Sanjeevani IS08019 Freshwheelers Others

8/13/2019 Sanjeevani IS08019 Freshwheelers Others

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FreshWheelers Inc.

Business Plan for an Initiative in Agri-Retailing

2008

[FRESHWHEELERS INC.] The Business Plan attempts to identify the weak links in the current Supply Chain of perishable fooditems and proposes a new services creating value for producer as well as consumer.


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ContentsBackground ................................................................................................................................................. 4

1. Political Environment ..................................................................................................................... 4

2. Economic Environment ................................................................................................................. 6

3. Changing Social Environment ...................................................................................................... 8

4. Technological Environment .......................................................................................................... 9

Analysis of Existing Value Chain and Market Structure ..................................................................... 10

Identification of different F&V marketing channels .......................................................................... 11

Policy, Institutions and Infrastructure ................................................................................................ 12

Sourcing, Producing and Delivering functions of the value chain ................................................. 14

Process mapping of the value chain ................................................................................................. 16

Business Opportunity ............................................................................................................................... 17

Concept ...................................................................................................................................................... 17

Target Customers ..................................................................................................................................... 21

Financials .................................................................................................................................................. 21

Profit and Loss Statement ................................................................................................................... 21

Sales Estimate ...................................................................................................................................... 22

Salaries and Wages ............................................................................................................................. 22

Capital Expenditure .............................................................................................................................. 23

Cold storage warehouse ..................................................................................................................... 24

Fuel and maintenance costs estimation ........................................................................................... 25

Exit strategy ............................................................................................................................................... 26

Expansion plans ....................................................................................................................................... 26

Challenges ................................................................................................................................................ 27

Price Risk Management .................................................................................................................. 27

Production Risk Management ........................................................................................................ 27

Cost of meeting quality and regulatory compliance costs .......................................................... 28

Lumpy investments and small growers ......................................................................................... 28

Access to credit, technology and information to the farmers ..................................................... 28

Success Factors for the venture ............................................................................................................ 29

Engaging participation- Organizing collectives and cooperatives ................................................ 29


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Infrastructure and Logistics ................................................................................................................. 29

Technology and Education ................................................................................................................. 29

Financial Services ................................................................................................................................ 30

Coordination Integration and Cooperation ....................................................................................... 30


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Background

The fresh Fruit & Vegetable market in India for long time has been dogged by number of issuesranging from simple infrastructural issues to government policy and regulatory issues which

potentially affect the voting patterns of the masses.

India for over a decade now has been consistently among the top producers of Fresh Fruit &Vegetable in the world. But, its share in the total world trade of Fruit & Vegetable has neverbeen too significant. The sector on suffers from high degrees of inefficiencies through thecomplete value chain from production techniques, post-harvest methods, marketing to pricediscovery processes. Its biggest opportunity lies in correcting these simple inefficiencies. Thevarious barriers to the F&V industry are discussed below mainly under four heading

1. Political Discuss various regulatory and policy issues prevalent and their impact on theindustry

2. Economic Discuss the Indian industry in context of the world supply and demand, thechanging consumption pattern of the internal consumers and also the opening of thesector to private participation

3. Social Discuss the various social issues and related factors which have happenedhistorically because of which the F&V market is significantly impacted

4. Technological Discuss the various technological drawbacks to Indian F&V farming andIndustry in general and the initiatives taken by the government to correct the same

1. Political Environment

Barriers to APMC (Agricultural produce marketing committee) and the legislative reforms TheModel APMC act

The guidelines to the APMC act were given by the central government in the year 1968. But

Agricultural Markets in most parts of the Country are established and regulated under the State

APMC Acts. The whole geographical area in the State is divided and declared as a market area

wherein the markets are managed by the Market Committees constituted by the State

Governments. No person or agency is allowed freely to carry on wholesale marketing activities

in market areas. The monopoly of Government regulated wholesale markets had prevented

development of a competitive marketing system in the country, providing no help to farmers in


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direct marketing, organizing retailing, a smooth raw material supply to agro-processing

industries and adoption of innovative marketing system and technologies.

An efficient agricultural marketing is essential for the development of the agriculture sector as it

provides outlets and incentives for increased production, the marketing system contributegreatly to the commercialization of subsistence farmers. Worldwide Governments have

recognized the importance of liberalized agriculture markets. Task Force on Agricultural

Marketing Reforms set up by the Ministry has suggested promotion of new and competitive

Agricultural Market in private and cooperative sectors to encourage direct marketing and

contract farming programmes, facilitate industries and large trading companies to undertake

procurement of agricultural commodities directly from the farmers fields and to establish

effective linkages between the farm production and retail chains. There is a necessity to

integrate farm production with national and international markets to enable farmers to undertakemarket driven production plan and adoption of modern marketing practices.

If agricultural markets are to be developed in private and cooperative sectors and to be provided

a level competitive environment vis--vis regulated markets, the existing framework of State

APMC Acts will have to undergo a change. The State has to facilitate varying models of

ownership of markets to accelerate investment in the area and enable private investment in

owning, establishing and operating markets. Working of existing Government regulated markets

also need to be professionalized by promoting public private partnership in their management.

