Market orientation when customers seem content with the status quo!

Observations from Indian agri-business and a case study

by S. P. Raj* and Atanu Adhikari**

*Distinguished Professor of Marketing, Whitman School of Management, Syracuse University, Syracuse, NY, U.S.A. 13244 2450. Tel. 315-443-3147 email: spraj@syr.edu Affiliated Visiting Professor of Marketing, Johnson Graduate School of Management, and International Professor of Marketing, International Programs, Cornell University, Ithaca, NY

**Assistant Professor, ICFAI Business School, 3rd Floor, Astral Heights, Road # 1, Banjara Hills, Hyderabad 500 034, India, Tel. (0091) 9966547633 email: adhatanu@yahoo.com

The authors acknowledge the valuable comments of Mr. V.V. Sadamathe, Adivsor, 11th Planning Commission, Government of India.

Market Orientation when customers seem content with the status quo! Observations from Indian agri-business and a case study
Introduction to what we are looking at and why it is of significance (this
headingto be removed after editing)

Market orientation, in its quintessence, calls for detecting customer articulated needs as well as divining their latent needs and successfully delivering value better than the competition. Various requirements of market orientation put forth in the literature include: understanding the market through systematic market intelligence, creating competitive differentiation, nurturing competencies, and cultivating an organizational culture to successfully satisfy market needs. In the arena of agri-business many products have become commoditized, especially in emerging markets that have historically experienced chronic shortages and poverty. This resulted from an exclusive focus on increasing production and achieving cost reduction. When an economic system and a system-wide business culture have had such prolonged focus along these dimensions, the challenge is particularly acute as firms attempt to differentiate. The challenge is further accentuated in emerging markets that present the dual responsibilities of seeking to serve customers as well as to enhance the welfare of growers who are small scale farmers. However, two slivers of opportunity with the potential for substantial growth are the rising aspirations of domestic customers in emerging markets as their incomes increase and exploring service offerings as differentiators. In detecting and acting upon evolving customer needs, timing is a critical factor too early, and customers are not yet ready to appreciate the differentiator being

offered; too late, and it becomes easy for competitors to quickly duplicate, if they havent already begun to offer another way to satisfy the customer need. In essence, the challenge in this dimension is one of appreciating when a latent customer need turns the corner and becomes a felt or articulated need, and to what extent the firm can surface customer recognition of the need. The second aspect that is explored in this chapter is one that is fairly well acknowledged in developed markets but is under-appreciated in developing ones namely, using high quality service as a differentiator and using price-discrimination strategies for customer segments whose willingness to pay for added service may be higher than the average customer. This is all the more likely to be true in an emerging market such as India. As incomes rise, and middle-class consumers raise their expectations they become more aware of global trends and the products their counterparts enjoy in advanced markets. While all of this appears straightforward in concept (even if challenging to execute in practice), there is a critical challenge that the agri-business sector poses, especially in emerging markets. This alludes to the imperfections in the market system as a whole from farmers, brokers, traders, and retailers to consumers, who may not all be ready for new ideas and who have self-interests to preserve the status quo. Further, considerable information-asymmetry exists in such markets. Some of this stems from the physical isolation of some of these entities, such as farmers, from the succeeding stages in the supply-chain resulting in ignorance of market information, misinformation and market imperfections fostered by other channel intermediaries. These ideas collectively present a picture of riddles. Yet, this picture promises enormous potential for firms that can envision a future market situation one that is both economically lucrative to the players in the value-chain and serves to improve

economic welfare. Visionary market orientation can here be seen as an instance of doing good by doing right. While customers and competitors are the main focus in market orientation strategy, exogenous but related factors that influence the long chain of entities in the producer-consumer link become important when a firms actions have significant socio-economic repercussions along the entire value chain. Organizational culture for market orientation within the firm is, of course, important; in the context of emerging economies the system-wide culture of business practices takes on equal significance. In this chapter we bring together these diverse considerations and their interplay in one particular firms efforts in the cold storage industry to become market oriented in the agri-business sector of an emerging economy specifically, India. The set of activities in the value chain is rather long and, In India, an arduous one, spanning growing, transportation, storage, processing and retail sales each one of which offers challenges and promise in any firms efforts to become more market oriented. We will discuss the efforts made in recent years by several firms in India that are engaged in agri-business to become more market oriented, as well as the public policy initiatives that are being undertaken to facilitate this transition. 2. Background of Agricultural Transformation in India Agriculture is arguably the oldest organized productive endeavor in the world. In stark contrast to the developed world, India has undergone a rather slow transformation, both in adopting new agricultural practices such as farm mechanization for harvesting and secondly in effectively organizing value-added activities at a system wide level. Promotion of new practices is imperative in ensuring adequate production of good quality produce without jeopardizing the welfare of cultivators and agricultural labor

numbering 89 million households of Indias rural population of 150 million households1. Value-adding activities that we broadly refer to as agri-business, require investments that encompass agricultural inputs, methods of transport, cold chain, processing, and retail. The terrain of development is rather uneven, and the progress rather poor. Several factors are at play in emerging economies like India that present a host of challenges and opportunities for adding value to the customer. (i)The increasing physical distance between production and consumption, and the resulting rise in unmonitored entrepreneurial intermediaries strains the system in terms of reduction in transparency of information available to the players in the system. Thus, instead of being value adding, they may be partially value-eroding. (ii) With Indias recent economic boom, there is a concomitant desire for other value-added activities such as cold-storage, processing and packaging, and enhanced retail experiences. (iii) As the basic food necessities to satisfy the hunger of the population are met for most income levels, inadequacies in meeting the quality of nutritional needs gain attention. Increasing distance between farm and fridge From about 1951 to the year 2001 the population grew from just over 350 million to over 1 billion2. Consequently, as the burgeoning imbalance between agricultural production and population growth became patently evident, the dire need to bridge the gap was addressed with single minded attention. India managed to grow its agricultural output dramatically as a result of the green revolution over a period of
1

