @ 13% annually (to $590 bn in 2011/12).*

Organized retail (comprising of just 4% of total retail) to grow at (45-50)% & (account for 16% by 2011/12).*

Total food (accounts for nearly 60% of the retail pie), organized segment hovering around 1%.

Huge scope for expansion

*Source; ICRIER Retail Report, 2008

Retail Revolution~ Growth of Organized Food & Grocery Retail

63.4

72.4

26

22.5

20.8

18.6

0 10 20 30 40 50 60 70 80

Philippines

Indonesia

Thailand

China

Viet Nam

India

average annual percent growth rate

Note: Food sales include food, beverages, tobacco products, drugstore items and small everyday non-foods household goods.

Source: Planet Retail website, Accessed on 20th May, 2008

Organized Food & Grocery Retail Sales of selected 10 Retailers (2002/07)

Market share (%) of Top 5 Grocers, 2005 ~very low level of concentration in India

Source: Global Retail Concentration, Planet Retail Report, August 2008

90.1

89.5

35

34.5

31.5

24.7

23.9

20.9

20.7

18.2

17.9

14

13.2

4.1

1.3

New Zealand

Australia

Thailand

Philippines

Hong Kong

Malaysia

Korea, South

Singapore

Taiwan

Japan

Turkey

Vietnam

Indonesia

China

India

Scaling up of Organized Food Processing Sector Food processing sector has grown at 13 percent in

2006/07 (up from 7 percent in 2002/03)

Organized segment accounted for nearly 81% of gross output in 2000/01 (up from 64.3% in 1984-85)…must have grown thereafter

Share of employment increased from 13.3% to 15.1% during the same period in the organized segment

Its share in fixed assets had increased to 61.4% in 2000/01 (up from 26.2% in 1984-85)

Scaling up of Organized Logistics Suppliers~favorable impact on the dd for logistics services in the organized food retail sector

Logistics industry is undergoing structural transformation: from conventional storage to inventory management & value addition

$100 bn industry (grew @ of (8-10)% b/w 2002/07) is likely to grow at (15-20)% to $385 bn by 2015 (Cushman & Wakefield, 2008).

Share of organized segment is likely to double (to12%) by 2015 (Cushman & Wakefield, 2008).

Logistics parks & 3-PL are gaining popularity

Indian players (Bharti, Reliance Logistics, Tata Realty & Infrastructure) are also entering the foray

Agricultural Markets By & large, agricultural produce is traded through

government regulated markets that

– lack proper facilities (cleaning, sorting, grading)– Inadequate storage infrastructure– Tax farmers in terms of high market fees, commission agents’ fee, etc

However things have begun to change Amendment of APMC is a positive step (although needs a lot a

political will at the state levels to actually implement the provisions)

Creation of Terminal markets on the “hub-and-spoke” model (eg: operated by Safal in Bangalore, more in the pipeline)

Private buyback arrangements

Fragmenting Farm Sector~swelling bottom

0%

20%40%

60%

80%100%

1970-71 1981-82 1991-92 2003

percent landholdings by size class

0-2 ha 2-4 ha 4 ha & abv

Avg farm size 2.2 1.67 1.34 1.06

0%

20%

40%

60%

80%

100%

1970-71 1981-82 1991-92 2003

percent operated area by size class

Source: NSSO, 2006

“fortune at the bottom of the pyramid”C.K Prahlad (2004)

Marginal & small farmers are quite competitive at the farm level

# accounts for 51% of the gross value of agricultural output (Srivastava, 2008)

Despite this, low marketable surplus; high transaction costs; going through mandis; long unorganized supply chains; etc eat into their net returns

Hence, how to do business with those at the bottom of the pyramid?

Can Retail lift the Tail? ~clusterization at the backend

Market Information(incl. food safety)

Retailers & Agro

processors

Input delivery &Extension services

Credit &Insurance

Farmers’ clusters

Source: Gulati & Ganguly, 2008

Missing or Inadequate Rural/Agri Services

Input services: quality inputs (seeds, fertilizers and alike), agri equipments, extension services, credit & insurance, etc

Output services: buyback & open ended procurement systems, contract farming & warehousing facilities.

Consumer services: FMCG, & other consumables.

Other services: health & medical facilities, money transfer facilities, entertainment facilities such as food joints, movie hall, parks, etc.

Open Source Intermediation~the dynamics of RBHs

Output

Farmers

Input

RBHs

IPR*

MandiInformal Markets

Ext. Services

Money lender

Banks &

Insurance

Financial

FuelInputs

FMCGs

ProduceExtension

FMCGInputs

*IPR: Input Suppliers, Processors and Retailers


Emerging Players in RBHs~a type of open source intermediaries

ITC led e-Choupal 2000, Choupal Saagar in 2004

DSCL-Hariyali 2002

Godrej Aadhar 2003

Others like Triveni (2005),IOCL (2006) and Reliance (yet to enter)

PPPP (CII & Ministry of Panchayati Raj), 2004

Mega FoodPark 2007

Private Initiatives

Public Initiatives

Tata Kisan Kendras 1998, rechristened as Tata Kisan Sansar in 2004


Challenge of “Inclusiveness with Competitiveness” ~ who benefits & how?

Implications on consumers: benefit from competitive price offers, better product quality, wider choice of commodities, better shopping environment, etc

international experience (in USA, Chile, Mexico, etc) & ICRIER study confirm the same

prices of vegetables were 33 percent cheaper in organized outlets as compared to traditional and that of fruit was 15 percent (Recent IFPRI study, Gulati & Reardon, 2008)

Not just Big Box Malls~opportunities for “mainstream participation”

Neighborhood, convenience stores: Subhiksha, Big Apple, Reliance Fresh, ITC-Choupal Fresh, etc…

Branded pushcarts (in fresh) piloted by ITC and ACME

Providing franchisee to traditional retailers: Mother Dairy in liquid milk & other dairy products

Huge employment generated: (likely to emerge next to agricultural sector!)

Branded pushcarts piloted by ITC

Source: ITC

ACME-branding of pushcarts

•Direct to Home is a revolutionary concept.•Sustainable livelihood to Urban Street Vendors.

A Pilot project with 70 thermally enabled carts has been implemented in Gurgaon, NCR.

Source: ACME

How have farmers benefited?

Studies confirm that farmers have benefited in the past through farm-firm tie-ups (contract farming, cooperatives, producers 'organization)

–through reduced transaction & marketing costs, better prices & access to niche markets

However farmers are still vulnerable to production and price shocks and there is a need to establish better firm-farm linkages.

Next Steps~ “one size fit all” formula does not work

Solving the policy puzzle (“rubic cube”) to ensure C-CompetitivenessI-InclusivenessS-ScalabilityS-Sustainability

Need for innovations and institutions at different levels of the agri-food system

What are the possible levers of change?

Clusterization in creating scale

Use of modern technology in enhancing information dissemination

Agricultural marketing reforms (amending APMC, introduce warehouse receipts system, etc)

Creation of vibrant land markets

Focus on agricultural R&D and extension services (strengthening RBHs)

ifpri ashok gulati

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