The current state of supply chain for food and beverage industry in India represents a complex ecosystem linking millions of small participants including farmers, trade intermediaries, kirana shops, hawkers, unorganised food vendors, restaurants, and small-scale food processing industries.
The importance of this sector can be characterised by facts such as there are more than 100 million small farm holdings; more than half of the population is dependent on agriculture; and food is the biggest expense for an urban Indian household at about 40% of the total consumption expenditure, adding up to Rs 11 trillion a year.
While, on the one hand, India has to its credit some very encouraging statistics on the scale and opportunities like 52% cultivatable land vs. a world average of 11%, about 127 agro-climatic zones, second-highest fruits and vegetable production in the world, and second-highest production of milk in the world, on the other, the massive inefficiencies in every aspect and primarily in the area of supply chain are appalling.
Any discussion on F&B sector is incomplete without talking about the mandi. It is a complex labyrinth of government regulations, traders and middlemen, resulting in the farmer getting a raw deal most of the time. Though there have been attempts at amending the Agricultural Produce Marketing Act (APMC) by several states, a mandi, in its current state, is a representation of supply chain inefficiencies in the F&B sector. A fair and transparent markets-based arrangement for selling their produce continues to be a dream for Indian farmers.
As per the 11th Planning Commission report, the amount of waste often quoted is up to 40% for vegetables and fruits. The end result is that supply chains have about seven to eight intermediaries and the cost that escalates by more than three times. Reducing food wastage is one of the most compelling reasons for inflow of investment in new sectors such as agri logistics and the creation of huge food processing zones; all of this is with the intent to establish the essential effective and efficient link to retail food structures in urban markets.
The two key trends that herald a rewriting of the existing supply chain practices in this sector can be broadly classified into policy level changes leading to structural reforms and changes from the demand side primarily driven by technology and end-consumers.
Policy-making
Policy decisions from the government can significantly alter the existing supply chain landscape in the F&B sector. The push towards enacting the Land Reforms Bill and implementing Goods and Services Tax, if successful, will mean a rewrite of the existing supply chain landscape not just for the F&B sector, but across industries. Specifically for F&B, free movement of goods between states, improved rural infrastructure and logistics can itself bring about an increase in overall efficiency from farm to plate.
Retail FDI, if approved, will attract investments in operations and marketing, increase availability of goods for consumers, encourage improved sourcing of goods from India, and enhance competitiveness of Indian enterprises through access to global designs, technologies and management practices. Additionally, the woefully absent cold chain infrastructure will become economically viable when there is strong and contractually binding demand from organised retail. These macro decisions have the potential to drive a lot of investments into this sector and create completely new business models with long-term implications for this sector.
Technology
While structural reforms are dependent on the political will of the government, the F&B space is just starting to see entrepreneurial ventures led by technology changes bringing in its share of disruptions to this sector. Given the overall state of rudimentary technology being used in the supply chain in India, we can analyse future trends from two perspectives, i.e. the adoption of proven technology from other markets to improve supply chain efficiencies and the evolution of completely new technology solutions that may support new business models.
Infrastructure
There exists enough proven mainstream technology related to cold chains, warehousing, transportation and other areas of the conventional supply chain that can be easily adapted to the Indian context. This adoption in itself will improve the overall efficiency in the supply chain. As an example, flash freezing technology, if available at a village/farm level, will not just reduce waste of fresh produce, but also improve the prices that farmers get paid. Of course, these cannot be isolated investments and these need to go hand-in-hand with other parts of the value chain being able to handle the produce.
Trading
The “Make in India” campaign has a special focus on food processing with about 42 mega food parks and 121 cold chain projects being setup with private partnership. If executed well, this is not just limited to improving efficiency and standards in India’s internal consumption, but food and beverage has the potential to become a big export area that can earn valuable foreign exchange and create rural jobs. The challenge here is to make it commercially attractive for private players to step in and make the required large investments. Advancements in this area can provide an impetus to the commodity trading market, which depends on warehouses holding stock that can be delivered at any time. Deepening of the commodity markets can enable price stability leading to virtuous cycle of attracting further investments in the sector. This has already provided access to farmers to tap real-time information on market prices and sell their produce from the comfort of his home. This real-time trading requires more evolved payment gateways and better e-contracts administration. Other technologies that can directly or indirectly improve this scenario include adoption of hybrid and GM crops, precision farming techniques, the ability to receive real-time market information at every level of the chain and so on.