Appropriate legal framework is also required to promote direct marketing and contract farming

arrangements as alternative marketing mechanism. Therefore, there is a need to formulate a

new model law for agricultural market.

To facilitate this change in state APMC act, the central government has come out with the

Model APMC Act, which gives guidelines to states to improve the existing APMC act. Currently

more than 5 states have already revised their APMC act and about 12 are in the process of

revision.


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2. Economic Environment

Change in consumption behavior & dietary patternsWith the high rate of growth of the Indian economy (more than 8% over the last 5 years) and the

improved lifestyles and incomes of the masses in the urban and semi-urban areas, there hasbeen a shift in consumption pattern. India in the 70 and early 80 were striving hard to achieveself sufficiency in grains and other basic pulses. In the late 90s and early part of the 21 st centurythere has been a shift to production of fresh horticultural products, because of the increase inavailability of expendable incomes. Also, with the increase in the number of people in upper-middle and upper class, which has the capacity to pay a premium for healthy and fresh produce,is also acting as a driver for increased production of high quality produce and also the key driverfor imports of exotic products.

Production Support IncentivesThe Indian government for a long time has given various production support services andincentives to the farmer. Incentives are chiefly handed to the farmers in the form of varioussubsidies at various levels Irrigation, Power, Inputs (Seeds, Fertilizers) and also productionsupport in the form of post-harvest handling and marketing support.

Subsidy in itself was given to the farmer on a social premise. But, at its current levels where theshare of subsidies as a percentage of GDP is around 14.4%, it is important to notice thatsubsidies are becoming a bane for the country and are also leading to the various inefficienciesin the farming practices.

There are numerous ill-effects that have been created by the so called subsidies due to which adifferent group of economists are against such subsidies. The basic premise of their view is thatmarket is the best allocator of resources and decider of the price levels. According to themsubsidies create market failure rather than remove them. For e.g. irrigation subsidy are meantfor small farmers but the benefits are reaped by large farmers. In the Indian scenario thesesubsidies are taken away by the producers or the middlemen and they never reach the poorsection of the society for whom the subsidies existed in the first place. For e.g. most of the foodsubsid y doesnt even reach the poor farmers. Also inefficient allocation of resources andwastage occur due to these subsidies. For e.g. subsidy in power transform into excess use ofwater leading thereby leading to depletion of ground water reserves. Further most of thesubsidies are required for merit goods and not the non-merit goods. But the political scenario in

India has lead to lobbying in favor of subsidy just to ensure more votes during elections. Theway a government builds up subsidy is by way of Taxes. So generally the one who enjoys thesubsidy should be taxed. But in fertilizer and food subsidies, the effect of taxation is applicableon all sections of the society whereas the benefits are enjoyed only by the affluent sections.


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Public Private Partnerships and the entry of Private Players into HorticultureFor a long time all aspects of Agriculture, (production, procurement, distribution and marketing)in India, has been a monopoly of the State Government. This has meant that at every step inthe value chain there are severe inefficiencies. With the potential gold mine that Agriculture isand especially the fresh F&V market it, a number of private players have been showing a lot of

interest in involving themselves with different aspects of the business. Hence the government incollaboration with the Private players is developing a number of Public-Private Partnershipsprojects in infrastructure development. Also the government is now allowing the private playersto involve themselves directly in direct procurement activities (contract farming, corporatefarming) and also in developing their own supply chains for F&Vs.

An e.g. of the Private Sectors involvement in Horticulture is the Pepsicos Potato Farmingactivities in Punjab, Haryana and surrounding areas, Reliance Fresh direct procurement model,Mahindra Shubhlabs F&V procurement model and a few others. Apart from the involvement ofthe private players directly in procurement and production activities, there has also been anincreased involvement of the private players in the development of PPP projects like the Modern

Terminal Markets Project. These terminal markets would be built-owned and operated bycorporate, cooperatives or other private bodies, while the government would delink itself fromOperational issues and involve itself in Policy and regulatory issues and intervene only toprotect the interest all involved players.

Rural Credit and Other Rural Financial Services - Distribution and AvailabilityThere is considerable unmet demand for rural credit. Local moneylenders continue to providecredit to the rural families, as the reach of institutional agencies to weaker sections hasremained poor. Meeting the credit needs of 25 million nonfarm informal sector enterprises

continues to be a challenge to the rural financial institutions (RFIs). Though the coverage ofmicro-finance scheme has expanded, still around 70% of the poor are out of this network.The micro-finance sub-sector of institutional credit has not explicitly targeted the agriculturalsector. RFIs have bypassed tenants and hare croppers. More than 60% of the farm families areyet to receive the Kisan Credit Cards. The rate of interest charged by RFIs from farmers isconsiderably high. On the supply side, many commercial banks have closed nonviable ruralbranches because of rising nonpaying assets and the high cost of rural lending. For farmers todo well it is very important to provide timely credit and also support them with other financialservices which could support their farming. With the sector now opening to private investments,a number of NBFCs have started investing money in Rural Finance and are also looking atworking with Cooperative, SHGs and other NGOs to efficiently distribute this credit andservices.


