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. 

‘Mall’ed no longer

I’m not sure if I can pin point- but somewhere in 1999-2000 was when Crossroads came up at Tardeo in Mumbai as a product of the ‘Retail Revolution’ India was about to embark on. The earliest I recall is a cartoon in the papers with a motorist stating “Now I know why they chose this name, it has made it easier to cross roads here”- a statement marking the ocean of people who turned up to witness the mall.

It was a novelty. Where would you get the best brands, entertainment options and food under one roof? Soon there were malls and retail chains mushrooming across the city with each one bringing in its own speciality. For people like me, it was a quantum leap to look beyond Heera-Panna or other shopping centres. Indeed, a place to shop, watch a movie, have great food and not to forget plenty of parking space to give up worrying about the car- they were like a dream come true for all.

With floor spaces sprawling 1000s of sqft, these spaces offered the perfect platform for the brand invasion in India. Malls even got specialized to attract every section of the society- from the super rich to the one’s who saw the mid week low prices to their liking. A family weekend now was all the members in the family going out together to a mall which could keep them busy the whole day with fun filled activities, shopping for novelties to groceries, food courts with everything under the sun to offer along with a multiplex to make every weekend big.

Old mills in central Mumbai turned high streets and almost every realty developer in Mumbai who has the space at his disposal made sure a mall was a part of their project. One after the other, every mall was trying to outbid each other in terms of space and facilities. Retailers like Future group were in the media for opening up across the country, even in tier II markets.

But what all this development was doing was creating the classic imbalance between demand and supply with supply out running demand by miles. Adding to it was the economic slowdown in 2008-09 and the real estate market going bust adding in to the problems. Warning signs started showing up when shops in malls started to close down. I guess the first amongst them was the Citi Mall at Andheri which never came anywhere close to the high street shopping of Lokhandwala or the brands of Infinity Mall a few hundred meters ahead.

Today the retail revolution has gone from boom to doom in a matter of 15 years. No longer is Future group expanding with 10 stores in a month, as a matter of fact I see them consolidate the existing assets by redesigning their offering. Citi mall and Milan mall have closed down and K- Star and Kohinoor mall have unoccupied spaces outnumber the ones with business.

Which brings me to the question- how do some malls survive while some run out of steam even at times when consumerism is at its peak and fuelled strongly by our population force?

The answer lies in what we call the ‘Bubble’ in economics. In the early days of the retail revolution, the novelty of the concept attracted an avalanche of people interest to be a part of the wave paying premium for land and location. Retail survives on the two pillars of margins earned through bulk buying complimented by footfalls to turn the margins to profit. Footfalls come in depending on the kind of offerings and what differentiates one mall from the other. Also, malls attract a lot of window shoppers who do add to the footfalls but not always contribute to revenue. Besides as the number of options increases, the repeat customers go down.

Porter’s 5 forces model also comes into the play. While malls competed amongst themselves, they did not overthrow the traditional business methods of standalone shops in market areas. External threat also came in from online shopping portals. I read recently that an online shopping portal has revenues greater than Shopper’s Stop. Prime reason- bulk buying and the fact that shipping costs never come close to the establishment cost for a store in a mall.

Bottom line- much like Darwin’s theory, the survival of any mall will lie completely on how well it can manage their profitability through high rental costs, running costs, margins and the competition from online space.