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Indian Agribusiness
Cultivating Future Opportunities
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INDIAN AGRIBUSINESS
CULTIVATING FUTURE OPPORTUNITIES
ASHISH IYER
ABHEEK SINGHI
EXECUTIVE SUMMARY
PRODUCT LANDSCAPE
Introduction
Food Grains Market in India
Dairy Industry in India
Meat Industry in India
Fruits and Vegetables Segment in India
INPUTS
Seeds
Fertilisers
Pesticides
Credit
Insurance
Information
Opportunity for Convergence in Distribution
FARMING
Levers to Debottleneck Farming
Wasteland Farming
The disbursement of credit to farmers in FY Poor weather data impedes design of insurance
2011 stood at an estimated Rs. 3,750 billion. products often resulting in unviable pricing,
Agricultural credit in India is marked by low resulting in losses and burden on the exchequer.
penetration and imbalances, based on the Redesigning the existing products (by replacing
types of farmers and type of credit. yield insurance with weather insurance) and
improving the pricing structure (moving
Small and marginal farmers, who are in the insurance products to market–linked rates) are
greatest need of credit, have the lowest essential to ensure adoption of insurance.
coverage within the farmer base. The
industry faces several challenges due to high I
risk, high transaction costs and low end–use A farmer’s decision to sow a particular crop or
monitoring. use a particular input is based on the limited
information available to him. Access to quality
Innovation in outreach and risk management information can assist the farmer in taking
is essential to propel growth in rural credit, and more informed and timely decisions. Similarly,
consequently, catalyze the adoption of quality they can use timely information to improve
inputs in agriculture. Spreading the risks across yield and realization.
the system (such as by focusing on group
lending, instead of lending only to individual There are three levers through which
farmers), expanding reach (through steps such information can impact farmers’ realization:
as appointing business correspondents), and
ensuring appropriate lending and usage (e.g. 1. Richness and reach trade–off: Providing
through in–kind lending models) are critical to customized guidance, while maximizing
break the sub–optimal credit cycle and drive the reach of such valuable information to
credit growth. farmers.
A business model for convergence, which The report has identified three levers that can
may be led by any of the afore–mentioned address the issues plaguing farming in India.
trio, can create a win–win scenario for all the These are:
stakeholders–the input providers, farmers,
and the end–consumer. Convergence in • Farmer aggregation: This is a crucial means
inputs would also enable better understanding of addressing the issue of fragmented land
of the needs of the farmers. holdings, and can help facilitate technology
adoption, build scale and improve the
The opportunity to leverage existing networks bargaining power of farmers. There are
presents a rationale for distributors, whereas multiple options available to aggregate
the ability to influence output quality and farmers. These include producer
ensure consistent supply presents a rationale cooperatives, producer companies and
for buyers. public limited companies. Amongst these,
the producer companies offer greater
The report identifies four specific convergence farmer control and higher flexibility. There
business models–input provider as distributor, are strong incentives for both private
input provider as end–buyer, distributor–led companies and the government to organize
model, and buyer–led model. producer companies.
Currently, the agricultural yields in India are Liberalize procurement for standardization;
woefully behind global levels due to poor crop allow free interstate movement of agri–
variety, lack of modern technology and farming commodities: There is an urgent need to
practices, as well as dearth of irrigation. There is standardize and ensure the implementation of
substantial potential to raise yields and output. the Agricultural Produce Market Committees
For instance, the scope to increase output is (APMC) Act. The Essential Commodities Act
approximately 20 to 30 percent in cereals and should also be scrapped to allow free interstate
over 100 percent in pulses and oilseeds. movement of commodities.
Increase in yield will free up land, making it Reform Minimum Support Price (MSP) norms
available for high–value crops (such as to provide fair remunerative incomes.
horticulture and cash crops like cotton and Procurement at MSP should be done only
tobacco). Today, 32 percent of the land is when prices go below the MSP. Also, quantities
available for cash crops. There is scope to enough for buffer stocks and social schemes
increase this to 35 to 36 percent. The should be procured–and that too, at market
consequent increases in production of high– prices. A fair and remunerative price will
value crops will supplement the existing encourage farmers to shift to pulses and also
incomes of farmers. invest in irrigation.
India and Agriculture production during 1900 to 1947 was hardly 0.1
Agriculture has played a critical role in the percent per annum. The country gained
Indian economy and society for thousands of Independence a few years after the Great
years. We can find evidence of its importance Bengal Famine (1942 to 1943), so the
even in 3000 BC, during the Indus Valley agricultural scenario, post–Independence, was
Civilization, when sophisticated irrigation and quite challenging.
water storage structures were built. The
Kallanai, an ancient dam built on the Kaveri Decades after Independence, agriculture has
River, around the first century AD, is considered remained the mainstay of the Indian economy.
the oldest in–use water regulating structure in Post–Independence, the government launched
the world. special programs to improve the supply of both
food and cash crops. The Grow More Food
In fact, agriculture is deeply ingrained in the Campaign (1940s) and the Integrated Production
Indian cultural ethos. Several rituals and Program (1950s) focused on the supply of food
festivals, and many beliefs and traditions and cash crops, respectively. These initiatives
revolve around agriculture and farming were followed by five–year plans that focused
patterns. For centuries, India has been known on agricultural development.
for its variety of food and non–food produce
that ranges from wheat, rice, pulses, fresh The agricultural history of India, post–
fruits, vegetables, spices, oilseeds and tea to Independence, can be divided into four phases:
rubber, tobacco, coconut, and cashews. 1947 to 1964, 1965 to 1985, 1985 to 2000, and
2000 till date.
Since medieval times, agriculture has remained
the predominant occupation of the populace. During the first phase, emphasis was on the
It satisfied a village’s food requirements, development of infrastructure for scientific
besides providing raw materials for industries agriculture. Major developments during this
like textile, food processing, and crafts. period included the establishment of fertilizer
and pesticide factories, and construction of large
During the late middle ages, till the start of multipurpose irrigation–cum–power projects.
colonial rule, construction of water works and During this period, India’s population grew at
improvement in irrigation techniques brought the rate of over 3 percent per annum. The growth
about economic growth. The colonial era was in food production was inadequate to meet the
not particularly good for agriculture. It saw consumption needs of the growing population
frequent famines. The growth rate in food and food imports became essential. The food
Resulted in ~4x growth in production and India world’s largest milk producer, availability
productivity of food grains close to global average (~280 grams)
Sources: Ministry of Water Resources, Department of Animal Husbandry, Dairying and Fisheries, Ministry of Agriculture.
!
400 5,000
–50 310 4,470
332 520
30
283 4,000 1,140
300 35 10 Oilseeds
16 Pulses
41
59 Other 3,000
cereals 2,500
200
109 86 Wheat 2,000
100
1,000
117 112 Rice
0 0
Demand Supply Oils Pulses Wheat Rice Total
imports
Sources: Directorate of Economics and Statistics, Ministry of Agriculture, SEA of India, EIU, BCG analysis.
Note: Demand projected assuming increase in per capita consumption at historic rate. Value of imports calculated assuming import price inflation of 10%;
value of imports could increase if inflation levels reach those between 2007 and 2010 (CAGR ~15%).
2
Economy
(Rs. billion)
3
2 Economic
growth
Agribusiness
growth
1
Agribusiness
(Rs. billion)
Agri–GDP
1 (Rs. billion)
Agriculture
growth
Sources: Datamonitor Agricultural products in India, India Brand Equity Foundation, World Economic forum, NCAER, RBI database on Indian economy,
BCG analysis.
Note: Fixed exchange rate of Rs. 45 to 1 US$ taken.
1
Does not include non–food cash crops such as jute, cotton, tobacco; includes only food crops — cereals, pulses, oilseeds, F&V, sugar, tea, coffee etc.
2
Assuming industry and services grow along historical growth rates of 9% and 10% respectively (observed over 2005–10 period).