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Government Intervention and Market failures

Government through various Acts and regulation has made the F&V sector and agriculture asector where private participants find it not lucrative to make investments in. The wholesale ofF&V are controlled still in some states by the arcane APMC act. Though most states are inprocess of revising this act, its implementation in the previous decade has acted as a majordeterrent to private participation in Horticulture. The essential commodities act and the MSPregime on some of the Horticultural products also made it difficult for private players to imposequality linked prices to these end products.

3. Changing Social Environment

Land fragmentation (Small farmers becoming smaller)In developing economies land reform, in particular land redistribution has occupied a central rolein debates about poverty particularly chronic poverty alleviation in rural areas. Even if itwere accepted that land redistribution could alleviate poverty the enthusiasm for suchredistribution needs to be tempered with consideration of the potential efficiency effects of landfragmentation. The fragmentation of land holdings could rise with land fragmentation. In turn,land fragmentation could lead to sub-optimal usage of factor inputs and thus to lower overallreturns to land. The factors contributing to this could be losses due to extra travel time, wastedspace along borders, inadequate monitoring, and the inability to use certain types of machinerysuch as harvesters.

Fragmentation of land is widespread in India and it is believed that fragmented nature of landholdings may play a major role in explaining low levels of agricultural productivity. The averageland holding in India is between 1-2 hectares and more than 70% of the farmers can becategorized under Small and Marginal Farmers. Because of this most farmers involved infarming grow for self consumption with very little marketable surplus. Another issue with smallland holding very particular to Horticulture is that a large part of the farm land would naturallyget allocated to grain and pulses with little meant for high quality F&V farming. Landconsolidation, contract farming and corporate farming are ways to overcome the issue offragmentation.

Self Help Groups- New breed of rural entrepreneursThe biggest issue with the supply chain in India today is the last mile delivery of any availableservice or a product. Absence of cost-effective distribution channels has meant that rural Indianhas consistently received low quality or no service or product. This has led to the developmentof a rare breed of rural entrepreneurs who have organized themselves as Self Help Groups,cooperatives or other Non- Government Organizations to provide the required services to thefarmer or the rural India.


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Migration & Urbanization\Livelihoods At a macroeconomic level, the services and the manufacturing sectors have been consistentlygrowing at above 9% over the past 3-4 years, while agriculture has shown an average growth ofless than 2% over the same period. This has obviously meant that people in rural India havestarted migrating out of villages to places where daily wage jobs are made available. A

phenomenon that has ensued out of this urbanization is the development of peri-urbanlivelihoods and cultivation. A lot of these rural workers grow vegetable on the land availablebesides the railway tracks and other small lands inside urban cities for primarily self-consumption and to some extent sell it in the market.

4. Technological Environment

Improvement in Production technologies

Post green revolution, these has been a major thrust on the continuous improvement in thetechnology in agriculture. Use of HYV of seeds, use of high quality seeds for better qualityproduce, scientific use of fertilizers, use of micro-nutrients, improved irrigation techniques havebeen some of the changes that have happened over the past decade.

In horticulture in particular Orchid management techniques have gained a lot momentum.Because people have seen a large potential in terms of exports and high end consumer in Indiafor high quality and exotic fruits and vegetable, large Orchids which are professionally managedhave started cropping up. With the interest in contract farming and corporate farming increasingbecause of the lowered government intervention in the F&V sector, improvement in extensionservices and in techniques of agriculture is being noticed.

Improvement in Processing and Post-harvest technologyMore than 25% of the fresh F&V produce is lost in the post harvest stage. This has pushed thegovernment and also the private sector to set up post-harvest technologies to extend the life offresh produce. The government has also taken a number of initiatives to set up FoodProcessing industries, Food Parks and Export zones in around the production centers to reducewastages and also help improve quality of produce.

ICT Catalyst across supply chain initiativesOne of the biggest problems in Indian agriculture was the number of intermediaries involvedbetween the farmer and the consumer. Studies have shown that in horticultural products thefarmer gets only about 30-40% of the final price at which a consumer buys. Hence, because ofthe excessive intermediation, neither the consumer nor the farmer was being benefitted. Use ofICT technology in making the supply chain more responsive and efficient has been anothertrend which is fast coming up. The farmer who for a long time was disadvantaged because ofhis need for information, is now exposed to all necessary information and data and now has theability to take his own decision in a much more informed manner.