Source : Report No. 498(59/33/1), Situation Assessment Survey of Farmers: Indebtedness of Farmer Households, National Sample Survey 59th).
2

Census India http://www.censusindia.gov.in/Census_Data_2001/Census_Data_Online/Population/Total_Popul ation.aspx

about 5 or 6 decades since its independence. During this period, the growth in agricultural output as best exemplified in the production of staple grains including rice and wheat, rose from 50 million tonnes to 206 million tonnes. Fruits and vegetables production increased from 22 to 113 million tonnes. It is remarkable that this growth occurred without the widespread acquisition and consolidation of small farms by conglomerates. About 233 million were engaged in agriculture in 2001 operating or working on 170,000 hectares of agricultural land and about 116,000 operational holdings with an average holding of about 1.4 hectares or 3.5 acres. Over 60% of the operational land holdings were less than about 2.5 acres (1 hectare). Medium to large holdings, averaging about 6 and 17 hectares respectively, constituted 5.4% and 1.2% of the total number of holdings3. Although the drive for more effective agricultural practices was pursued, they could only be adopted in keeping with the necessity of ensuring the welfare of small farmers. This limited the adoption of many advanced methods that required scale of operation. As the population grew exponentially, the centers of employment opportunity in manufacturing and service enterprises concentrated in urban areas encouraging the people to migrate from rural areas to urban centers. This quickened pace of urbanization separated large numbers of the population from the proximity of food production. Agricultural production and its consumption which were traditionally in proximity to each other, slowly but inexorably drifted apart. For example, in 1951 the split between rural and urban populations was about 300 million rural and 62 million urban; by 2001 it was close to 750 million rural and 300 million urban. (Census of India).

Agricultural Census Division, Ministry of Agriculture, New Delhi cited in AGRICULTURAL STATISTICS AT A GLANCE, Aug. 2004.

Challenges posed by the widening gap between production and consumption Transportation The increased distance between production and points of consumption precipitates several challenges. Foremost is the limited availability of infrastructure and modes of transport required to serve the consumer population. The situation is aggravated by a weak infrastructure such as the lack of paved roadways that result in prolonged delays in moving produce to markets. Modes of transport, including trucks, are quite likely to be of inferior quality when compared to developed markets. Once again, similar to its earlier march to freedom from hunger by focusing on volume of production even while accommodating constraints placed to ensure farmers welfare, a recent study notes that Indias freight rates are among the lowest in the world. Costs which range from 0.019 to 0.027 USD for an average ton km is one of the lowest in the world, and lower than, say, the United States at 0.025 to 0.050 USD4.

As the World Bank report notes, The industrys structure, comprising transporters, broker agents and small operators, is market driven and appears to be serving the market reasonably well. Given the very low freight rates, one has to conclude it is an effective industry structure. Interestingly though, the same report goes on to state, While the industry delivers very low freight rates, service quality is poor, with low reliability and transit times nearly double that of developed countries. It is not

SOURCE: Clell Harral, Ian Jenkins, John Terry, Richard Sharp, The Efficiency of Road Transport in India: The Trucking Industry, WB Background Paper, 2003. Cited in ROAD TRANSPORT SERVICE EFFICIENCY STUDY, Worl Bank, Nov 2005)

adequate for higher-value manufactures or the time-sensitive export trade which comprise a growing share of the Indian economy. Maintaining quality and quantity Secondly, availability of other facilities for post harvest management is severely limited and has become more noticeable as consumers expect more. This rise in expectations is driven by a steadily improving economy, particularly in urban areas. Per capita GDP has increased from a little over Rs. 10,000 in 1980 to close to Rs. 27,000 in 2006 in constant prices5. Concomitantly, busier lifestyles of dual income middle-class households and increased access to television content from international markets have further fueled the demand for convenience and processed food products as well as desire for greater variety of food products. This desire for choice in foods as well as value-added processed foods calls for an agri-business infrastructure that can facilitate meeting this demand. For example, for most fruits and vegetables an adequate cold chain is mandatory to yield acceptable quality of value-added products, or, say, to ensure their off-season availability. Lack of infrastructure has resulted in considerable wastage; the loss has been estimated in the range of Rs. 75,000 to Rs. 100,000 crores annually varying from 10% for cereals and pulses to 20% for perishables such as fruits and vegetables6.

