Professional Documents
Culture Documents
This case was prepared by Dr. Debasis Pradhan & Dr. B.K. Mangaraj of XLRI
Jamshedpur, INDIA, as a basis for classroom discussion rather than to illustrate either
effective or ineffective handling of a management situation.
India's vast middle class and its almost untapped retail industry were key
attractions for global retail giants wanting to enter newer markets. While
organized retail in India was only 2% of the total US$ 215 billion retail
industry, it was expected to grow 25% annually, driven by changing lifestyles,
strong income growth and favourable demographic patterns. A retail consulting
and research agency had predicted that by 2010, organized retailing in India
would cross US$ 21.5 billion mark.1
Unlike in the developed world, food dominated the shopping basket in India.
While food accounted for only 9.7% of the total private consumption
expenditure for an average American, 15% for the Japanese & British, for the
Indian, it was the principal component of their consumption expenditure
accounting for as much 53%. Since much of this was non-branded (including
perishable items like fruits and vegetables), the branded food industry was
homing in on converting Indian consumers to branded food. At the same time,
a huge population base of 1.08 billion, growing at about 1.6% per annum,
provided a large and growing domestic market for food products.
Also, the country’s middle class had been expanding due to rapid urbanization,
increasing per capita income and credit card ownerships, increased
participation of women in the urban work force. The segment aged between
20-45 years was emerging as the fastest growing consumer group and the mean
age of Indians was now 27 years, a mean age that reinforced spending across
all retailing channels of grocery, non-grocery and non-stores. Unsurprisingly,
food & grocery retailers continued to be the staple of retailing in 2005,
accounting for ¾ of overall retailing value sales as shown in Fig-1,
1
KSA-Technopak
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Clothing
Durables
0 20 40 60 80 100
Agriculture was the backbone of the Indian economy as Nature had been very
favourable to the country. Of the land within its boundaries, 52% was
cultivable, as against the global average of 11%. All the major 15 climate types
existed in India and sunshine hours and day length were ideally suited for good
cultivation round the year. Also, India had great bio-diversity and accounted
for 17% of animals, 12% of plants and 10% of fish genetic resources of the
world. Undoubtedly, this comparative advantage was one of the reasons for the
advent of a number of retail majors into food retailing in the past few years.
Many were leading players in FMCGs, tobacco business, and agribusiness.
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However, the supply chain that connected the vast natural resources and the
farmers to both organized as well as unorganized retail was highly inefficient
with several intermediaries and manual handling. The result was lots of
wastage (as much as 30%) and small remunerations for the farmers (Exhibit-1).
There was hardly any supply chain integrator or channel master for retail
channels in this sector. RIL was aware of this and hence was keen on setting up
its own supply chain which could be more efficient than the existing ones.
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Reliance Fresh
Reliance Fresh was the first foray into retailing by the $25 billion behemoth
known as Reliance Industries Limited. There were three basic reasons for
Reliance Industries Limited (RIL) choosing foods and vegetables for entering
into retailing. First, it wanted to go after the very core of the great Indian retail
opportunity. Food accounted for over two-thirds of the $200 billion Indian
retail market and yet, it had seen hardly any penetration by modern retail so far.
Second, its aim was to build a high-profitability business and food was perhaps
the best place to start. Third, the grossly inefficient food supply chain provided
a well resourced and well managed organization like RIL with an opportunity
to think of amending the flaws which would also make business sense. In the
traditional supply chain in India, there were several intermediaries, who added
their respective profit margin to the cost. Besides, there was huge wastage in
transit. This offered potential for savings and profits and Reliance Fresh was a
step in that direction.
beginning in the southern states. RIL planned to invest $63.50 billion (Rs.
2,500 billion) over the next five years in the retail business with 4,000 retail
outlets in different cities.
The store’s size varied from 1,500 sq ft to 3,000 sq ft, and stocked fresh fruits
and vegetables, staples, FMCG products and dairy products (Exhibits 5-7). The
stores stocked their own private label in staples and food under the "Reliance
Select" label (Exhibit-8). Eventually the label would include other food
categories such as dairy products, jams and colas. The Fresh model was
engineered to clock a faster turnover of inventory — Reliance expected
consumers to visit the store at least twice a week for their top-up groceries.
