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Home > Business > Special

Why India Inc is helping farmers

Shobhana Subramanian | April 17, 2007

The sugarcane stands tall in the fields. It will be another six months before the crop is harvested and there's already talk of a glut in the market. But Arvindbhai, who hails from the village of Pipodara in Gujarat, is not too worried.

Thanks to advice from the technical staff from Godrej Aadhar, he hopes to harvest 180 tonnes of sugarcane from his four-acre plot, compared with just 159 tonnes last year. So even if the government reduces procurement prices, he won't be too badly hit.

Arvindbhai isn't alone in getting technical help on his farm. Across the country, whether in Uttar Pradesh or Rajasthan, companies like Godrej Aadhar, DCM Hariyali Kisaan Bazaar, Triveni Khushhali, ITC Sagar Choupal and Tata Kisan Sansar are helping farmers earn a better livelihood.

Needless to say, their motives are not entirely altruistic. Once the farmer earns sufficient money, these companies want him to spend it at the chains of shops they are setting up across the countryside.

Between them, these companies now operate over 175 stores across 12 states, which focus exclusively on rural customers. With sizes varying from 1,000 sq ft (in smaller areas, catering to 10 villages and 150 families) to larger than 6,000 sq ft (with a catchment area of 100 villages and up to 20,000 families), the stores are an interesting mix of consumer and agricultural goods. Now, ambitions are running high. As the rural retail phenomenon steadily gathers steam, the strategist takes a closer look.

Low hanging fruit

Some companies are already seeing a good harvest, which explains their and others' enthusiasm for rural marketing. Farm incomes are going up steadily, thanks to better irrigation facilities, quality farm inputs, assured purchases from organised buyers and the gradual decline of intermediaries.

Research agency Indicus Analytics puts the size of the rural market in 2005-06 at Rs 13,40,646 crore (Rs 13406.46 billion), while the NCAER notes that "thanks to the higher income growth in the rural areas compared to urban ones, the importance of such consumers is projected to increase."

That is a thought endorsed by most organisations with interests in the hinterland. Tata Chemicals, for instance, has 550 outlets of Tata Kisan Sansar across the country and COO Kapil Mehan couldn't be more delighted with the growing response.

"We are seeing a rise in spends of farmers: even the ticket sizes are going up," he says, pointing out that average annual revenue of an outlet has tripled in the past three years to Rs 75 lakh (Rs 7.5 million).

ITC, head, agri business, S Sivakumar proffers a reason for the improvement in farmers' (and therefore, retail outlets') fortunes: "The farmer today is less vulnerable to a crop failure, thanks to products like weather insurance. He can now think in terms of a more stable income. Moreover, the government too is doing a lot for rural welfare."

Earn more...

The retailers are doing their bit as well. If ITC, through its e-choupals (Internet kiosks), is making available the real-time prices of commodities, Godrej Aadhar arranges for technical staff to continuously advise farmers on the use of pesticides, fertilisers and seeds. And they are all looking to the banks to ensure farmers have money to buy the inputs they recommend.

Where Triveni Khushhali's executives help farmers fill out the loan forms and liaise with bank officials, Sagar Choupal is working with State Bank of India to help farmers either get loans or asset-backed finance.

For its part, DCM Hariyali Kisaan Bazaar has persuaded ICICI Bank to open branches in some of its stores. Observes business head Rajesh Gupta, "Farmers cannot prosper if they deal with moneylenders and even the co-operative banks are not always helpful."

It's not just assistance during the sowing season: these companies are ensuring their presence is felt even at harvest time.

ITC also procures soya and wheat from farmers whom its Sagar Choupal assists, while last year Triveni Khushhali procured 5 million tonnes of sugarcane from Uttar Pradesh and plans to increase that by another 2 million tonnes this year.

Come October and Tata Chemicals will be sourcing its entire requirement of fruit and vegetables from farmers in the states where it is present. Besides, it has entered into contract farming agreements for wheat and potatoes across 40,000-50,000 acres of land. Godrej Aadhar, too, buys maize, fruits and vegetables from cultivators in Maharashtra, Gujarat and Punjab.

Says Godrej Agrovet managing director C K Vaidya, "By buying the crop we ensure middlemen are eliminated and the farmer gets the right price." Needless to say, the company also benefits - it has access to raw material for its other businesses at a reasonable price. After all, Triveni has sugar mills, ITC uses the wheat for flour and Godrej makes animal feed from the maize.

