Food for Thought

Food does not make money on branding; food makes money on technology, stated Ireena Vittal, principal of McKinsey & Co at Food Forum India last month in Mumbai. Presenting the highlights of a consumption research, Vittal stated that in India, 70 percent of shoppers enjoy shopping as the most favourite activity; 50 percent of Indian women enjoy shopping only for food and on an average 42 percent of the monthly household expenditure is allotted for food.

 

At this point of time there is a huge market for both brands and retailers in the food industry, especially with the advent of modern retail in the country, experts emphasise. However, seizing the opportunity and drawing a sustainable margin out of that within a limited timeframe is easier said than done. In this scenario, the hard and fast rule for profiting in the food industry may be investing in technology. “If you don’t get aware of the technology, you cannot develop a sustainable margin,” advised Vittal. As all know, technology enhances the production process, improves the supply chain, reduces the input cost and prices of the products, thus increases sales and the profit margin. Technology also adds innovation and value to the product besides ensuring that consumers get fresh, safe and quality food products. Therefore, investing in it makes great sense. The challenge? India is yet to experience this.

 

In India, food is still the least organised amongst all retail sectors; it needs to be the most, though, says Gunender Kapur, president and chief executive, Foods Business, Reliance India Ltd. “It is the responsibility of the retailer to ensure that they are selling the best quality of the product. If the system is not technically enhanced then the retailer has to go back all the way through the supply chain management for a quality check,” he says.

 

 

Even as the modern retailer’s prime area of concern – especially in these difficult times – is protection of the bottomline, the consumer is also looking for opportunities to derive optimum bang for the buck. According to Vittal, price points have always been the crucial in driving the Indian consumer to the store.   

 

“For Indian consumers the propositions are a little different. They want fresh food but it is also an area where savings are of great importance – consumers typically compare prices before finalising on a retailer,” she commented. For the retail shelves, a wide range of products with a low opening pricing point is the best practice. This also presents options to the consumer if she further scales up her choice for the product and price points. Besides, Indian consumers have a little understanding of the emotional appeal of a brand, says Vittal. 

 

“They buy branded merchandise only at the time for special occasions because price points affect the brand’s appeal – even if a brand represents higher quality and assurance.” Although buying branded goods is the safest mode of consuming quality and good food, in a country like India, it has to be cost effective, says Jon Ratcliff from F.A.C.S, UK.

 

“Therefore, investing in technology – starting at the basic level of production – will help retailers and manufacturers to cut down the input costbut for the best,” he says. When technology is appropriately implemented in the food production it has significant value addition in determining the price point of the product, he points out.

 

“Drive the price points of your products based on certain innovations derived from a specific technology because the combination of innovation, technology and price points is a powerful one,” commented Praveen Someshwar, vice president, PepsiCo India. According to Kishore Biyani, CEO and founder of Future Group, although the food business is the safest among all the businesses in modern trade, the profit margin depends significantly on the cost of delivery to the consumers – especially in the grocery business.

 

“Consumers do not pay more than the MRPs. The cost of procurement, packaging and ultimately delivering to the consumers actually fall on us (retailers). Neither can we increase the cost nor can we compromise on the quality of the product. Instead, we have to work on an efficient system derived from the latest techniques,” he said. The industry is still struggling to home in on the best way in the process, admitted Vinod Sawhny, president and COO of Bharti Retail.  According to him, the right label of quality and price can give the best margin to the retailers and manufacturers.

 

“Supply chain integration in the procurement coupled with value addition in the product at a lower price are what attract the consumers the most and as such, are being followed by Indian retailers as a regular practice,” he added.

 

Achieving that balance, however, is a tough job, Vittal points out. “At least 81 percent of Indian consumers think that modern retailers cheat them with higher price of a particular product than a kirana store,” she says. “Against this background, only investing in an improved technology can help the retailer in giving the best product at the lowest price, thereby ultimately driving the consumers’ attention to the store. Implementing some smart technology will actually help in cutting down the input cost of the product by the retailer as well as the manufacturer and that will ultimately boost the margin,” she adds. 

