Retailing farm-fresh produce in India- from the memoirs of a retail entrepreneur

I happen to realise that in the last one year, I had been writing a lot about the retail sector in India. The crumbling malls, the fight back of the local mom ‘n pop retailers against the organised chains and the rise of the e-retailing models in India. Much of my writings were analysis of what I was reading about or witnessing as a consumer. But as luck would have it, I had the pleasure of meeting a retail entrepreneur last week over business consulting, which gave me a lot more in-depth understanding of the challenges and gaps in the Indian retail sector.

I happened to meet Ameya Vartak, the CEO of Aamrai (www.aamrai.com for more details), which is into a focused retail of authentic Ratnagiri Alphonso mangoes for the last 5 years.  Since mangoes are a season fruit and possibly keeps him on his toes for 4 months each year, he had floated small retail model for green groceries in Mumbai named Green Box. Some things about the trade he has learnt the hard way, some while he was a project manager with Fabmall (later renamed as Indiaplaza.com). But what was amazing was the amount of knowledge about source- to- sale logistics and trader chain that exists in India. In the few years selling mangoes, he had not only learnt the way to deal with modern food retailers like Star Bazaar or BigBasket.com but also worked his way to sell through traditional retail channel and even export overseas. 

Unlike food grains or fruits, vegetables need to be harvested almost across the year unless they can be processed in some way to impart a longer shelf life. Typically, onions and potatoes are the one’s which are irradiated to increase their life in storage facilities. But these irradiation facilities are few and limited only to these specific produce. Green leafy vegetables or other produce like carrots, tomatoes, capsicum (bell peppers) all have to be planted in a manner where their time to market has to be planned through stage-wise plantation. But a smart farmer with some acumen into ‘Contract Farming’ actually can earn a hefty sum of income each year if he plans and executes his farming practices.

An example he quoted about a discussion with a prospective contract farmer was noteworthy. A capsicum farmer with a 4 acre (16200 sqm) farm about 100kms from Mumbai ran a cycle of roughly 20-25 yields every year. Even while including rejects on any account; the farmer was comfortable in offering up to 30 tons of assured produce each year. At a modest per ton rate of Rs. 30,000 (Rs. 30 per Kg), the farmer was looking at making roughly Rs. 12,00,00,000 a year with an input cost of roughly Rs 1,00,00,000. On an average, a kilo of capsicum in any retail market in Mumbai is around Rs. 80. Apart from Rs. 15 per Kg for transport and labour, the rest is pure margin which is pocketed by the traders who connect the farms to the consumers. What’s more; agricultural income in India is non-taxable.  

My curiosity went on to ask him if this was actually the case, why the model of Contract Farming not catching up and why aren’t consumers and farmers getting the benefit of a fair pricing system. The response I got was not shocking, but something that illustrated the power wielded by the trader lobby.

Traditional Indian retailers for vegetables are too small to engage into contract farming and have to depend on wholesale traders who break the bulk. This is a known evil which most traditional retailers live with knowing that supply and pricing at variable as per the will of the traders. Traders run their own cartels and fix their rates as per their wish. A trader who buys mangoes in Ratnagiri picks them by weight, irrespective of their size or quality. By the time they reach major markets like the APMC in Vashi, they break their buying into boxes holding mangoes by multiples of a dozen and sorted by size. This is where they make their biggest margins. Retailers then just follow the market precedence and sell the same beyond with a small mark up. In the overall, consumers are paying a lot for which the farmer actually received a little.

If traditional retail is flawed, organised retail chains are still to develop supply chain efficiency their sourcing end. More so, a typically Indian mentality of ‘why should I care’ comes in too strong; which is something traditional retail chains manage the best. More product is more earnings- they squeeze out every last bit of every batch of produce.

In an organised retail, every member in the chain has a fixed income which is not affected by the efficiency or reduction in waste that it generates. Consequently, no one is actually bothered about quality of the vegetables until they are up on the supermarket shelves. In some cases, losses in transport, storage and sorting can be up to 25%, which in the long run are offset with the operating margins. To cover this, prices are always higher than what would be if these losses were curtailed. As a result, the buying team is always in search for the better deal on price as supply chain losses have to be compensated.

A unique perspective which also came in was that merchandisers (the people from the buying or sourcing teams in modern retail) are never in any danger as long as certain key elements are well stocked and the margins on them are solid. It is like the onion index which they are judged on. As long as they can be managed, it’s a win. So when high value perishables like mangoes go bad, merchandisers are at a risk of being noticed for losses and there by avoid them on their lists.

There is a lot more I learnt that one evening. All in all I could gather was agriculture if well done was profitable. Also, if a retailer got his act together and found a good source-to-consumer model, there is a lot that is still to be achieved in India.