Retail Management

Retail Sector Analysis – Food

Group:

Aniket Dahasahastra 2010c01

Avijit Kumar Singh 2010c12

Manoj Kumar Jaju 2010c13

Ayush Bhagat 2010c29

Khushboo Kheria 2010c38

Kunal Singh 2010c43

MBA (2010-12) Sem III

SCMHRD

Pune

Submitted to :- Prof. Venkat

Contents:

GLOBAL RETAILING INDUSTRY

RETAIL IN INDIA

Demand and Market Potential of F & B retail in India

Decadal Analysis of the Food Retail Sector

Formats of Food Retail in India

FORMATS IN FOOD RETAIL

Organized vs Unorganized Food Retail

Competitor Analysis in Organized Retail based on Price/Quality/Variety

Major Food Retailers

SUPPLY CHAIN OF FOOD RETAIL IN INDIA

Supply Related Issues

Channel Related Issues

Distribution Related Issues

Potential Solutions

Food supply chain Models by different retailers

GROWTH POTENTIAL

MAJOR CHALLENGES

REFERENCES

GLOBAL RETAILING INDUSTRY

In the latter half of the 20th

Century, in both Europe and North America, the supermarket has

emerged as the dominant grocery retail form. The search for convenience in food shopping

and consumption, coupled to car ownership, led to the birth of the supermarket. As incomes

rose and shoppers sought both convenience and new tastes and stimulation, supermarkets

were able to expand the products offered. Wal-Mart is still ranked the top retailer in the

world. Other than Wal-Mart‟s dominance, Carrefour and Tesco have been doing well. Sears

which was much older than Walmart has lost out to the former due to cost pressures. The

global economy has changed, consumer demand has shifted and technology and supply chain

systems have become the real enabler for retailers. The global retail industry has travelled a

long way from a small beginning to an industry where the world wide retail sales alone is

valued at $ 7 trillion (Source:2003 Global Retail Report, Deloitte Touche Tohmatsu). The top

200 retailers alone account for 30% of worldwide demand.

RETAIL IN INDIA

The Indian retail industry has scaled impeccable growth over the last decade with an amiable

acceptance to organised retailing formats. The industry is maturing towards modern concept

of retailing, cornering the conventional unorganised family-owned businesses. India has been

ranked as the fourth most attractive nation for retail investment among 30 emerging markets

by the US-based global management consulting firm, A T Kearney, in its Global Retail

Development Index (GRDI) 2011.

The Business Monitor International (BMI) India Retail Report for the fourth-quarter of 2011

forecasts that the total retail sales will grow from US$ 411.28 billion in 2011 to US$ 804.06

billion by 2015. The report has underlined factors like economic growth, population

expansion, increasing wealth of individuals and rapid construction of organised retail

infrastructure as major drivers for the optimistic forecast figures.

According to a research report named „Retail Sector in India‟ by Research and Markets,

Indian retail sector accounts for 22 per cent of the country's gross domestic product (GDP)

and contributes to 8% of the total employment. The report further highlighted that

hypermarkets (currently accounting for 14 per cent of mall space) will witness immense

progress in the Indian landscape.

Demand and Market Potential of F & B retail in India.

All India food consumption is close to Rs 9000 billion.

Urban food consumption being Rs 3300 billion

This means that aggregate revenues of large food players is only 5 % of the total

Indian market and around 15-20% of the total urban food consumption.

Most of the foods in the local „wet‟ market, vendors, roadside push-card sellers and

tiny-kiranas.

As per McKinsey Report share of an Indian household spending on foos is one of the

highest in the world with 48% of income being spent on food and beverage.

DECADAL ANALYSIS OF THE FOOD RETAIL SECTOR

Retailing is a sunrise industry in India with many challenges like exclusion of small farms,

management of processing and distribution chains. Evolution of super markets and fast food

chains is a recent phenomenon in India. Various demand and supply side factors have

contributed towards this growth.

Supply Side: The liberalization of the economy in the 1990s led to a boom in the “Consumer

Goods” Industry with reductions in custom duties and shift from quota to tariff based system.