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Analysis of Existing Value Chain and Market Structure

A broad scan on the Indian F&V market shows that, fruit marketing especially for fruits with high

market demand like certain varieties of Apples, Mango and Citrus fruits, is well established with

large growers and exporters practicing grading, adhering to quality standards. For fruits likegrapes, citrus fruits, apples, etc., which are required in the processing industry, standardized

procurement and marketing systems have evolved over period of time efficiently In case of

other fruits like Chiku, melons, Sitaphal, bananas, Bers, Litchis, etc., which mostly cater to

domestic market, grading and quality are major issues. In case of vegetables which are mostly

produced for local markets by a large number of small and marginal farmers (low income

producers), the major challenge is price discovery. The existing Agricultural produce market

committee (APMC) system facilitates the marketing of F&V commodities but unlike food grains

and other staples which have price supports, price risk management of F&V commodities is agreat challenge due to their high perishability.

Across the board with few exceptions post harvest and handling losses is a major challenge in

Indian context due to weak infrastructure. Around 15% to 20% of semi perishables (Vegetables

like Potato, onion) production and 20% of perishables (Most of the other F&V) production is lost

after harvest at various stages of handling through the value chain. Pesticide residues, pests

and pathogen infections and contamination with heavy metals are other issue with reference to

export of these commodities.

There are several other hurdles with respect to marketing fruits and vegetables in an

environment of weak infrastructure that India has, in terms of logistics, warehousing and

information. We need to the dimensions of fruit and vegetable market efficiency in terms of net

realization of the consumer rupee to the producer. This assumes greater importance in the

emerging market scenario when India is rated among the top countries in the world as predicted

by ATK, Global Retail Development Index (GRDI). Further within retail sector food and groceries

segment has the highest projected growth with a CAGR of 77%.As Food products trade on

razor thin margins, volumes and significant economies of scale are going to play a vital role inthe success of the emerging retailing industry in India. The advent of these new retail formats

as a business opportunity and ever increasing competition in this space has forced all the major

retailers concentrate on cost cutting measures. The major focus is on restraining procurement

costs.


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Consequently, the longer supply chains have come under severe scrutiny and a need for

alternative channels for procurement of agricultural produce was realized. There have been

many initiatives in this direction starting form direct procurement from the farm gate to contract

farming. We therefore attempted to explore value addition in different procurement channels

keeping in view an emerging scenario, where India is poised towards a paradigm change infood and groceries retailing.

Identification of different F&V marketing channelsThe market channels were identified with respect to study of procurement models as existing in

different parts of India are as follows.(Source: Interviews with DMI,NHB and professionals,

APMC functionaries).Given below are the Fruit marketing channels.

1. Producers (Contract farming with Agro processing industry) transport to the Collectioncentres or Factory

2. Customer (F&V Company) coordinates production of a specific quality produce (Contractfarming with procedural and product quality specification) & picks up the produce fromthe producer. Involvement of third party facilitators like financial institution(banks,Insurance,) government institutions, Research and educational institutions andagri-input companies.

3. Producers (Contract farming with Retailer or F&V company without specification)transport to the Collection centers or Factory

4. Producers-Village level middleman(Aggregator)-Transporter-APMC mandi-CA-Wholesaler-trader-Retailer-Consumer (Traditional Channel)

5. Producer- mandi-Consumer

6. Producers-Producer cooperative-APMC-CA-Retailer or (Producer-Producer cooperative-CA-Exporter-CA-Importer-Retailer/Wholesaler-Consumer) or (Producer-Producercooperative-F&V company)-Maha grape model

7. Producer-SHG(Microfinance institutions)-mandi-ConsumerThe above seven channel variants are indicative of both the existing and emerging Fruit

marketing scenario in the country. Channel variations are based on the roles of different

intermediaries and the coordination level of the dominant player. Like in the channels 1 to 3, the

customer, F&V Company is the channel master which coordinates different supply chain players

to improve chain efficiency. Similarly in channel- 6 the producers cooperative coordinates the

sale of the produce, especially to meet export requirements. Given below are ten variants of

Vegetable marketing channels.

1. Producers (Contract farming with Agro processing industry) transport to the Collection

centres or Factory ( Vadilal, Nestle,Priya foods)

2. Customer guides production of a specific quality produce(Contract farming with Agro

processing industry) & picks up the produce from the producer.(PEPSICO model)


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c) The auction based price discovery is not followed in the vegetable market at all and price

fixation happens based on negotiation between buyer and seller based on their claims of

quality and freshness of produce.

d) The notice board at the entry of the market yard mentions previous days prices and arrivals

and this information is vital for price fixation.e) There is an element of price stickiness in determining prices on a particular day which is

used by CAs to their advantage in charging lower prices to farmers even when overall

supply is low and selling at higher prices to vegetable vendors. CAs have an advantage with

respect to seeking information from various institutional sources compared to vegetable

vendors and farmers.

f) One of the biggest issues with price discovery is the daily price range. The price for a single

commodity, on an average leis between a range of Rs 50/- to Rs 150/- . Every commodity

transaction therefore has a minimum, maximum and a modal price. This price range isbased on negotiation between producer and CA and is not strongly linked to market arrivals:

Information asymmetry between arrival information and price fixation during auction period

exists which increases this range, leading to realization of different prices to different

producers and vendors.

g) The vegetable vendor actually pays up the 6% commission to the CA and 0.5% market

cess, in addition to weighing charges and other miscellaneous expenses which amount to

further 1%-1.5%.

h) Apart from individual vegetable vendors(small shops, Mobile carts, Kirana, Thelawallahs,Individual vendors, mobile Pheriwallahs ) and small retailers (Fresh and Green

shops),Organized retail stores also purchase from the APMC mandi from specific CAs who

can source produce of requisite quality

i) Although most of the sellers in the mandi are farmers, a considerable number of village levelmiddlemen or aggregators also bring the produce to the market. Sometimes these

middlemen also act as transporters and the agents of large wholesale traders who in turn

operate through the faade of CAs in the APMC. This suggests that already a certain kind of

vertical coordination exists within the trader community which prevents the percolation ofbenefits to the producers.