12,000 2,000 11,500
500
1,600
9,000
3,100
6,000
4,300
3,000
0
Food grains– Fruits and Dairy Meat Other food Total
cereals, pulses, vegetables categories
oils and oilseeds
Rice and wheat most consumed cereals Consumption of corn, wheat and rice
— both in volume and value terms growing at a steady rate
203 Rs. 2,845
million tonnes billion Growth volume Growth value
%
100 0.5% 3.3%
0.4%
3.2% 3.2% Barley Barley 0.8% 11.6%
8.2% 6.1%
(Rs. 10.7 bn) 1
80 Sorghum 0.0% 0.0% 13.2%
Sorghum
33.1% (Rs. 85.0 bn) 2
Millet 0.7% 0.7% 15.5%
39.8% Millet
60 (Rs. 90.3 bn) 3
Corn 4.6% 10.0%
8.2% Corn
2.2% (Rs. 172.7 bn) Wheat 3.3% 12.2%
40
Wheat
(Rs. 941.9 bn) Basmati rice 3.2% 20.9%
42.7% 46.1% Basmati rice
20 Non–basmati rice 2.8% 15.9%
(Rs. 232.9 bn)
Non–basmati rice Overall 2.9% 13.5%
(Rs. 1,311.9 bn)
0
Volume Value 0 2 4 6 0 10 20 30
2009–10 5 year CAGR % 5 year CAGR %
Sources: indiaagristat.com, FAO, USDA FAS (PSD online), Way2Health Indian Food Processing Industry Report.
1
Sorghum = Jowar.
2
Millet = Bajra & Ragi.
3
Corn = Maize.
Bengal gram and Tur most consumed pulses and growing — both in volume and value terms
5–year CAGR
% )&
%
& '(&' (volume)
)&' !*# &( !(+*# !
"
" *
#
&' !*# & !+*# *
& !(*#
)& !*#
*
& !*#
&( !*# &) !*#
*
&( !*# +& !*# *
(& !*# *
& !*#
)& !(*#
$ $
2009–10
E . | Potential for savings through disintermediation and supply chain control in Paddy
,
(
)&& ' * + *& (
)&& ' $%! #
!( & ++
&
Activities in paddy – rice value chain
!
"
Cost break–up
#
" "" !
$%%& & % "& (
* (
$%%& ' ("" '" & ' (( )" %
E . | Wastages on account of poor post harvest management in Bengal Gram and Tur
Grading according to commercial type of the product will help in creating a differentiating value
E . | Market for Bengal–gram based processed products (limited tertiary processing of other
pulses)
Sources: Area of production from agmart.nic.in and patterns of consumption based on real consumption data 2008–09 NFS data.
Cereals tend to be stably priced — matching High volatility over the long term
the primary articles index in prices of pulses
%$
!
%
"
$
#
$
$ $
E . | Segmental split of Indian dairy industry and growth of organized players
*
!" #$%
Sources: Ministry of Food Processing Industries in India, Department of Animal Husbandry Dairying and Fisheries, Corporate annual reports, Press releases,
BCG analysis.
1
Organized players only.
2
Clarified butter.
3
Primarily khoa and channa.
4
Includes milk powder and dairy creamer.
5
Includes paneer, mozarella and cheese spreads.
6
Includes UHT milk, milk beverages and sour milk drinks.
#
$
$
!"
Sources: Euromonitor, Ministry of Agriculture, Department of Animal Husbandry Dairying and Fisheries, World Bank, BCG analysis.
1
Only organized market included for India.
2
Foods with added fortification for wellness benefits.
3
Processed dairy products like cheese, butter, ice cream without any added functional ingredients.
E . | Yield and infrastructure profile of livestock for different states
!!
60 48% 3,000
55% Buffalo 4.6
Delhi, Rajasthan, 5–7
40 2,000
Tamil Nadu LPD
# $ % &
!"" $
Competitive advantages
• Low–cost, pasture–based dairying system makes products price competitive
• Strong distribution allows daily replenishment of products at approximately 43,500 locations (market leading
position across fresh dairy product categories)
• Strong association with quality due to continued brand investments
Procures ~40 86 plants with total Outsources all key Brands strongly Does not own retail
million LPD (4x capacity of ~70 logistics functions associated with points of presence
Amul) via its million LPD quality and
co–op linkages (India’s capacity is innovation
~97 million LPD)
Competitive advantages
• Low procurement cost as New Zealand is a highly cost–competitive milk producer
• Strong processing capabilities (cost–effective operating efficiencies)
• Association with quality and innovation due to investments in R&D and brand
Dean Foods: One of the largest dairy processors in the United States
Sources from Owns majority of Owns majority of Pole position in Does not own retail
co–ops and the 100 plants the fleet of 13,000 some dairy points of presence
independent operated in the US cold vehicles segments; also
farmers; handles and UK delivering to over manufactures for
~10% of US milk 170,000 stores private labels
Competitive advantages
• Strong distribution capabilities, catering to over 170,000 locations across United States
• Processing excellence and scale (scale acquired primarily through acquisitions)
• Strong brands in select segments (portfolio of over 50 local and regional brands)
Positioning options across segments of value chain
Product play and geographic scale
Pricing ability
Business economics — Own vs. lease production / distribution and own vs. white label manufacturing
product portfolio, backward linkages, The domestic meat industry has limited
manufacturing capacities, etc., as this would organized presence and is dominated by the ‘wet
have a strong bearing on the required market’14 or unorganized players (Exhibit 2.18).
distribution capabilities. This is due to multiple factors — including a
higher preference for fresh meat, low penetration
• Customer focus: Players also need to decide of organized retail (especially in the food
on their target segment — retail, business– segment), weak food safety norms, and high cost
to–business (white label or institutional), of cold chain infrastructure. Buffalo meat has
or exports. the highest organized presence, of approximately
22 percent, mainly on account of exports15.
The business model (product positioning,
portfolio, pricing, and operating model) will O
depend on decisions taken in these key areas. India is widely believed to have a large
vegetarian population, and thus the meat
industry was traditionally assumed to be of
Meat Industry in India minor significance. The Hindu–CNN–IBN
I State of the Nation survey of 2006 indicated
The Indian meat industry is estimated at that approximately 60 percent of the population
approximately Rs. 500 billion with bovine was non–vegetarian, with an additional 9
meat12 (about Rs. 190 billion), chicken (almost percent consuming eggs. Meat is thus a key
Rs. 185 billion) and ovine meat13 (approximately constituent of the nation’s diet, and also a vital
Rs. 130 billion) being the key segments (see source of nutrition. However, the frequency of
Exhibit 2.17). Pork is a minor segment with an consumption remains low.
estimated size of approximately Rs. 14 billion.
The total meat production in India is estimated From a nutritional perspective, India’s per–
at 6 million tonnes and is dominated by chicken capita protein supply is estimated at
and beef (buffalo meat). approximately 57 grams per day, which is
Sources: USDA, FAOstat, MOFPI, APEDA, Suguna Poultry, Delhi agri marketing, Press releases, BCG analysis.
Beef Chicken
!
Sources: USDA, FAOstat, MOFPI, APEDA, Suguna Poultry, Delhi agri marketing, Press releases, BCG analysis.
! "#"
$
%
!
&''
( ( (
Sources: Ministry of Agriculture, World Bank, Delhi agri marketing, International Egg Commission, FAO, NSSO sample survey round 61 (2004–05), BCG
analysis.
1
Cereals considered low quality proteins due to lack of essential amino acids and constitute ~60% of total protein supply in India (~25–40% in other
countries).
Sources: Ministry of Agriculture, World Bank, Delhi agri marketing, International Egg Commission, FAO, NSSO sample survey round 61 (2004–05),
BCG analysis.
1
Recommended Dietary Allowance (~60 grams per day for normal adult of 60 kilograms).
Poultry is the preferred Consumption low even if adjusted
meat across markets for vegetarian population
&
'
## )* +,- ( '
! "
# $
Sources: Ministry of Agriculture, FAO, USDA, Solvent Extractors Association, BCG analysis.
