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Off the Shelf

September 14th, 2008 by Devangshu Dutta

You’ve walked into your neighbourhood supermarket with your shopping list. The particular detergent that your spouse had put on the list isn’t on the shelf and the sales associate is not sure whether they have any in stock (maybe you get the standard line: “whatever we have in stock is already on the shelf”).

You’ve forgotten your mobile at home so you can’t call to check whether a substitute brand or different pack size will suffice, so you walk out with the item still on your list.

And into the local kirana store. The brand and pack size that you were looking for isn’t there either, but the shop-owner says that he will have it in stock sometime during the next 3-4 hours, and can send it over to your home. Or, he suggests, you could also buy an alternative brand (or pack size). At the end of that conversation you would have very likely bought the alternative offered, or would have agreed to home-delivery of the item you were seeking. (A study by the Institute of Grocery Distribution in the UK in 2006 discovered that, in case of non-availability, 40% of the customers end up buying the same product somewhere else.)

Some people would be cheering, “Yea, more power to the underdog small retailer”. But the point of this example is not the victory of the local, independent kirana over the chain-store. The point I am illustrating is that the difference in the business models and formats of these two competitors, and the impact of on-shelf availability.

Modern convenience stores and supermarkets, and the format that is being largely adopted by the chain-stores in India, is the western model of self-service. Compared to the kirana-model of “being served”, modern retailers depend on product being available and visible on the shelf. Very clearly, visibility and availability drive sales.

And in the current environment, retailers are or should be looking at squeezing more sales out of their existing stores (see the earlier column – “Priority #1: Same Store Growth”).

On-Shelf Availability is driven by a number of factors – some are within the retailer’s control, while others are not.

On the vendor side, availability is driven by a number of factors. In India, vendors themselves can be small to mid-sized companies, with distribution systems that are poor in terms of information linkages. The supply chain may comprise of several levels of stockists, distributors, and wholesalers, with an inherent and in-built delay in information exchange. In this situation there is always a phase difference between demand (non-availability) and supply.

Other than the phase-difference, the order-fill rates at the vendor’s end can also be poor due to supply constraints. The quantity available in stock for a certain product at a regional or state level can frequently be lower than the requirement, and in such cases the manager, or the distributor, can end up allocating the available stocks.

These causes can lead to availability that is as low as 60-65% on average, even among the popular products. “Good” vendors can have supply rates of 85-90%, but even in these there is a high variance.

However, the interesting thing is that a very high proportion of stock-outs (around 75% according to the 2006 IGD study) can be attributed to problems within the individual store. These include poor in-store disciplines, lack of awareness of the impact of low availability, too much work for the sales associates or the lack of motivation.

(For instance, 35% of sales executives in British study did not plan to pursue retail selling as a long-term career. In a study carried out by Third Eyesight a few months ago, with retail was being seen as a “growth industry”, that figure in India was about 55% and was closely correlated with the frontline attrition rates being witnessed by Indian retailers.)

One of the critical factors in how on-shelf availability is handled is the very different perception various people have of its importance. The store manager or a sales executive may directly correlate lack of availability with lost sales (and lost incentives), while a category merchant may not find it as critical since he or she may be able to balance the margins through the mix of product and the aggregation of sales across stores. The first critical element to be fixed is to have a common view on the importance of availability communicated across the retail organisation.

The second important element is highlighting the visibility of stock within the store – isn’t it surprising that despite the small size of back-office space, how stock that is showing “on the system” can be so invisible?! The product may be stacked in inaccessible boxes, or may have just been kept in the wrong location.

On busy days and during busy hours, merchandise can arrive at the store and simply “disappear” off the radar for a few hours, since the staff may not have had the time to take the stock into the store’s inventory. It sits in the shipping boxes waiting for stock intake, which may well happen after the peak selling hours have passed.

Sometimes the availability issue comes up because the product is very popular, and it becomes virtually impossible to maintain a high availability during the critical selling windows – a typical example may be health and beauty products or popular snacks, where the aggregate availability may be high during the week, but abysmally low during the peaks. A key feature of these categories is also the large number of SKUs, which can be cause for substitutions in the supply chain, and therefore poor availability of a particular SKU.
On the other hand, fresh produce and dairy may show poor availability if daily reports are configured for end-of-day rather than beginning-of-day stock-checks, since fresh vegetables, fruit, fish and dairy may actually be taken into the store during the early hours in the morning.

