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8/23/2015 Fresh food retail chains in India, Magazines - Retail Insight - Retailing360,Retailing360
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Fresh food retail chains in IndiaProfessor Sukhpal Singh gives a brief of the food retail scenario in India whileproviding a comparative view of the traditional and modern food retail formats India’s retailing industry, the fourth largest in the world by sales, accounts for 11percent of the country’s GDP and employs 40 million people, that is, 7 percent of thetotal employment in India. Traditional local markets and small-scale retailing storescontinue to dominate India’s food retail sector. There are approximately 12 millionretail outlets, of which, almost 7 million sell food and grocery products. The vastmajority of these are small kiosks (17 percent), general provision stores (14percent) and traditional grocery retail stores (called kirana shops, which mainlycomprise retail sale as opposed to wholesale 56 percent of all rural retail outlets) runby a single trader and his family.
In the towns and cities, most consumers buy food and groceries from the localneighbourhood independent retailers, kiosks and street hawkers. The task of foodshopping is usually delegated to servants of high and middle-income households.
More than 70 percent of food and grocery (F&G) retailing in India is in the hands ofthe unorganised sector. The penetration of organised retail in the F&G segment isonly 1 percent. About half of the total F&G retail revenue comes from food grainsand unprocessed fruits and vegetables. CRISIL Research estimates that the retailvalue of these unprocessed items is approximately Rs 3.8 trillion.
Fresh foods rapidly growing presenceThe number of retail outlets grew at the rate of 26 percent during 1996–2001. In2007, food accounted for 62 percent of the Indian retail market, and the organisedsector accounted for only 0.4 percent of this market. This organised sector wasgrowing at the rate of 30.8 percent per annum compared to the 2.2 percent growthin the total F&G retail market (India Retail Report, 2007). F&G accounts for about 14percent of the total organised sector sales after clothing and textiles (36 percent)and watches and jewellery (17 percent).
The major food retailers in India include RPG’s Spencer’s, Food World, Nilgiris, ITC’sChoupal Fresh, Namdhari, Heritage’s Fresh, Reliance’s Reliance Fresh, Birla’s More,Aries Agro’s Six-Ten and Easy Day of Bharti Walmart. There are others like BigBazaar and Star India Bazaar who also sell food besides textiles and clothingproducts (readymade garments) and durables. Most of the fruit and vegetable chainsprocure a small part of their requirements directly from farmers. Firms such asRadhkrishna Foodland, Adani’s Agri Fresh Limited and Trikaya Agriculture providededicated supply chain support to the retail chains and fast food outlets, that is, theysupply them with the required raw materials on a long-term contractual basis.
Traditional versus modern food retailThe distribution of food items in the traditional market channel involves multipleintermediaries and high cycle times. Often wastage occurs during transportation andstorage, which ranges from 24 percent in the case of potatoes and cauliflower to 40percent in the case of tomatoes.
It is argued that organised distribution format of a modern retail chain reduces thecycle time from four days in the traditional system in India to 2.5 days. Ideally,according to global best practices, the cycle time should be only two days. The majorsavings in time takes place in communicating the requirements of the retailer to thefarmer and picking up and transporting the produce. A large chunk of fresh fruitsand vegetables is lost because of inadequate post-harvest handling and lack of coldstorage, processing facilities and convenient marketing channels.
Figure 1: A generalised view of the value chain of a fruit andvegetable retail chain in India
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Challenges with fresh foodsExisting intermediaries cause delays and consume a large portion of the earningsthat essentially belong to farmers who are mostly marginal or small landholdersfarming two hectares or less of land. The result is a chain replete with inefficiencies.Lack of information about the end consumer’s requirements and pressure fromconsolidators force the farmer to make inefficient decisions on crop selection andpricing. This results in huge wastage and poor produce quality.
The farmer is unable to realise better value as his produce varies in size, shape andquality. Smaller harvest lots do not allow for economies of scale in transportationand lower the final realisation.
Protecting the farmerThe market yard (regulated market), created under the APMC Act, where buyers andsellers of agricultural produce could transact legally, has not been profitable for theprime intended beneficiary—the farmer. Therefore, the amended Act provides forprivate mandis and contract farming, which refers to direct contractual procurementfrom the supplying farmer on pre-agreed terms and conditions.
There was much fanfare as well as fear when the food retail sector saw the entry oflarge domestic corporate entities a couple of years ago. It was feared that the largeformat stores will sound the death knell for small food vendors and retailers due tothe attraction of their air-conditioned stores and, of course, expected low prices. Inthe last 2 to 4 years, the sector has seen tremendous change even though it is stillnot completely open to FDI. There has been a spate of mergers, takeovers andclosures of outlets across cities and chains as part of the consolidation of operations,which were too thinly spread in many cases.
Value chain analysis
Procurement practices of F&G retail chainsMoreover, most of the chains have stuck to procuring a large part of their fresh foodsupplies, that is, fruits and vegetables, from APMC markets. However, it was initiallyargued that these markets are inefficient, and therefore, they need to be eithercompletely reformed or done away with.
These markets do not serve the selling primary producer or the buying corporate asthey lack quality, cost effectiveness and efficient delivery and overcharge andexploit the sellers. Most of the chains went ahead and set up their own collectioncentres, and farmers have been keen to sell to them as they often incur a lower costby selling to these locally based collection centres. The farmers are offered APMCmarket prices and are paid in cash on the same or next day in most cases. Thechains buy only grade A (retail grade) produce and the farmers take the rest of theproduce back or bring only grade A produce to the collection centre and take therest to the mandis. In this way, the chains get quality materials directly from farmersat the mandi price and do not have to pay a commission like in the case of mandiprocurement. Thus, it is a win-win situation for both the farmers and the buyingchains.