Sources: Ministry of Agriculture, FAO, USDA, Solvent Extractors Association, BCG analysis.
traceability. Policy initiatives to promote manufacture the feed through captive mills.
efficient livestock markets will thus eliminate This enables higher appropriation of value
middlemen and also improve quality of meat along the value chain and better operational
produce (thereby improving export prospects). metrics like FCR22. This may remain a challenge
in the case of bovine meat due to the lack of
Poor harmonization with international regulatory clarity and the political sensitivity.
standards There exists potential for integration into corn
Globally, key import markets have steadily and soya procurement23 via contract farming,
introduced stringent SPS20 standards requiring through introduction of high–yielding varieties
higher certifications and compliance from and efficient agri–practices (investments would
exporters. Another level of complexity has be required to build these capabilities).
been introduced due to the variations in these
standards across markets. Export potential has Scale and diversification
been highly constrained due to the absence of Apart from delivering economies of scale, large–
an overseeing authority that would harmonize scale operations also reduce compliance costs
standards across markets. The NMPPB21 has on a per unit basis. Due to the steadily increasing
recently been given this mandate. Sanitary and Phytosanitary (SPS) standards,
there has been an increase in compliance costs
K I that can only be managed through large–scale
operations. In addition, for export purposes,
High integration along value chain product and geographic diversification reduces
High value chain integration via feed risks associated with disease outbreak in a
manufacturing, contract farming, and veterinary particular geography or animal.
care services holds the key to controlling costs
and standardizing quality. For instance, The export–oriented Brazilian meat industry
integrated poultry processors in India typically illustrates a business model that encompasses
provide the Day–Old Chick (DOC), feed, and both elements of scale as well as value chain
veterinary care to contract farmers, and also integration.
Brazil is one of the world’s largest meat exporters availability of pasture land (see Exhibits 2.24, 2.25).
(second only to the United States), with approximately Brazil treated approximately 50 million hectares of its
26 percent share of global meat exports. In 2009, Brazil savannah and converted it into cultivated pasture land,
was the world’s largest exporter of beef and chicken, which boosted its meat industry. Other favorable factors
with a market share of almost 22 percent, and 38 include concentration of livestock ownership, low labor
percent, respectively. The country’s leadership in the costs, and government initiatives like cattle traceability,
meat industry has primarily been on account of interest rate subvention, and stronger domestic
domestic attributes like high crop productivity and standards.
!#
%# !$
'#" " ! #$ #%
(
&
#
Sources: USDA, Ministry of Agriculture, FAO.
1
Includes dairy and beef cattle but excludes small livestock like hogs, turkey, chicken, goats, sheep etc.
!
!
Brazilian meat processors today are highly integrated around four times India’s total meat production.
and operate on a large scale. They have acquired this Moreover, they have presence in other geographies, and
scale primarily through the inorganic route (see Exhibit operate across meat segments — primarily poultry,
2.26). To put the scale of their operations in perspective, beef, and pork. This scale has resulted in significant
the top three Brazilian processors together handle savings and synergies.
The company is a leading poultry player in India, with a backward integration have been key to the players
share of approximately 18–20 percent in the live birds success.
market. India is predominantly a ‘wet market’24; live
birds form about 95 percent of poultry. The player is Contract farming
present across 12 states, and has a contract farming • De–links growth and capital requirements thereby
network of approximately 15,000 farmers. It also creating greater capital flexibility
manufactures feed in over 50 feed mills and markets • Low cost of labor, as contract farming relies on
processed chicken under its own brand. The company is surplus labor in farmer households
integrated across the value chain and pioneered the
contract farming model for poultry in India (see Exhibit Backward integration
2.27). • Reduction in feed costs via direct procurement and
investment in efficient mills
High integration across the value chain • Maintains control over feed supply throughout its
Successful implementation of contract farming and network
4 1
Production of feed inputs GP chicks from Aviagen
concentrated in South and West
Corn — South (~45%), West (~20%)
5
Soya — Centre (~60%), West (~35%) 2
DOC produced in own hatcheries
50 feed manufacturing mills across India
License for mandi procurement in
"#
Maharashtra3 and procurement centers in
key states
Feed, medicine etc. constituting ~90% of
Network for ~15,000 contract farmers
production costs provided by the company
across India
Bank linkages provided to farmers for
Farmers paid ‘growing charges’ based on $#
initial investment
live weight of chicken after 6 weeks
Own plant in Tamil Nadu with capacity of
~10,000 metric tonnes per annum
! $ (~15% of total installed capacity of India)
Outsourced
%
&#
Sources: Management discussions, corporate website, press releases, Ministry of Agriculture, BCG analysis.
1
Grand Parent.
2
Day Old Chick.
3
ITC is the only other company that has this license.
4
Feed constitutes ~60% corn and ~30% soya and ~10% of minerals etc.
5
Madhya Pradesh accounts for ~60% of India’s soya production.
!
Rearing for slaughter
Contract farming
Political sensitivity regulations
Domestic support for
quality assurance
Tariff and non–tariff Availability and prices of
barriers in key global inputs
markets
50 30%
25 14%
0
Consumption – Cereals, Fruits and Animal Others 2009 2010
1
food bread, pulses vegetables products
Sources: Central Statistical Organization — National Accounts publication, RBI, EIU database estimates, BCG analysis.
Note: All data relevant for financial years is earmarked with “FY”, otherwise data can be assumed to be relevant for the calendar year.
1
Fruits and Vegetables contains potatoes and other tubers.
India exports less than 2% of production... ...lagging behind in global F&V trade
India’s volume share of global exports — 2010
)* ( ' & %
India’s value share of global exports — 2010
)* ( ' & %
!
$$ ! " # $$ &# + ,-. #
6,000
CAGR 5,000–6,000
10–14% 4,500–5,200
4,100–4,600
4,000 3,700–4,000
3,400–3,500
3,099
2,713
2,000
0
2009 2010 2011 2012 2013 2014 2015
Actual Projections
Sources: Central Statistical Organization — National Accounts publication, RBI, EIU database, BCG analysis.
Illustrative wastage in value chain — Onion Illustrative wastage in value chain — Banana
20 25
10–12% 16–20% 6–7% 21–24.5%
Weight loss of
20 stem not included
15
4–5%
15
10 1–1.5%
10–11%
10
2–2.5%
5 1–1.5%
3–4% 5
0%
0 0
Farmer Wholesaler Overall Farmer Ripening Retailer
Transport Retailer Transport Wholesaler Overall
Illustrative prices in value chain — Onion Illustrative prices in value chain — Banana
15–20% 100% 12–13% 100%
100 100
16–19%
15–21%
80 80
3–4%
4–6% 20–24%
12–16%
60 60
40–50% 19–29%
40 40
16–25%
20 20
0 0
Farmer Market trader Retailer Farmer Ripener Wholesalers Consumer
Aggregator Wholesaler Consumer Aggregator Market trader Retailer
• It is important to earn the farmer’s trust • Partnering with farmers: It is important for
and involve him as a partner. Providing him private players to enter into tie–ups with an
with quality inputs, training, modern aggregated farmer base, assist them in
equipment, and farming practices will cultivation, and secure a steady supply of
definitely help the initiative. produce (wherever necessary) from them
that meets global requirements in terms of
• Invest in R&D in order to determine the quality, safety, and hygiene.
correct crop variant and the appropriate
agricultural practice that is required for it. • Developing infrastructure: Investments in
infrastructure such as port facilities, testing
• It may be necessary to provide support and packaging are important factors that
through access to credit, insurance products, would boost exports of F&V.
and contractual agreements.
• Getting certifications: Players will need to
• It is important to aggregate farmers in order help farmers achieve international
to build scale and improve financial viability certifications, a precondition to exports.
of the initiative.
• Implementing controls: It is critical to play
Create an efficient value chain across the value chain in order to ensure
Private players can benefit significantly by that both quality and cost controls are
reducing the current levels of inefficiency in properly implemented, prerequisites to
the F&V supply chain. Bypassing the traditional running a successful export F&V business.
intermediaries will help them reduce their
sourcing costs and wastage levels, thereby Increase processing levels
bringing down the cost for the end–consumer. In order to realize its growth potential and
Investments in the supply chain (cold storage, succeed, F&V processing sub–segment will
ripening, warehousing, etc.) are needed to need to focus on the following areas:
handle the perishable nature of produce.
However, private players — in order to make • Forming tie–ups with aggregated farmers,
their investments economically viable — providing assistance, if necessary, and
should build sufficient scale of operations ensuring consistent, high–quality produce.
(through farming of multiple crops, handling a
large farmer base, and establishing a large • Establishing processing facilities close to
distribution network). This essentially requires farms, reducing transport costs and wastage.
focus on two key areas:
• Tightly managing the entire chain to ensure
1. Sourcing: Private players need to improve control over costs, since price cuts will
the sourcing mechanism by procuring speed up adoption of these products.
directly from farmers, thereby bypassing
intermediaries. Integration and scale
The success of a private player will depend
2. Supply chain: Private players must make upon how it executes against the imperatives
substantial investments in cold storage, listed above. The ability of a player to play
warehousing, ripening facilities, etc. to across the value chain will translate into:
improve various supply chain elements.