Many people believe that the best way to tackle these issues is through information technology.

However, IT is only a tool that can enable a business if the processes are robust and people are attuned to a common objective.

The correct sequence, as for many other aspects of business, is to tackle the people issue first. Awareness and common understand can only happen through consistent communication and widespread training. (The 2007 study by IGD (UK) on this issue highlighted the fact that 61% of the sales associates had not received any formal training, while 23% had no communication about on-shelf availability.)

This communication needs to be not just within the organisation, but across the retailer and vendor relationship. This process is, unfortunately, not enabled by the very tactical and adversarial nature of the buyer-supplier relationship. Retail buyers don’t easily share point-of-sale information with vendors due to a variety of real and perceived barriers – confidentiality, power-issues, competitive pressures.

Fortunately, although it is still early days, chain-stores and vendors in India are already beginning to work together. Very often the exercise is actually being led by the larger, multi-national vendors who have been exposed to the concepts of Efficient Consumer Response (ECR) and Collaborative Planning, Forecasting & Replenishment (CPFR) – concepts that have been around for about 15 years.

However, these frameworks require a significant amount of joint business planning as well as point-of-sale visibility being provided to the vendor, and both of those aspects are still weak in the Indian modern retail ecosystem. Such degree of high transparency will only come in with further maturation of the retail businesses and the vendor relationships. Some of the modern retailers are already able to see consistent availability of over 90% through these efforts, and as word spreads, hopefully so will the practice.

Creating a culture of transparency and communicating the desired levels of availability is the foundation on which robust processes can be built for checking and reporting availability, which then can be enabled through technology. The correct sequence, therefore, is People-Process-Technology, and not the other way round.

In closing, let me show the other side of the coin (after all, this column is titled “Devil’s Advocate”!). The additional sales from better availability are very seductive, and can be very profitable, but up to a point. After a certain level, the law of diminishing returns takes over as the cost of maintaining high availability exceeds the additional margin. Particularly in perishables the possibility of product expiry and spoilage is quite high. Of course, during festive occasions there may be no option but to ensure high availability of perishables such as gift packs of snacks and packaged foods, even at the risk of spoilage or expiry.

Having said that, on the whole, modern retailers in India and their vendors do need to focus on on-shelf availability as a key area for increasing the productivity of the existing stores. For many stores, there is significant room an increase in sales. With real estate and operating overheads remaining high, every extra rupee of sales squeezed out of the current square footage will contribute directly to the bottom-line, a fact that Indian retailers cannot ignore today.

Posted in COLUMN-Progressive Grocer, Food & Grocery, India, Retail, Supply Chain, Uncategorized | No Comments »

Freedom of Ownership

August 21st, 2008 by Devangshu Dutta

August is the month when India celebrates gaining its independence in 1947.

So it is quite apt to think about the implications the word “independent” has in the world of grocery retailing as well.

India’s food and grocery retail sector (as most of the other product sectors) is full of traditional “mom-and-pop” operations. Estimates of their share of the market vary from 97% to 99.5% of the total food and grocery sales – but it is given that “independent” retailers rule the roost, and the estimates vary only in the degree of predominance.

The word “independent” in this context differentiates an entrepreneur-run stand-alone operation from a chain store, and encompasses all the kiranawalas and corner shops – traditional, modernizing, as well as the best-of-breed. The business owner-manager of these operations is solely responsible for merchandising, buying, staffing & HR, finance and the rest of it. If he works well, he makes a decent living and helps others to make a living as well. If he doesn’t work well, others may still make a living but he will most likely just scrape by.

In many ways, of course, the word “independent” is related to “freedom”. The phrase “independent retailer” also conjures up a picture of overall economic freedom, of self-ownership of one’s business and economic destiny.

There is freedom from an externally imposed operating framework, freedom in selection of products, freedom in pricing, freedom to service local customers for the store in the most appropriate and locally-relevant way, freedom to manage the cash-flows as the owner-manager wishes to, and so on.

This picture obviously is based on the premise that the independence that is assumed is actually available, as it would be if the market remains hugely fragmented and the supply base also becomes fragmented with many suppliers and brands fighting out for their share of the pie.

Clearly, to anyone who is actually involved in the retail sector that is a huge assumption.