Entry barriers on multinationals were largely removed after which Food Industry majors like

Kellogg‟s, Heinz, Tropicana, etc., entered the Indian food industry. This gave rise to

tremendous development of sophisticated supply chain & logistics which eventually and

gradually has led to the growth in the food processing & packaging industry

Demand Side: The increase in the income levels of middle & higher income groups in the

1990s coupled with the reduction in poverty levels was a major factor in contributing to the

increase in demand for high quality food retailing services. Changing consumer lifestyles

with the steep increase in time value, wide spread change in the Indian family structure from

vast Joint Hindu families to more manageable nuclear families and increasing level of quality

awareness has also helped the cause of the Food Retailing industry considerably. Another

major factor that has accelerated the growth of the Indian Food Retailing Sector has been the

advent of cable television and the increasing instances of overseas travel by Indians for

various reasons.

FORMATS IN FOOD RETAIL:

The Indian food retail market is characterized by several co-existing types and formats. The

Indian retail industry is divided into organised and unorganised sectors.

Organised retailing refers to trading activities undertaken by licensed retailers, that is, those

who are registered for sales tax, income tax, etc. These include the corporate-backed

hypermarkets and retail chains, and also the privately owned large retail businesses.

Unorganised retailing, on the other hand, refers to the traditional formats of low-cost

retailing, for example, the local kirana shops, owner manned general stores, paan/beedi

shops, convenience stores, hand cart and pavement vendors etc. These stores (which can

occupy a 50 square meter area or less) still account for a major share of the food and grocery

sales in India. According to the industry sources, India is estimated to have more than eight

million neighbourhood stores growing at the rate of five percent per annum and people shop

here on a regular basis. Shopping at these stores provides benefits in terms of easy reach,

personalized services, extension of credit etc. but these stores have limited assortment space.

The share of organized food, grocery, and beverage (FGB) retail sector in the total FGB retail

sector is small but has exhibited strong sales in last five years.

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

2008-09 Growth

Rate

Total Retail Sales 235.7 246.1 271.6 321.9 360.5 407 12.3

FGB Retail Sales 161.1 160.5 176 203.1 225 252 10.2

Share of FGB in

Total Sales (%)

68.35% 65.22% 64.80% 63.09% 62.41% 61.92%

Organized Retail

Sales

7.8 8.9 10.8 13.2 18 25 26.2

Organized FGB

Retail Sales

1.1 1.2 1.4 1.7 2.3 3.2 23.8

Share of

Organized FGB

in FGB (%)

0.68% 0.75% 0.80% 0.84% 1.02% 1.27%

Data Source: ICRIER Research

The share of organized FGB retail sales in fiscal 2008-09 was estimated at nearly one percent

of the total FGB retail sales in India; but there is strong potential for future growth and

expansion. Most privately owned Indian supermarkets (which are basically large grocery

stores and convenience stores) are located in and around major cities with 3,000-6,000 square

feet of floor space. However, in recent years, larger discount stores/hypermarkets (with floor

area of 25,000 –100,000 square feet) have come up across major metropolitan cities, offering

a range of value-added products and services to price-conscious middle income consumers.

Convenience stores at petrol/gas stations have also made a debut in larger cities. However,

the food retail sector remains largely dominated by unorganized players (mom and pop

stores/neighbourhood stores (100-500 square feet floor area).

ORGANIZED RETAIL SECTOR FORMATS:

The organized retail sector in India which includes a mix of supermarkets, hypermarkets,

discounted stores, malls, specialty stores, convenience stores and departmental stores are

dominated by large players like Reliance, Tata, Aditya Birla, ITC, Future Group, RPG,

Heritage, Metro Cash and Carry, Bharti, Bharti Wal-Mart (joint venture, cash and carry

store). Many retail players have targeted semi-urban or rural areas for setting their retail

stores. A few closures and acquisitions were also seen in the retail sector in the past two years

due to several financial and operational constraints (for example Reliance Fresh closed its

stores in many places). Retailers have taken this phase in developing organized retail

operation as a learning experience and are restructuring their business models to ensure long-

term sustenance and growth.

Organized vs Unorganized Food Retail

Kirana Stores and Hawkers

1. The road side hawkers and the mobile (pushcart thela variety) retailers.

2. The kirana stores (the Indian equivalent of the mom-and-pop stores of the US), within

which are:

a. Open format more organized outlets

b. Small to medium food retail outlets

The following gives a comparative analysis of the neighbourhood stores vis- a- vis the

organised retail stores.

