Agri input Industry Scenario

Agri-input Industry Perspective

Agri-industry encompasses Fertilisers, Seeds, Pesticides, Farm Machinery, Micro

Irrigation, Specialty Products, Cattle feed & Veterinary Medicines segments which are
used by farmer to fulfill his farming & allied farming needs. A perspective of the size of
each segment for FY 2005-06 & their growth rate are being furnished on the following
table –

Agri-Marketing Scenario

The Indian economy has traditionally been an agrarian one. Agriculture in India
sustains 65 % of its population. Massive strides were made in the agricultural
production since independence. The total production of food grains in the country has
grown rapidly after the introduction of green revolution in the mid nineteen sixties and
has now exceeded the 200 million ton mark. The buffer stocks also exceed the 60
million ton mark today. From being a deficient state, India today is a net exporter of
agri produce. Yet it contributes only about 24 % to the Gross Domestic Product (GDP)
of the country. The mismatch between the share of agriculture in the GDP and the
percentage of the population it sustains clearly indicates the inefficiencies of Indian
agriculture.

The bane of Indian agriculture is small and fragmented land holdings. Although the
average size of operational farm holding is about 1.18 hectares, about 70 % of the
farmers own below 0.4 HA of land. This prevents use of technology inputs by the
farmers, which in turn leads to low yields and farm productivity. The poor infrastructure
available in rural India and the lack of adequate market support, coupled with the
inability of the small farmer to hold on to his produce, has led to the predominance of
middlemen in the agricultural marketing in the country. This sector is riddled with
imperfections like multiple intermediaries, archaic and abysmal storage warehousing
for agri-produce, lack of transport facilities from countryside to urban markets tilt the
balance against farmers. With the Indian farmer being cut-off from the market, he
continues to produce traditional crops irrespective of their demand. This has led to
another major flaw in the Indian agricultural scene; it is supply driven instead of being
demand led. The huge inefficiencies prevailing at the root level in the supply chain
system also calls for agricultural marketing revolution.

A look into the phalanx of agri-marketing imperfections in India is broadly given

below,

• Nature of competition: Imperfect, unfair and even monopolistic

• Wide price spread due to multiple intermediaries
• Inadequate market surplus
• Lack of organization: Buyers of agricultural produce usually operate on a large
scale and exploit the producers who are usually small and scattered.
• Forced sales: Farmers are unable to wait for a long period after harvest due to
poverty, indebtedness and need for finance.
• Expensive means of transport from countryside to urban markets.
• Superfluous middlemen and malpractices
• Inadequate storage facility
• Absence of grading and standardization of agricultural products
• Lack of market intelligence
 Another disturbing feature of Indian agriculture is the low penetration of post harvest
management. It is estimated that 25 – 40 % of the total agricultural production is
wasted due to poor post harvest management. This wastage adds to the cost of
production. These inefficiencies have virtually priced out the Indian agricultural goods
from the world market. With the World Trade Organization (WTO) regime coming into
force shortly, allowing free market in crop output including free movement across
international borders, Indian agriculture is going to face severe competition from
agricultural imports.

There is a need for paradigm shift with regard to the likely dispensation for
agriculture marketing. Agricultural growth not only requires credit to support for
purchase of agri-inputs, but also more importantly knowledge of farmers regarding
the changing technologies and practices. It is important to ensure timely availability
of inputs & advice to farmers and facilitating in marketing their produce through
proper buy back tie-ups.
The Government is well aware of the requirement of the new paradigm. However,
due to its typical functioning and bureaucratic delays, it is unequal to the magnitude
of the task at hand. In this background the role of private sector initiative in making
Indian agriculture globally competitive becomes paramount.

The current trend is to view the industry as a chain and is towards organized retailing
in agri-sector. The main objective is to integrate the chain, ironing out market
inefficiencies and improving the business prospects for the producer. Media
explosion and technology revolution have raised the aspiration levels of the rural
customers. They are willing to shed out extra penny for quality products and
services. Companies are looking at this opportunity in a big way and based on their
individual strengths, they are trying to generate businesses across the supply chain.

