Retail Management

Retail Sector Analysis Food

Group: Aniket Dahasahastra Avijit Kumar Singh Manoj Kumar Jaju Ayush Bhagat Khushboo Kheria Kunal Singh 2010c01 2010c12 2010c13 2010c29 2010c38 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-Marts 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 Kelloggs, 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. 200304 Total Retail Sales 235.7 FGB Retail Sales 161.1 Share of FGB in 68.35% Total Sales (%) 200405 246.1 160.5 65.22% 200506 271.6 176 64.80% 10.8 1.4 0.80% 200607 321.9 203.1 63.09% 13.2 1.7 0.84% 200708 360.5 225 62.41% 18 2.3 1.02% 2008-09 407 252 61.92% 25 3.2 1.27% Growth Rate 12.3 10.2

Organized Retail 7.8 8.9 Sales Organized FGB 1.1 1.2 Retail Sales Share of 0.68% 0.75% Organized FGB in FGB (%) Data Source: ICRIER Research

26.2 23.8

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 longterm 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 Convenient Location Additional services like home-delivery and credit on purchase Owners have a personal contact with their customers Do not have adequate refrigeration and storage space. Customers prefer buying perishable items as perishable inventories are replaced on a daily basis Strengths of organized retail stores One stop shop for an extended assortment of products (with various brands and private labels) Feel good factor associated with clean, hygienic and air-conditioned environment Due to economies of scale, increased capacity to offer discount schemes and conduct promotional campaigns 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.

INDIAS 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.

Indias Major Food Retailers: Company Profiles Retailer Name/ - Outlet Type
Pantaloon Retail (India) Ltd./Hypermarkets & supermarkets

Name of Stores
Food Bazaar

Ownership

No. of Outlets
163

Locations

Local (Future Group)

Spencers Retail Limited/Hypermarkets, supermarkets & convenience stores

Spencers

Local (RPG group)

380

Reliance Retail (Hypermarkets, Supermarkets and convenience Stores) Aditya Birla Retail Private Limited / (Supermarkets and hypermarkets) Bharti Retail Private Limited / Supermarkets & convenience stores

Reliance Fresh and others More

Local (Reliance Industries Limited) Local (Aditya Birla Group)

700+

Bangalore, Pune, New Delhi, Ahmedabad, Hyderabad, Kolkata and other major metros, and larger cities. Various cities in West Bengal, Punjab, Uttar Pradesh, New Delhi, West Bengal, Maharashtra, Gujarat, Tamil Nadu, Karnataka, Andhra Pradesh, and Kerala. Around 71 cities across India Punjab, Mumbai, Delhi, Gurgaon, Noida, Rajasthan, Kolkata, Ahmedabad, Baroda, and Surat Haryana (Kurukshetra, Jagadhari, Faridabad), Punjab (Ludhiana, Hoshiarpur), Delhi, and Ghaziabad Punjab (Amritsar)

643

Easy Day

Local, Bharti Group

31

Bharti Walmart [1] Private Limited / Cash and Carry Heritage Foods India Limited / Dairy format stores & rural retail stores

Best Price Modern Wholesale Heritage

JV between Bharti Enterprises and Walmart Local, (Heritage Group)

Metro Cash and Carry [2] India/ Hypermarket My Dollar Store / Convenience stores

Metro My Dollar Store

Foreign (Metro AG Germany) Local (Franchisee of My Dollar Store of the U.S. +in collaboration with the Futures Group) Local (K. Raheja Group) Local (Wadhawan Group) Local (Nilgiris Group)

1800 stores in A.P. (rural retail stores) & others 5 13+

Various cities in Andhra Pradesh, Karnataka, and Tamil Nadu

Bangalore, Hyderabad, Mumbai, and Kolkata Mumbai, Noida, and New Delhi etc.

Hypercity Retail India Limited/ Hypermarkets Wadhawan Food Retail Pvt. Ltd. / Mainly Convenience Stores Nilgiris /Supermarkets & convenience stores

Hypercity Spinach, Smart and Sabka Bazaar Nilgiris

4 182

Mumbai, Jaipur Delhi, Mumbai, Bangalore and other major cities Major cities in the Southern states (Karnataka, Tamil Nadu, Kerala and Andhra Pradesh) Bangalore, Delhi, and Ludhiana Mumbai

88+

Namdhari Agro Fresh Pvt. Ltd./ Convenience Stores Godrej Agrovet Limited/Convenience Stores,

Namdharis Natures Basket

Local (Namdhari Group) Local (Godrej Agro vet Group)

21 8

Specialty Stores Big Apple Retail / Convenience Stores N Stores /Convenience Stores Shoprite/ Hypermarket Big Apple N Store Shoprite Local (Express Retail Services Pvt. Ltd.) Local (N Stores Retail Pvt. Ltd.) Local (Subsidiary of Shoprite Group from South Africa) Local (70% Future Group + 30% Godrej Agro vet Group) 65 3 1 Delhi Bangalore Mumbai

Aaadhar

Aaadhar

65+

Maharashtra, Punjab, Haryana, and Gujarat

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

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 Producers 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, precooling) 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 endconsumer 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

RETAILERS 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
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 Organized retailing leads to disintermediation. Hence, intermediaries need to redefine their role in the new supply chain Will co-exist with large retailers due to their proximity to customers Need to display better customer service through better quality and more choice More choice of fresh fruits and vegetables Increased convenience (products under one roof) Better shopping environment More affordable prices 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

Intermediaries

Independent retailers

Consumers

Government

After this analysis, we clearly see that most of the issues can be resolved by reconfiguring the supply chain in an optimal manner. Hence, the following sections of the project concentrate on building a model for an optimal supply-chain.

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 farmers job)

Total Price Increase Total Wastage

75% 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 & Inecient 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 governments 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