Strengths of neighbourhood stores Strengths of organized retail stores

Convenient Location One stop shop for an extended assortment of

products (with various brands and private labels)

Additional services like home-delivery and

credit on purchase

Feel good factor associated with clean, hygienic

and air-conditioned environment

Owners have a personal contact with their

customers

Due to economies of scale, increased capacity to

offer discount schemes and conduct promotional

campaigns

Do not have adequate refrigeration and

storage space. Customers prefer buying

perishable items as perishable inventories are

replaced on a daily basis

Larger storage and refrigeration space

The unorganized retail sector competes on the basis of a number of factors that give it a leg

up on organized retail. Much of the reason why unorganized retail has dominated the retail

market is the unique ways in which it operates when it comes to serving the consumer.

Corner-stores have catered to the traditional Indian consumer psyche and are partially

responsible for shaping it. For unorganized retail in India the market mantra is

“convenience”:

1) Home-Delivery: Corner-stores and street vendors do their best to cater to the local

population in the area in which they operate. As a result most of them provide home-delivery

services, for any and all order sizes, at no extra charge. Shopping is as simple as making a

phone call and narrating the shopping list to the store owner. Within minutes, the entire list of

groceries with an itemized, hand-written bill reaches your doorstep. The absence of product

variety, brand diversity, marketing and exposure had made shopping in stores almost

unnecessary for the Indian consumer. Retailers unconstrained by labor costs had no problem

in understanding this dynamic and adapting to the needs of the Indian consumer.

2) Credit: Unorganized retailers enjoy a loyal and limited clientele. The personal nature of

transactions coupled with small transaction sizes allows unorganized retailers to sell goods on

credit often settling bills with clients at the end of the month.

3) Proximity: Unorganized retailers like corner stores are almost always located at a few

minutes walking distance from their clients. Street vendors will go door-to-door selling their

goods. This has provided a number of advantages to the Indian consumer. He receives his

purchase almost immediately thanks to the home-delivery of goods, he never has to move

more than half a mile from his house to purchase food, clothing and other goods. Finally, the

proximity of unorganized retailers caters to the just-in-time mentality of Indian consumers

who prefer to buy goods when needed for immediate use rather than making bulk purchases

in advance.

4) Level of Trust: The level of „trust‟ that the modern day retailer of food & grocery enjoys,

in comparison with the friendly neighbourhood kirana store. Indians, have traditionally had a

distrust of big business and a lot many of the average Indian consumer still thinks the same

about the corporate retailers. They feel that the level of familiarity and trust that they strike

with their kiranewala is missing in the modern day food & grocery retail outlet.

INDIA’S TOP ORGANIZED FOOD RETAILERS:

The following have been the prominent players in the Indian Food Retail Segment.

1. Pantaloons Big Bazaar: It is a part of the future group and the most successful food retail

chain. Their primary strength lies in ability to compete with big players for example Reliance

and also creating entry barriers. Moreover, the concept of Sabse Sasta Din brought out their

understanding of the Indian consumers. Their strong front end and Indian Management has

also contributed to their success. However, they suffer from cash flow problems and a weak

backend.

2. Reliance Fresh: It is a part of the Reliance group which is known for its Project

Management capabilities. However, they did not focus on the business model and failed

miserably owing to problems created by themselves like opening shops everywhere, paying

high salaries to acquire the best resources, terrorising the unorganised sector.

3. Bharti-Walmart: Bharti entered into a JV with Walmart since no FDI is allowed in Multi

Branded Retail. However, since Retail Supply Chain allows 100% FDI, this symbiotic

relationship was entered into so that Bharti could limit its losses by appointing Walmart to

take care of its back end Supply Chain and Walmart could also gauge the Indian consumers

since their success have been limited to US and Canada only.

India’s Major Food Retailers:

Company Profiles

Retailer Name/ - Outlet

Type

Name of

Stores

Ownership No. of

Outlets

Locations

Pantaloon Retail (India)

Ltd./Hypermarkets &

supermarkets

Food Bazaar Local (Future Group) 163 Bangalore, Pune, New

Delhi, Ahmedabad,

Hyderabad, Kolkata and

other major metros, and

larger cities.