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Sourcing, Producing and Delivering functions of the value chain

There have been significant changes in the world economy in the past decade with reference to

i) Synergy and reorganization of production systems into global production systems

ii) Changing competitive scenario within domestic production systems.

This has led to business opportunities across the value chains which interact in complex ways.

F&V value chains are one of the most important area where such transformation is underway

across the world to meet the changing demand needs of the consumer and market. Severalnew marketing initiatives which are based on supply chain perspective are emerging within India

and elsewhere. Some of the broad categories which depict the role of different market

institutions and respective interventions are given in the table given below.

Although the founding principles of APMC system and the Directorate of Marketing and

Inspection (DMI) have been to increase the net share of producer in consumer price which over

the years could not be accomplished effectively due to the stranglehold of commission agents in

the mandi system and the weak infrastructure environment with respect to highly perishable

commodities like fruits and vegetables. The infrastructure effect is apparent in the enormous

post harvest losses and the wastage happening due to handling by multiple intermediaries

before the product reaches the end consumer. Further the seasonality in production of F&V

leads to irregular arrivals in the market affecting the supply and hence leading to price volatility.


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Process mapping of the value chain

Vegetable Supply chain:

PRODUCERS (VEGETABLE FARMERS)

Self HelpGroups

Farmers

CooperativeTransporter cummiddlemen

Mandi orFarmers

market

Villagelevelmiddlemen

Sub-

wholesaler

Consumers

Cooperative

APMC MARKET

Commissionagent cum

trader Lender

Contractfarming/Collection centers-Retailer

Contractfarming/Collectioncentre-Agroprocessingindustry

VendorWholesaler-

Trader cumSTOCKIST/COLDCHAIN/WAREHOUSE

Vendor Coop Retailer

CONSUMER


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Fruits Supply chain:

Business Opportunity

The wide range of products consumed and lacuna in the current service level gives anopportunity to organize the business with help of efficient supply chain and a better valuedistribution. The daily sales volume from even a tier II and tier III city is so high tapping a tinyportion can be substantial. Farmers deter the current contract farming format of participation asit binds them on selling price basis which they predicts as a loss of opportunity, thus the profitsharing model will provide the needed flexibility as they wish. An Ernst and Young report saysthe food and grocery retail segment is estimated to be $152 b.

ConceptIn light of the mentioned background we propose a new vertically integrated supply chain

serving the concept of from farms to plates. The underlying idea of the concept is to remove the

existing inefficiencies of the current supply chain and work on an inclusive growth model where


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the farmers are given their fair share of profits and the saving from the efficient supply chain are

passed on to the consumers. For example the existing margin leads to inefficiencies to the tune

of 65% and only 35% is what farmer receives of what a consumer pays. A 10% distribution will

increase farmers margin to 45% and reduce consumers price by 10% . The procurement will be

done directly from farms and occasionally from the existing mandis. The idea is to estimate andgenerate demand on the downside with retailing and marketing and secure the supplies from

upstream by associating farmers alongside. The farmers association is based on the profit

sharing concept wherein on every take-off from farm the farmer will know the market price and

his share of profit. Farmers credit cycle will also be supported with the financing activity of the

firm. Downstream, we will be having small retail outlets at strategic locations known as

FreshWheelers. These outlets will serve the function of sales and marketing and will be the last

mile of the supply chain. Efficient order can be booked by phone and internet and will be

delivered by these FreshWheelers.

Proposed Supply Chain

As we can see from the diagram the efficacy of the proposed supply chain comes from the

synchronized flow of material as well the information. This is to ensues the transparency in the

system and make it more efficient. We think the ability to reciprocate to consumer need as well

Farmer

Bulk storage

Transport

Cold storage warehouse

Retail chain/ Hotels andRestaurents,front end retail

Consumer

Information flowMaterial Flow


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as the producers dilemma of what and how much to produce can be efficiently handled with the

help of an integrated system, which we believe could make a lot difference in the current market

scenario.