International Monetary Fund, World Economic Outlook Database, April 2006

Agro-Processing Industries in India Growth, Status and Prospects, R.P. Kachru, http://agricoop.nic.in/docs.htm).Other studies have noted even higher losses reaching as high as 40% (The Rising Elephant: Benefits of Modern Trade to Indian Economy, CII PricewaterhouseCoopers, 2005) (http://www.pwc.com/extweb/pwcpublications.nsf/docid/D13AC5F4FD6E7F5C852570C7006E2E 7E)

The first imperative of a free-India was to ensure availability of food throughout the year and throughout the country. As attaining this goal has become more possible, the quality of agricultural produce becomes a factor for consideration. Quality can be seen in various ways freshness, uniformity, and, in some sense most importantly, nutritional value. Eradicating hunger or under nourishment is a somewhat different goal than eradicating malnutrition. Specific micronutrient deficiencies lead to demand for food fortification processes. Deficiency in Vitamin A, and its negative consequences for eyesight is but one example7. While adding nutrient value is one side of the coin, the wastage estimates referred to previously may not necessarily include loss of nutritional value that occurs in the absence of processing or cold store facilities. One study that sought to establish the benefits of well preserved frozen vegetables found experimentally that whole green beans initially lost up to 30% of their ascorbic acid (vitamin C) after 1 day, and after 14 days they retained only 40% at ambient temperatures of about 20 degrees C. (Ambient temperatures in India are typically much higher). Spinach, for example, retained only 10% after 3 days. Frozen versions of these vegetables fared much better8. Consumer concerns Also, as incomes rise, concerns evolve from feeding the population to ensuring food safety. For example, concerns over the potential side effects from use of agricultural inputs such as chemical fertilizers may drive the desire for organic produce, certainly for exports at the present time, and even for domestic consumption at a future date.
7

The Micronutrient Report: Current Progress and Trends in the Control of Vitamin A, Iodine, and Iron Deficiencies, John. B. Mason, Mahshid Lotfi, Nita Dalmiya, Kavita Sethuraman and Megan Deitchler, International Development Research Centre 200, http://www.micronutrient.org
8

A Comparison of the vitamin C content of fresh and frozen vegetables, D.J. Favell, Food Chemistry, Vol. 62, No. 1, pp. 59-64, 1998.

As noted in estimates from a study by Rabobank, only 1.3% of fruits and vegetables undergo secondary processing compared to 12% in the Netherlands, and as high as 80% in the U.S. The study notes the evolution in value-added food processing levels as economies develop. The ladder of evolution is: staples - processed mass market foods - snacks and prepared meals - to convenience foods, and finally at the top of the ladder, diet/functional/organic foods; India is estimated in this study as now entering the stage of snacks/prepared meals. Intermediaries in the supply chain When growers or small-scale food processors sell directly to consumers who are geographically in proximity, they are able to readily assess demand and other market information. However, as this proximity is broken, the task of relaying market information to the producers is left to intermediaries. These intermediaries are subject to a variety of conflicting pressures including, of course self-interest, resulting in the producer receiving distorted or quite often, no worthwhile market information. While this can be a concern even in developed economies, communication technologies, being more abundant, tend to ameliorate the problem. In India, however, players at almost each stage of the chain, and most certainly the farmer, are cut off from the realities of the end-market place and end-consumer due to the absence of adequate communication infrastructure. In addition, as the number of hands touching the produce or relaying the information increases, quality is eroded, both of the goods being transported and the information being transmitted. 3. Brief overview of market orientation and barriers A firm that practices the philosophy of market orientation seeks to sense, serve and satisfy customer needs better than the competition. It is as much a philosophy as a

practice. Some of the key aspects of market orientation involve systematized ongoing attention to acquiring and utilizing market intelligence, investing in product and service development that create competitive differentiation, and fostering an organizational culture that internalizes this philosophy and expresses it in all its actions. The marketing literature has identified high market and technological turbulence as ripe conditions for seeing the full benefits of market orientation on firm performance. In the case of emerging markets, domestic firms are typically protected by government regulations from the winds of change from the outside, and this can often lull domestic firms into preserving the status quo. When governments decide that economic growth is possible only by opening markets to international influences, they set up the conditions for turbulence, oftentimes unleashing a tsunami for existing businesses. Not being used to sophisticated business practices such as systematically gathering market intelligence or investing in ideas and technology for new products and processes, these businesses flail about in their efforts to become more market oriented. In developed markets, information gathering, methods of transmission, and its utilization in product and process development have been continually refined over the decades. On the other hand, in emerging markets, the historical lack of demand for such market information has severely limited the information industry and information infrastructure. Occasional entrepreneurial insight and vision coupled with limited trial and error by experimentation become substitutes for the systematic development and utilization of the information infrastructure that is lacking. Although the systematic sensing of market needs and trends, and competitive offerings yields substantial benefits in staying competitive, the widespread availability of such information to all competitors in the market levels the playing field and raises

the overall quality of business practices. Firms advantaged by unique insights and new product and process development capabilities are bestowed with a competitive edge in serving the market by effective differentiation. Access to technological inputs and skills to convert ideas into products are essential ingredients for successful differentiation. In emerging countries, even when entrepreneurial vision provides the insight, absence of technical know-how and skilled labor severely limit the ability to offer innovative solutions to the market. It becomes important to nurture an organizational culture that values inter-functional coordination and empowers all levels of employees to focus on the customer to understand their needs and develop innovative solutions to satisfy them. Interfunctional coordination can produce superior results in customer satisfaction as a result of developing solutions for customer needs that are holistic in approach. Leadership that actively encourages such an orientation becomes an essential prerequisite for achieving market orientation in the firm. In emerging economies rampant unemployment and consequent concerns of job security and deference to senior management may tend to restrict the free flow of ideas upwards from the front lines of customer contact that is so essential for a culture of market orientation to thrive. This calls for a leadership that is visionary in sensing the market as well as in earning the trust of employees to be open in sharing their ideas. Some examples of value-added initiatives throughout the value-chain There is considerable potential in the agri-business sector for adding value at each stage of the chain. No attempt will be made to systematically enumerate all the initiatives that have been undertaken in India, but to highlight a few of them as illustrations. These examples have been chosen to reflect how these can be initiated

