Food Wastage: Challenges for India

A FAO study throws up interesting numbers on food wastage across the world and splits up food wastage per capita into supply chain losses and consumer level losses. For developed countries, consumer level wastage is alarming but for countries like India, the supply chain level wastage is alarming because of the volume of food losses given the country’s size and the scale of its farm output. India is not unique in the level of its losses. According to the FAO,42 per cent of fruit and vegetables grown in the Asia-Pacific region, and up to 20 per cent of the grain, never reaches consumers because of poor post-harvest handling.

I think there are two key reasons why it is practically more difficult to reduce wastage in India, compared to the developed countries.

a.) Structural Challenge : It is important to note that supply chain issues (for agricultural produce) in India is much more complicated and difficult to sort out compared to North America and Europe, primarily because of structural differences in production. Indian agriculture is primarily small holder agriculture and hence disaggregated by nature. However, it is also said that the milk supply chain has done comparatively better than vegetables when it comes to reducing wastage. One of the key reasons behind that is structural “innovations” at the farmer level for aggregation i.e. pockets of successful co-operative institutions. While investments in cold chain infrastructure is key, India has to find ways of improving aggregation at the farmer levels and unless that is in place we will not find people making extensive investments in cold chain infrastructure even after the policy situation has improved.

b.) Political Intent: A closely linked reality behind “private” sector not being able to do much in setting up efficient procurement back-ends (and marketing linkages in general till date), is that the farmers are a “constituency” of the politicians and to ensure that politicians continue to get votes,it is critical to ensure that farmers continue to depend upon politicians or continue to have expectations from politicians for critical needs. If the politicians enable the cold storage investment environment too much in favour of private entities, the private enterprises, which have historically shown better effectiveness, might make a dent on the dependence of farmers on politicians. This is not a happy state for the vote hungry political class. To put things in perspective, the politicians (as lawmakers) have the tough task of ensuring that policies do not breed exploitation of the weak by the strong and they do need to be sure of the intent of the people who look at investment in procurement infrastructure from a return on investments perspective. However, an equally pertinent question is if “partial” socialism helps us in the long run.

While I wanted to cover this in a separate post, I thought I might as well place it here to give a complete picture of the complications around deciding upon policies and the seriousness around that.

A few years ago, a nation-wide study on assessment of harvest and post-harvest losses for 46 different agricultural commodities was carried out in 106 randomly selected districts. The study was carried out by CIPHET, Ludhiana and the figures of wastage are much lower than any estimate we get from other reports or what we hear from even the policymakers. The wastage levels as per that report is given below.

Cereals 3.9 – 6.0 per cent, Pulses 4.3-6.1 per cent, Oil seeds 2.8-10.1 per cent, Fruits & Vegetables 5.8-18.0 per cent, Milk 0.8 per cent, Fisheries (Inland) 6.9 per cent,Fisheries (Marine) 2.9 per cent, Meat 2.3 per cent, Poultry 3.7 per cent.

These numbers have been used as a justification to stop FDI in market linkage in India with the argument that the level of losses in India is not much. Well! that is how complicated policy making is.

(Also published on LinkedIn.)

Reading List – 9th November, 2013

1.) How does the pirates business model work? An interesting article on financing Somali Pirates.

Article: Somali Pirates

2.) Would you work harder if you were given a raise? A new Harvard study says yes, but only if it came as a surprise and you thought that you were already being paid the “going rate”.

Article: Pay and performance

3.) What happens if you don’t have telephone, internet? An interesting story about what happened when a US island went completely off grid and only a few locations had connectivity

Article: Disconnected

4.) Fabulous work on micro-franchising from Jibu. A drinking water company set up in Africa.

Article: Microfranchising- Jibu

Interesting perspectives on how concepts like risk sharing, skin in the game and ownership structures can have a major role in deciding the success of delivery channels in any market, especially so for the developing world.

Access to Credit: Financing Options for Farmer Producer Organisations (FPOs)

FWWB and SFAC organized a Round  Table Discussion (RTD) forum on July 31st, 2012. I had the opportunity to attend the RTD and talk about the possibilities of enabling innovative market based financing solutions for Producer Organisations. Needless to say, it was one of those rare gatherings with everybody from policymakers to practitioners being present in the same room. The RTD was very well represented by Academia, FPO promoting organisations, Financial Insitutions, Donor Organisations and others.

The minutes of the meeting can be found here. (RT- Delhi – July 31 2012)

The organisers:

Small Farmers’ Agri-Business Consortium (SFAC) was set up in 1994 by the Governement of India. SFAC has emerged as a Developmental Institution with its core aims and objectives focused on increased production and productivity, value addition, provision of efficient linkages between producers and consumers. SFAC deals with agriculture in its wider connotation, including fisheries and horticulture.