Price mechanism and discovery

In case of vegetables which are mostly produced for local markets by a large number of small

and marginal farmers (low income producers), the major challenge is price discovery. The

existing Agricultural produce market committee (APMC) system facilitates the marketing of F&V

commodities but unlike food grains and other staples which have price supports, price risk

management of F&V commodities is a great challenge due to their high perishability. Hence

FreshWheelers would adapt a revenue sharing model. With most farmers being marginal andpoor, their ability to procure high quality high yield seeds and other agricultural inputs is severely

restricted. The farmers would also be supported in their cash credit cycle and inputs like seeds

will be given

Price Mechanism Strength Weaknesses

Free market Producer and processor

choice and efficiency

Price volatility

Producers vulnerable to

information symmetries Administrative Prices APMC Producer and processor

protected from market risk

Public sector bears risk

Equity concerns

Contract Growing Producer protected from risk Producers do not get

benefit from higher prices

Processors vulnerable to

low prices

Contract Processing Processor protected frommarket risk

Producer bears risk Low incentive for

processor to innovate

Revenue Sharing Market risk and benefits

shared between producer

and processor


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The USP of the business is the vertical integration of the vegetable product supply chain and

the service levels offered to customers. The fruits and vegetables would be procured directly

from farmers and the cost of procuring is taken as 35% of sales value.

Solving infrastructure issue is setting up cold chain or other distribution centers. This is highly

critical for the especially the food and vegetable segment considering the perishable nature of

the product. Infrastructure in the entire supply chain right from production clusters to the

markets ought to be fed up including grading, pre cooling, packaging, storage and marketing of

fresh farm produce. Owned transportation vehicles would be used, and responsive supply chain

models would be used to maximize efficiency.

For procurement, considering the Pune city as the location of business inception, we identify

four major procuring destinations. Based on our sales projections, there would be a requirement

of four 8 ton Tata 1516 type trucks (80km per trip) and four 1 ton Tata 407 type trucks (30 km

per trip)

For distribution well have sma ll shops at different residential locations in the city with no fixed

construction (movable and all steel made) called as Freshwheelers. Considering Pune as our

business market we would start with 20 such Freshwheelers.

We would have a central storage warehouse (2000 square feet rented) which will be

temperature controlled. An online database of inventory levels of different SKUs at each point

and Freshwheelers would be maintained. The vegetables to the Freshwheelers would be

distributed through Tata 407 type minivans from warehouse.

The Freshwheelers would be an 8*8*10 non fixed structure shop which would be air controlled

to maintain freshness of the vegetables.

The pricing of the products will be done on the real time basis, and the risk due to price

variations is mitigated by revenue sharing model viz EOQ or Fixed Period models will be used

to maximize the efficiency of the gains and minimize the operating losses evident in the current

system, the savings in the supply chain will be passed on to the customers.


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Target Customers

Target customers would be middle class customers who are very particular about price andquality; f or the home delivery and fast response, the working customer who dont have time toshop due to hectic office hours.

Orders would be taken online through internet (at the online site) and telephonically (through tollfree numbers). The nearest Freshwheelers would be identified and the demand would befurnished by home delivery with a minimum limit on purchase. The point of sales would also bethe shop itself.

The second type of customers i.e. hotels and restaurants would also be supplied withvegetables via delivery at their respective locations. Also the surplus supplies would be sold tofront end retails, like big bazaar, spencers and subiksha

Financials

Profit and Loss Statement(in Rs.) 2009 2010 2011 2012 2013Sales from Consumers 26000000 28600000 31460000 34606000 38066600Sales from Restaurants 11406250 12546875 13801562.5 15181718.75 16699890.63Total Sales 37406250 41146875 45261562.5 49787718.75 54766490.63

Cost of goods sold(45% ofsales) 16832813 18516093.75 20367703.13 22404473.44 24644920.78

Gross Income 20573438 22630781.25 24893859.38 27383245.31 30121569.84Expenses

Fuel & Maintenance Costs 847128.89 931841.7778 1025025.956 1127528.551 1240281.406Inventory costs 26562.5 29218.75 32140.625 35354.6875 38890.15625Rental 300000 330000 363000 399300 439230SG & A 300000 330000 363000 399300 439230Salaries 8488000 9336800 10270480 11297528 12427280.8

Depreciation (@20%) 2120000 2260000 2260000 2260000 2260000Total Expenses 12081691 13217860.53 14313646.58 15519011.24 16844912.36

Gross Profit 8491746.1 9412920.722 10580212.79 11864234.07 13276657.48Tax 34% 34% 34% 34% 34%

Net Profit 5604552.4 6212527.677 6982940.444 7830394.489 8762593.938


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Sales EstimateSales Estimation ( in RS.)

Total number of families per shop 100Number of shops 20Family(size of 4) consumption per week 250

total annual consumption 26000000

Number of restaurants 10Average number of meals by consumers in a day 50Consumption cost per meal by a person 62.5

Total sales from hotels and restaurants 11406250

Total sales( in Rs.) 37406250

Volume(kg)Average vegetable consumption per person per day 0.4Average vegetable consumption per person per week 2.8Total consumption for a family per week 11.2Total annual volumes from retail shops 1164800Total volumes from hotels and restaurants 72800

Total annual volumes 1237600

Miscellaneous & Selling expenses 300000

approx average vegetable cost per/kg 22.32143

Salaries and WagesWe have identified the following personnel for the operations of the company. We would berequiring proficient operations managers, to overlook the operations within the company. Thekey operations are would be the procurement side i.e managing the trucks, schedules costs andtime taken. Similarly at the distribution side we would need operation managers, for distributionefficiency and minimizing losses. They would be required even for the warehouse management.