Organizing Retailing in INDIA

The retail industry in India is fragmented, with several small and medium players
accounting for a sizable portion of the total market size. Organized retailing has just
made a foray in the country and is only 2% of the total sector estimated at Rs. 15,00
billion. This sector is spreading and making its presence felt in different parts of the
country. In India, the population base of over one billion, the demographic profile and the
dynamic changes in consumer behavior provide a base and foundation for capitalizing
on the enormous market opportunities. Given the vast potential of the Indian market, a
lot remains to be explored for expanding the commercial operations in this sector.

Recent Trends & Developments

Independent Retail Shops: In India, the rural and semi urban segments are
saturated with small independent retail shops and distribution outlets. These are
mostly family owned with high dependence on the owner, thus affecting long run
success and employee morale. The unorganized sector is fraught with business risks
as process inefficiencies and lack of storage amenities are leading to colossal
product damage, wastage and cost overruns. Besides, it is virtually impossible to
undertake attractive display of branded products and facilitate consumer awareness
and map customer expectations.
Corporate Retail / Supermarket Chains: A corporate retail chain owns and
operates multiple retail outfits under common ownership. There exist well-defined
management philosophies and consistent strategies with regard to working hours,
product assortment, pricing policy, sales personnel, promotion policies etc. These
must be maintained throughout all branches in order to project a particular image of
the chain. This calls for centralized decision making which in turn result in difficulties
for individual units in adapting to local needs of the target markets.
More and more companies are now looking at rural markets for growth. As the
urban markets are getting saturated, rural market with huge latent demand seems to
be beckoning the retailers. Rural market is not what many believed it was – poor
populace, not aware of brands and not conscious of quality. On the contrary, high
disposable incomes and more aware customers with rising aspiration levels now
characterize rural market.

PEST Analysis

An analysis of the rural retail business environment w.r.t Political, Economic, Social
and Technological environments (PEST Analysis) along with competitor analysis
would enable one to look into the opportunities that exist in this sector.
Political Factors

• The Govt. of India is giving positive consideration to open up retail trade sector
and for extension services.
• Govt. is willing to give incentives to corporate sector for setting of agri output
procurement system.
• Amendment of the Agriculture Produce Marketing Act is under consideration and
procurement outside mandis is being permitted.
• Essential Commodities Act. is under review for major amendments in order to
allow storage or handling of large quantities of produce.
• The Govt. of Punjab, Haryana and even UP are proactive towards agri sector.
• High incidence of taxes in organized retail.
• Existence of a layer of petty bureaucracy encouraged by the requirement of
licenses for various activities, which is time consuming and harassing.
• Archaic laws leading to poor availability and high cost of real estate.
• Input sales largely controlled by PSUs.
• MSP is decided by Govt. without any concrete information of the market.

Economic Factors

• Priority sector lending for agriculture by financial institutions.

• Rising disposable income.
• Subsidies and controls in agri trade.
• MSP has become a hindrance for free trade. Price is determined by Govt., not by
market forces. For example, PAU has come out with a wheat variety, which is
high, yielding, but poor in quality. Farmers prefer to grow that because of assured
MSP, irrespective of its quality.
• High taxation on input trading.
• Inter-state sales tax: a problem for logistics.
• High cost of cultivation due to unscientific farming practices.

Social Factors

• Aspiration for better life style.

 • Looking for wider choices of products and services.
• Increased awareness with information explosion. Farmers are ready to spend
money on better household items, health and education.
• Farmers are becoming status conscious, especially in Punjab. They prefer to go
for upper-end products.
• Dramatic change in consumption habits.
• Receptive to new ideas and technologies.
• Changing ethos in decision making factor.

VALUE

Pre-‘80s Price

Mid-‘80s Quality / Price

1990s Quality + Enjoyment / Price + Time

Quality + Enjoyment + Entertainment / Price + Time + Energy

2000s

Changing Customer Expectations in India

• Cultural gap is prominent in rural areas.

• Highly dispersed markets
• Wide variation across states
• Traditional relationship between farmers and commission agents, has become a
hindrance to break the existing value chain

Technological Factors

• Some Agriculture Universities (Eg: PAU) are proactively participating in R&D.