Each store would have an investment of approx $127,000 (Rs. 5 million) to
$153,000 (Rs. 6 million). Industry sources expected Reliance Fresh to turn this
capital over six times.
“Each of our stores aim at catchments of only about 2,000 households in a 2-3
sq km radius,” shared Jai Bendre, Head of Marketing (foods), Reliance Fresh.
This was the concept of a neighbourhood store. Reliance Fresh opened its 100th
outlet in the country in the national capital, New Delhi. In addition to this,
Bangalore was said to have 40 stores in all by the end of the year. The push in
the retailing of perishables was part of an overall planned $5 billion project
which was aimed to cater to more than 780 cities and 6,000 rural towns in India
over the next five years. Reliance Fresh aimed at opening stores in the top 70
cities within the next two years and attaining sales of $25 billion by 2011.
Reliance Fresh’s shelves provided an indication that the group was looking for
higher margins. Most of the staples were under its own private label brand —
‘Reliance Select’. Except a few packets of Nestlé’s Maggi, or MTR’s Masala’s
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or Pepsi’s Lays chips, there was very little shelf space given to the big brand
owners in the country.
The traditional model of vegetable retailing in India involved vegetables being
sold in small “stores” on the roadside, and there were no formal rules regarding
weighing, bargaining and quality issues, let alone cold storage and
sophisticated supply chains. Produce travelled slowly and inefficiently through
a series of intermediaries before reaching the hands of customers, suffering
mark-ups, wastages and quality losses along the way. “Reliance Fresh”
marketing model operates on affordability and a hygienic ambience along with
a good shopping experience”, said Mukesh Ambani, the Chairman of RIL.
Reliance Fresh intended to bring high quality fresh food to the customers at an
affordable price. Reliance Fresh also wanted to establish a benchmark of
hygiene and quality in their sales. It thus sought to provide the consumer
affordable and quality produce in a congenial and pleasing environment and
enforced stringent quality and hygiene guidelines which would help it bring
high value to the consumer
Supply Chain
“We will always buy from the farmer, almost never from the mandi
(wholesalers),” said a group official. For example, the leafy vegetables,
aubergines, tomatoes and green chillies in the one of the outlets in Mumbai
were sourced directly from farmers in nearby districts. This in effect got
translated into lower prices by at least 15% to 20%. “We'll be very affordable
and competitive in the market, but we aren’t playing a price game here. The
full effort is to deliver value to the customer,” said Chief Executive, Customer
Operations, KS Venugopal. Produce from the farmers came to Reliance's city
distribution centre, which connected two very different sides of India, the
poverty-ridden countryside, steeped in tradition, and the wealthy city centers.
“Already, a few hundred farmers have been hooked on to the Reliance Retail
supply chain. In the next five years, that number will grow to millions. Even
contract farming — by assisting farmers in procuring high-quality seeds,
fertilisers and other essential raw materials is on the cards. By going to the
farmer directly, Reliance Retail hoped to disintermediate the supply chain and
eliminate waste. This meant fresher products at lower cost”, reasoned the same
group official. Still, there was a general concern in the industry about the
possibility of steady and high quality supply of vegetables and other perishable
food items to the huge number of proposed retail outlets. How far backwards
would Reliance have to integrate to assure such supply?
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LOCAL
FARMERS
COLLECTION CENTRES
LINKED
WITH
CONSORTIUMS
(Here grading and standardization takes
place)
RELIANCE
FRESH
OUTLETS
The company was planning to set up Rural Business Hubs (RBHs) which
would be the strategic business platform for providing comprehensive range of
products and services to the rural communities. The first such hub would start
by October 2007. RBHs would provide agricultural inputs, financial services,
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Reliance Retail also hoped to bring "prosperity of scale" to the State of Tamil
Nadu's farmers through the sourcing and supply chain for its Reliance Fresh
outlets. 95% of fresh fruits and vegetables sold at the stores were sourced from
farmers. Under its “Ranger Farms” concept, the company had set up 10
collection centers across the State, with 10 more to come up soon. “The
produce will be cleaned, graded and distributed at a centre at Puzhal. This will
eliminate middlemen and pay farmers cash, fair price for quality produce”, said
Gunender Kapoor, President, Agribusiness. Farmers would not only get market
access but also advice on market demand — what vegetables to grow, how
much and when. Ultimately, these collection centers would graduate into 40
rural business hubs across the State, which would help to improve farm
productivity through technology and mechanization and offer services such as
credit, insurance, health and veterinary care.