There is some discussion regarding why chains do not offer a fixed price to farmerssince the prices at APMC or other vegetable markets fluctuate widely and do notreally assure remunerative prices for farmers. Thus, basing chainprocurement/farmer prices on such mandi prices is not logically correct.
Trends in the fresh food segmentSince both sides (the farmer and the chain) are happy, no questions are beingasked. It is also interesting to note that almost no chain has made a commitment tobuy from farmers even though each chain has a registered set of growers along withtheir mobile numbers. These farmers have been approached based on the intentreceived from distribution centres, which in turn get the indent from retail storesevery evening or twice a day. Similarly, farmers have no commitment to sell to the
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• India is one of the fastest growingmarkets of Asia • Contract farming is gaining popularityamong private and the cooperative sectorplayers to overcome the challenge ofsmall land holdings of Indian farmers.Large corporates and internationalcompanies use contract farming toproduce a consistent quality crop forprocessing. Some recent projects havebeen in growing tomato, cotton, tobacco,gherkins, grapes, sunflower seed, chillies,flowers, banana, ginger, herbs etc• India is one of the world’s largest foodproducers It is the 2nd largest producer of fruits (45 million tonnes) after Brazil• The 2nd largest producer of vegetables(90 million tonnes), next to China
chains as there is no contract. Figure 1 shows the procurement system of a typicalvegetable retail chain in India.
There is another desirable trend in the perishable retail sector in the form ofwholesale ‘cash and carry’ players as well as dedicated wholesalers. Recent entrantssuch as Radhakrishna Foodland, Adani Agri Fresh and Tata-Total Produce areorganising themselves to supply to retail chains as well as to other large or bulkbuyers.
This will help retail chains focus on their retail operations and offer a range ofproducts to satisfy diverse customer demands. In fact, Tata-Total Produce is alsoorganising primary producers into producer companies to achieve better economiesof scale and a lower transaction cost advantage.
Demand versus supplyThe crux of the issue in the fruit andvegetable retailing by chains in India isthat the chains have not been able to addvalue to the front end, with regard toperishable foods. This has resulted in lowvolumes, which do not permit thesechains to build any long-term valuablebusiness linkages with the farmers.
The supplying farmers are traditionallycommercial vegetable and fruit growers,and they cultivate these crops for themarket. Therefore, these food andvegetable supply chains hardly buy 10 to15 percent of each SKU of any farmer,and hence create very little value forthem. The problem lies with the front endwhere the sale of fruits and vegetablesare not picking up. The earlier argument
was that fruits and vegetables were destination category products that were used toattract more footfalls in stores.
Even the so-called perishable or fresh food stores hardly devote 10 to 15 percent oftheir store space to fruits and vegetables and many have, in fact, reduced itovertime. The chains are not able to add any value other than provide lower prices,which is merely a ‘me too’ strategy. Moreover, those who visit these stores arelooking for lower prices as well as high or good quality produce, and most of thechain stores lack high-quality produce. Some of them simply procure the goods frommandis as early as possible in the morning and sell them within a few hours.
The scene in such stores is no different from that of any neighbourhood vegetable orfruit market. In fact, a few chains are attempting to establish a high price-high quality relationshipin the fruits and vegetables segment. There is no doubt that cost as well as qualitycompetitiveness are key to the success of this sector.
Small-farmer linkagesUnless there is an increase in volume and loyalty in the stores, the supply chainimprovements cannot go far. The chains need to add variety in terms of niche andupcoming products like organic, natural, chemical-free or safe vegetables, which canattract a committed clientele that will be willing to pay for such products. Only a fewchains have an organic shelf in the grocery section, which is often not veryprominent.
Chains should invest in the market to create a niche and value add segment, andthis can lead to viable selling of highly perishable products like fruits and vegetables.Some stores are achieving returns on fruits and vegetables through volume, qualitydelivery, commitment and consistency, which can only come from efficientlycoordinated and well-linked supply chains.
Agri-food supply chain
Corporate social responsibility lends a helping handOn the supply side, the concept of corporate social responsibility (CSR) issue isgaining popularity, and this is often linked to the type of growers from which thechain buys its produce.
At present, most of the chains are not concerned about this issue and buy fromwhoever is able to supply the goods at a low price. They prefer to buy from largegrowers who can each supply the whole quantity of each SKU needed by the chain.Thus, the small vegetable growers are left out, and they need help in marketing theirproduce. Thus, the developmental objective of strengthening the small farmers iscompromised.
In fact, a chain’s linkage with small farmers can be used as a Unique SellingProposition (USP) in the market, which is a part of the ethical, fair and responsibletrade and marketing movements taking place all over the world. From a cost
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advantage perspective, small farmers have greater flexibility in their workingcapability. They also have more efficient operations as they are low cost (due tofamily labour and the support provided by state and development agencies).
The retail chains stand to gain from links with small farmers. Today, it is not only‘profit’ but also the ‘people’ and ‘planet’ as a whole that is gaining precedence. In thissense, the concept of the ‘triple bottom line’ is becoming increasingly popular in thedomain of corporate social responsibility.
The author is a part of the faculty at the Centre for Management in Agriculture(CMA), Indian Institute of Management (IIM), Ahmedabad
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