by firms of all sizes, from entrepreneurial ventures to huge companies. What makes any of these initiatives interesting is that the status-quo is usually profitable but these are examples of organizations that reached out to offer even more value with a vision of the future. This section then sets the backdrop for a more detailed look at the case of a cold storage firm Indraprastha Ice and Cold Storage to better appreciate the challenges and nuances in providing a value added service. The chart below provides an overview of the various stages in the value-chain and examples of value-adding initiatives at each of these stages. A brief description of what each of these initiatives offers in terms of value enhancement to the system is then described. This discussion is not intended to be an exhaustive enumeration of value-adding possibilities, but merely seeks to highlight the possibilities and their potential. Value-added KanBiosys Golden rice ITC eChoupal Indraprastha Ice & Cold Storage VitaRice Spencers Daily Organics productivity Fortified seeds Market information Quality of perishables Fortification processing XXX Growing XXX XXX XXX XXX XXX Transpo rt Storage Processi ng Retail

XXX XXX

KanBiosys is revisiting the development of microbe based fertilizers that were first introduced in India in the 60s but was ignored as chemical based fertilizers took over

the market. However, now, as the issue of overuse of chemicals in agriculture has become prominent9, including yield fatigue from over-use of inputs such as chemical fertilizers, renewed interest in alternative approaches is gaining interest. With its own R&D efforts MFC has launched microbe based fertilizers that help growers slowly reduce the overall use of chemicals in the various agri-inputs that typically include fertilizers and pesticides. Clearly, introducing this kind of agricultural input can add value to certain customer segments, especially those interested in more organically grown produce which can yield much better prices for the grower and all players in the agri-business sector. Golden rice essentially approaches the issue of nutritive value of a key staple in India by introducing fortification in the seed thereby avoiding the need for micronutrient supplements that the consumer needs to add to their diet. Lack of education, low income levels, and non-availability of supplements are often barriers to adding supplement to the diet. The value-added is less visible but perhaps more important for the health of the consumer and savings from the reduction in health care costs. ITC is a very large conglomerate with a portfolio of businesses in various sectors including agri-business. Interest in assuring consistent and high quality of raw materials for packaged food products led the company to develop an innovative service to farmers called eChoupals. Essentially, the eChoupals were information centers in rural areas that are operated by ITC franchisees who are small local entrepreneurs and provide farmers access to real time market information and advice on farm inputs using computers connected to the internet. One of the key values

Perspectives of soil fertility management with a focus on fertilizer use for crop productivity, S.Ayala and E. V. S. Prakasa Rao, CURRENT SCIENCE, VOL. 82, NO. 7, 10 APRIL 2002.

provided to the grower is market information on prices and demand which attempts to bridge the distance between producer and market that was noted earlier in the context of urbanization and the separation of farmer and the market place.

New technologies have tremendous potential for adding value. These technologies span the spectrum from developing seeds that are fortified and pest resistant through genetically modified seeds such as Golden Rice and bt Eggplant, to VitaRice that processes an important staple such as rice for fortification. VitaRice10 is a technology that is being developed to convert broken rice into whole kernels fortified with iron, zinc, vitamin A and other micronutrients and ensure a low glycemic value. Starting with broken rice that is of lower value and is 30% cheaper than whole rice can result in the same final price as whole grain rice but offer the nutritional value that can be of value in the struggle to eradicate malnutrition. The value of such emerging technologies becomes evident as consumers and policy makers in emerging countries begin to appreciate the importance of nutrition and fortification,. Specific Case Study: Indraprastha Ice & Cold Storage11 To best appreciate the richness of the intricate web of issues involved we then discuss in depth a specific case study of a Small and Medium Enterprise in the coldstorage business in the post-harvest end of the agri-business chain. This company decided to make a bold break away from the prevailing business model and sought to change the competitive field by introducing new cold storage technology to a rather staid and old service sector. The road from farm to fridge is fraught with severe value-eroding forces; almost one-third of fruits and vegetables grown in India are estimated to perish, and more lose nutritive value as they wend their way to market.
10

Manufacture of a Fiber Enhamced, Nutritionally Superior Rice Product by Supercritical Extrusion (SCFX), Docket No. D3724, Syed Rizvi and Kwan-Han Chen, Cornell University, Rizvi and Mulvaney, 1992.
11

This section draws from the case study Indraprastha Ice & Cold Storage (A), ECCH case number xxxx, written by the authors.