Spencer‟s Retail

Limited/Hypermarkets,

supermarkets & convenience

stores

Spencer‟s Local (RPG group) 380 Various cities in West

Bengal, Punjab, Uttar

Pradesh, New Delhi, West

Bengal, Maharashtra,

Gujarat, Tamil Nadu,

Karnataka, Andhra Pradesh,

and Kerala.

Reliance Retail

(Hypermarkets, Supermarkets

and convenience Stores)

Reliance Fresh

and others

Local (Reliance

Industries Limited)

700+ Around 71 cities across

India

Aditya Birla Retail Private

Limited / (Supermarkets and

hypermarkets)

More Local (Aditya Birla

Group)

643 Punjab, Mumbai, Delhi,

Gurgaon, Noida, Rajasthan,

Kolkata, Ahmedabad,

Baroda, and Surat

Bharti Retail Private Limited /

Supermarkets & convenience

stores

Easy Day Local, Bharti Group 31 Haryana (Kurukshetra,

Jagadhari, Faridabad),

Punjab (Ludhiana,

Hoshiarpur), Delhi, and

Ghaziabad

Bharti Walmart [1] Private

Limited / Cash and Carry

Best Price

Modern

Wholesale

JV between Bharti

Enterprises and Walmart

1 Punjab (Amritsar)

Heritage Foods India Limited /

Dairy format stores & rural

retail stores

Heritage Local, (Heritage Group) 1800 stores

in A.P.

(rural retail

stores) &

others

Various cities in Andhra

Pradesh, Karnataka, and

Tamil Nadu

Metro Cash and Carry [2]

India/ Hypermarket

Metro Foreign (Metro AG

Germany)

5 Bangalore, Hyderabad,

Mumbai, and Kolkata

My Dollar Store /

Convenience stores

My Dollar Store Local (Franchisee of

My Dollar Store of the

U.S. +in collaboration

with the Future‟s

Group)

13+ Mumbai, Noida, and New

Delhi etc.

Hypercity Retail India

Limited/ Hypermarkets

Hypercity Local (K. Raheja

Group)

4 Mumbai, Jaipur

Wadhawan Food Retail Pvt.

Ltd. / Mainly Convenience

Stores

Spinach, Smart

and Sabka

Bazaar

Local (Wadhawan

Group)

182 Delhi, Mumbai, Bangalore

and other major cities

Nilgiri‟s /Supermarkets &

convenience stores

Nilgiri‟s Local (Nilgiri‟s Group) 88+ Major cities in the Southern

states (Karnataka, Tamil

Nadu, Kerala and Andhra

Pradesh)

Namdhari Agro Fresh Pvt.

Ltd./ Convenience Stores

Namdhari‟s Local (Namdhari

Group)

21 Bangalore, Delhi, and

Ludhiana

Godrej Agrovet

Limited/Convenience Stores,

Nature‟s Basket Local (Godrej Agro vet

Group)

8 Mumbai

Besides there have been other retailers like Aditya Birla More which have not been quite

successful. Subiksha which was very popular and expanding rapidly has become bankrupt

today and its existence ceases to exist.

Competitor Analysis in Organized Retail based on Price/Quality/Variety

Specialty Stores

Big Apple Retail /

Convenience Stores

Big Apple Local (Express Retail

Services Pvt. Ltd.)

65 Delhi

N Stores /Convenience Stores N Store Local (N Stores Retail

Pvt. Ltd.)

3 Bangalore

Shoprite/ Hypermarket Shoprite Local (Subsidiary of

Shoprite Group from

South Africa)

1 Mumbai

Aaadhar Aaadhar Local (70% Future

Group + 30% Godrej

Agro vet Group)

65+ Maharashtra, Punjab,

Haryana, and Gujarat

Supply Chain of Food Retail in India

Issues in the Indian Food Supply Chain

The sub-optimal growth in the Indian fruits and vegetables sector can be attributed to the

vicious cycle of high unit cost – low demand – low capacity and utilization – high unit cost.