Reliance Industries’ (RIL) was planning to acquire over 2,000 acres for its
contract farming venture in the State of Karnataka, which could emerge as one
of its hubs for farm produce exports. The company was also ready to enter into
contract farming operations in the states of Haryana and Maharashtra. Its plan
entailed acquiring 10-acres each of the nearly 200 administrative sub-divisions
in the state. It was learnt that RIL had recruited a vast number of agriculture
graduates for this project. Also in the pipeline were the company’s plans to set
up warehouses across the states. It had already unveiled ambitious contract
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Win-Win Situation?
ITC Choupal Fresh stores were started in the cities of Chandigarh, Hyderabad
and Pune, with their own cold chain supply to wholesale and retail clients. It
was the first of 140 stores that ITC planned to open in 54 Indian cities over
three years at an investment of $1.9 billion (Rs. 80 billion). ITC had designed
the supply chain in collaboration with Ingersoll Rand and Mitsubish's
Snowman. Ingersoll Rand had designed the climate-control shelves, the freezer
trucks in which farmers send produce, the pre-coolers, and Snowman managed
the logistics of the produce. The store stocked only fresh fruit and vegetables,
sourced directly from farmers from all over the country. And it expected the
organised retail market for fresh produce would touch $12.4 billion (Rs. 500
billion) in the three years.
The e-choupal project was empowering farmers and in turn, helping create new
businesses for the company. These projects essentially worked on digital
infrastructure (IT, Internet access), physical infrastructure (rural Internet
enabled offices) human infrastructure (managers and IT professionals) and
network orchestration by ITC. As an intermediary, ITC had brought a network
of insurance companies, banks, micro-finance entities, seed and fertiliser
companies, FMCG, e-learning and training organisations to rural India.
Launched in June 2000, in 7 years the 6,500 strong e-choupal kiosk's services
reached millions of farmers growing a wide range of crops and seafood,
soyabean, coffee, wheat, rice, pulses, shrimp, in over 38,000 villages across
nine states of the country.
Hariyali Kisaan Bazaar: The Hariyali Kisaan Bazaar was a pioneering micro
level effort, which created a far-reaching positive impact in bringing a
qualitative change and revolutionising the farming sector in India. The chain
successfully ran its business through 33 stores in five rural locations in North
India. Each Hariyali Kisaan Bazaar centre operated in a catchment of about 20
km. A typical centre catered to agricultural land of about 50,000-70,000 acres
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and made an impact in the life of nearly 15,000 farmers across India. Each
centre provided support through a team of qualified agronomists; provided a
complete range of good quality, multi-brand agri-inputs like fertilizers, seeds,
pesticides, farm implements and tools, veterinary products, animal feed,
irrigation items and other key inputs like diesel and petrol at fair prices. The
centres also provided access to modern retail banking and farm credit, farm
produce buyback opportunities, access to new markets and output related
services.
Adani Agri Fresh launched operations in Himachal Pradesh last year, when it
procured a major chunk of apples from the hill state. The orchardist in the
largest apple growing state in the country got a much better price from the agri-
major and they were also spared the hassle of packaging their produce and
transporting it to big markets in Delhi, Mumbai, Ahmedabad and Kolkata.
Adani had already made an investment of over $280 million (Rs. 11 billion) in
the hill state for setting up controlled atmosphere packaging and storage units.
This year, the company planned to invest over $408 million (Rs.16 billion) to
set up its own cold chain of refrigerated vehicles for transporting apples, kiwi,
almonds and peaches.
Senior officers in the company were known to have set a “conservative” sales
target of $25 billion for the next five years. The firm expected to employ
500,000 staff as well as create at least one million jobs indirectly. Reliance
planned to invest $7-8 billion in setting up its stores arm that would cover
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1,500 Indian cities and towns in the country, said a senior Reliance official.