Connectivity
The ubiquitous mobile phone and increased Internet connectivity in India provides a complete new paradigm for emergence of new business models in the F&B space. As per a recent Internet Trends 2015 report from Kleiner, Perkins, Caufield and Byers<http://www.kpcb.com/internet-trends>, 65% of Indian Internet traffic is from a mobile device and puts it at the top of the list of mobilised countries. With India being at the point of an Internet penetration growth inflection, opportunities to come up with new disruptive models led by technology are many. While the majority of the Internet usage is currently non-business related, the connectivity across the country itself is a major boon, setting up the platform for rapid adoption and scaling up of disruptive innovation.
Logistics
We see entrepreneurs tackle the low hanging aggregation model in logistics which have worked very well in the ecommerce and taxi market. Companies like Trucksfirst, Truckmandi, Trucksuvidha, and half a dozen other players with slightly differing models, address the unorganised truck market-making problem. All of them are trying to squeeze out inefficiencies in the current unorganised broker-booking agent model using better visibility into supply-demand information and real-time tracking of trucks. As an example is Gurgaon-based Trucksfirst, which also owns trucks, secured venture funding of Rs 61 crore from SAIF Partners in April 2015. With GPS and mobile technology available all over the country, it is only a matter of time before players like Uber and Ola Cabs emerge for aggregation of commercial vehicles. The nascent area of Internet of Things is showing rapid progress in commercial applications and holds a lot of promise for use in this sector.
F&B Service
Another related area, which is seeing a lot of action, is the Food and Beverage service industry. The F&B service market is worth Rs 2,04,438 crore and is expected to reach Rs 3,80,000 crore by 2017 with a CAGR of 23-24% as per the latest FICCI-Grant Thornton F&B report<http://gtw3.grantthornton.in/assets/FICCI-Grant_Thornton_F%26B_report_May_2015.pdf>. Food constitutes about 50% of the overall consumption expenditure and given the large young population, this trend is not going to change. Dominated by traditional segments that are mostly unorganised, brands of Indian and multinational origins are keen on penetrating the market. Indian and global brands like Café Coffee Day, Haldiram’s, McDonald’s, Domino’s Pizza, Subway, and KFC are scaling up and rapidly entering tier-2 and tier-3 cities. Efficiency in their supply chains is critical for such players to compete against unorganised traditional outlets.
As an example, McCain Foods, a supplier of French fries for McDonald’s, has invested significantly in contract farming of potatoes in Gujarat while Pepsi Foods has over 7,000 acre spread across western India. Driven by young demographics and increased dispensable income, this segment will see the emergence of large chains, and will drive more innovation on the supply chain side.
F&B Delivery
The more recent development is the growth of entrepreneurial ventures in the food delivery business i.e. the last mile connectivity to the consumer. New forms of commerce are transforming how people can get products and services. Aided by technology and funded by venture capitalists, start-ups like Foodpanda, Swiggy, and TinyOwl have taken to the marketplace model, whereas full-stack cloud kitchens like Freshmenu and Spoonjoy are owning the entire experience. Though at a very early stage, the online marketplace model is showing rapid growth but questions remain on scalability and profitability. The full-stack, vertical model is slower in scaling, but as they scale, it is inevitable that such companies look back into their supply chains to ensure consistent and efficient supplies. Some of these technologies, which are currently disrupting the end-consumer space, will soon disrupt the traditional procurement and supply models.
Changes in connectivity and commerce will impact the F&B sector like never before. With the government’s push on infrastructure, mainstream technology will see better adoption. With addition of disruptive technologies and business models emerging in adjacent spaces, the next few years promise a lot of action in the supply chain in the food and beverage space in India.