The Indian food supply chain involves various issues at many levels as it is highly complex

and fragmented. The different stakeholders in the food supply chain in India and the related

issues are summarized below:

Production-related issues

Domestically, affordability is the key issue. Price differential between fresh and processed

foods in India is quite high, relative to the convenience, hygiene and health values of the

processed food. Low income Indians are very price sensitive since food forms more than 50%

of their household income. In developed countries, the price differential between processed

and fresh food is not very high. However, the cultural barriers which have been there for

processed food in terms of preference for fresh food and home-cooked food are going away

rapidly with urbanization and increase in the disposable income of the households. Hence, it

becomes important for the processed food industry to ramp up to meet this challenge. The

various issues related production is detailed below:

Identification, development and propagation of process able agricultural commodities

Producer‟s access to external funds and insurance

Forward linkages for the producer

Adoption of improper methods of cultivation

Poor planning and demand forecasting

Supply side issues

The cost of raw material is high due to low productivity and lack of knowledge of the farmer

about efficient crop management practices. A comparison of India with other countries on the

productivity of fruits and vegetables compares as follows:

This low productivity constrains the supply chain from the back-end. We see that India

substantially lacks productivity especially in the vegetable segment. This can be attributed to

the following reasons:

1. Limited farmer knowledge about the appropriate varieties to be cultivated

2. Lack of „precision approach‟ to cultivation practices such as quantum of fertilizers to

be applied across different stages of crop, optimal usage of water, crop rotation, usage

of macro-nutrients, harvesting techniques etc

3. Lack of availability of requisite quality and quantity of agro-inputs, driven by poor

delivery channels and limited availability of credit

4. Non-transparent pricing, limited financial availability and primitive sorting, grading

and cleaning facilities.

It is estimated that nearly 30% of the inefficiencies can be rectified in case the

productivity problems were tackled.

Channel-related issues

The supply chain is constrained by various issues because of its long and fragmented nature.

They are listed below:

Too many intermediaries along the chain

High transportation costs

Poor co-ordination at various levels

High amount of wastages along the chain

The supply-chain in fresh produce has several intermediaries from the farm to the consumer.

While the intermediaries have a role to play in the transportation as well as temporary storage

of produce, multiple-level manual handling on this account together with inappropriate

facilities for storage and transportation, and intermediary margins translate into cost and

wastage build-up, leading to high consumer prices. Also, the long supply chain leads to lack

of direct communication between the producer and the consumer, leading to

Lack of demand and supply match

Lack of farmer awareness of proper prices for his produce

Increased power and subsequent misuse of it by the intermediaries

High costs and low choice for the ultimate consumers

Poor quality of the ultimate produce that is brought to the consumer

As an illustration, the key issues in the fresh produce supply chain are listed:

Distribution-level issues

The supply chain for Indian food products is plagued by extensive wastage and poor

handling. The wastage occurs because of multiple points of manual handling, inadequate

packaging, and lack of temperature control. The physical wastage represents one form of

inefficiency in the supply chain. There are other inefficiencies as well in terms of

deterioration in quality and cost of intermediation in the supply chain. The various factors can

be listed as follows:

Government policy restrictive for private players to participate

High transport costs

Unorganized retail chains

Poor storage facilities

Poor storage facilities are one of the key factors impacting the food supply chain in India.

The supply chain is plagued by poor handling and wastages across different levels. This has

an impact on the overall costs in 3 ways:

1. Poor storage leads to lesser consumer demand due to poor quality

2. It leads to spoilage of the vegetables and fruits earlier. Hence, shorter shelf lives

require more frequent trips to and from the farm to the retailer, increasing the

transportation costs.

3. The accumulated wastage at different levels just due to supply chain problems is

nearly 50% on an average. This directly translates into lost sales for the parties

concerned.

Hence, the problem of storage needs to be resolved in order to build and efficient supply

chain. Indifferent policy framework In India, the retailers is handicapped by lack of

economies of scale. APMC act does the following:

1. It prevents direct producer-retailer linkages.

2. It makes the commission agents wield extreme power which is leading to farmers not

realizing the proper prices for their produce.

3. Mandi cess paid to maintain the infrastructure of the mandis is not adequate and the

loading and unloading practices lead to huge wastages.