• Assured supply of quality inputs through
Meeting quality standards for exports efficient agri–practices.
Exports of Indian fruits and vegetables have
been adversely impacted due to the producers’ • Exercising of strict control over the supply
inability to meet international quality chain to monitor quality and costs, and to
standards. Players in this space will have to reduce wastages.
E . | Key decision levers for Indian fruits and vegetables play
Economic model
Owned
Crop selection Target customer Leased
Outsourced
What crops to target?
Who will we sell to?
Cereals Business
X Retail X X
Oil seeds model
Wholesale
Pulses
Industrial
F&V
Exports Growth model
Cash crops
Organic
Size and complexity Inorganic
including adjacencies JV / partnership
Opportunity to value–add
Regulations etc.
Revenue model
With a presence in over 90 countries, Dole is a leading The company is able to source inputs through its own
global producer, marketer and distributor of fresh fruits plantations, in Costa Rica, Ecuador and Honduras,
and vegetables, including a line of value–added fruit ensuring steady supplies. Assets in the supply chain help
and vegetable products. Its product portfolio includes it maintain quality levels and reduce costs. Dole’s recent
fruits (banana, kiwi, pineapple, etc.), vegetables (lettuce, focus on value–added products, like salads, fruit bowls,
celery, packed salads, etc.) and packaged foods (canned frozen fruits, organic products etc., marks an extension
fruit, juices, etc.). A key reason for Dole’s success has of its integrated play, moving the company into higher
been its uniquely integrated model (see Exhibit 2.37) margin products. Its ability to scale up to a diverse
— including sourcing, growing, processing, distributing product portfolio has helped it leverage its distribution
and marketing — which helps it maintain input supply base, as well as minimize the volatility of its earnings.
and quality, and simultaneously minimize risks and Dole established a ‘pipe-line’ first, building scale and
costs. ability, and then carried other products with it.
Dole sources most of its fresh Leverages Dole has Dole Dole has
fruits from owned plantations in the largest forward extensively multiple
Costa Rica, Ecuador and dedicated, integrated markets and consumer
Honduras refrigerated, into ripening brands its products,
Leases out land for vegetables containerized for fruits, products for particularly in
fleet for processing retail–salads, the packaged
Also operates plantations in Asia
shipping plants for fruit bowls foods segment
fresh salads and etc.
produce canneries for
packaged
foods
Sources: Company information, press research, industry reports, analyst reports, BCG analysis.
1
Net Fixed Assets.
2
Ranges based on last available 5 years data.
200 +120%
200 +225%
60 60
55
52
150
40 40
100
25
20 20
50
28 16
0 0 0
Pre–program Post–program Pre–program Post–program Pre–program Post–program
Sources: Company information, press research, industry reports, analyst reports, BCG analysis.
1
Net Fixed Assets.
2
Ranges based on last available 5 years data.
• Seeds: Once the decision to sow a • Insurance: On one hand, Indian farmers do
particular crop has been taken (based on not have access to low–cost institutional
varied inputs), the use of the right variety credit, and on the other hand there are
of seeds is essential to ensure high yield. several risks associated with agriculture
Examples of the use of high yielding that make farmers even more (financially)
varieties of seeds in the Green Revolution vulnerable. Some of these risks, such as
and the Bollgard technology in cotton weather, are beyond control. Therefore,
clearly outline the importance of quality insurance is a key input required to diversify
seeds in enhancing yield. these (uncontrollable) risks, and reduce the
3 2.8 150
2.5 126
+22%
2 100
1.8
1.6
68
1.3
1 50
0 0
2005–06 2006–07 2007–08 2008–09 2009–10 2009–10 2014–15
Sources: Agricoop.gov.in, Grain Agricultural Information Report, Seednet.gov.in, National seed association of India, Indiastat.com, BCG analysis.
E . | Seed Requirement and penetration of hybrid across various crops in India
!
"#$
"# %
Sources: Agricoop.gov.in, Grain Agricultural Information Report, Seednet.gov.in, National seed association of India, Indiastat.com, BCG analysis.
Note: F&V: Fruits and vegetables.
#$%
20
15.9
15.5
14.6 15.1
15 13.6 14.1
15.1 15.1
13.4 13.4
12.5 12.7
10
7.2
6.3 6.6 6.9
5.7 6.0
5
4.8
4.3 4.5 4.7 4.8
4.4
0
FY’07 FY’08 FY’09 FY’10 FY’11 FY’12
! "
urea, given the imminent capacity additions the recommended proportion of 4:2:1, the
after the recent allocation of natural gas. imbalance in the usage of urea is even higher
in North India at 15:4:1 (see Exhibit 3.6). The
High reliance on imports imbalance in usage can be primarily attributed
The use of chemical fertilizers in India has to better availability and relatively cheaper
grown by approximately 7 percent per annum prices of urea as compared with other fertilizers.
through the period 2004 to 2005 to 2010 to The increased use of nitrogen–based fertilizers
2011 (see Exhibit 3.5). However, production has resulted in depletion of other soil nutrients
capacities for Nitrogen and Phosphorous have and has affected crop productivity.
grown only by 6 percent in the same period
leading to higher imports that grew by 24 K
percent during this period. The high growth in The two key challenges that have been
imports is primarily on account of higher impeding the adequate and balanced use of
imports of potassium–based fertilizers, for fertilizers are:
which India completely relies on imports due
to the absence of potash reserves in the country. • High cost of production and imports,
Limited availability of phosphate rock and resulting in high subsidies
natural gas, which are raw materials for
phosphorus– and nitrogen–based fertilizers, • Lack of raw material supplies for
has impeded growth in production capacities. production
100
6%
12% 14% Potassium
20% 21%
80 24%
40
70%
55% 56% 59% Nitrogen
52%
20
0
East West North South All–India
1,000 950
880
800 760
650
600
640
Other
520
400 fertilizers
400
260 170
190
200 160 100
50 70 300
230 240 240 Urea
120 160
110
0
2004–05 2005–06 2006–07 2007–08 2008–09 2009–10 2010–11
The imbalanced use of fertilizers is not only Price sensitivity in global fertilizer prices is
impacting the growth in productivity but also likely to have some impact, given the scale of
the existing productivity of the soil by depleting India’s fertilizer consumption and the reliance
its nutrients. Unless adequate supplies of raw on imports. Hence, pricing innovations would
materials and imported fertilizers are ensured, be essential to create a pull for products in the
the subsidy burden on the government, and future.
the existing imbalance in usage, will continue
to increase. First–movers along these factors would be
well–poised to derive a competitive advantage,
K through product innovations and stronger,
Fertilizer companies have long relied on push–based sales models.
subsidies for being profitable. However, given
the new subsidy scheme, it is imperative for
companies to look beyond subsidies in order to Pesticides
build sustainable and profitable business I
models. Going forward, successful business Low consumption
models will be built on the following two Pesticide consumption in India is significantly
critical factors: lower than the global average. The average
consumption in India is 500 grams per hectare,
• Cost reduction by driving operating as compared with 7 kg per hectare in the
efficiencies United States, and 14 kg per hectare in China
(see Exhibit 3.8). Growth in consumption has
• Product innovation and effective sales been slow at 1 percent from 2004 to 2005 to
models 2009 to 2010. The sluggish growth is largely on
Japan 12
30
Korea 7
USA 7
20
France 5
UK 5
10
Pakistan 1
India 0.5
0
2004–05 2006–07 2008–09
2005–06 2007–08 2009–10
account of the significant de–growth in share, with 21 percent of the market. This is
consumption of pesticides for cotton, which unlike the global markets where weedicides
accounted for 35 percent of the pesticide use constitute the largest share of the market (with
in India. a 45 percent share). The low use of weedicides
can be attributed to the low agricultural labor
The use of pesticides is concentrated in a few costs in India. As a result, manual weed removal
crops. Consequently, the usage of pesticides is is more cost–effective as compared with the
concentrated in the states that sow these crops. use of weedicides. However, given the significant
Paddy has the largest proportion of pesticides rise in labor costs in the last few years, weedicide
consumption in India, accounting for 26 percent use is increasing among Indian farmers. Going
of the pesticide consumption, followed by cotton forward, as usage patterns change, weedicides
with 20 percent. Consequently, Andhra Pradesh and fungicides are expected to grow faster as
has the highest proportion of pesticide compared to insecticides.
consumption at 23 percent, followed by Punjab
and Maharashtra with 10 percent each. Industry structure
While the industry is extremely fragmented
While imports have increased as a percentage with over 600 players, the top 10 players
of domestic consumption, India still remains a dominate with approximately 50 percent
net exporter of pesticides. Exports, which market share (see Exhibit 3.9). The large
constituted 49 percent of industry sales in 2007 players are backward integrated and
to 2008, are envisaged as the key growth driver manufacture the active ingredient as well as
for the industry going forward. India’s pesticides end–formulations. The small– and medium–
are primarily exported to the United States, sized players only manufacture and sell end–
Brazil, Malaysia, and European countries. formulations under local brands.