Yes, the supply base is certainly becoming more diverse than earlier as new brands get launched in the market and battle for shelf-space. These brands include not just start-ups or mid-sized companies, but also large companies who are well-equipped to deal with the large incumbents on their own terms. This is surely a good thing for the independent retailer, as it provides him more choice and makes his shelf-space more valuable.

However, there is a quantum difference in the sophistication in organisation, information availability and financial capability between a single-location independent retailer, and even a mid-sized branded supplier, and the balance of power is actually more fragile than it seems. As a supplier grows, it builds up a differentiated position and a distinctive branding and becomes less easily replaceable, while each independent retailer becomes more and more generic, and therefore replaceable. The major differentiating or sustaining factor for most such retailers is their physical location, whose desirability and marketability is not as much within their own control.

When you add large modern retailers into the mix, the economic freedom of the independent looks even more fragile.

Some observers would have us believe that in India modern retailers have little or no impact on the long-term health of independent retailers. This is quite contrary to the ample evidence available from the modernization of retail over several decades in other markets around the world. (Should we chant the old hymn, “But India is different”?)

The fact is that modern retailers don’t suddenly lead to a boom in consumption of food and FMCG products. While there may be some increment due to greater supply and better retail techniques, a new store will invariably take business from existing retail channels. After all, given a choice of a wider variety, a better shopping environment, similar or better products, and similar or better pricing, why would consumers not shift some or all of their spending to a modern retail store?

This, then, brings us to the (sensitive) question – what would happen to the independent retailers in such a circumstance?

Of course, we can take heart from the fact that independent retailers continue to exist even in highly-consolidated and more “developed” markets, and imagine that such a thing will happen in India as well.

Let’s not forget that in some developed and consolidated markets, independents may be supported by local laws and regulations (such as urban planning constraints), while in other places they are supported by the community which may not just show their support by shopping at the mom-and-pop store but also by actively blocking the entry of large retailers and chain stores.

In India the picture is a bit more complex and nuanced.

One the one hand, the consumer is apparently quite happy to enjoy better shopping environments, the convenience of all-under-one-roof. And, while estimates of “wastage” in the food supply chain vary widely, it is widely acknowledged that modern retailers can have a significant positive impact on product quality, value addition, and logistical infrastructure. That is surely a good thing for the country when it is vital to explore every bit of efficiency in food production and its delivery to the population.

On the other hand, regulatory or activist blocks have started to appear already, very early in the growth cycle of modern food and grocery retailing. A few state governments have even taken to banning or at least restricting the growth of corporate-promoted retail chains. Traders’ associations in many markets are quite clear in their perception of the threat from modern retailers to the independent’s normal existence. They express the wish to retain a livelihood threatened by corporate-backed retail operations that are perceived to be competing unfairly with their deeper pockets.

One of the core issues here is the sense of ownership, of being one’s own boss, the dignity offered by being an entrepreneur. Think about what we said earlier about the sense of freedom. Is there a way to retain, or even improve upon that?

The answer may lie in franchising. This may be the bridge between the two sides, and the vehicle for a “co-opted” growth of both.

In a fragmented market like India, it will certainly be a while before corporate retailers can understand and service diverse localities as well as the independents can, or have operations that are as efficient as a kirana-store. As long as independents evolve their own business to offer consumers better service, keep their operating expenses low, manage their inventory closely and retain the energy to run their family business, they will thrive. Imagine if that management capability, sense of ownership and drive became available to a corporate retailer.

At the same time, surely the sourcing scale and marketing muscle that are available to retail chains could be useful to an independent retailer, and help him build more business.

The fundamental successful structure for franchising is identical the world over. The franchiser is an entrepreneur or a company with a product or service that has a market beyond what he can immediately service. The franchisee is an entrepreneur who wants to have the pleasure and privilege of being a business owner, but would also like to benefit from being part of an organisation.

For a win-win, both franchiser and franchisee have to bring something to the table, they both have obligations and responsibilities and both have rights. The framework of the franchise relationship has to be clear in defining these, and yet allow operational flexibility. The partners must also be able to break-away if things don’t shape up the way they have planned, without being too restrictive of each other after the break-up.

The Indian market is not new to franchising. Lifestyle products such as apparel, footwear and others have franchise networks that date back to the 1960s. However, food retail has only seen sporadic attempts at franchising (many of them unsuccessful).