...spend more

With more money to spend, rural folk are shopping like never before. Apart from farm inputs like fertiliser and seeds, they are buying more food, groceries, apparel, household items, consumer durables, footwear, tractors, motorcycles and stationery.

For instance, according to NCAER, by the end of the decade, rural India will account for over 75 per cent of the total demand for washing soap, 54.7 per cent of toilet soap sales, 52.7 per cent of moped sales and 55 per cent of motorcycle sales.

Of course, even the retailers haven't been to completely predict the rural consumer's shopping preferences.

Although the local stores typically sell from behind a counter, consumers have quickly adapted to the supermarket-style aisle layout of these stores. And they are asking for products the retailers hadn't anticipated.

For instance, Sivakumar points to an unexpected demand for greeting cards at the Sagar Choupals, adding "We were hesitant to stock readymade garments since we believed cloth would be preferred. We were surprised."

Offering discounts on the maximum retail price helps some of the organised retailers score on the crucial price-value equation, but there's a surprise here as well. Private labels would prove even better bargains, but unlike in urban areas where willingness to try new products is high (and the consumer is always seeking a "deal"), rural customers want the brands. Even if it means paying a little extra.

Explains Goel, "We can't sell private labels because aspirations are high." Others concur. "Nearly 90 per cent of our products are branded and the urban-rural divide is fast being bridged," says DCM's Gupta, whose outlets are visited by about 400 people a day.

Price is not everyone's USP, though. Says Godrej's Vaidya, "Our prices are not necessarily lower than those of the kiranas nearby, though they will surely be competitive. Our proposition is one of convenience, ambience, quality products and promotions that kiranas would not be in a position to offer."

He adds that while currently about 60-70 per cent of revenues come from agricultural products and food and groceries, the mix will slowly change in favour of apparel and other consumer products.

Here come the big brands

Sensing the opportunity, big manufacturers are making a beeline for rural markets, either asking for shelf space or setting up counters at outlets, much like the stores-in-store seen in the urban hypermarkets. The first to get there have been the agri-input makers, such as Bayer, Syngenta and Nath Seeds. But the rest are not far behind.

Oil firms HPCL and BPCL, pharma firm Apollo Hospitals, cement manufacturer ACC and Apollo Tyres are among those who have tied up with rural retailers. On average, each retailer associates with around 25 companies, including IL&FS for education, and Bajaj Allianz, ICICI Lombard and Max New York Life for insurance. Commodities exchange NCDEX, too, may soon make an appearance.

Typically, retailers either ask for a rental for the space or collect a share of the revenues. DCM's Gupta says his company charges a fee, but there are also instances where service providers are given free space simply because they bring in the footfalls.

A bumper crop?

Encouraged by the response, every player has drawn up a blueprint for a countrywide rollout. Some, like Tata Chemicals are scaling up through the franchisee model. "It is easier to rope in people already in the trade and help them build the business rather than create a big structure," explains Mehan.

On the other hand, DCM's Gupta does not believe franchises hold any real value proposition. "We are dealing with general products and would rather keep control over the process and products," he says.

In all this, the price of land is not really an issue. More important in choosing a location is the kind of crop grown in the area, whether more than one crop is grown and also irrigation facilities, all of which point to the purchasing power of farmers in the region.

And while it may be somewhat early to talk about the pickings, rural India is clearly a focus area for those who are in. Says Vaidya, "We will spend Rs 750 crore (Rs 7.5 billion) on building the business and hope to earn revenues of around Rs 3,000-4,000 crore (Rs 30-40 billion) in five years."

Mehan is not willing to talk numbers but says he is looking to invest about Rs 100 crore (Rs 1 billion) in the next couple of years and the current turnover of Rs 400 crore (Rs 4 billion) should be "significantly higher" by then. DCM's looking at revenues of Rs 1,000 crore (Rs 10 billion) in three years from around Rs 200 crore (Rs 2 billion) currently."

While top line growth should not be an issue, all players have been plagued by low operating margins, thanks to incubation costs and the lack of scale. Says Gupta, "The gross margins are barely in double digits and they will improve only when supply chain efficiencies come in." Vaidya confirms this.

"Even in a steady state, we are unlikely to see net margins of more than 3-4 per cent," he feels. It may take them a while to get their act together but India's rural retailers sure are in business.

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