Lack of good storage prevents selling this produce off-season at a higher price and also smoothing out the supply to the market in season to maintain prices. As such, cold storage facilities offer tremendous potential for preserving value. The authors have studied this company in developing a case to illustrate these issues and have gained an in-depth understanding and appreciation for the context, challenges, and the firms efforts to find a way out of the quagmire. Although this one firms initiatives are specific to its regional market, its practices may be viewed as a prototype of how to lead market oriented change in the face of myriad obstacles. The firms customers are middlemen with entrenched business practices and interests; their suppliers, the growers are unaware of market conditions; and IPCSL is, in effect, a facilitator in preserving value. In order to change the business model, the firm needed to look at product and information flows both upstream and downstream along the entire supply chain to understand the motivations and preferences of the various players. The challenge in this context has been to educate the growers who are small farmers and the firms customers who are predominantly middlemen brokers or agents about the value proposition of the new technology that comes at a higher price to them, and to find ways to motivate their self-interests. IPCSL is a player caught in the middle of the value chain and has to either optimize on the status quo or work toward a vision of the future. Background of company In 1938, before Indias independence, Debi Prasad Aggarwal, grandfather of the current CEO, Sanjay Aggarwal, went to the U.K. intending to purchase a textile mill to set up in India. His discussions with other business passengers during the long ocean voyage led him to change his plans and he decided to set up a sugar mill instead. He set up a sugar factory near Delhi in partnership with a friend which soon became one of the biggest sugar factories using the equipment he purchased from the U.K. Debi Prasads travels through the Indian countryside to persuade farmers to grow sugar cane for his mill had provided him with a first hand glimpse of the challenges of Indian agriculture. One major problem was the widespread devastation of newly harvested crop because of inadequate storage facilities. Indias tropical climate made preservation difficult, especially for crops like potato that were harvested in the beginning of summer. Traditionally, farmers used to preserve their crops by storing them in ventilated rooms or heaping them in open fields under tree shade, covered with husk and mud and sprinkled water over them. These remedies tended to result in significant waste when large amounts of produce needed to be stored for longer durations and for distant markets. Because of this wastage, supply shortages occurred and this often led to prices doubling, or even quadrupling that of the standard price of potatoes during summer. This presented an excellent business opportunity and he imported the latest cold storage equipment from the U.K. and set up the first cold storage facility in Shidipura, Delhi in 1944. Jagdish Prasad, his son, realized in 1958 that fruits were more perishable than potatoes and there was a great demand for storage facilities for this type of produce.

Seizing the opportunity, he began marketing his cold storage facility to fruit traders in Delhi, convincing them that they could preserve their surplus produce for off-season sales at a higher price. Jagdish Prasads efforts proved successful and soon his cold storage facility was being used for storing apples, oranges, pomegranates, watermelons and dry fruits like dates, and nuts like almonds, cashews, and pistachios. By 1960, competitors started to set up similar cold storage facilities and competition began to intensify. Jagadish Prasad realized the need for an association to bring together all cold storage owners so that matters of common interest could be taken up with government agencies. In addition, he thought, the association could collectively decide on minimum storage fees for different commodities to prevent harmful price-cutting. He invited all the other cold storage owners to form the All India Cold Storage Association under his stewardship as the Founding General Secretary. In 1977, his 18-year-old son, Sanjay Aggarwal joined the companys board of directors and was given the task of supervising the construction of the 2500 MT cold storage facility in Azadpur, in the new mandi that the Government of Delhi had just established. This project was successfully completed in 1980, and thus Indraprastha Ice and Cold Storage (IPCSL) was born. Four years later, Sanjay traveled to the U.S, visiting cold storages across the country where he noticed the more technologically advanced cold storage facilities in operation. The Entrepreneurial Vision In 1998, Sanjay had realized that Delhis cold storage service had become a commodity. Price was the main factor for the intermediaries who were agents for the growers when they selected a cold storage service for their produce. At the time, Sanjay had gathered his senior staff for a meeting announcing: We must differentiate ourselves from the rest to avoid a price war. And for that we have to transform the company in the next three years. We have to modernize our cold storage facility with new technology to provide higher value to the customer and charge a premium for the better service. This is the only way we can survive in this environment. Sizing up the competition In Delhis cold storage market alone, out of 91 storage facilities, 26 units operated at more than 2000 MT of storage capacity each. Most of these units are located in the two areas of New Sabji Market and the Lawrence Road Industrial Area about 15 km from Azadpur. All these units have multipurpose facilities storing several horticultural and milk products in separate compartments. However, none of the others operated gas controlled technology or controlled atmosphere technology that was now being

offered by IPCSL. Sanjay Aggarwal felt that the governmental subsidy cap resulted in the proliferation of lower quality facilities. According to one of IPCSLs competitors, service was the differentiating factor. Thus, he had introduced a 24-hour, 24/7 cold storage service to cater to traders who could not keep their produce waiting, especially when storing high value imported fruits like red grapes and kiwi which sell for Rs.220 per kg.

Sensing market need Sanjay and his staff spoke with several customers in the mandi who were the commission agents for the growers; but most of them did not see the need for an improved facility which also meant higher costs for them. One commission agent, who had started as a young boy of 8 years working at a mandi several decades ago, and now a successful commission agent, for example opined that there was minimal quality difference between produce kept in an ordinary cold storage as compared to that kept in a gas controlled storage, especially if storage needs were only for a short duration. What was crucial was the ambient temperature:In winter, when the outside temperature is low, fruit remains good in most of the cold storages. However, when the outside temperature shoots up, the difference in quality is visible

