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Food retail: Addressing the challenges - Views on News from Equitymaster
 
 
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  • Jun 22, 2007

    Food retail: Addressing the challenges

    India is the world's second largest grower of fruits and vegetables after Brazil and China. Food retailing in India has come a long way, from a period when food items were sold at mandis, road side grocery shops, bazaars etc. to a stage where the food items are now sold through supermarkets, retail chains etc. The changing life styles, tastes and higher disposable incomes, growing need for convenience, higher aspirations among youth, exposure to the western lifestyle and increasing numbers of working women have revolutionised the food retail scenario of the country. Food retail has surpassed the dominating apparel and accessories sector. The US$ 6.1 bn Indian foods industry, which forms 44% of the entire FMCG sales, is growing at 9% and has set the growth agenda for modern trade formats. The organised form of food retail accounts for less than 1% of food consumed in India and the balance is accounted by unorganised stores. Since nearly 60% of the average Indian grocery basket comprises non-branded items, the branded food industry is struggling to achieve share of the wallet of Indian consumers.

    Post the liberalisation of the economy, the food industry has witnessed a fast growth with reductions in custom duties and shift from quota to tariff based system. Entry barriers for multinationals were removed after which food Industry majors like Kellogg's, 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. The Indian markets have also witnessed a flurry of food chain majors like McDonalds, Pizza Hut etc. spreading across the country.

    Though these advancements have set a growth path for the organised food retailing sector, food retailing in India still remains a traditional business with the market dominated by small, independently operated neighborhood stores.

    In this article, we shall take a look at what has led to the slow growth of organised food retailing in India and how resolving some issues can make a significant impact or help achieve multiple benefits for the economy.

    The challenges...
    Poor supply chain:
    Logistics play an important role in distributing products to all corners of the country. Due to its vast territory implementing a smooth supply chain model poses a challenge. The Indian supply chain for food products is characterised by extensive wastage and poor handling. The wastage occurs because of multiple points of manual handling, inadequate packaging and cold storage facilities. The physical wastage is one component of the inefficiency in the supply chain. There are other problems as well, in terms of the deterioration in quality and the cost of intermediation in the food chain. To avoid all this, there is need to have appropriate infrastructure for storage and transportation.

    In developed countries like the US, logistics costs comprising transportation costs account for 7% to 9% of the cost of the final product, warehousing cost accounts for about 1% to 2% and inventory holding costs account for about 3% to 5%. In developing countries, logistics costs are estimated to be higher at around 15% to 25% of the final cost of the product due to lack of adequate logistics system. In India, logistics cost is around 13%, comparatively higher than the developed countries. (Source: Indo-Italian Chamber of Commerce)

    Regulatory and other issues: Agricultural markets, in most parts of the country, are regulated under the State APMC (Agriculture Produce Market Committee) Acts. The act was established to protect farmers and set a minimum support price. However, today it is creating a problem for the competitive marketing system and smooth supply of raw materials to agro-processing industries.

    Reforms by India in opening up its economy have greatly improved trade prospects but major barriers still exist, with tariff rates being the highest in the world. Lack of adequate infrastructure with respect to roads, electricity, cold chains and ports has further led to the impediment of a pan-India network of suppliers.

    As per CRISIL research, effective supply chain management and government's support to encourage private participation and investment will help curtail inflation on account of lower costs translating into savings.

    Reducing costs: 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).

    To sum up...
    Thus, it is clear that if some of these issues are tackled it will result into better profitability for retailers, higher farm income for framers, low cost for consumers and above all increase in the amount of savings, which may help curtail inflation.

     

     

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