Insecticides constitute 62 percent of the Indian Off–patent products dominate the Indian
market while weedicides have the smallest pesticide market accounting for 70 percent of
!
(
1
/+.
! '
'
/+2
#
1 & 3
#
/+4
5
2+.
#
2+
Sources: Press releases, CMIE, ICRA Management Consulting Services Limited, Company Reports (Data for 2010).
industry sales. Investment into research and Consequently, while off–patent products form
development has been low at less than 1 percent the largest proportion of industry turnover,
of sales. International players such as Bayer and innovators continue to enjoy a larger market
Syngenta have invested in product development, share within off–patented products.
while Indian players such as Rallis have entered
into alliances for access to new products lines. Increasing penetration of GM and hybrid seeds
Players such as United Phosphorus have focused that are resistant to pests
on the inorganic route for access to new markets Research and development into genetically
to launch products. United Phosphorus has modified seeds presents a significant challenge
completed 13 acquisitions since 2004, primarily for pesticides since GM seeds are resistant to
in Europe and Latin America. key pests. Research into hybrids is also focusing
on resistance to pests in addition to yield
K enhancement. The case of BT cotton, wherein
While the low penetration in the Indian market the use of pesticides in cotton reduced
presents significant opportunity for growth, drastically after its use, is a case in point.
the fertilizer industry in India is faced with
certain specific challenges, such as: Emergence of bio–pesticides as an alternative
While inadequate use of pesticides could lower
• Increasing penetration of GM and hybrid crop yields by as much as 42 percent, excessive
seeds which are resistant to pests use results in residues and degradation of land
and low crop quality. Pesticide residues in food
• Emergence of bio–pesticides as alternative have impacted quality, which in turn has
products adversely affected exports of food products.
Integrated pest management, which promotes
Stringent regulations for product registration the use of non–chemical methods such as the
pose a significant entry barrier for new entrants. use of bio–pesticides, poses challenges to the
4,500 60
45.60
42.30 43.90
48.20 Number
target
3,000 40
3,670 3,750
1,500 3,020 20
2,550
2,290
0 0
2006–07 2007–08 2008–09 2009–10 2010–11
(Target)
100
80
51% Small and
59%
marginal
60
93%
40
49% Medium
20 41%
and large
7%
0
Farmer Number of accounts Number of accounts
base 2006–07 2009–10
100
Investment
29% 25%
30% credit
80 40%
60
40 Short term
71% 75%
70% credit
60%
20
0
2006–07 2007–08 2008–09 2009–10
Indian farmers are further accentuated by the poor realization for the crop. Consequently,
fact that the adoption rates for modern farming farmers are unable to repay loans on time,
practices continue to be quite low, especially thereby tarnishing their risk profile.
among small and marginal farmers. Banks and
financial institutions providing credit to farmers High transaction costs due to small ticket size
primarily face the following challenges: of loans
Currently, the average ticket size for farmer
• High risk due to high default rates among loans ranges from approximately Rs. 150,000
farmers for commercial banks to about Rs. 30,000 for
co–operative banks. As a result, the transaction
• High transaction costs due to small ticket costs towards due diligence and loan
size of loans administration and servicing are higher as a
percentage of the amount lent. Banks either
• Limited end–use monitoring resulting in limit the due diligence to reduce costs or lend
inappropriate usage of loans higher amounts to existing farmers in order to
meet lending targets.
The compounding effect of these risks is
illustrated in Exhibit 3.13 Limited end–use monitoring resulting in
inappropriate usage of loans
High risk due to high default rates among The fragmented borrower base limits the end–
farmers use monitoring of loans. It is estimated that
Most small and marginal farmers are caught in about 41 percent of the credit is utilized for
a vicious cycle, as explained in the Exhibit 3.13. non–farm purposes, such as repayment of
It is the lack of availability of institutional overdue loans, personal expenses, etc. This
credit and the high cost of borrowing that also has an impact on the repaying capability
forces farmers to reduce the use of high quality of farmers, since there is no income accrual
inputs. This, in turn, results in lower yield and from such usage of loans.
El Comercio has entered into strategic resulting in lower lending rates. Transaction
alliances with silos to provide customers costs are also lower due to the alliances
references, thereby facilitating customer with silos that also manage repayment
acquisition. These silos provide in–kind wherein the farmer receives payments aer
credit by way of seeds, fertilizers, and other deduction of loan amount and El Comercio
inputs and also refer farmers to El Comercio collects repayment from buyers for a fee.
for cash requirements. Given the lower cash Over the years, El Comercio also covers
ticket size and reduction in misappropriation, default risk for the entire loan aer getting
El Comercio’s initial portfolio at risk is lower, repeat business from the farmer.
14.5
Penetration of private players is negligible
14.1
14.0
13.7
13.5 13.3
13.1
13.0
12.5
12.0
2006–07 2007–08 2008–09 2009–10
Three levers through which better information can impact farmers’ realization
~20–25%
~30–70%
3–5%
Lastly, farmers would have access to customized • Distributor–led model: Under this model,
product bundles suitable for specific crops and the distributor would aggregate inputs to
climatic conditions. This would encourage provide customized bundles to farmers and
higher adoption of quality inputs, thereby would also buy the final output from
assisting improvements in yield. farmers. Here, the distributor is able to
leverage the common network to push
Based on the rationale underlined above, we product bundles. The distributor also
see opportunities for four models for aggregates output supply and hence is able
convergence in input distribution: to command prices based on higher
volumes. Currently, distributors offer partial
• Input provider as distributor: In this case, aggregation of inputs and cater to a small
an input provider would collaborate with network of farmers within a taluka or
other input providers to aggregate supply village. However, players need to make
and provide customized product bundles to large investments in distribution network
farmers. The distribution network of to achieve national scale.
retailers would, however, continue and
would supplement the last mile reach to • Buyer–led model: In this case, food
farmers. Through this model, all players processing companies or retailers aggregate
can effectively utilize synergies in their and distribute quality inputs and also agree
sales force. Moreover, the input provider to buy the final output. Buyers may lock–in
secures a presence in distribution and the purchase of produce initially or subject
comes in closer contact with the farmers. the purchase to achieving desired quality
output. The biggest benefit, in this case, is
• Input provider as the end–buyer: In this the stability in output quality that the buyer
case, an input provider would distribute is able to derive through the use of
customized product bundles to farmers and customized bundles of quality inputs.
Between 1996 and 2006, Gujarat revolutionized its agriculture Limited, — as a nodal agency to implement government
through a gradual shi toward high value cash crops, animal schemes that also provides 50 percent micro–irrigation
husbandry, fruits and vegetables (F&V), and a series of subsidy to farmers. It aims to promote sustainable agri–
measures to bolster productivity. Together, these initiatives practices and has already improved crop productivity and
resulted in a 9.6 percent growth in agricultural GDP in Gujarat, water efficiency. Private participation through contract
compared to 2.9 percent for India over the same period. farming led to an increased share of cash crops and fruits
and vegetables (F&V) from 60 to 70 percent of the total value
The Gujarat government’s initiatives during the period added by agriculture. There was also greater adoption of
included bolstering of infrastructure through various technology; for example, the cotton yield increased by
irrigation schemes, rural electrification, and road construction approximately 130 percent due to Bt cotton adoption in
projects (which connected farms to the markets), as well as about 54 percent crop area.
an amendment to the Agricultural Produce Market
Committee (APMC) Act to bring forth greater private Gujarat provides a strong example that other states could
investment using subsidies. The government also created a emulate in order to improve farm productivity and farmer
special body — the Gujarat Green Revolution Company livelihoods in a sustainable manner.
lower productivity and even greater The three key issues that plague farming in
poverty. Smaller land–holdings also make India — staples–oriented choice of crop, low
it unviable to mechanize farming, further cropping intensity, and fragmented landholding
lowering farm productivity. — are summarized in the Exhibit 4.1 below.