Market driving initiative leap of faith? Despite this market feedback, IPCSL embarked on a major technological transformation as Sanjay felt that actually making such a facility available would convince potential customers even though they balked at the idea when presented as a concept. He also saw the end-market evolving in a different way the building desires in the emerging middle and upper-middle classes and growth of an organized retail sector to satisfy them. IPCSLs immediate customers were primarily commission agents and some wholesalers. The end customers are the Indian consumers buying fruits off-season, a market profile that has changed significantly in the last six years. The increased income of the Indian middle and upper middle classes (see Exhibit A) had influenced consumption patterns with up to 60% of their available income being spent on discretionary items like consumer goods, health and entertainment. These higher income classes were becoming increasingly health conscious and those in the urban and semi-urban areas began consuming more fruits as part of their daily food intake. The preferred place to purchase fruits and vegetables was the neighborhood market, small street shop or the 'pushcart vendor'. In India, almost 90% of fruits are sold

through such un-organized retail outlets for a number of reasons. Consumers prefer the convenience of the push-cart vendor who visits the residential areas daily. Consumers also perceive the fruits available in neighborhood markets to be fresh as the refrigerated fruits may be old and not well preserved. Price of fruits in the organized retail stores are considerably higher than neighborhood market or push cart vendors, in addition to the fact that organized retail is not well established. In season, the organized retail chains purchase directly from the markets while offseason, purchases are made through wholesalers and sub-wholesalers. Wholesalers also supply fruit to hotels and restaurants in Delhi and nearby cities. Without high quality cold storage facilities consumers perception of the quality of fruit in retail stores was, indeed, well-founded. The value offering IPCSL completed upgrading its cold storage facility in 2002 (???)by installing Controlled Atmosphere (CA) and Gas Controlled (GC) cooling units12. Anticipating a sizable demand for superior cold storage services, Sanjay also doubled IPCSLs storage capacity to 5000 MT by 2001. Despite his familys opposition to the huge investment that this modernization and expansion entailed, Sanjay went ahead with his plans sinking in a total of Rs.13 60 million rupees ($1.144 million) with the help of financing from NABARD14 and other national banks.
12

Gas Controlled Cold Storage: Approximately 3900 MT of the companys cold storage capacity operated under the gas controlled technology. This had been imported from the U.S. where it was used by NASA to grow wheat in outer space. This technology reduces the production of ethylene, a naturally produced gas present in the atmosphere and a trigger for ripening of most fruits. With this technology, fruits like kiwi and red grapes can be stored for up to two months whereas they would spoil in ten days in ordinary cold storages. Controlled Atmosphere (CA) Cold Storage: About 100 MT of the companys cold storage capacity operates under the controlled atmosphere technology. This technology is widely used for varied produce and is the most commonly used method of storing apples. It uses a natural process of storage that changes the ratio of the constituent gases in the atmosphere to minimize the respiratory activity of the stored produce.
13

Rs (Rupees) is the currency of India. As on 31st March 2002, 1 USD = 52.45 Indian rupees.

14

National Bank for Agriculture and Rural Development (NABARD) is an Indian Government organization that provides finance to agricultural and rural development projects. Aimed at encouraging the growing industry, in 1998, the Government introduced a new Capital Investment Subsidy Scheme for the construction, expansion and/or modification of cold storage units catering to horticultural produce. NABARD approved projects become eligible for subsidies from the National Horticulture Board for up to 25% of project cost to a maximum of Re 1 per kg of storage and 5000 MT of total project storage capacity. However, storages built to international quality standards usually cost Rs. 6 per kg for ordinary storage, Rs. 15 per kg for Gas

Fruits like mangoes, bananas and grapes perish faster. For instance, grapes last about ten days from harvest in ordinary cold storage while in a gas controlled storage, they could last for two months. Apples can be stored up to two months in ordinary storage, four months in gas controlled storage and even six months in controlled atmosphere storage (See Exhibit B). While most fruits are sold during harvest season, apples are sold throughout the year in India. Kiwi and imported grapes are stored for 15 days to one month. Challenges in the system Transport and Cold Chain In most parts of India, growers harvest fruits manually, placing them in padded baskets to avoid damage and the fruits are then transported from the orchards for grading and packing. During grading they are placed in different lots based on their size and quality. Packing is mostly done in layers within corrugated paperboard cartons. On average, fruits are handled five to six times before being dispatched to consumer markets for sale. Since most of the fruit produced in India is transported by road, this has posed severe challenges to the industry. Road infrastructure, especially in the remote, fruit producing areas, is still developing while alternative transportation like the railways, although cheap for smaller consignments, is not available for bulk transportation due to the hilly terrain. Poor road conditions and ongoing construction of national highways and state highways throughout the country lead to slow transportation of fruits. The complexity of the system adds up in a number of costs that the grower incurs. (Exhibit C) In contrast, a cold chain system is an integrated system in which fresh produce is chilled at very low temperatures (0-4 degrees Celsius or 32-40 degrees Fahrenheit for apples) at specific humidity rates (95% RH for apples), in an unbroken link from harvesting through the stages of transport, storage, distribution and retail sale to the consumer. Once produce is cooled to a low temperature, it must remain at that temperature so that bacterial growth is minimized. Since fruits provide a good medium for bacterial growth, their removal from the cold chain at any point enables rapid growth of pathogenic cells at the higher temperatures. Thus the Cold Chain System ensures a cleaner, healthier and better quality of fruit to the consumer. Very few transportation companies in India maintain refrigerated trucks in their fleet and the few that do, use them for transportation of milk products. As a number of agents are involved in the movement of produce from grower to the customer. each has a vital role to play in ensuring that the freshness, nutritional quality and firmness of produce is effectively maintained making this quite a challenge. With the higher costs involved in the Cold Chain System, horticulture produce that is transported by refrigerated truck commands a premium during the season which increases further in the off-season (Exhibit D) Intermediaries in the distribution channel: Controlled storage and Rs. 30 per kg ( Rs. 600per box) for CA storage facilities.