Friends of Women World Banking (FWWB): In 1982, promoted by SEWA, Friends of Women’s World Banking, India (FWWB-I) was created as one of the first few affiliates of Women’s World Banking.

Why go cashless?

We want to make cashless payments to farmers, rural labourers directly to their bank accounts and hand them over a card which they can use to transact “business”.

By removing cash from the system, we have managed to remove chances of “middlemen” (our very own people handling payments) siphoning money out of the system before it reaches the farmer or the labourer.

But then, what does the farmer do with the card? Where does he get the cash? Nobody in his immediate neighbourhood accepts cards! He needs to pay cash to buy his food!

He has to go to the bank which is in the next town to draw cash from the bank. All the farmers/labourers in his area get the transfer on the same day and so on one day of the month the bank branch in the nearby town is packed with villagers looking to withdraw their cash. It is a nightmare for the bankers and the villagers because they have to wait for hours and they have spend money and one full day to go the town.

To solve the problem, we got agents who carry a small authentication device and a bag full of cash. The agent then delivers the cash to the farmers at his doorstep. What if the agent gets the authentication and then does not pay the full amount of due like the earlier “paymaster”. Off course, the agents are “recruited” by organisations and hence the villagers have an institutional “back-end” to file complaints and given that this institution is smaller than Govt, it should be more responsive compared to the big Government machinery. But, does it really happen that way?

Moreover, the agent runs the risk of being robbed/killed because of the amount of cash that he is carrying. How do you prevent that?

What is the way out? Carry on with this till the kirana shops in the villages accept cards for payments? Given that mobile is now ubiquitous, how about mobile payments? How complicated is that?

An interesting article on the PSD World Bank blog: Read

How can venture capital accelarate growth of SMEs?

Lately, there has been a lot of excitement about a bunch of new initiatives across the world which aims at tackling issues of poverty with the help of market-based solutions. The entrepreneurs embarking upon such initiatives are popularly called social entrepreneurs. Their intention is to find ways of improving affordable access to products and services for people who have historically found it difficult to have access to them either because they reside at some remote location or just because the cost of making the product or service available to them is too high for them to afford themselves.

In most cases, the social entrepreneurs are people who are well-educated, well-connected, and sometimes tech-savvy. These are people who are known as those who are not focused entirely around increasing their own wealth but have a passion to have a positive impact in the lives of other people. A bunch of social investment funds are focusing on these highly talented, well-intentioned people and making sure that they are not deprived of any financial support which they might require to achieve their aim. In fact, the social investors are even fine with a lower rate of return because they consider social impact more important than financial returns. There are no two opinions about the fact that we need more such well-intentioned entrepreneurs and investors.

However, two questions arise at this juncture, how many people in this world do not have access to the products or services that we are talking about? The answer is innumerable! And, how many social entrepreneurs or social investment funds will this world be able to create? The answer, unfortunately, is a handful.

Interestingly, at the same time, there are millions and millions of less educated, less resourceful people who are natural residents of a place, who try to earn a living out of producing or selling possibly the same kind of products/services that the social entrepreneurs intends to bring to the people of his/her community. Let us call him/her the desi-entrepreneur. The desi-entrepreneur’s life is dependent on being able to able to produce and supply these products and services. However, the difference is that this less resourceful desi-entrepreneur either does not have know-how, the sophisticated technology, the business linkages or the training which the social entrepreneur possesses. In fact, the biggest pain point is that even if he knows where the technology and the linkages exist, he does not have the money to invest in capacities or meet his working capital requirements just because the local financial institutions (LFI) think that his “enterprise” is highly risky. This means that this desi-entrepreneur continues to perform at sub-optimal levels, the products and services that he delivers are either not of very good quality or not available at an affordable price. This results in situation that the people in his community do not have access to them or what he produces does not give him adequate returns to support his living.

Interestingly, if he could have access to finance from the LFI, he could possibly have the same positive impact on the lives of the people in his community without having required any social entrepreneur to come in.

A very simple theoretical solution is to have the social venture capital investors invest directly in these so called desi-entrepreneurs! And that is where the problem begins.

The amount of money required to fund all such desi-entrepreneurs is huge and unfortunately there is a limit to the amount of social investor money that the world has! Moreover, these entrepreneurs are too scattered and the size of investment in each enterprise is too small to justify a team to professionals in the social investment fund to do due diligence and make equity investments in them. The volume of work required simply complicates the whole picture. LFIs are however located geographically closer to these enterprises and are better suited to assess and finance them. However, given that equity is certainly not a business of the banks or the LFI, the perceived level of risk of the desi-enterprise is too high and hence the LFI ends up not lending to them at all.