Sources: MOSPI, Department of Agriculture and Cooperation, XI five year plan, Indiaagristat.
Note: Marginal farmers are defined as those with area less than 1 Ha; small farmers have area between 1 and 2 Ha; semi–medium farmers have area
between 2 and 4 Ha; medium farmers have area between 4 and 10 Ha; large farmers have area more than 10 Ha.
Registered under the cooperative Registered under section IXA of Registered under the companies
societies act: companies act as producer act as public limited:
company; new insertion amended
Can have nominal members in 2002: Can get external equity
other than producers (FabIndia model)
Can have > 50 members, no
Seen as welfare organization, minimum capital (unlike Can have > 50 members
tax benefit private limited)
Allows multi–state operations
High state involvement Equal voting rights to all
members, interests protected Minimum capital required
Does not allow multi–state (one share / one vote)
operations Large formalities, reporting
Allows multi–state operations requirement, professional
management requirement,
MACS have minimum state Only producers are members, taxed
involvement; accepted in only difficult to get equity capital
few states
Large formalities, professional
management requirement,
taxed
!
"
"
#
!
• Promoting sustainable agricultural practices: The • Enabling farmers to attract capital: This model has also
farmer owned model deployed by this company raised interest from venture capital funds and banks.
reduces dependence on expensive agro–chemicals Several micro-venture funds have picked up stake in
through the use of manure and crop rotation. This the company.
process also helps in reducing water contamination
and soil degradation. Key success factors (see Exhibit 4.7) for this model include
farmer ownership and empowerment, guaranteed
• Enhancing farmer welfare: Since its formation in transparency in supply chain, and training and coaching
2007–2008, the player has paid farmers Rs. 10 million of farmers for better quality and yield.
E . | Key success factors in the organic players’ business model
Each farmer owns shares in the Provide consumers i.e.
company and has equal international brands, direct
voting rights access to farmers
For every ton of raw cotton Reduced complexities in supply
bought, Rs. 1,100 is invested through direct access to the
by the player
companies
Engages closely with farmers
and helps them in resolving
farm issues
E . | Significant yield improvement and water saving across crops
( "'
*
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" %(
%" %" %%
%
"
&
$" $%
$ $$ $$
$ !#
! ! !$
!
! &'
&"
&
"
$
!"
# # # # # $# # # #
Sources: Land Use Statistics from Directorate of Economics and Statistics, Department of Agriculture and Cooperation.
Note: Cultivable waste land refers to land available for cultivation, whether taken up or not taken up for cultivation once, but not cultivated during the last
five years or more in succession. Figures for latest available year 2009–10.
2 million hectares 4.6 million hectares 1.2 million hectares
Preference for horticulture Bio–fuel crops only No restriction specified
and bio–fuel trees
No restriction 30% of total No restriction
) No rent for 5 years ) 10 times of land revenue ) Rs. 500 per hectare for
) Rs. 100 per hectare for of lowest category of first 5 years
next 5 years barani land in the ) Rs. 1,000 per hectare for
) Rs. 250 per hectare for relevant tehsil next 5 years
next 10 years ) Rs. 1,500 per hectare for
) 50% increment for value next 20 years
adding activities
uptake from the corporate sector and individual • Wasteland farming can also be a less
farmers alike, and this can substantially politically–sensitive means of introducing
increase agricultural production. The benefits corporate farming in India which, if well–
from this exercise will be manifold, as monitored, will undoubtedly boost
enumerated below: production
NOTE:
• These farms will enjoy benefits of scale 1. Form of farming where production is primarily meant
for self–consumption.
(resulting in superior productivity) and
2. Ratio of gross cropped area to net sown area — thus
investments in allied infrastructure like if a farmer has two crops a year the intensity is said to
food processing units be 200%.
3. Marginal farmers are those with area < 1 Ha, small
farmers have area between 1 to 2 Ha.
• Investments in these wastelands will create 4. Theoretical gross area that could be irrigated through
available water resources.
several rural employment opportunities
Brazil has increased area under cultivation over the last decade
50 47 49 48 47 48 48 48
46
44
40
40 38 38
30
20
10
0
1999–00 2001–02 2003–04 2005–06 2007–08 2009–10
2000–01 2002–03 2004–05 2006–07 2008–09 2010–11
0 0
2003 2005 2007 2009 2011 2003 2005 2007 2009 2011
2004 2006 2008 2010 2004 2006 2008 2010
75 30
30
24.5
10
Accounts for
15–20 75% of total cold
15
storage space
0 0
Potatoes Meat and Total Supply Potatoes Meat and Others
fish demand fish
Fruits and Flowers Gap Multi Fruits and Total
vegetables and others purpose vegetables
~25% shortfall in the current supply of Current planned capacity addition would
warehouses in India not be able to meet future demand
200 200 180–190 85
50% shortfall
150 130–140 150
45–55
30–35
100 100
30 85 70–80
20
50 50
10
25
0 0
FCI CWC SWC Others Total Gap Required Expected Existing Capacity Gap
1
capacity demand capacity planned
Sources: Ministry of Agriculture; Department of food and public distribution; BCG analysis.
1
Expected to grow at a CAGR of 8% for next 5 years.
4 6
On a cash–flow basis, it will
be a cash positive business
2 2.5– 3 3.0–
2.5– 2.2– 4.5–
4.0 3.5
4.0 2.5 3.5– 5.5
5.5
0 0
2.2– 3
0.0– 2 1.5 0.1
2.4 1.5
–2 –3
Operating Depreciation2 EBT from Operating Depreciation2 Revenue
3
profit other sources profit from WRF
Interest EBT from Total Interest EBT from Total
cost1 storage EBT cost1 storage EBT
/ Dry storage has additional revenue streams like / Limited scope for additional revenue streams in
WRF, procurement, collateral management etc. case of cold storage
/ Economically viable model for an independent play / Most of the time present as captive units;
subsidized by other business
The company offers end–to–end warehousing and logistics utilizations, but also fetched it better warehousing
solutions to commodity stakeholders with a strong focus rentals.
on traders. Along with warehousing, the company offers
allied–services like commodity funding, collateral • Partnerships to explore additional revenue streams:
management, testing and certification, fumigation and The player has tied up with multiple banks to provide
pest management, commodity procurement, trading, and collateral management for extending post–harvest
exports. It has also forward–integrated into branding and credit facilities to farmers, traders etc.
retailing of spices to leverage fixed assets more effectively
(see Exhibit 5.7). The company has developed a strong • Partnerships to support asset–light expansion: The
presence in Rajasthan and Gujarat with more than 10 company has entered into a strategic tie–up with the
warehouses totaling more than 0.5 million MT of capacity. Rajasthan State Warehousing Corporation (RSWC) to
It plans to build approximately 1 million MT of capacity in manage the latter’s warehouses by taking control over
five to six states including Madhya Pradesh, Karnataka, its entire operation. This partnership has enabled it to
and Punjab. expand thrice its own capacity with minimum
investments. Moreover, a tie–up with a public sector
The player has strategically forged partnerships with company has enabled the company to enter long–term
multiple agri–stakeholders to build a scalable, stable, and contracts.
asset–light model.
• Captive storage: This business model is mainly
• Partnership to ensure higher capacity utilization: The applicable for produce that requires special technology
company has tied up with NCDEX Spot Exchange and methodology for preservation. For instance, Adani
(NSPOT) to provide warehousing and logistics support Agrifresh has set up a captive cold storage with imported
to the NSPOT participants. This partnership has not technology to preserve its goods due to lack of local
only helped the player in ensuring better capacity providers in this space.
Plan going
2007 2008–09 2010
forward
Acquired a local Expanded by building own Leased state government Expand across
Storage warehouse player warehouses in 2 states warehouses to expand 5 more states in India
Corporate
Traders
Farmers
Corporate
Specialized
Traders 1–2 5–6 Pan
Allied states states India
services Generic
Farmers like WRF
Corporate 3PL
Specialized
Traders 1–2 5–6 Pan
Allied states states India
services Generic
Farmers like WRF
3PL
Specialized
1–2 5–6 Pan
Allied states states India Build a full–scale integrated play
services Generic by expanding pan–India
like WRF Target corporate customers for
end–to–end supply chain
3PL
Expand footprint to multiple
management
geographies
Leverage the established network
to expand across the value chain
such as
Build strong footprint within 1–2 Transportation, food
states first processing, retail, etc.