Drivers and delivery guys will perform different rolls, of picking up and offloading goods, andalso home delivery. The original partners would also be given salaries.


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Employee Number Compensation Total

Shopkeeper 40 60000 2400000Drivers & deliverystaff 30 72000 2160000

Operations manager 8 160000 1280000Accountants 1 96000 96000Sales personnel 2 96000 192000

GM 1 360000 360000Salary partners 2 1000000 2000000

Total salaries 8488000

Capital Expenditure

Quantity Costs TotalTrucks (8-10 ton) 4 1000000 4000000Trucks ( 2-3 ton) 4 500000 2000000

Freshwheeler shop 20 215000 4300000WarehouseSetup, refrigeration 1 300000 300000Total Capex 10600000

Total workingcapital requirement

7481250

Total funds required 18081250

Based on sales projections and inventory days of 7 days, the trucks required would be asmentioned in table. Higher ton trucks are for procurement from fields and the lower ones are fordistribution in the city to the FreshWheeler shops. Warehouse would have refrigeration levels,so that the freshness would be maintained as long as 7 days, and for the very same reason wehave kept the inventory days at warehouse to be 7.


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Fuel and maintenance costs estimationUsing the sales value projection and inventory life and truck capacity the fuel costs andmaintenance costs are calculated. Also average inventory costs are calculated using cycleinventory will have holding costs of 10%

Fuel costs for procuring

Total sales volume(m ton) 1237.6

Number of truck trips(4 trucks every week, 52 timesannualy) 204average Distance per trip( km) 200Total travel 40800Truck mileage per litre(8 ton) 4Diesel requirement in litres 10200

Diesel costs 408000

Fuel costs distributionTotal sales volume(m ton) 1237.6Truck capacity 3Number of truck trips 412.5333average Distance per trip( km) 100Total travel 41253.33Truck mileage per litre 6Diesel requirement in litres 6875.556

Diesel costs 275022.2

Total Fuel costs 683022.2Maintenance costs(Rs 2/km) 164106.7

Total Fuel and maintenance costs 847128.9

Cycle inventory 23.8Average inventory 11.9approx average vegetable cost per/kg 22.32143

Average inventory cost 265625Inventory costs at warehouse at holding cost 10% 26562.5

*Average Inventory days at warehouse should be 7 days incold storage.So lot size is sales / 52 Hence consideringsmall lot size small trucks have to be used


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Exit strategy

The project envisages its current value around Rs. 3 crores (discounted at a hurdle rate of 14% for 5years). The positive outlook of IRR comes around 39% (considering only the short term 5 years cash

flows)

Thus the exit options for a VC funding could be invest for the period of 5 years reap the benefits of 38%IRR, or we can make an arrangement of annual payments on funding. For example considering a rate ofreturn of 25% a repayment plan could be as follows.

Fund Schedule

AssumptionsInitial Funding 18081250.00Rate of Return 25Duration (Years) 5

Yearly Installment 6723453.86

Year 2009 2010 2011 2012 20131 2 3 4 5

Amount Left From LastYear 18081250.00 15878108.64 13124181.94 9681773.56 5378763.09Interest 4520312.50 3969527.16 3281045.48 2420443.39 1344690.77Principal Payment 2203141.36 2753926.70 3442408.38 4303010.47 5378763.09Total Payment 6723453.86 6723453.86 6723453.86 6723453.86 6723453.86

Balance 15878108.64 13124181.94 9681773.56 5378763.09 0.00

Expansion plans

We plan to launch the venture at Pune. The main reason for choosing pune city is that it is a fastgrowing city owing to its allegiance to software industry and it has a healthy mix of our targetconsumers that we want to pursue for the venture. Later down the line with healthy cash flowfrom Pune venture and learning we can scale it up to other tier 2 and tier 3 cities. We may notgo metros until we have enough capabilities to pursue the venture as it might be a costly affairto establish in the metros.


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Challenges

Price Risk ManagementPrice Risk refers to the input and output price volatility which farmers are exposed to. Such

volatility is mainly due to the instability of the markets for inputs and outputs in the agricultural

sector.

The fluctuations in price are largely due to:

The seasonal fluctuations in demand

Lack of information about market prices

Lack of alternative market avenues

Inability to hold tradable surpluses until the producer gets a better price National policy level changes

Volatility in the global market.

A volatility in the output prices leads to losses for the farmers. Input price volatility leads to

increased costs for agricultural inputs.

Majority of the Indian farmers are small and marginal farmers, holding less than 2 hectares of

land. They cannot afford to hold on to their produce to sell it at a later date to avail better prices.

So they are highly susceptible to output price risk.

