Supply chain practices of agro-based products in the Indian retail industry

Abstract

India, being the most attractive retail destination of the world, has seen huge spurt in organized retail despite the stringent FDI regulations. Since food segment holds over 60% of the Indian retail pie, major chunk of investments have been made in this segment alone. But despite offering high variety at reasonable prices, most of the retailers have faced huge losses and are now forced to rollback their expansion plans. The experts believe that food retail in India will be like a silver bullet – will get the company brand equity (which can then be leveraged in other segments) but will not be profitable. But it is not as if no one is making profits-government-run shops (HOPCOMS) do make profits while the ubiquitous street hawkers manage to make decent profits(10-30%). These small players offer fresh product at competitive prices at convenient locations to the consumer. Organized retailers on the other hand also have to offer a decent environment to give consumers the shopping experience which is always expected from these stores. These facilities thus add to the costs which makes it difficult to compete on price. This gets exacerbated when multiple players enter the industry and thus price war starts between these players which hits the company’s bottom-line. Does competing on price, especially in the food segment, makes sense? Should companies invest on saving each penny in the supply chain to ultimately reduce the price or should they differentiate on some other factor? Does Indian customer wants something else apart from price? According to a consumer research study done across various food buyers in Bangalore- price was found to be as a critical factor but consumers also attach huge importance to the informational factors like where was the product grown (place of origin effects), how much pesticides were used(health factors), how old is the product etc. This comes under a concept called ‘Supply Chain Transparency’ or being transparent enough to ensure that consumer gets full information about the product. Thus a company can differentiate itself by offering complete information about the products (from the time it is plucked till the current instant when consumer is holding the product in his hand). This will help a company command a premium in the market and thus will not have to compete on price. Reliance Retail made a big bang entry into the retail sector in 2006 and laid out huge expansion plans by driving in money from its highly profitable oil business. Barely three years after- is it in a situation where it had to close 30% of its stores due to huge losses in the fresh food segment (or Reliance Fresh) and put on hold all expansion plans. Company meanwhile has tried changing everything from its retail group structure, organizational structure, senior management to even changing the store sizes etc. While this kind of evolution is common in any retail business- we still do not know how Reliance hopes to turn profitable as there is no differentiation from other retailers either in terms of price, quality, location or the whole shopping experience. This study aims to explore Reliance Fresh in detail to understand their retail structurefrontend, backend and the business strategy to see if they are in line and how the company can transform itself to become one of the biggest retailers of India as it’s CEO – Mr. Mukesh Ambani intends to. Gaps in their retailing model would be highlighted and specific recommendations will be provided to iron out the gaps that are there in their business model. Finally, the project also aims to briefly cover how a new entrant into this sector can compete with the Industry behemoths as well as the small players. Overall this report does intend to provide a complete analysis of the food retail sector and underline an India specific strategy that companies should adopt to actually make profits.