Following are the findings from a recently concluded study on Organized Agri-food retailing in India.

1.  Indian retail has grown nearly at the rate of India’s nominal GDP since 1990-91

The sum of Private Final Consumption Expenditure at current prices (nominal)2 on durable, semi-durable and non-durable goods is perhaps the closest estimation of aggregate size of Indian retail. On the basis of this, the size of retail in 2008-09 is estimated at Rs. 17,497 billion. Since 1990-91, the Indian retail industry and India’s Nominal GDP has grown at a compounded annual rate of 11.06% and 13.85% respectively. Past data also indicate that period of accelerated per capita income results in accelerated growth in retail (2004 – 2008 period).

2. Food retailing forms about 61% of the total retail

The value of food retail was expressed as a sum of contribution of PFCE (classification by objects) towards food and beverages. Accordingly, the size of food retail in 2008-09 was estimated at about Rs.10700 billion, 61% of the total retail. Analysis of the past five year data reveal marginal decline in the share of expenditure towards food and beverage. It is in line with the international trend wherein with the increase in income level, the proportion of expenditure on non-food items (lifestyle goods and services) increases.

3. Organised agri food retailing is still urban centric, miniscule albeit growing at one and a half times as fast as food retailing

Based on estimates of value share of purchase of food in organised retail among the primary survey respondents (22% and 14% respectively for class A and class B cities) of over 1,160 consumers from across the country and based on the share of population of the surveyed regions in the total population, 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 organized 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 favorable 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.

A regression model with the historic data indicates the relationship between retail growth and per capita GDP growth to an extent of 84%. It is also seen that per capita income growth had a variability of 25 % around the mean. Thus while the retail growth is expected to be high, it is also expected to be irregular and volatile in the future

4. Organized Retailing is learning to do the right things to sustain, survive and grow

Multi-brand organised retail industry is less than 10 years old. As per our findings, the total organised retail market is estimated to be worth Rs. 855 billion equivalent to 5% of total retail size of Rs. 17,497 billion.

Huge growth projections on the back of favourable demographic, attracted the attention of all major corporate houses into organised retail. The rush to capture market share and mind share lead most of the initial entrants into committing a series of strategic, and irreparable mistakes such as non sustainable cost structure, skewed sourcing decisions, focus on front-end without streamlining the supply chain, short term borrowing to fund fixed asset and so on. Absence of fresh equity, economic slowdown and inability to estimate demand correctly, quickly corrected the situation with almost every players scaling down operation and expansion plans and changing the business model for survival.

A general consensus is slowly emerging on a few growth-oriented and sustainable business models for food and multi-category organised retailing. Based on the discussions with the players, it appears that a store of about 3,000 sft (a sub-2,000 sft Subhiksha store model is ideal, if supply-chain can be managed) for food retailing and a hypermarket format with a floor space of 20,000 – 25,000 sft with multi-cate- gory merchandise is more likely to survive and grow in future. All-in-all ‘irrational exuberance’ is being replaced with ‘cautious optimism’.

5. Food retailing essential but not very profitable for organised retailers

It is unfortunate that no multi-category organised retailer has had any prior experience in food. Most organised retailers in fact are from apparel business. Thus, the complexities of dealing with supply chain issues of food were under-estimated. Especially, issues of perishability, wastage and shrinkage, dealing with large number of small suppliers besides volatile and raising prices greatly increased costs and risks and reduced returns. However, quality and range in food retailing meant regular customer footfalls. Thus, although food as a category is painful and relatively low margin, it is an attractive proposition for organised retailers as it ensures regular footfalls into the store.

The long-term implication of this could be that food part of retailing could be entirely outsourced to a supply-chain specialist company under a profit sharing arrangement. In this case, the customer would be given the choice, the organised retailer would have transferred his risks to a third party in exchange for lower but predictable returns. In fruits and vegetable already some organised retailers are working out such arrangements.

6. Organised and unorganised retail would coexist

Multiple needs and utility functions among various socioeconomic classes would ensure that both organised as well as unorganised retail would coexist primarily in the food sector.

The consumer survey results indicate a clear segmentation of categories purchased at organised retail. Here, purchases are clearly skewed towards unorganised outlets in fresh fruits and vegetables and milk, meat, poultry and eggs, the organised retailing takes a significant share in grocery, F&V and processed food.

Cluster analysis of consumer groups in A1 and A class sample indicates that largest group of customers constituting about 60% of the sample have a low preference for organised retailer when it comes to food.

In our survey, about 60% of unorganised retailers in A class sample and 38% in B and C class sample reported increase in turnover in the last one to two years. There is clear indication that a part of the growth of overall food retail has been transmitted to unorganised retail.