A number of market intermediaries are involved in transferring produce from the growers to the end consumer. The typical marketing channel for produce like apples flows as shown in the figure (see Exhibit D for a typical channel). Delhi Azadpur market is the main market for apples; more than 80% of the apples sold at Azadpur are dispatched from Himachal Pradesh and Kashmir. Since it is not economically viable for apple growers to hire transportation separately, fruit produce is aggregated by forwarding agents who transport the produce of several farmers on a trip. These agents send the produce, most often by open trucks, to nodal points like Delhis New Azadpur Market charging approximately two percent for this service. Growers designate their preferred commission agents, locally known as Arti, who receive and unload the produce and auction it to wholesalers. Excess produce is kept in cold storage and the market is monitored until its sale to wholesalers at off-season rates. This is the business that IPCSL and other cold storages vie for. The designated commission agents charge the growers six percent of the sales amount. These fees, along with the costs of packing and loading, are borne by the growers. Wholesalers in this distribution chain buy produce from the commission agents and dispatch it to different states of India for further sales by sub-wholesalers. Sub-wholesalers sell the produce to retailers within their area who finally market it to purchasing customers (Exhibit E). Information asymmetry: Very few growers are aware of prices prevailing in different wholesale or retail markets across the country. In fact, very few growers visit even Delhis major market during sale of their produce. Because of this they remain largely unaware of the higher off-season rates at which agents sell their produce that had been kept in cold storages. Usually only 50% of the fruits are sold the same day while 35-40% is sold within a month thereafter and a small percentage (10-15%) is kept in cold storage to be sold up to six months later. In Delhis Azadpur market, for example, the prescribed commission rate is 6%, although in practice up to 10% is paid to compensate for advances taken by the growers when the growing season begins. The New Sabji Mandi functions as a regulated market to safeguard the interests of producers, traders and consumers by checking unethical and illegal practices like under-weighing, short payment, delayed payments, unauthorized deductions and exploitation by intermediaries. Sales are conducted by artis in two ways: closed auction and open auction. The former is effected through handshakes with the commission agent taking the hand of the bidding wholesaler and signaling the price under a handkerchief to keep the transaction price confidential. Open auctions, on the other hand, are similar to any public auction with the Arti calling out the highest bid received and exhorting other buyers to bid higher. Economic Value to the customer offered by IPCSL:

Following its modernization and expansion drive, IPCSL has priced its services at Rs. 20 per month per box of 20 kg of Indian fruits and imported apples, and Rs 60 per month per box for imported fruits like kiwi and red grapes. This compared unfavorably with the other cold storages at the New Sabji Market which were still charging Rs. 10 per box for Indian fruits with no premium for imported fruits. Sanjay felt his higher prices were necessary as the variable cost of operating IPCSLs upgraded facilities was approx. Rs. 7.50 per box per month; double that of the competition. A simple back-of-the-envelope calculation was used to educate the customer of the value of storing at IPCSL. Life of kiwi in ordinary cold store is 10 days. At most 2/3 rd container can be sold within 10 days, about 1/3 rd of kiwi would perish.

Price of kiwi is Rs.100 per kg. So Rs. 33 per kg is wasted. In IPCSL cold storage kiwi can be stored for 2 months and the entire container can be sold

Ordinary cold storage rate is Re. 0.50/kg/month. IPCSL charges Rs. 3/kg/month. Hence, in 2 months, IPCSL charges Rs. 6 (Rs. 5 extra from ordinary storage) as rent but saves Rs. 33 value of fruit. So, IPCSL storage adds value of Rs. (33 6) or Rs. 27 per kg of kiwi fruit to the grower While the logic was clear, the new facility did not gain traction in the market despite offering the agents free storage on an experimental basis so they could tangibly experience the added value. Sanjay speculated two reasons for the crisis. First, the market underestimated the value addition of IPCSLs upgraded cold storage. They were still more concerned about short-term costs instead of long-term benefits. The commission agent was more interested in quick turnover of produce and was quite busy and profitable with the current business practice. Furthermore, growers would be unaware of the potential benefits to them as they had delegated rights to the commission agent. Second, there was rampant and unsustainable price-cutting in the market. As Sanjay complained, Our competitors have reduced their rates to such a level that it is almost at our cost. He also suspected that some of the competition was insisting on complete lot orders only and so customers were unable to split their produce into smaller lots for varied storage.