Some of the problems can be tackled by improving the operational and system rigour, while others (such as how do you manage fresh produce consistently at franchise outlets) may be insurmountable in the short term and will require some constraints to be built into the business model.

I believe food and grocery retailers need to explore the option of franchising for faster and possibly more efficient growth, and for encouraging a spirit of partnership in the development of the grocery retail sector. Inclusive growth is a trite phrase, but very true in this context.

India has been and will remain a land of entrepreneurs, and companies would be wise to co-opt that energy.

Who knows – you may even be giving birth to a retail giant. After all, Sam Walton also began his business as a franchisee of another company.

Posted in COLUMN-Progressive Grocer, Food & Grocery, India, Retail, Strategy, Uncategorized | No Comments »

Retailers vs Brands

July 14th, 2008 by Devangshu Dutta

In early-June Big Bazaar (part of Future Group) was reported to have broken off its relationship with Cadbury’s. About 2-3 weeks later the two were reportedly back together. The alleged differences and the apparent solutions have been reported widely, as also the feeling that some issues remain unresolved.

If that reads like something you would find in a celebrity tabloid, you’re probably right. The relationship between brands and large retailers is truly one of the “love-hate” kind. And this case is no different from many other such relationships in various markets around the world. In fact, the Future Group itself is reported to have had similar run-ins with PepsiCo’s FritoLay and GlaxoSmithKline in the past.

I won’t dwell on the various allegations and clarifications about commercial structures and differential pricing in this particular case, since the view from outside isn’t really clear. But it is certainly worth noting that this case is not unique, and thinking about what the future (no pun intended) might hold for brands in markets such as India.

There is no doubt that brands love the scale that large retailers provide them, with the quick access to a large footprint in the market, and the high visibility. On the other hand, as a vendor, they hate the negotiating edge that this scale gives the large retailer. Brand generally rule fragmented retail environments such as India. Large retailers, on the other hand, squeeze out more margins in the form of bulk discounts, placement fees and the like. There’s more: special promotions, differential merchandising and delivery needs…the list of demands seems endless.

On the other side, retailers love brands for the footfall they bring. The brand typically creates a “need to buy” on the consumer’s part, and invests in creating a distinctive proposition which is valuable in a cluttered market. In many cases the brand would have also advertised where it is available. This is all good stuff for the retailer, who then essentially has to make sure that the brand is available and visible in-store to the customer to convert the walk-ins into sales. However, what retailers don’t like is the fact that brands will generally charge a premium of 10-50% over a comparable generic product. In some cases the premium may be so high that the brand product’s price itself is multiples of a generic product’s price.

The retailer-brand partnership is a very powerful one, even from early days. Many consumer brands and branded companies have scaled up significantly with the growth of their retail customers. The US market due to its sheer size and its evolution offers numerous examples including companies such as Levi Strauss, Hanes, Fruit of the Loom and Proctor & Gamble that grew on the back of discounters such as Wal-Mart and K-Mart as well as retailers such as JC Penney, Macy’s and Sears. Similar examples appear from other countries where the modernisation and consolidation of retail have happened over decades along with economic development.

An established brand provides the new retailer credibility, even as the retailer provides the brand new shelf-space. Or the other way around: even a new brand provides value to an established retailer by identifying the market need, developing the product, managing sourcing & production, and establishing the consumer’s interest in the product, while it is the established retailer who provides the much-needed credibility and presence to the new brand.

For most, this remained a happy relationship for a long time even as the retail environment grew and evolved. Retailers focussed on creating shelf-space and managing it, while the brands focussed on creating products and desirability.

However, economic shocks various times and the rise of low-cost imports raised questions in retailers’ minds about the value added by the brand compared to the margin they supposedly made on the higher prices. At the same time, better communication and travel infrastructure as well as falling costs made it easier for retailers to consider approaching factories directly.

Enter private label, the “other” in the love-hate triangle.

Over the last couple of decades, department stores, hypermarkets, grocery stores and even discounters have worked seriously on private label.  The opening premise was that you could entice the customer with a lower price (sharing some of the margin earned by direct sourcing), and as long as you gave a comparable product the consumer was happy. Many Indian retailers followed a similar route when they began exploring private label.

The strategy has had a varied degree of success, much of it to do with how the private label has been handled (indifferently in most cases). Recognising this flaw, many retailers around the world have attempted to improve their handling of their private label product development and also presenting it also in a manner (including advertising) similar to a national or an international brand. Some of these retailers’ own labels are now serious brands in their own right even though they are restricted to only one retail chain.