4. The APMC act needs to be amended to facilitate more producer-retailer linkages. Till

the Agricultural Produce Marketing Committee (APMC) Act is amended, farmers

cannot sell their produce in the open market, but only in the mandis (wholesale

markets). The mandi is controlled by the arthiyas (commission agents) and mashokars

(middlemen) who pay a fee to the government for the upkeep of the market and

improving the infrastructure. The amendment of the act has paved way for contract

farming in various states although there is a restriction on the lease period. Under the

model, a farmer can lease out his land for a minimum of 11 months and a maximum

of 30 months. Even this period, considered short by the companies entering the retail

business, has led to a 30% increase in the price realization by the farmers and a 20%

reduction in wastage.

Thus, we see that the supply chain in the Indian fruits and vegetables industry is crippled by

various inefficiencies along the supply chain. An efficient supply chain and distribution

structure is an important means for raising the income levels of the farmers on the one hand

and increasing the affordability of these products on the other.

Potential Solutions

1. Better demand forecasting and planning

There is a need to embrace the concept of Efficient Consumer Response (ECR) which was

introduced in the United States in the 1990s and is now followed world-wide in grocery

supply chains. ECR refers to a set of strategies that aims to get companies across a supply

chain to work closely to serve their customers better and at lower cost. Consumers benefit

from improved product availability and choice, while distributors and suppliers derive better

efficiency and cost savings. Also collaborative planning forecasting and replenishment is

another area that has yielded substantial savings for retailers. Relationship between the stake

holders in the supply chain is of paramount importance for ECR, CPFR and other relationship

paradigms to work.

2. Cold Chain infrastructure

Cold chain is a logistic system that provides a series of facilities for maintaining ideal

storage conditions for perishables from the point of origin to the point of consumption in the

food supply chain. The chain needs to start at the farm level (e.g. harvest methods, pre-

cooling) and cover up to the consumer level or at least to the retail level. A well organized

cold chain reduces spoilage, retains the quality of the harvested products and guarantees a

cost efficient delivery to the consumer given adequate attention for customer service. The

main feature of the chain is that if any of the links is missing or is weak, the whole system

fails.

The Cold chain logistics infrastructure generally consists of

• Pre-cooling facilities

• Cold Storages

• Refrigerated Carriers

• Packaging

• Warehouse and Information Management systems

• Traceability

• Financial and Insurance Institutions

The temperature controlled supply chains or cold chains are a significant proportion of the

retail food market. Fast foods, ready meals and frozen products have increased market share

in recent years. There are several food temperature levels to suit different types of products.

Frozen, cold chill, medium chill, and exotic chill are some of the frequently nomenclatures

with identified temperature ranges. The range of temperatures is dependent on the products

whether it is meat or ice cream or potatoes or bananas. Failure to maintain appropriate

temperature regimes through-out the product life cycle may shorten the product life or

adversely affect its fitness for consumption. Cold chain management involves maintaining

appropriate temperature regime when the product travels from the farm in Himachal Pradesh

to the consumer in London or New York City. That is why the logistics challenge is

formidable in food chains, which is cost conscious industry. There are several governmental

regulations in all countries and the responsibility to maintain hygiene and standards falls on

the food retailer or manufacturer. The recent developments in electronic tagging could be

useful for monitoring the temperatures and also the shelf life of the product.

3. Third party logistics:

The food supply chain is temperature sensitive and manual handling reduces the product

quality and life. Logistics providers with air conditioned trucks, automatic handling

equipment and trained manpower will provide end to end support. They can also adapt state

of the art techniques such as cross docking that will reduce the transit times and inventory.

4. Reducing the number of levels of intermediaries:

This would help in two ways:

(a) By reducing the price to end-consumer and increasing the price realization of the farmer

and

(b) By reducing the wastage along the supply chain.

The present model of F&V supply chain has various levels between the farmer and the end-

consumer which add more cost than value. A leaner supply chain would reduce the costs by

drastically reducing the number of levels as shown in the figure below.

PRESENT MODEL: MANDI ROUTE

RETAILER’S IDEAL – PROPOSED MODEL

Importance and Impact of Organized food retailing

The specific impact of organized food retailing on the supply chain is as follows:

1. Consolidation among the farmers to meet consumer requirements

Farmers are benefited with increased amount of access to output markets, inputs and credit.