7. Unorganised retailers choice of cost control over scale has endured them well during slow-down

As per the survey, the average monthly turnover of an unorganised retailer in A1 and A class and B1, B2 and C class cities is about Rs. 2.57 lakhs and Rs. 1.8 lakhs respectively. For organised food retail, a comparable matrix is revenue per sft per month, which is in the range of Rs.700 – 1,000 per sft per month.

The cost structure of unorganised retailer is in the range of 5 to 8% of the turnover, taking into consideration rent as well as imputed cost of own labour. About 25% of the total surveyed sample used their own premises for retailing.

In case of organised food retailer, the cost structure varies between 17% and 25% of the turnover depending on scale of operation, store format and merchandise mix. Higher cost structure is mainly on account of higher rental, higher employee costs, logistic costs, and costs due to shrinkage, wastage, theft and unsold inventory. Most of the costs of organised food retailers are outside the control of the firm. Although rentals have dropped and have been renegotiated in many cases after the economic slow down, the rules pertaining to tenancy are largely in favour of the owner and not the tenants

Low cost structure and control over costs have enabled unorganised retailers to survive.

8. Growth levers for organised food retailers are largely outside the industry

Organised food retailers have relatively less hold on investment, revenues and costs. This may affect the growth of the sector going forward.

Restrictions on foreign direct investment are likely to affect directly the expansion plans. This would also delay the knowledge transfer process, which is crucial for moving up the learning curve fast and with least costs.

Investments are also required at the supply chain end and logistics. Though FDI is allowed in this area (51% in single brand retailing and 100% in cash and carry wholesale), the incentive structures are not in place and the operational hassles are too many.

Key challenges in costs are managing rental costs, employee costs and sourcing costs. Changes have been noticed in the rental structure from fixed to fixed plus variable to variable structure .When it comes to employees, it is more of cost of quality (trained) and committed manpower. Sourcing and merchandising have undergone substantial change. It is more integrated now and new metrics such as contribution per sft, attempts to integrate sourcing, merchandising and inventory turnover are being attempted.

On the external cost front, reforms in agricultural marketing systems could greatly simplify procedures and compliance requirement and thereby costs. In the same fashion, introduction of GST at both state as well as central level and doing away with a plethora of other taxes would not only simplify but also lead to cost savings through set-off (estimated conservatively at 0.5% of the sales)

On revenue front, some retailers have opined that doing away with the Maximum Retail Price(MRP) restrictions could enable retailers to differentiate their products and services through correct pricing. Again, it is regulatory and outside the control of the industry.

9. Credit requirement, availability, affordability and risk perception

The lending decision of the banking institutions to organised food retailers has been based on the strength of the group (parent company) and not on the project. The bankers admit that the metric for performance evaluation for organised retail is still not in place. Thus, quantification of risk and pricing is still not practiced on a stand-alone basis.

Banks and institutions are however comfortable with lending against stocks, collaterals and other tangible assets whose value can be reasonably assessed.

In terms of risk perception, bankers are relatively more comfortable with unorganised retailers as their requirement on a single store basis can be objectively assessed. Besides, size of exposure is also small. However, cash dealing and lack of maintenance of books of accounts are major irritants that come in the way of lending.

Access to informal credit and own fund is the norm in unorganised retail, while sourcing equity through the parent company and debt from banks is the usual practice observed in the organised food retailers.

Debt is not the preferred source of fund given the thin operating margin and unpredictably in demand and sales. Despite this, some of the national level retailers are heavily leveraged.

10. Challenge to growth – supply chain

It is observed in the survey that direct procurement of fruits and vegetables by organised food retailers from farmers has not only resulted in farmer realizing better share of consumer spending but also has reduced cost to the consumers. However, certain pre-requisites are needed to make such models work. (1) Organizing farmers into clusters or groups to aggregate produce, bring in scale effect and increase bargaining power; (2) Basic infrastructure at the place of produce for grading, sorting and cleaning; (3) Organised retailer who has the required scale of operation to lift the quantities offered for sale.

This involves engagement of stakeholders, a sponsor (typically government agency) and creation of public infrastructure at rural level to be managed by the beneficiary.

11. Challenge- are organised food retailers responsible for high gap between wholesale and retail prices?

When it comes to groceries other than staples, local sourcing from the nearby wholesale market is adopted by every retailer. All such products suffer a mark-up of 25 – 30%, so as to absorb the cost structure. Thus, in many sub-categories, the price levels of organised retailers are much above unorganised retailers and more than the wholesale prices by as much as 25 – 30%. This could trigger an unsuspecting debate. Though organised retailers have a small share in the overall food retailing, price set by some organised retailers are taken as benchmark by not only other organised food retailers but also unorganised retailers.

