Future Fruits & Vegetables supply chain in India Kishore Biyani’s Future Group is making a vigorous push to increase its share in the fruit and vegetables business, a category that has traditionally been an Achilles heel for the country’s largest retailer. The group behind supermarket chains such as Food Bazaar and Big Bazaar is forming a specialized entity that will set up and manage an efficient supply chain for fruits and vegetables (F&V), marking a shift away from the outsourced model it has followed so far.
Globally, F&V sales for most retailers is about 10% and Mr Biyani wants to take it to that level. Within a year, he wants to hike the billing share of fruits and vegetables to 8-10%. Fruit and vegetables currently account for 3-4% of total supermarket sales for the group, which expects to end the fiscal in June, 2010 with retail sales of 9,200 crore. Mr Biyani’s move to take direct control of the fruits and vegetables business brings to focus the challenges faced by organised retailers in selling fresh and perishable goods. Challenges India has one of the most fragmented produce-supply chains on the planet.
Industry experts estimate more than 30% of all fresh produce is lost or spoils before it reaches the market. On average, goods pass through six or seven middlemen before a consumer can buy it, resulting in tortuous journeys, big markups and poor quality. In 1966 the government introduced a law that banned farmers from dealing directly with retailers and forced them to sell through licensed middlemen, called mandis. The law, was aimed to give farmers a fair and consistent price. But over the years it grew into a monster, gaining layer upon layer f intermediaries, none of whom added any value to the fruits and vegetables they traded even as they added on their own margins. India lacks a network of cold storages and refrigerated trucking facilities that can efficiently transport fresh fruits and vegetables from a farm to the shop-floor while retaining its freshness. The country’s 35 states and territories run separate tax and duty systems. To get from Bangalore to Hyderabad, about 550 km away, for example, the driving time is about 16 hours, but stops at border and tax-inspection checkpoints add two to three hours to the trip.
Smaller, unorganized ‘kirana’ stores sell fruits and vegetables to most of the country’s population, but the extensive network of middlemen and high levels of wastage mean that the price paid to farmers is only a fraction of the retail price. Customers, meantime, have little choice but to accept food of uneven quality and unreliable supply. The organised retail trade relies heavily on APMC ‘mandis’ and agents to source the bulk of its stock of fruits and vegetables. Because profit margins are thin in the grocery business, shipping delays and spoiled merchandise can be harmful to the bottom line.
Solution The McKinsey Global Institute, a think tank, estimates India’s retail market will be worth $1. 52 trillion by 2025, up from $370 billion in 2005. Though the relative importance of comestibles will shrink as people earn more disposable income, McKinsey estimates the food-and-beverage category will still account for 25% of all retail spending in 20 years. Big retailers like Reliance fresh and Future group have taken note of this big opportunity. Government should improve infrastructure facilities like cold storage warehouses, roads and transport system.
Tax laws must be rationalized and it should also liberalize laws and allow big retailers to source fruits and vegetables from the farmers directly. Unfortunately, the government is too slow to react. The big retailers are taking things into their own hands. They are investing heavily into building their own end-to-supply chain system. They are pressurizing government to relax laws and rationalize taxes. Future group is trying to put in place new sorting and grading technologies, better cold storage and aggressively cutting out middlemen, which can bring down the prices of fruits and vegetables by about 15-20% across categories.
The efficiencies created by this exercise can be passed on to the consumers. They are forming a separate entity which could be responsible for its own profit and loss. The new company will have end-to-end responsibilities. That way the back-end won’t be able to blame the front-end and vice-versa for poor produce or sales performance of fruits and vegetables.