The company had hired 6,000 managers for the new business. Reliance was
selecting locations for the stores, setting up agreements with farmers to buy
their produce and tying up with manufacturers for merchandise ranging from
consumer electronics to apparel. The company had aimed at setting up as many
as 60 distribution centres across the nation to feed its retail chain and planed to
initially contract trucks and warehouses with cold storage facilities and then
build its own.
It was recognized that different retail formats other than the city based stores
might be necessary in different markets. In towns and villages, it would have
so-called hypermarkets – warehouse style stores spread over 150,000 square
feet, or about 14,000 square meters, selling groceries, fresh food, consumer
electronics and clothes. The company would also open smaller, 75,000 square
feet, supermarkets. Larger metropolises like New Delhi and Mumbai would
have smaller stores depending on the availability of real estate.
Yet, despite these dramatic expansion plans, several questions remained: How
would competitors, including the formidably resourced ITC and Godrej groups
respond to these expansion plans? Were they perhaps ignoring the most
obvious source of competition- the traditional small neighbourhood grocery
store, where the shopkeeper knew every customer (and his needs) by face, and
was willing to extend credit till the next pay check? How necessary and
realistic were Reliance Fresh’s plans to backward integrate all the way to
farming? And what would be the social consequences of this expanding
corporate presence into the largely unorganized, but politically mobilized
farming sector? How would intermediaries and small grocers react, and where
would the people’s (and Government’s) sympathies lie?
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References
Exhibit 1
Exhibit-2
Vertical glow sign outside the store -- as typically seen in petrol pumps. Not
seen till now in grocery stores. Increases visibility of stores in by-lanes --
where visibility is limited to just 2-3 stores from the main road. Products
available listed on the glow sign
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Exhibit-3
Exhibit-4
Exhibit-5
Vegetables in Baskets
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Exhibit-6
Exhibit-7
The consumer has three options in cereals & pulses – branded, store
brand “Reliance Select” or packaged unbranded
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Exhibit-8
BusinessDailyfromTHEHINDUgroupofpublications
Saturday,Dec16,2006
centres get graded again and processed there before getting into the 17 `Fresh'
outlets the company opened in the twin cities.
"We used to sell a 20-kg bhindi (okra) bag for just Rs 150. But now we are
getting Rs 10-11 a kg," Mr Jangaiah of Alamkhangudem said. "It is not just the
higher price. We also save on the 10 per cent commission we pay at the market
yards," he said.
But they understood quite well that the ‘maal’ (produce) should be fresh. "It
should be plucked too in a certain way. All my life I grew bhindi (okra) the
way my father did and sold as he did in the market. They (Reliance) do not
take the second grade vegetables. But it seems I have to change," said.
Mr Venkatrami Reddy of Chinnareddy Gudem saw another advantage. "They
would tell me what quantity of vegetables they need from me. I'll go there and
get my consignment graded at their collection centre," he said.
The centre would get the price-band and quantity of vegetables it needed to
collect that particular day.
Mr Vithal, Secretary of the Agriculture Market Committee at Shankarpally, felt
that the procurement by ‘Ranger Farms’ (through which Reliance procures
vegetables) has no impact on the arrivals at the committee.
The committee accepts vegetable consignments two days in a week. "Some
days we receive more and some days we see less arrivals. We haven't yet seen
any decrease on account of their (Reliance's) entry," he said.
Asked about farmers' claim that they paid 10 per cent as commission, Mr
Vithal said the committee charged four per cent. The farmers also needed to
pay for weighing and hamalis, he explained.
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Exhibit-9
"Sell your land and you will lose your identity," he warns another as the group
winds its way through the cluster of austere mud, brick and cement homes.
Gulia is trying to spell out the dangers to locals whose land has been earmarked
for a Chinese-style business enclave - a joint venture between the Haryana state
government and Reliance Industries, India's largest private conglomerate.
"We want to be sure our fertile land that gives us three crops a year does not
end up as part of the Reliance empire," he said. "We don't want Reliance to
colonise us. Land is what sustains us farmers with food, respect and dignity."
Eight months ago, he was the owner of a 20-acre (eight-hectare) fertile field
that yielded three harvests a year.
"My sons were lured by the promise of good and quick money. They persuaded
me to sell most of my land to the big company," says Singh, squatting on the
sandy floor of the one-room house that he and his wife share with a buffalo. He
did get some cash, but it did not last him long in the world outside his usual
farming routine.