The difference between a “label” and a “brand” is the inherent promise that a brand has built into the name, the repeated experience that the customer has had with the brand that reinforces this promise, and the relationship that develops between the consumer and the brand. All of this requires structuring, nurturing and careful management, and it costs time, effort and money. When the economy and individual incomes are growing, consumers are willing to shell out a little extra for a brand and all that it stands for.

However, brands get into trouble if income and spending perceptions turn downwards, and comparable products are available. The 10+ per cent premium between branded and generic begins to look like an important saving to the customer.  Or conversely, due to the growing market more suppliers for the same product appear that the retailer can use as a foil to the branded market leader. With falling import barriers, more diverse contract manufacturing becomes available for sourcing private label merchandise. The scenario becomes particularly grim if the relationship between the brand and the consumer is not old enough to have become lasting – in this case, replacement of the brand with an alternative or a retailer’s own label is truly feasible.

The Indian market, at this time, shows all of the above ingredients. Inflation is making consumers reconsider how and where they spend their money.  The growth of the market over the last few years has attracted several companies with alternative products and brands e.g. ITC as a challenger to biscuit-cookie major Britannia as well as to Pepsi’s potato chip brand Lays. Retailers such as the Future Group, Shopper’s Stop and Reliance have actively incorporated imports into their sourcing strategy. In many cases, the brands that most want to be on the modern retailer’s shelves are new to the market, and don’t yet have a strong imprint on the consumer’s mind.

However, at the same time, retailers themselves are still developing the systems and disciplines to manage their relatively new businesses. They are more than fully occupied with rising real estate costs, and managing the front end. If a brand can handle the product and supply side for a reasonable margin, they are more than happy to ride with the brand.

There is place for the branded suppliers in the market, and for them even to lead the market. Even as retailers grow, branded suppliers won’t lie down or die quietly. Many of them (such as Hindustan Unilever) are also actively engaging with smaller retailers, to help them improve their business processes and competitiveness. On the other hand, they are also reconciled to the inevitable growth of modern retailers, and are developing “key account management” functions, parallel distribution processes etc. to cater to the large retailers differently from the rest of the market.

So will brands survive, or will it be the retailer with the muscle of the storefront relegate them to a small portion of the market?

As long as the competitive pressures and economic cycles remain, the relationship between retailers and their branded suppliers will inherently be a tug-of-war for margin.

In either case, whether individual brands or retailers win or lose in the short term, the consumer will hopefully be a beneficiary in terms of better product, more variety and some sanity in terms of prices.

Posted in Apparel, Branding, COLUMN-Progressive Grocer, Consumer, Food & Grocery, Footwear, India, Lifestyle & Fashion, Market Research, Marketing, Retail, Soft Goods, Strategy, Textiles, Uncategorized | 1 Comment »

Is Marketing 101 Dead?

June 2nd, 2008 by Devangshu Dutta

When we began studying the basic fundamentals of marketing, our professor introduced us to the 4-P framework covering Product, Price, Place and Promotion created by “the Great P” of Marketing, Philip Kotler, whose textbooks are classics among marketing management studies.

In time, others modified it to 5-P, 6-P and 7-P, but the basic framework stands best on the original four legs defined by Kotler.

The principle is that to design an effective marketing strategy you need to:

  • clearly define the product or service (covering the core as well as augmented product) to sell to the target customer
  • identify the price (point or range)
  • define where it will be sold and
  • define what will be communicated, and how the product offer will be promoted.

If you are truly disciplined, you may then extend any of these into spider-webs of clearer attribute definition. For instance, when you get involved with defining the product it can start from “breakfast” and then be further defined by attributes such as taste (e.g. sweetened or unsweetened), texture (e.g. crunchy or wet), fullness (e.g. light or filling), and go further into the benefits (e.g. helpful in losing weight, or in gaining body mass) etc.

Given that the basic framework is straight-forward and simple to apply, when we ask the question “what is your marketing strategy”, it is surprising to get the answer: “advertising”. It gets somewhat more distressing when we interrogate further, when we examine what the advertising is focussed on: “cheaper prices than competition”.