Establish strong connect with
traders to ensure better
capacity utilization
Build capabilities for multiple
crops across both seasons
Mitigate risks of a particular
crop failure
Ensure better utilization of
assets
Asia Pacific logistics market growing faster than rest of the world
!"" Rest of
the world 3.2%1 ,&"(+
#""
,&&%+
$""
,#)+
%""
&""
"
%""" %""& %""% %""$ %""# %""! %""' %""( %"") %""* %"&" %"&& %"&%
CAGR (’06–’11)
)""" .
-
'$"" +12.3% Growth drivers
'"""
#!""
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)#+ +9.7%
*"+
%"""
Leveraging in–house
logistics capabilities and Trying to capture the
benefit from internal base Automotive FMCG Retail emerging opportunity
to better utilize assets Significant investment
However, interest conflict in and capability
In–
&
potentially optimizing development required
competitors’ supply chain
Sources: Analyst reports (Cushman Wakefield 08, Enam 07, Frost & Sullivan); Market interviews; BCG analysis.
K PL scope for supply chain optimization. Players
Key success factors for building a large and should set up the right infrastructure, IT
successful 3PL play: systems, and manpower to cater to target
industries.
• Build scale and optimize logistics
operations: While building the initial • Access to high quality sub–contractors: In
network of warehouses and transportation, order to reduce upfront investment in
3PL players should carefully examine the warehouses and transportation networks,
prospective client base and set up a network 3PL players can tie up with other high–
where it would be possible to share the quality sub–contractors and leverage their
established asset across multiple clients asset base.
and to have better asset utilization. NOTE:
1. With the India government introducing the Negotiable
• Ability to up–sell value added services: 3PL Warehouse Receipt System (NWRs), farmers can seek
loans from banks against the warehouse receipts issued
players should build industry expertise by to them against storage.
focusing on certain industries with high 2. Incremental rate of return.
!
6,000 40
5,500 35%
5,000 30
+10% 4,550
21%
4,150 20
4,000 3,750
3,400 10 8%
3,100 6%
2,850 2%
0
F&V Milk Buffalo Poultry Marine
and its meat products
2,000 products
.
/ ,
/
,
," .
,"
%
%
0 .
/
0 ,
/
,
," .
,"
0
0
%0 %0
%0
0
0
0
Source: Capitaline.
Note: All figures for 2011.
Dole is a leading global producer, marketer, and distributor Dole has built a unique fully–integrated model in the F&V
of fresh fruits and vegetables, including a line of value– space. Dole sources most of its fresh fruits from its own
added F&V products. The company operates a fully– plantations in Costa Rica, Ecuador, and Honduras. It has
integrated model (including sourcing, growing, processing, leased out land for vegetable farming and also operates
distributing, and marketing), holding number one or plantations in Asia. Due to the perishable nature of its
number two share positions in the categories in which it products, the company has invested heavily in building
participates. Overall the agriculture portfolio of the specialized and dedicated refrigerated containerized fleet
company comprises three categories: for shipping the fresh produce across the world.
• Fresh fruits account for US$4.8 billion in revenues for Apart from this, the company has forward integrated into
the company. Dole is a leading player in the banana, fruit ripening, processing plants for salads, and canneries
fresh pineapple, grapes, apple, and kiwi market. The for packaged food (Dole business model evolution
company has established large–scale ripening and illustrated in Exhibit 6.4). Dole has built a strong brand
distribution operations in the Europe. imagery in fresh F&V segment by investing heavily in
marketing and branding its products for retail.
• Fresh vegetables account for US$1 billion in revenues.
Dole’s portfolio primarily consists of fresh produce Key success factors for Dole have been three–fold:
like lettuce, celery, broccoli, etc., and fresh–packed
vegetables and salad. • Efficient supply chain: Dole has invested heavily in
building a “closed–loop” cold storage supply chain
• Packaged food accounts for US$1.1 billion in revenues. with 60 processing and ripening centres, 25 ships and
Dole’s portfolio primarily consists of canned fruits, approximately 14,800 refrigerated containers, and port
fruits bowl, juices, etc. facilities in each of the countries it operates out of.
• Global scale and multiple products: Dole has risking’ strategy works when Dole markets its products
developed a diversified sourcing option and product in several countries across the globe.
lines to de–risk itself from country–specific factors.
For instance, the company sources bananas from the • Universal brand: The company has invested heavily
Americas, vegetables largely from the United States, in marketing and branding in order to build a single,
deciduous and citrus fruits from Chile, New Zealand, universal “Dole” brand with a strong recall across
and South Africa. This way, the business is minimally the world. For long associated with pineapples, the
impacted in case there are problems with sourcing a “Dole” brand has been extended across the
particular input from one country. The same ‘de– portfolio.
chain segment plays a critical role in and provide farm inputs like seeds and
determining the success of a food processing fertilizers to have better control over quality
business. The value chain segment is also and quantity of the raw material used.
dependent on the end–product the food Backward integration into farming inputs
processing unit is manufacturing. Four kinds of and farm management is critical for
business models have been observed in this businesses where the raw input for food
sector: processing forms a critical source of
differentiation. For instance, Pepsi is
• An integrated input and farm management involved in contract farming for potatoes to
play: A set of food processing players have procure a particular quality input for its
backward integrated into farm management chips. Through contract farming, Pepsi is
ITC is one of India’s foremost private sector outsourced the entire production and
companies with a turnover of Rs. 280 billion. sourcing operation to local food processors
It has diversified presence in sectors such as for its ready–to–eat food product category to
cigarettes, hotels, paperboards, packaging, cater to the preference for local taste. It
agribusiness etc. ITC’s agribusiness division leverages ITC’s large distribution network
is the country’s second largest exporter of and established brand along with stringent
agri–products with exports of over Rs. 10 quality check process to build scale in the
billion. Its domestic sales of agri–products product segment. On the other hand, for
are in excess of Rs. 15 billion. ITC is present Bingo chips the entire process is in–house. It
across different processed food products relies on in–house technology and plants for
ranging from wheat flour, ready–to–eat food, the production of Bingo chips in order to
biscuits, chips etc. Each of the businesses ensure consistency in product quality and
operates in different parts of the value chain taste. It is also leveraging in–house
depending on its source of differentiation. production for the development of new
For instance, on the one hand ITC has products and innovation.
1. Product category: There are some product For a food processing business to succeed,
categories that are more amenable to several choices need to be made along multiple
branding as compared with others. Branding dimensions. These are enumerated below:
plays a crucial role in product categories
such as oil and ready–to–eat food where • Value chain segments: Selection of the right
the quality of the product cannot be value chain is critical not only to improve
ascertained easily. In the case of F&V, profitability but also to build a competitive
branding has a very limited role. advantage. There are some food processing
businesses where the requirement of inputs
2. Existing capabilities: For players that have is very specific, whereas there are others
a strong brand and distribution channel, it where optimization of input costs is critical
is easy to leverage existing capabilities and for acquiring a competitive edge in the
enter into the branded food processing market. For example, Pepsi requires
space. potatoes of certain kind and size for its
chips business to ensure taste of the chips,
3. Investment: Decision for forward whereas for ITC’s wheat flour business it is
integrating into branding / marketing important to procure wheat at lowest–
depends heavily on the investment appetite possible cost so as to compete with the
of the players. Players like Jain Irrigation unorganized market. The strategic choice
have strategically decided to be in the of the value chain segment would be very
wholesale business of fruit pulp and juices, different for both these businesses. The
instead of retailing the same. former would require high level of
integration in farming inputs and farm
S management to ensure produce quality.