Emerging from the paradox IPCSL continued facing such adversity for a few more months. Customers were reluctant to store their produce in IPCSL because of the high price and continued storing in competitors cold storages. Wholesalers who were selling imported fruits and a few big sellers who were selling fruits in the off-season began to use IPCSL as they could see its value better and had an immediate need. At this time IPCSL extended a promotional offering to customers at the mandi. They could store a portion of their produce at IPCSL free of cost and compare the difference after one month with that stored in an ordinary storage. However, this also did not work. Aggarwal, however, was adamant about not reducing the price. He felt he would then be acknowledging that the improved quality of service was not worth every extra rupee. Convinced of his strategy, he wanted to stay true to the price. IPCSL also started storing and selling imported fruits and vegetables directly to wholesalers. Fruits like Kiwi, grapes, Washington Apples, citrus, pears etc., were imported and stored in the cold storage. IPCSLs modernized cold storage can store these fruits much longer than ordinary cold storages with little loss of quality. It also imports and stores vegetables like super sweet corn, green peas etc. IPCSL also received two large orders for milk and medicinal products in the deep freezer section from Amul and Mother Dairy15. Slowly but surely, IPCSL began to refine and refocus its customer product mix to align with the new technology and service offerings and began to tiptoe into backward and forward integration. Subsequently, Aggarwal decided to solidify this evolving strategy to diversify in a planned manner into higher value fruits and vegetables in addition to integrating backward and forward. He started a holding company, Dev Bhumi Cold Chain Pvt. Ltd. to focus on the backward and forward linkages for fruits, with IPCSL under its umbrella continuing as the cold storage facility. He set up a procurement network by coordinating a dedicated farmers group in Himachal Pradesh (HP) who started working with him. Providing them with pre and post harvest support enabled him to gain the farmers loyalty. IPCSL purchased three large refrigerated trucks for transporting apples directly from growers in Himachal Pradesh. These refrigerated trucks maintained the cold chain from orchard to storage in Delhi. Two small refrigerated vans were purchased to deliver apples to its several retail customers in Delhi. In addition, the company also procured apples from HP and transported them to the storage facility using open trucks. It then stored these apples in its cold storage for a few months and sold them after the season was over to get a better price. (Is this for wholesalers and smaller retailers noted below?) Dev Bhumi soon began
15

Mother Dairy is a Rs. 10 billion company having 1100 retail outlets in and around Delhi.

supplying fruits to over one thousand small street side retail shops and to two larger retail chains: Namdhari Fresh and Safal in Delhi. The company has six sales people who look after selling the fruit to retailers. The new strategy began working for IPCSL. There was a visible difference in quality of fruits that came out of IPCSL compared to other cold storages. While apples stored in other cold storages used to sell at Rs. 70 per kg, retailers procuring from Dev Bhumi used to sell their apples at Rs. 88 per kg. A similar difference was observed in the wholesale market as well. A 20 kg box of apple stored in other cold storages sold at Rs. 900 whereas the same size apple stored in IPCSL was sold at Rs. 1100 per box. The additional value created by IPCSL was visible to many sellers and they began to change their minds. They slowly started keeping their produce in IPCSL to obtain the added value; the market was beginning to value the change. Indeed, the best endorsement of this whole initiative to improve the state of affairs in the cold storage business was evident in the actions taken by the commission agent whose original skepticism was noted earlier in this section. He is now building a small short term (few days) cold storage facility in the basement of his mandi offices with a view to preserving value even as he tries to get rapid daily turnover in produce. Some of the older storages are being renovated to better facilities. One of the earliest stages of market orientation is to recognize how customer needs can differ by segments and fine tuning offerings better. This is most certainly happening at the mandi and allows a new equilibrium to be established allowing many cold storages to operate profitably. Despite the enormous financial risk for a small enterprise being the change you wish to see is surely bringing about a systemic market orientation. Conclusion

Exhibit A: Indias Emerging Middle Class Number of Households (in 000s) 20 40 201 546 1,712 9034 41,262 1,35,378 % growth from 1995 1996 300 256 219 189 163 133 43 3 Annual Household Income 000 (RS) >10,000 5000 10000 2000 5000 1000 2000 500 1000 200 500 90 200 <90

Exhibit B: Appearance of Apples Stored in CA/GC Storage (top) and Ordinary RA Storage (bottom) 1 month old apples 4 month old apples

GC Storage

RA Storage

GC Storage

RA Storage

Photographs taken on site by the authors

Exhibit C: Typical Expenses borne by a Himachal Grower from Farm to Sale at NSM, Azadpur Mandi Items 1 2 3 4 5 6 7 8 9 1 0 1 1 1 2 1 3 1 3 1 4 Cost of Grading/packing Cost of Box (CFB) Transportation cost upto loading point in the orchard Forwarding agents commission Transportation cost up to road head (a) Loading and Chaukidari (b) Transportation cost up to Azadpur Market by ordinary truck Octoroi (c) Market fee Dalla /Unloading (d) Commission @ 6% Gate pass at APMC Mandi Charges at NSM, Azadpur @1% Misc. Expenditure (Telephone, Postal Dharmada, etc.) Total Cost Apple cost/box(20 kg) 12 45 2 2 10 2 20 2 2 1 60* 5 6 0 175

*The commission agent typically collects an additional 4% from the wholesaler which is effectively borne by the grower.

(a) Road-head is the first main road point from the firm of the growers.

(b) Choukidari is the amount given to the watchman who looks after the produce in loading point to prevent stealing. (c) A type of tax taken by Govt. of India for transportation of material from one state to another. (d) Dalla is a type of agent who takes unloading contract in ports, mandis and other transport points Exhibit D: Average Price (20 kg Box) of Domestic Apples (Himachal and Kashmir) With More Than 80% Eating Quality

Grade of Fruit

Wholesale price (Rs) in season off season 930 780 630 580 480 680

Retail price (Rs) in season 1,340 1,090 890 790 590 940 off season 1,730 1,430 1,180 1,080 880 1,260

Extra large (special) Large (fancy) Medium (selected) Small (commercial) Extra small (janta or mass market) Average

730 630 530 480 380 550

Exhibit E: Typical Marketing Channel for Produce Producer with Forwarding Agent

Commission Agents

Wholesaler

Sub Wholesaler

Retailer

Consumer