Okay, let’s grant a couple of reality checks here. One is that most retailers and consumer goods companies in the current stage of the market’s growth want to grab the maximum possible market share in the minimum possible time. Two, if you want to get the attention of a lot of customers very quickly, shouting out a great price offer is one of the easiest ways to do it.

Which brings us to the basic issue: in the current market scenario, if you are a retailer or if you have a brand that you want to scale up fast, advertising extensively about the “great value” is highly likely to quickly give you the footfall and conversions you need.

But the question is, when does it stop being a good tactic and just becomes lazy marketing? And once it’s in that territory, when does it become dangerously weak even as a sustained tactic?

Imagine a scenario with me: the CEO strides into a marketing strategy meeting and says, “I want you to stop advertising the way you do. In fact, I want you to stop advertising, period. But I don’t want sales to drop and I don’t want our brand image to suffer.”

Shock, horror, dismay at the thought of “where is this company going”? Resignations, even, on the CEO’s table?

But just stay with that thought for a minute, and then look at Kotler’s framework again.

Let’s look at “product” holistically because, in the noise of high-decibel advertising about low prices, typically the definition of the “product” is the first to slip from attention. How the customer relates to the store, what her experience is as she walks through from the entrance to the check-out and beyond is part and parcel of the “product”. What does she think the store is about? Does her perception of the store’s “product” (the entire experience of shopping) match with the retailer’s own perception? Does the retailer even have a clear perception of his product?

Secondly, “place”. Sure, in-store product placement is frequently governed by the marketing function. But how many retailers have marketing involved in selecting the store location? A great store location is the best live, “walk-in advertisement” that a retailer can have. If a fashion brand like Zara can eschew advertising (founder Amancio Ortega has been quoted as saying that “advertising” is a distraction), and instead focus on its stores to create the traffic and the awareness about the brands, surely the store location should receive some attention from the marketing heads of food and grocery companies.

Let’s also reconsider how much connection there is between the marketing strategy and the store layout itself (in many cases it is not enough). Whether the customer likes wide aisles and a “clean” experience or prefers a chaotic environment, the store must make a statement that is in sync with the overall business strategy and the target customer.  Good retailers understand this intuitively, but it is important also to express it overtly within the organisation and get the marketing team involved in the planning and execution. Further, once the customer is actually in the store, clear price ticketing, intuitive adjacencies and clean signage can make a tremendous difference in converting walk-ins to purchases.

Let’s leave price alone for this inquiry because, whether high or low, it gets a lot of attention anyway, and let’s move to promotion.

If we define marketing’s role as getting customers into the store and getting them to buy, then the surely promotion is the driver of the marketing engine. But does promotion necessarily have to mean advertising?

We’ve discussed Zara’s example of using the stores as the medium of promotion. Another thing that works for Zara is word of mouth publicity, as well as the humongous amount of publicity the company gets due to its business model. (Other interesting companies, such as Pantaloon, Reliance, Wal-Mart, The Body Shop etc. also enjoy promotion through publicity.)

Pizza companies use cost-effective menu flyers dropped at the customer’s door and “box toppers” to drive the next purchase (yes, of course, they also advertise hugely, but during their lean years when they have had to reduce advertising, it is the flyers and box-toppers that have kept them going.) Direct selling companies can also offer some learnings about creating and sustaining interest, as do entrepreneurial start-ups. As a matter of fact, think of the last time you saw an advertisement of the most popular “unbranded” take-away in your area. Ever?

It may be time for us to dust off the notes from the Marketing 101 class, and re-examine what we do.

Posted in Apparel, Branding, COLUMN-Progressive Grocer, Consumer, Food & Grocery, Footwear, Lifestyle & Fashion, Marketing, Retail, Soft Goods, Strategy, Textiles, Uncategorized | No Comments »

The Dis-Economy of Scale

May 1st, 2008 by Devangshu Dutta

We touched upon food price inflation last month and – no surprises – it is still hogging the headlines. It is, after all, an emotive topic. We are terribly concerned not just as food and grocery professionals, but also as consumers and general public. After all, food and grocery are typically half of our monthly spend, give or take a few percentage points.

Inflation often brings with it swift (sometimes knee-jerkingly quick) reactions – price controls, export controls, subsidies to farmers and food producers, and various others. Some of these measures work but only in the short term, while others may have no immediate visible impact on the market at all but may be truly insidious because of that.