The source of the risk in most cases are as discussed above, uncertainty of supply and price of raw material, lack of advanced skills and lack of affordable access to advanced technology necessary for enterprise viability, with all of this leading to an uncertainty of demand owing to the uncertainty of prices for products or service offered by the enterprise.

Incidentally, if we categorise the enterprises into sectors, we would realise that there are a few key missing links specific to a sector that contribute to the risks for most enterprises in that particular sector. If a solution is devised to address one or two such key risks per sector and such a solution is made available to the all the enterprises in that sector, we may end up unlocking growth potential of hundreds and thousands of enterprises by making them less risky and thus making them attractive for the local financial institution to directly provide debt financing.

For example, a rural tourism company that aggregates and distributes information about rural home stays, provides a payment gateway to potential travellers via an online web platform and provides accreditation facility to the home stays, can provide a steady base of travellers to qualified properties and ensure their revenue certainty. Once this happens, the ability of the home stay owner (desi-enterprise) to leverage debt goes up for every single rural home stay in the country.

An equity investment into one rural tourism supply chain company can thus potentially unlock growth of millions of rural home stay properties, agents and other members of the rural tourism supply chain.

[Disclaimer: This line of thinking is borne out of the work that I did in the past but the views are personal. ]

How to “serve the BoP”?

I have come to a few conclusions based on three years of my personal experience of building businesses for the last mile remote rural customer. The segment that I have been looking at is similar in a lot of ways to the segment referred to as BoP in popular development literature. I, do, however, feel that the term BoP business model is a misnomer because I am increasingly being made to believe out of my experience that such business models do not exist. Even if they do, they are not sustainable. That might be a big statement given the new found belief across circles about the viability of BoP of business models. My experience is limited to a few states in India and limited to the following supply chains like dairy, clean energy, rural tourism, agri, drinking water, etc.

Here are my “learnings”:

1.)I think that instead of segmenting customers into BoP and non-BoP, it is much more useful for companies (those companies who want to reach out to the excluded categories) to segment the customer base in terms of a.)who can be reached easily and b.)who can NOT be reached easily. This is what I call the distribution channel lens of segmenting.

For eg:In a remote rural location there might be both a BoP/low income household as well as a slightly well off household. Similarly so in urban locations. If we design  business to serve only the low income household in remote rural locations I doubt if the business can ever be viable. (I will be very happy to be proved wrong.) In other words, I think the business models should be designed in such a way that “Access” is provided to both the low income as well as the high income customers in a particular geographical area. This, according to me, makes more sense in terms of distribution channels AND company viability.

2.) Good intentions ONLY are not sufficient for designing business models. My personal experience with the dairy healthcare backed on the spot cattle insurance product told me that though we assumed that there is a need for the product and that the customers were ready for it, we realised that the ground situation was quite different. No doubt, there is a need for the product but the inertia against a paid service when a free service is available (no matter how bad that quality is)is so huge that it is difficult to ensure that customers pay to buy some product or services. I had a similar experience with smokeless stoves. I think the solution to this type of problem requires a more involved approach which I discussed in an earlier post.

I think any model looking at reaching out to the excluded groups (or BoP) has to involve iterations to come to a final product based on “extreme” customer understanding. Lot of work is needed there. Anybody who says that “BoP” businesses can be low touch is not talking about the BoP market at all.

3.) The distribution channels has to have a very local nature and in all possibility they can not be owned by ONE “company”. They would essentially be multi product channels but similar products flowing through a particular channel. Eg: White goods/capital goods like stoves may pass through a different distribution channel and fast moving goods has to flow through a completely different channel. The channels have to ensure that the last mile customer facing people are a part of the local community AND they are well conversant with the product/service features AND are capable of basic troubleshooting. This most certainly requires a lot of standardised training. Again, a reason why I said these efforts would be high touch. (You might ask, who takes the initiative to build these localised channels? My answer is professional NGOs. They can use some of their “low cost or no cost” money to make an angel investment in the local “distribution companies”)

4.) A big reason why products do not reach the last mile is because there is no one to fund the inventory! Something has to be worked out at the small town levels or the cluster levels to ensure that banks/financial institutions lend to small distributors. I think the big companies should work with banks to promote financing of inventories and building ware-houses in the small sub-sub taluka towns. This will free up tremendous scale. The financing has to target small distributors and NOT purchasers or retailers as has been tried through some MFI and SHG backed models.