Optimizing Web Biz – The Times of India Mumbai edition today features Wingify on page 28 http://is.gd/7myXVd. Just punch no 28 in the appropriate form and hit GO button.

Wingify? What’s Wingify? What it has to do with a fresh produce blog. Genuine question no doubt.

Wingify has nothing to do with this blog but it has lot to do with the writer of this blog.

If you have stumbled upon this site you would possibly also have looked or clicked on a web link ‘Wingify’ tucked somewhere on the right side of main page. Follow http://is.gd/YK5v3b to know more about recent  exploits at Wingify.

Yes, some big daddies of e-commerce World over also use our code.

FOOD INFRASTRUCTURE:

The Finance Minister’s announcement that modern storage infrastructure, such as silos would be eligible for “viability gap” funding is also a good initiative  to encourage modern storage practices, as  currently post harvest losses are estimated at 500 billion rupees ($11 billion) due to poor storage practices. Along with this, the finance minister has also reduced customs duty to 2.5 % on the import of all cold storage equipment which is seen by the industry as a complete package of relief provided to this sector.”

AGRICULTURE

“Increasing the agricultural credit limit to 4.75 trillion rupees ($104 billion) for farmers, the interest subvention to farmers paying their loans on time and capital infusion to NABARD (National Bank for Agriculture and Rural Development) are progressive steps. The subsidy in the fertilizer sector and reduction in customs duty on micro-irrigation products will also boost agri-productivity.”

February 28, 2011: 

I-T exemption limit raised to Rs 1.80 lakh from Rs 1.60 lakh .

Exemption for senior citizens raised to Rs 2.5 lakh

Tax under women slab unchanged.

Tax exemption raised to Rs 5 lakh for senior citizens of 80 years.

To increase service tax on air travel

Excise and customs duty proposals to result in the net gain of Rs 7,300 crore.

Export duty rates on iron ore unified and kept at 20% ad valorem.

Basic customs duty on agricultural machinery reduced to 4.5% from 5%

Basic customs duty on raw silk reduced from 30 to 5 per cent

Excise and customs duty proposals to result in the net gain of Rs 7,300 crore

Nominal one per cent central excise duty on 130 items entering the tax net. Basic food and fuel and precious stones, gold and silver jewellery will be exempted.

Peak rate of customs duty maintained at 10% in view of the global economic situation.

Customs duty exemptions for hybrid auto parts.

Nominal one per cent central excise duty on 130 items entering the tax net. Basic food and fuel and precious stones, gold and silver jewellery will be exempted.

Standard rate of central exercise duty maintained at 10%.

Central government debt in proportion to GDP will be 44.2% in 2011-12.

20% export duty on all grades of iron ore.

Basic customs duty reduced on certain textile products

No change in service tax rate of 10%.

No change in central excise duty.

Plan to levy 1% on 130 consumer items.

Revenue deficit fixed at 2.3 per cent in revised estimates of 2010—11 and 1.8 per cent in 2011—12,

Total plan expenditure will go up 100 per cent in nominal terms in the next year

15% tax on dividend for Indian cos from foreign unit.

Direct Tax proposals result in expenditure of Rs 11,500 cr.

To reduce surcharge on domestic companies to 5% from 7.5%

MAT rate hiked to 18.5% from 18%.

MAT on developers in SEZs to be levied.

Fiscal deficit revised to 5.1% from 5.5% for FY’11

Total expenditure raised by 13.4% at Rs 12.57 lakh cr over budget estimates

Gross tax receipts estimated at 9.32 lakh cr for FY 2011-12

Bill to amend India Stamp Act soon.

Budget allocation of Rs 100 cr for Ladakh and Rs 150 cr for Jammu for implementation of projects identified by taskforce

Old age pension to persons of over the age of 80 raised from Rs 200 to Rs 500

Health allocation up by 20% to R 27,600 cr.

Rs 9- lakh ex-gratia for defence personnel for 100% disability fighting Left-wing extremism.

To set up 15 more mega food parks.

Remuneration of anganwadi workers raised from Rs 1,500 to Rs 3,000 per month. Helpers to get Rs 1,500 from Rs 750

Tax free bonds of Rs 30,000 cr to be issued for infrastructure development. This will cover Warehousing Corporation, NHAI, IRFC and Hudco.

Allocation under Rashtriya Krishi Vikas Yojana to be raised from Rs 6,755 crore in the current year to Rs 7,860 crore.

