retail food sector analysis
TRANSCRIPT
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