Farmers would join out-grower schemes started by dedicated retailers. Associations would be

formed to supply to supermarkets with requisite volumes. On the whole, it would lead to a

demand-supply match by better planning and forecasting.

2. Investments in infrastructure

Producers and wholesalers would invest in greenhouses, irrigation, new packing and transport

facilities, to meet quality and consistency requirements of retailers. This would lead to better

quality of fruits and vegetables.

3. Increase in scale-shift towards centralized distribution centre from traditional

wholesale markets

Super market procurement systems would shift away from traditional wholesale systems

towards use of large, centralized distribution centres, specialized/dedicated wholesalers

operating preferred supplier systems and high standards of quality and food safety.

4. Increase in employment

This would also generate a large amount of employment in the retail sector as witnessed in

China, where the employment in retail sector has grown steadily at 6% from 1992 from under

20 million to over 55 million last year.

5. More choice and savings for the consumers

Large storage facilities and bulk merchandizing lead to economies of scale and lesser cost

additions along the supply chain as a result of which the prices of many commodities will

come down and make them more affordable to the consumers.

In summary, the following impact would be heralded with the advent of organized retail in

fruits and vegetables to various stake-holders:

IMPROVEMENTS IN VARIOUS INTERMEDIARIES’ ROLES

After this analysis, we clearly see that most of the issues can be resolved by re-

configuring the supply chain in an optimal manner. Hence, the following sections of the

project concentrate on building a model for an optimal supply-chain.

Farmers Opportunities for establishing forward linkages or enter into

contract farming arrangements with retailers

Need for consolidation/aggregation of farm produce Increased

emphasis on quality control, better farming practices

Intermediaries Organized retailing leads to disintermediation.

Hence, intermediaries need to redefine their role in the new

supply chain

Independent retailers Will co-exist with large retailers due to their proximity to

customers

Need to display better customer service through better quality and

more choice

Consumers More choice of fresh fruits and vegetables Increased convenience

(products under one roof)

Better shopping environment More affordable prices

Government Increased opportunities for quality employment in retailing Access

to reliable information regarding sales, greater tax compliance

Investment in supply chain leading to better infrastructure, less

wastages and reduced costs, and quality controls and compliance

with food standards

Food supply chain Models by different retailers

Based on our studies we propose four models for the supply-chain arrangement in the fresh

fruits and vegetables depending on the number of intermediaries in the model.

1. Present model of 6 intermediaries

2. Farmer → Wholesaler → Retailer (New Model)

Total Price Increase: 70%

Total Wastage: 55%

The logistics of storage and transportation in this case are carried out by a third-party.

3. Farmer → Retailer (Reliance Fresh Model)

Total Price Increase: 70-75%

Total Wastage 35%

4. Bharti Field Fresh Model (take over the farmer’s job)

Total Price Increase 75%

Total Wastage 11-12%

Proposed uninterrupted Supply chain model for Food in organised retail

Growth Potential

Indian consumers spend a large share of their income on food, with share of expenditures on

food and beverages estimated at 42.3 percent of total private consumption expenditure.

It is estimated that share of organised food retailing is about 1.44% of the size of food

retailing, valued at Rs.154 billion for 2008-09. Thus, the size of organised food retailing is

very small compared to the size of food retailing. However, it is growing at nearly 150% as

that of food retailing on the back of favourable drivers such as higher disposable income,

growing proportion of youth in overall population, gradual increase in the share of population

living in urban areas and increasing proportion of enrollment of women employees into the

job market.

Most privately owned Indian supermarkets (which are basically large grocery stores and

convenience stores) are located in and around major cities with 3,000-6,000 square feet of

floor space. However, in recent years, larger discount stores/hypermarkets (with floor area of

25,000 –100,000 square feet) have come up across major metropolitan cities, offering a range

of value-added products and services to price-conscious middle income consumers.

Convenience stores at petrol/gas stations have also made a debut in larger cities.

The country's food retail sector, which is currently estimated at USD 70 billion (around Rs

313,137 crore) will be more than double in the next fifteen years, the global audit and

advisory firm KPMG said in a Food Forum India,2008.