However, a significant set of questions has not really been touched yet: how the food supply chain is structured, how it is driving consumption, what impact that might have on food prices and several broader cost implications.

Thousands of years ago, when hunter-gatherer human beings stumbled upon agriculture, it was a breakthrough similar to the discovery of controlled fire. Hunter-gatherers were dependent on the natural availability of food, while agriculture created the opportunity to have some control over food supplies and reduce the natural feast-famine cycle. Thereafter, farming, processing and storage techniques kept evolving incrementally to ensure that more food could be produced for each unit of land and effort, and stored for longer – all moving towards ensuring “food security”. This led to the age of empire-building, where monarchs grew their wealth (essentially food territory) with the help of military-imperial complexes, and the greater wealth in turn supported the military-imperial complex.

This remained the trend for a few thousand years, until the age of industrialisation and the age of petroleum. Through the industrialisation and the world wars, the military-imperial complex gave way to a military-industrial complex, which essentially became the military-industrial-petroleum-agricultural complex. Suddenly, there were not just machines to plant, reap, thresh, sort, clean and process, but also petroleum-based substances to dramatically increase output and to keep the produce fresher for longer.

As US farms and then European farms industrialised, the parameters that began to be applied were the same as in any factory – how to produce more while spending less – and every year the target was to grow more for less. Underlying this was the principle of “efficiency from larger scale”. The same philosophy played out further down in the supply chain – from processing to extend the shelf-life of the product as it was (such as chilling, cleaning, sorting) to processing and packing in order to change the nature of the product itself and gain additional value (such as tomatoes to paste or potatoes to chips).

Standardisation became a vital link in industrialisation – if you can standardise produce, you can cut down human handling – while you may lose product variety (including flavour and colour) you gain in terms of driving down the cost of production. By reducing unpredictability you can also concentrate on building the scale of business, because it becomes more repetitive.

The interesting side-effect of this is that, gradually, we are converting ourselves (and people in many industrialised economies already have) into petroleum-burning machines rather than those running on solar energy, because increasingly the agricultural supply chain is dependent on non-renewable petroleum and its products, rather than by the natural energy of the sun being converted into food by the plants.

And the important thing to keep in mind is that, in this switch-over, the energy efficiency is actually going down rather than up – we are using more calories of fuel source to produce each calorie of food energy.

The issue is more acute now than ever before, because now the growth markets of choice for industrial agriculture companies are China and India. If these two countries move through the exactly same path as have the western economies in terms of agriculture and food processing, given the population base itself, clearly the impact will be 5-7 times (or more) on the demand for petroleum as well as the fall-out on the ecosystem.

You may ask, why should retailers worry about this?

Firstly, pure cost considerations – clearly, the costs of petroleum are not coming down, and explosive demand through industrialised agriculture will only serve to push them up. How far can you push the food bill every month, before people start buying less? What impact would that have on large retail supply chains and farmers whose processes are increasingly built around products of industrial agriculture?

Secondly, what consumers are already beginning to express in western markets will possibly happen in India in the next few years as well: concern about where and how the product has been produced, what has been the fall-out on the environment and on the overall health of people involved with that supply chain as well as the health of consumers.

Carbon footprint, food miles & locavores (people who only consume food that is produced within 100 miles of where they live) are terms that retailers are increasingly hearing.

And an alternative set of questions is also being raised. Is it ok to burn non-sustainable fossil fuel if you get “carbon credits” by planting trees somewhere else – have all the carbon costs been accounted for from the start to the finish of the production process? Is it better to reduce the food miles and have food produced locally in a high-cost economy’s industrial agricultural model, or to have naturally grown foods from a more primitive farm in Africa or Asia where the environmental impact is only the “carbon debit” of the air-freight. And, even if the produce is carbon-friendly, what about the nitrogen footprint (from the fixation of nitrogen into fertilisers) and the methane footprint (from large scale animal farming)?

This one page is surely not enough to present any in-depth analysis, but I hope it will serve to kick-start the process of questioning how India (and China) should take the lead in creating an alternative and more sustainable model for food security for large populations. There is a lot of research being done, and much yet to be done, to quantify the true cost of blindly pushing for scale in the food chain. Truly “progressive grocers” need to take an active role in supporting this.

Posted in COLUMN-Progressive Grocer, Corporate Social Responsibility, Food & Grocery, India, Retail, Supply Chain, Uncategorized | 1 Comment »

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