Rs 50 cr grant to Aligarh Muslim University centres in Murshidabad in West Bengal and Malappuram in Kerala.

Rs 200 cr for environmental remediation programme.

Age for pension eligibility reduced from 65 years to 60 years under Indira Gandhi Yojana scheme

To move insurance, pension and banking bills in Parliament

Rs 500-cr for National Development Fund.

Rs 400-cr as one-time grant for IIT-Kharagpur.

Move to set up State Innovation Councils underway.

Allocation to education sector raised to Rs 52,000 cr

Scholarship scheme for SC/ST students in classes iX, X.

Increase in allocation to higher education

Increase in remuneration for Anganwadi workers from Rs 1,500 to Rs 3,000 per month.

Plan 17% increase in social sector spending.

To introduce Food Security Bill

Tax free bonds of Rs 30,000 cr to be issued for infrastructure development. This will cover Warehousing Corporation, NHAI, IRFC and Hudco.

Fertiliser industry to be included under infrastructure category.

New companies bill to be introduced.

GoM to be set up to deal with corruption

Five-fold strategy to deal with black money.

Mega cluster for leather products to be introduced.

Existing interest subvention scheme on short term farm loans at 7 % interest to continue.

Self-assessment in customs to be introduced.

Credit flows to farmers raised from Rs 3.75 lakh crore to Rs 4.75 lakh crore.

Constitution Amendment Bill for introduction of GST in this session.

Goods and Services Tax Bill this year.

Direct Taxes Code Bill likely to be passed by Parliament next financial year after getting Standing Committee report.

Public Debt Management Agency Bill in the next fiscal.

Indian mutual funds to get direct access to foreign markets; FIIs to be allowed to invest in MFs.

To liberalise FDI policy further.

To extend infra tax breaks to fertiliser sector.

To set up microfinance equity fund.

Government to move towards direct cash transfer of cash subsidy as regards kerosene, LPG and fertilisers from March 2012 for BPL in view of large diversion.

3% interest subvention to farmers who repay in time.

Nabard capital base to be increased by infusing Rs 10,000 cr

Rural housing fund increased to Rs 3,000 cr

Banks asked to step up lending to agriculture.

Allocation under Rashtriya Krishi Vikas Yojana to be raised from Rs 6,755 crore in the current year to Rs 7,860 crore.

Budget proposes to raise housing loan limit from Rs 20 lakh to Rs 25 lakh for priority sector lending.

Allocation for farm development hiked to Rs 7,860 cr.

Rs 300 cr proposed to promote production of cereals.

Indian micro-finance equity with SIDBI to be formed at Rs 100 crore.

Rs 6,000 cr to be given to public sector banks to maintain capital-to-risk assets ratio norms

RBI to bring in new guidelines for banking licences.

Aiming Fiscal deficit of 3% by fiscal 2014

Central electronic registry to reduce fraud cases.

FII investment limit for infra corporate bonds hiked to $40 billion.

Discussions on to further liberalise FDI policy.

Preparation of GST rollout in final stages.

Microfinance equity fund of Rs 100 cr proposed.

Govt committed to hold 51% in PSUs.

Rs 3,000 cr to Nabard for handloom societies.

Women self-help group development fund to be set up.

Direct transfer of subsidy for kerosene.

Goods and Services Tax Bill to be introduced in Parliament this year.

Direct Tax Code Bill likely to be passed by Parliament next financial year after getting Standing Committee report.

Disinvestment target at Rs 40,000 cr.

Direct Tax Code from April 2012.

SEBI-registered MFs to be allowed direct access to foreign funds.

Expect RBI to moderate inflation.

Public Debt Management Agency Bill to be introduced next financial year.

Current account deficit and average inflation in 2011-12 likely to be less than current year.

FDI policy review done in Sept 2010.

Economic growth in 2011-12 likely to be 9 per cent.

Admits large-scale diversion of kerosene.

Introduction of DTC will be a watershed moment.

Debt managment bill to be introduced.

Constitutional Amendment Bill on GST to be introduced.

Expect agri sector to grow at 5.4% in 2011.

Growth in 2010-11 broad-based.

Economy resilient to shocks.

RBI measures will further moderate inflation.

GDP estimated growth at 8.6% in real terms.

New dynamism in rural economy.

Core inflation in check.

Current account deficit is at 2009-10 levels, and is a matter of concern.

Huge difference in wholesale and retail prices not acceptable.

Total food inflation down from 20.2 per cent last year to 9.3 per cent in Jan

Revival in private investment should be sustainable.

Service growing in double digits.

Need to reconcile legitimate environmental concerns with developmental needs.

Food Inflation has declined by half, but still a matter of concern.