Now comes the difficult part. To make sure that the banks lend to small distributors in the small sub-sub taluka towns,the companies might need to give some kind of a guarantee to the banks to start with.  (And this is extremely difficult given the corruption ridden last mile banking system in our country. But I think the big companies should be able to manage this.)  My assumption also is that the companies will need to bear the cost of doing proper due dilligence in identifying their local area distributors. This is a one time cost. The local banks can then finance the inventory. This reduces the extent of monetary loss in case the distributor identified by one company is poached by another.

5.) There is a good reason to leverage public/Govt infrastructure or funding wherever available: We leveraged govt universities, facility centres, staff in our work. We identified what they were good at and left it to them. It saves a lot of money.

6.)There is no harm in starting with selling a product or service that gives good returns or working a high gross profit pricing model. This would help in ensuring that the business model is sustainable and can fund itself in future when you need to get into the lower margin products. Starting with a difficult aim of making the business sustainable with low margin product/service could end up killing the effort all together. Eg: when you are looking at building a procurement network you might as well start off with a cash crop that gives higher margin, rather than a food crop. You can then start with other types of crops. We had started with castor in our work. It helped!

I say again, instead of a BoP/ non-BoP segmentation, I think it is the distribution channel lens that is a better way of segmenting customers. Given the fact that the unit margins in serving the BoP segment of customers is thin, it is necessary to have huge scale and huge scale is possible only if the distribution model is robust, sustainable and adequately financed.

What do you think?

Q & A: FMCG Distribution

Some important questions were raised from my previous post. I am attempting to respond to them based on my observation and experience.

How do you think the process will change in case of a new product and a new company? Especially with regards to the terms of engagement?

Based on the product, the industry and the territory the company is operating in, the distribution process changes. Though the basic role of the distributor remains same, there are differences at various levels. We can think of following different scenario which provides for various levels of engagement from the distributor:

Old company, old product

Both company and product are old and known to the market. It has already made its own space in the retail space, so it does not require routine attention and intervention of the distributor. Distributor can focus on developmental activities.

Old company, new product

When a new product is launched by the company which is already out there in the market, the approach is different. Distributor needs to make retailers aware about the new product, salesman needs to be trained, and infrastructure needs to be arranged. As company is already selling its other products, retailers are already known to the company, already identified. This requires less effort on the part of distributor.

New company, new product

This is higher level of problem as compared to previous two cases, as both company and its product are new in the market. The distributor needs to identify relevant retailers, introduce the company and then introduce the product. This requires much more effort and engagement from the distributor.

We can add third dimension to this based on the distributor is new in the distribution business or an old hand already distributing other FMCG products. Distributor can exploit his relationship with retailers for the new company and new product.

 How do you track the performance of the distributor?

Performance of the distributor can be measured on following criteria.

  • Sales growth on previous year base (compare with expected sales in case of new product)
  • Retail penetration- retail universe covered
  • If product range is there, distribution of sales across the range
  • No. of stock out instances
  • Complaints/feedback received from retailers
  • Qualitative observation of the company officer concerned

Some punitive points should also be added in the performance measurement. Punitive points in the sense, failing to adhere to those criteria will bring negative points to performance. Regularity of delivery, quality of delivered product, training & behavior of the salesman can be added to this list.

Is it a good thing if a particular distributor is given 3 products to sell and he sells one extremely well but he does poorly in the other two? Do you restrict the flow of the better selling one by attaching a condition that you have to sell amount X of the other two to get further supply of the better selling product? Or do you rearrange incentives?

It is not desirable if distributor sales one product and ignores other. That product will die in that territory. We need to create various mechanisms by which all products receive due attention from the distributor. It can be changes in the margin structure, changes in the incentive structure etc.

Distributor as businessman would always like to sell fast moving products first and ignore the slow moving one. He would like to maximize his commission putting minimum efforts.

We can take commitment for the lower selling product ensuring distributor that he will be given better selling product as demanded. It’s the responsibility of the local officer responsible to see that all products get due attention based on the potential.

How are the commissions decided? Do we have information about the common range of commissions for different FMCG products?

Commission for distributors is decided based on following.

  • Investment and operating expenses of the distributor
  • Expected rate of return on investment
  • Margin/commission offered by competitors on same/similar products
  • RoI in other similar businesses
  • Expected sales volume of the product (for example, slow moving products have higher margin)

Apart from normal commission, various incentives are also given to the distributor to make him focus on a particular product or pack, to counter competitor’s move etc.