"We have a saying here that our land is our mother," Singh added sadly. "How
can you get any respect when you have sold your mother?"
For foreign and domestic corporate giants, the SEZs are a tempting option --
promising a way around the country's notoriously slow, corrupt and spirit-
crushing bureaucracy.
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But opponents say the government is merely sidelining the still-crucial farm
sector -- stealing labour and prime land from a sector which employs more than
60 percent of the workforce and generates more than a fifth of India's gross
domestic product.
Journalist-turned-activist Praful Bidwai says the years 2006 and 2007 "will be
noted in history for the launch of the Great Land Grab".
"It's happening across India," added social activist Vandana Shiva, pointing to
farmers' protests in the Communist-ruled eastern West Bengal state in March.
Fourteen farmers were killed when police entered their village to evict them
from land designated for a SEZ - causing a furore and polarising public
opinion.
Not that land grabbing is a new concept in India - tribal peoples have long seen
their forest land shrink with the march of urbanisation.
But SEZs are different, says Shiva. "These are enclaves of privilege, insulated
from the laws of the land - whether it is labour laws or environment laws."
Democratic-corporate "schizophrenia"
So far, India has approved 303 SEZs and set aside 1,400 square kilometres
(540 square miles) of land on which they are to be built.
According to India's trade ministry, the 126 enclaves already operating have
generated 32,578 jobs, and this will swell to 1.5 million by December 2009. It
also hopes SEZs will generate 25 billion dollars worth of exports in 2008-2009.
While the figures look impressive, critics argue that Indian democracy is
suffering.
"When there is large scale displacement of people involved, you need their
consent. In a democracy, people have the right to decide their own future," said
prominent community activist Aruna Roy.
"All the villagers should decide -- not just the village headman." She also
points to what she sees as the irony of Prime Minister Manmohan Singh's
government -- elected on a pro-poor platform in May 2004, but aggressively
pushing through the SEZs.
"It's a case of schizophrenia," Roy said. Those who may end up profiting from
the affair are India's Maoists, who have seized on the land grabbing issue and
already hold sway in much of the impoverished east.
"Agitations like the Maoists' insurgency are triggered by the repeated failure of
governance to deliver basic rights," says Roy.
"The Chinese SEZs are like giant urban agglomerations, independent nation
states with their own rules for labour and environment," he said.
India following the same model will only create "huge islands of industrial
affluence in a sea of deprivation and poverty.
Exhibit 10
Wal-Mart has succeeded in getting its toe in the door of the Indian market, via
a long-planned joint venture with local partner Bharti Enterprises.
The world's largest retailer stressed it would “work with and develop local
supplies and create local beneficiaries along the supply chain”, in an apparent
effort to play down controversy over the potential disruptive effects of
corporate retail in India.
The 50-50 joint venture, called Bharti Wal-Mart, is a “wholesale cash-and-
carry” business that will use Wal-Mart's back-end logistics technology,
inventory systems, cold chain infrastructure, truck tracking and fuel
management.
Bharti, one of India's largest companies and owner of Airtel, the country's
leading mobile phone operator, recently announced investments of up to
$2.5bn in Bharti Retail, its own 100 per cent-owned supermarket chain that
will be supported by Wal-Mart's logistics and supply chain technology through
a franchise agreement.
The plans come amid controversy over Wal-Mart's entry into India. Activists
and small trade associations insist corporate retailers will disrupt millions of
Indians whose livelihoods depend on farming and retail dominated by small
'mom-and-pop' shops.
Manmohan Singh, Indian prime minister, this spring called for an independent
study on corporate retail advances into the country. The report is yet to be
finalised.
Dharmendra Kumar, head of India FDI Watch, which opposes big retail, said:
“The government is still to know the likely impact of corporate retail. In the
meantime, they are allowing corporations to expand their retail plans at an
alarming”
India FDI Watch and other activist groups plan demonstrations across India
this week. Hakim Singh Rawat, president of the Hawkers Association, said
street traders would be hit hard by Bharti Wal-Mart and warned the Indian
government about favouring “only a few huge corporations”.
Opponents insist the joint venture is a “back door” into India's $300bn retail
industry. Under current law “multi-brand retailers” that sell more than one
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