There are various factors paving the way to revolutionizing food retailing in India. Among

them few are:

Changing life styles and tastes

Growing need for convenience

Increasing disposable income

Increasing numbers of working women

Change in consumption patterns

Higher aspirations among youth

Impact of western lifestyle

Plastic Revolution – Increased use of credit cards and debit cards

"Evolution of innovative food processing capacity, emergence of organised retail and

change in consumption patterns along with fast changing demographics and habits is

fuelling the next growth trajectory for the food industry in India" KPMG said in a

statement.

Major Challenges Ahead for Organized Food Retail in India

Several Major Challenges

Fragmented & Inefficient Supply Chain :Logistics play an important role in

distributing products to all corners of the country. Due to its vast territory

implementing a smooth supply chain model poses a challenge. The Indian supply

chain for food products is characterised by extensive wastage and poor handling. The

wastage occurs because of multiple points of manual handling, inadequate packaging

and cold storage facilities. The physical wastage is one component of the inefficiency

in the supply chain. There are other problems as well, in terms of the deterioration in

quality and the cost of intermediation in the food chain. To avoid all this, there is need

to have appropriate infrastructure for storage and transportation.

In developed countries like the US, logistics costs comprising transportation costs

account for 7% to 9% of the cost of the final product, warehousing cost accounts for

about 1% to 2% and inventory holding costs account for about 3% to 5%. In

developing countries, logistics costs are estimated to be higher at around 15% to 25%

of the final cost of the product due to lack of adequate logistics system. In India,

logistics cost is around 13%, comparatively higher than the developed countries.

(Source: Indo-Italian Chamber of Commerce)

Regulatory and other issues: Agricultural markets, in most parts of the country, are

regulated under the State APMC (Agriculture Produce Market Committee) Acts. The

act was established to protect farmers and set a minimum support price. However,

today it is creating a problem for the competitive marketing system and smooth

supply of raw materials to agro-processing industries.

Reforms by India in opening up its economy have greatly improved trade prospects – but

major barriers still exist, with tariff rates being the highest in the world. Lack of adequate

infrastructure with respect to roads, electricity, cold chains and ports has further led to the

impediment of a pan-India network of suppliers.

As per CRISIL research, effective supply chain management and government‟s support to

encourage private participation and investment will help curtail inflation on account of lower

costs translating into savings.

Reducing costs in an Inflationary Environment: Recently, CRISIL conducted

research to address some key concerns facing the Indian economy today viz., limited

rural prosperity and high food prices. It also states that reduced supply chain costs

arising out of lower wastage and storage costs can be shared between producers and

consumers of food items in the form of higher farm incomes and lower food prices.

As mentioned earlier India fares poorly on the logistics front as compared to develop and

developing economies. The distribution costs increase due to the presence of several

layers in the supply chain and this coupled with the movement of goods across different

states or regions, leads to high wastage. On account of these bottlenecks costs are on the

higher side. CRISIL Research has estimated that with fewer middlemen, costs and

commissions can decline up to 1.7 times the farm prices (even if retailers maintain current

mark-up levels), translating into savings of about Rs 1 trillion. About 57% of this is due

to avoidable wastage and about 43% is due to avoidable costs of storage and

commissions. Consequently, the average realisation of the farmer is only 35% to 40% of

the retail price. This is very low as compared to the farm realisations of 60% to 65% of

the retail price in countries like the USA, which have an organised retail penetration of

about 80% (Source: CRISIL Research).

Level of Trust: The level of „trust‟ that the modern day retailer of food & grocery

enjoys, in comparison with the friendly neighbourhood kirana store. Indians, have

traditionally had a distrust of big business and a lot many of the average Indian

consumer still thinks the same about the corporate retailers. They feel that the level of

familiarity and trust that they strike with their kiranewala is missing in the modern

day food & grocery retail outlet.

References:

- Reports on Indian Food Retail by Mckinsey, ICRA, CRISIL

- Research Papers on Indian Food Retail

- Company Statistics from the Respective company websites and www.indiastats.com

- Newspaper Articles from the Economic Times, The Hindu, The Business Standard,

Business Line

- Magazine Articles from Business World, Business India and Business Today

- Primary Survey Report by NABARD, 2010