• Farmers showing positive attitude towards mechanization of agriculture.
• Infrastructure inadequacies for power supply, telecom connectivity, bandwidth
etc.
 • Poor infrastructure availability for specialized structures like silos, greenhouses
etc.

Analysis of Strategic Forces

Suppliers

Bargaining power of suppliers for each category –

• Fertilisers
o Bulk – High
o Specialty – Low-Medium
• Seeds – Low-Medium
• Pesticides
o Generics- Low
o Specialties - High
• Irrigation - Low
• Cattle Feed – Low – Medium
• Veterinary Medicines – Low - Medium

Customer

Private Trade

• Price and delivery are main deliverables.

• Brand image and pull by farmer still exists as a result of which premium is
realised in some brands.

• Price sensitivity due to low margins.

• Credit orientation.

Bargaining power “Medium”

Institutional Buyer

• Price, delivery and terms very important.

• Bargaining power “High”

Farmer

• Farmer preferences have been developed due to association with brands

& perception about the companies.
 • Packaging influences the choice of the farmer.

• Purchasing decision is influenced by dealer (availability, profitability of

dealer, etc.).

• Customers vastly spread with low unit value of purchase.

• Bargaining Power “Low”

Competition: Strengths & Weaknesses

Unorganised Network
The main competition would be witnessed from unorganized players i.e., the
dealer & distribution network which still commands a significant share of the Agri-
industry.

Strengths

• Reach & Relationship

• Low investment
• Credit exposure & ability to recover
• Integration of Input & Output
• Working Capital Rotation

Weaknesses

• Lack of transparency in dealings

• Lack of technical know how
• Mis-utilisation of company promotion funds

Organised Retail

The Indian retail sector is highly fragmented in nature. About 45-50% of the
market is dominated by grocery products, and it is this area which is encountering
huge risks on account of fragmentation and massive wastages.

The unorganized segment is witnessing fierce competition from the organized

retailers. The organized retailing concept has gathered popularity as competitive
pressures are prompting firms to realign their distribution strategy and acquire
sizable market share by expanding and diversifying their business operations.
 Most enterprises are entering into the retail business segment, as they perceive
retail business to be a dominant revenue generator, with staggering profits in the
long run provided they can develop the right value chain.

The business houses who have recently ventured into this sector include,
•E-choupal of ITC
•Tata Kisan Kendra of Tata Chemicals Ltd. & Rallis India Ltd.
•Mahindra Krishivihar of MSSL (M&M)
•Shriram Farm World of DSCL
Aadhar of Godrej Agrovet.

Substitute Products and Services

Products
Inter-shift between organized & unorganized models would act substitutes
between themselves. Retailing as a product might find substitutes in agri-industry
in terms of new models emerging like specialty stores for each category segment
& subsegments.

Services
Services from Retail would find substitutes from the services extended by
Government departments, Agri-input & Output companies, Organised Retailers.

The channel, infrastructure & utility used for services might determine the extent of
substitution.

The projections of unorganized & organized sector in the Indian Retailing

Scenario is bring Illustrated through graph.

Indian retail industry ~ Rs 990,037 Cr (USD 300 bn), growing at 5-6% p.a.

Organised retail industry ~ Rs 35,000 Cr (USD 7.7 bn), growing at 25-30% p.a.

1400

1200
 Regulatory and Fiscal Scenario

Government is reviewing the share of FDI in the Retail Sector. The policy change of
FDI would bring in quite a bit of competition from the MNC’s.

Products and Services - Existing and Emerging

Existing Products
Various products as retailing models are being made available by players. But till
date a successful stand alone model in the retailing segment is still to be seen. The
kind of Retailing models are as follows –

• Agri-Input Sales & Services

• Agri-Input, certain Output Categories & Services
• Agri-Input, certain Output Categories, Services & certain Categories in Non-
Food Segments.

Emerging Products
• Integration of Farming & House Hold needs, Output & Services

Marketing, Distribution and retailing Models

• Distribution Structure
o Buying of products from different sourcing partners.
o Selling Products from Retail shop to to Consumer

Marketing & Distribution structure in all rural retail models are still at the stage of B2C