The latter would require building local
procurement centers and providing
Companies pursuing opportunities in the food transportation facilities to farmers in order
processing space in India first need to to bring down procurement cost through
determine the construct of their business direct procurement.
model and then seek to accelerate the
development of the same (as illustrated in • Target customer: The choice of customer
Exhibit 6.7) segment largely depends on the existing
distribution model and the brand or the revenue model where they process
appetite to build the same. For companies oilseeds procured by other companies.
like ITC and HUL that have a strong Similarly, ITC has built a unique capability
distribution network and an established of procuring cereals at a low price through
brand, reaching out to the retail customer its wide e–Chaupal network.
segment is easy. Such companies can easily
enjoy higher margins. Other players may K
have to wholesale the processed product to
other companies, and play the low margin • Closeness to source: The proximity of the
but high volume game. food processing industry to raw material
inputs is one of the most important levers
• Revenue model: Most of the food– for success given the perishable nature of
processing business models are trade– the produce. The transportation of raw
based where food processors procure raw materials is not only costlier than that of
inputs, process it, and sell the finished processed food but can also lead to excessive
goods. However, in some cases where the wastage in the event of longer and repeated
sourcing of the raw material requires handling.
special skill / abilities, food processors
prefer the fee–based revenue model. For • Low–cost structure: Food processing,
instance, in order to be successful in oil especially primary processing for
refining and retailing, it is very important commodities is typically a low–margin,
to hedge business against fluctuations of high–volume game. Hence, it is very
oil prices in the international markets. important to build low–cost structures by
Hence, some food processors have built accessing cheaper sources of inputs — raw
refining capacities and have a fee–based materials, labor, power, and land — by
!
# " "
Essential activities Intermediaries
20
3.26 15.26
(21%) (100%)
15 3.00
(20%)
1.50
10 1.50 (10%)
2.25 (10%)
3.75 (15%)
5 (25%)
0
Farmer Intermediaries Transport and Wholesaling Retailing Losses1 End–customer
packaging price
E . | Savings made by Metro Cash & Carry through disintermediation
Sources: S. Raghunath and D. Ashok, “Significance of Cash and Carry Model for Small and Medium Businesses in the
Indian Wholesale Distribution Formats,” Metro Cash & Carry Bangalore internal document, October 16, 2006, p. 5.
15–20%
20 400 25–35% 30–40%
16–17
14.0 270–300
15 300 260–280
203 205
10 200
35–45% 100–130%
140–150% 85–95%
130–160%
100–120%
5 3–3.2 100
2.5 1.9–2.0 55–65
1.6–1.7 33–38
0.9 1.3 15 25
6 12–13
0 0
Cereals Pulses Oilseeds F&V Cereals Pulses Oilseeds F&V Meat
2010 2020
Sources: Indiastat, FAOstat, National Horticultural Board, NMCE report on oilseeds, India Vision 2020 — R. Radhakrishna and K Reddy, BCG analysis.
Note: The above projections are based on our analysis of the potential rise in India’s production levels.
1
Yield figures are best on global benchmarking, we compared Indian yields with other countries.
in high–value crops will supplement the billion by 2020. This would also have a spillover
existing income of farmers (see Exhibit 7.3). effect on the entire agribusiness industry,
leading to growth at approximately 8 percent
F and a GDP contribution of Rs. 36,000 billion by
While food processing in India is quite behind 2020. Steps in the right direction would serve
global levels, our vision is for it to go through a as “cogs” in the wheels, driving our overall
sea change by 2020 driven by: economic growth to about 9 percent, leading
India’s GDP to a size of Rs. 140,000 billion by
1. Higher government support 2020 compared to Rs. 59,000 billion in 2010
(see Exhibit 7.5).
2. Establishment of infrastructure
150 –11% 100
8% 8–11%
129
111–117 80 24%
26 27–28%
100 21–22
28 60
18–19
29 30–32 40
50 68% 62–64%
20
46 42–44
0 0
2011 2020 2011 2020
Rice Wheat Coarse cereals Pulses Food grains Commercial Fruits and
crops vegetables
Sources: Indiastat, FAOstat, National Horticultural Board, NMCE report on oilseeds, India Vision 2020 — R. Radhakrishna and K Reddy, BCG analysis.
Note: The above projections are based on our analysis of the potential rise in India’s production levels.
1
Yield figures are best on global benchmarking, we compared Indian yields with other countries.
60
40–50% 40–50%
45
35% 30–40%
30 20–30%
21% 18–22%
15
8%
6%
2%
0
Fresh produce / Dairy Buffalo meat Poultry Marine products
Fruits and vegetables
2004 2020
Sources: Indiaagristat, India Vision 2020 — Planning Commission, MOFPI reports, MOFPI annual report, BCG analysis.
Note: As per Ministry of Food Processing vision for processing levels.
2
Economy (Rs. billion)
3
2
Economic
growth
Agribusiness
growth
Sources: Datamonitor Agricultural products in India, India Brand Equity Foundation, World Economic forum, NCAER, RBI database on Indian economy, BCG
analysis.
Note: Fixed exchange rate of Rs. 45 to 1 USD taken.
1
Does not include non–food cash crops such as jute, cotton, tobacco; includes only food crops: cereals, pulses, oilseeds, F&V, sugar, tea, coffee etc.
2
Assuming industry and services grow along historical growth rates of 9% and 10% respectively (observed over 2005–10 period)
I Act. The process of acquiring a license for
Political will and cooperation has been a direct procurement / marketing, needs to be
critical component of all agricultural simplified to a single, unified, national license,
‘revolutions’. It will play a key role even now, in i.e., there should be no separate license for
order to bring about the next revolution. In procurement, storage, warehousing etc. The
fact, without political will, the agricultural Essential Commodities Act should also be
sector is unlikely to see any dramatic change. scrapped to allow free inter–state movement
We have highlighted select imperatives across of commodities.
the entire agricultural landscape that need to
be undertaken on a war footing. Reform Minimum Support Price (MSP) norms:
Procurement at MSP should be done only
Policy and regulatory reforms when prices go below the MSP, and only
Liberalize procurement: The government’s quantities enough for buffer stocks and social
attempt to liberalize marketing through the schemes should be procured — and that too at
Model APMC Act has not yielded expected market prices. A fair and remunerative price,
results. The implementation of the Model Act ensuring similar incomes as wheat / rice, and
has been done selectively, and does not retain assuming cost of cultivation as for irrigated
its spirit. There is thus an urgent need to lands, will encourage farmers to shift to pulses
standardize and ensure implementation of this and also invest in irrigation.
!"#
$
The nature of interventions introduced in participate in. An action plan for the crop zone
agri zones would depend on the issues model is set out in Exhibit 7.11
identified with the particular crop (see
Exhibit 7.9). Public and private initiatives are Soya agri zone: Soya bean is an important
fundamentally more suited to target certain oilseed for India and contributes over 17
types of issues and hence a combination of percent of India’s edible oil requirements (see
these could be used to develop a holistic Exhibit 7.12). India’s total soya oil consumption
intervention. in 2010 was estimated at approximately 2.7
million MT of which about 50 percent is
Agri zones would create a conducive ecosystem imported in the form of crude soya oil. The
to boost crop production through multiple crude oil is refined and then sold for domestic
means — regulatory changes, accelerated consumption. Increasing production is critical
public investments, financial, and other for multiple reasons:
incentives (see Exhibit 7.10).
• Reduce imports that cost approximately Rs.
A central government agency would be 50 billion in foreign exchange each year
responsible for overseeing the creation,
implementation, and progress of agri zones. • Low utilization of 30 to 40 percent of
While various state bodies would be engaged extraction capacities increases the cost of
in the creation of agri zones, each zone would soya oil
have a multi–state nodal agency. Funding
would be undertaken jointly by the center and • Soya oil is perceived as beneficial from a
the state governments with the central public health perspective compared to
government funding, contingent on other sources like palm oil
implementation progress and matching
investments from states. This will ensure that • Soya meal, a by–product of processing, is a
states prioritize the agri zones they choose to key input for the livestock industry
!
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Regulatory changes
!
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Accelerated public investments Financial incentives
Ecosystem enabled via
multiple means
!"
Other incentives
1
Contract farming, producer companies, farmer co–operatives etc.
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!* +,
, -.,
+,
,
'* .
+,
,
+,
,
/
)
0
,
,
, 1 %
(
)
!* 2
,
+
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3 3
, 1 2 %
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2
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E . | Low yields and poor irrigation inhibit soya bean production
! " #
$ % &
% "
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&
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%
%
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#$
Sources: Solvent Extractors Association, Ministry of Water Resources, Solvent Extractors Associations, Analyst reports, Press releases, BCG analysis.
1
At constant prices.
Dr. M. S. Swaminathan
Founder and Chairman, MS Swaminathan
Research Foundation
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