Similarly, these farmers are almost completely dependent on monsoons for irrigation. Therefore,

the time for input cultivation is also not in their hands. Hence, input price risk is also a very real

threat to them.

We try to mitigate this to risk by forming Farmers association which is going to be a group ofsmall farmers when combined together they will have a larger land bank and this can cut ontheir production costs by virtue of economies of scale.

Production Risk ManagementProduction risks refer to the high variability of production outcomes. This variability is due to

yield and revenue loss because of:

Unpredictable nature of the weather

Seasonal fluctuations

Pest infestation

Diseases


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Insurance can play a pivotal role in covering production risks, which would help reduce the

vulnerability of the farmers to economic losses.

This risk can be mitigated by providing proper assistance in gathering meteorological weather

forecasts and proper agricultural consultancies from the experts.

Cost of meeting quality and regulatory compliance costsWhen the question of sourcing from small farmers comes, one of the major issues is meeting

quality standards. The success of the few of the Indian fruits exports like apples etc is because

large players intervened and ensured quality standards. However, meeting quality standards

comes at a cost; the cost of implementing quality, and the possible tradeoff of taking a hit on

quantity.

Also, agriculture and its related industries are highly regulated in India. Large players face

regulatory costs in terms of compliance, standards etc. These costs are then passed on to the

smaller farmers

Lumpy investments and small growers

For a small farmer to enter into the value chain of big agricultural companies, they need upfront

lumpy investments. Such investments would include facilities for cold storage, for quality

assurance etc. For a marginal farmer with less than 2 hectares of land, such upfront

investments are out of scope. Therefore, adequate support in the form of formation of Farmersassociation will help the cause.

Access to credit, technology and information to the farmers

Access to credit is one of the foremost requirements for farmers. With most farmers being

marginal and poor, their ability to procure high quality high yield seeds and other agricultural

inputs is severely restricted. Due to this, the output is sub-par. Due to this the prices fetched by

the output is less. This again leads to distraught ness of the farmer. Its a vicious cycle. Hence

there is a grave need for agricultural credit with reasonable terms and with reasonable amount

of flexibility. In the absence of such a system, farmers usually depend on moneylenders who

charge exorbitant interest rates. Also, due to lack of flexibility and dependence on extraneous

factors such as monsoon etc, produce/price is much lesser than expected.


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Availability of technology and information is also a huge requirement and therefore a huge

challenge. Adequate weather information will lead to proper planning of crops. Couple with

proper technology like the right seeds etc, and one might be looking at a bumper harvest.

Similarly, proper information about the prices of produce in different markets would remove

information asymmetry and therefore lead to farmers getting the maximum for their produce.

Success Factors for the venture

Engaging participation- Organizing collectives and cooperatives As mentioned in the challenges, for small farmers to organize themselves and provide for credit,quality measures, technology is a big challange. This is mainly due to the upfront investment

needed. Hence its necessary to work towards these objectives in a collective manner. The

success of Shree Renuka Sugars is a case in example of the cooperative structure, coupled

with proper management can turn around an ailing firm into a highly successful venture.

Infrastructure and LogisticsInfrastructure and logistics are a must for any value c hains success. In our case it includes

need for proper storage and warehousing facilities, need for adequate and timely transportation

etc. These are extremely critical for a the agricultural sector products like fruits, vegetables,

poultry etc which are of a perishable nature and need facilities to store and transport. Hence

the availability of infrastructure and logistics is very much a critical success factor for inclusive

growth.

Technology and EducationFor inclusion of small and marginal farmers into the value chain of the venture technology and

education are a must.

Technology in terms of better inputs, better practices, quality and regulatory compliances is

required. Technology is also required in terms of usage of better tools or machinery, which can

increase the yield. An increase in yield would mean higher revenues at even lower margins and

a situation that the farmer earns more, and also the company sources for less. Hence there is a

win-win situation for both the company and the farmers.


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Education is required to properly utilize and respect technology. It is also required to avail the

services like weather information, price information across markets etc. Education is also in

terms of learning how to use new technology; in terms of agreement to adoption of new

technology; understanding the vale derived from being a part of a large value chain.

Financial ServicesThe one most important issue that the Indian small farmer is grappling with is finance. Be it

credit, be is risk management through insurance, be it availability of banking services, there are

huge shortcomings and huge gaps which need to be filled.

Price risk and product risk can be managed to a large extent if there are robust credit facilities

and insurance facilities extended to small farmers. Investments in technology and education

require contribution from the farmers end; again a question of credit.

Hence a robust system for financial services is the most important critical success factor for

inclusion of small farmers into the value chain of large corporate.

Coordination Integration and Cooperation As mentioned, the Indian small farmer is actually small. They hold lesser than 2 hectares of land

on an average. They dont have the financial or the technical might to get the pre-requisites for

entering huge value chains.

Hence, they need to cooperate among themselves and also need support from outside

agencies like the big corporate themselves or NGOs or government bodies. These external

agencies can help coordinate the efforts of these small farmers; they can integrate their skills;

their produce; their competencies and therefore

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