 

This is because investing in technology will essentially involve a better production technology that will enhance and improve the production and quality of food. Besides, technology upgrades the methods of processing and preservation of the products, adds innovation and value addition and above all, develops an efficient supply chain, added Vittal.

 

Covering all these aspects and implementing them into the food business will ultimately help the retailers and manufacturers in developing a valueadded product-pricing proposition, which is very essential for Indian consumers who clearly want the finest quality of product at the lowest possible price.

 

Therefore, be it fresh produce or processed and packaged products, technology at the very basic level of the production is critical in driving organised retail for years to come. Manufacturers should also seize the best of the opportunity provided by the market by maximising the role of an efficient supply chain, said Vittal.

 

 

As is evident, the greater challenge lies for the fresh produce category. According to Sawhny at Bharti Retail, while there is little doubt about the tremendous demand for fresh produce, challenges at each and every step of the process from procurement to purchase make it difficult for a modern retailer to constantly monitor the chain. “Investments should be made in upgrading the technology, infrastructure and mechanism in pre- and postharvesting, preservation, processing and supply chain management with special attention on the cold storage network, which is an important and the most efficient part of the SCM,” he advised.

 

Speaking about the shortcomings in farm fresh business, Sawhny highlighted the major challenges where technology inputs can turn the story around. These include quality of produce, the rules and tools of directly sourcing from farmers, improving standardisation in the supply chain, inefficient usage of existing infrastructure, food processing and an overall reduction of the logistics cost..

 

“There is a substantial market, wide spectrum of growth opportunities and massive production of crops, but simultaneously there is also a huge amount of wastage during the process of procurement due to the poor and inefficient infrastructure and usage of the supply chain management,” he pointed out. “Retailers and manufacturers are still not in a suitable position to scrutinise the logistics cost and save money at the back end by driving down the cost, which is increasing beyond efficiency levels due to inadequate cold storages and inefficient use of existing warehousing facilities. This affects the front end cost of the retail operation and curtails the overall profit margin,” added Sawhny.  

 

According to him this is actually disturbing the planned structure of modern trade and that is already happening with some of the organised retailers. Therefore, technical upgradation in cold storage operation needs special attention in the area of distribution along with capacity enhancement, coordination and utilisation, which together constitute the needs of the hour in supply chain management. “Collaborating with the farmers and government by imparting knowledge in technology through the process of contract farming is the best way to meet the solution,” Sawhny stated. He cited the example of “Field Fresh”, the fresh produce procurement concept by Bharti Retail where collaborating with farmers on technology updragation of warehouse management and cold storage facility has created a win-win situation for both the retailer and the farmers.

 

 

The food processing industry too needs the attention of technology. The fact that India is one of the largest food producers in the world, but only two percent of fresh fruits and vegetables and one percent of the meat and poultry products are processed in the country, is now a universal truth. “The food processing indus-try in India is unfocused and wholly unexplored even when organised retail is growing so fast. To gain better margins the food processing industry has to be supported by retailers and manufacturers,” Sawhney said. But the industry is not at all prepared to face and meet the surging demand for processed food in India.

 

According to Technopak Advisors, the present technology and infrastructure are unable to meet the situation. “Food processing industry is valued at USD 600 billion in India; clearly, we need more advanced technology and higher grade infrastructure for the industry,” said RIL’s Kapur.

 

“The problem is that the development of infrastructure cannot take place without implementing and upgrading technology,” says Sudhanshu, AGM, APEDA. “Outdated equipment is unable to produce appropriately and result in efficiency loss within the system,” he added.

 

Avoiding these truths will mean that the overall investment in an unplanned infrastructure will ultimately increase the input cost and can even become double of the profit margin, said Sanjay Sethi, VP, food and agriculture, Technopak Advisors. “To leverage the best of the existing infrastructure, investment in technology in terms of setting up logistics parks and food parks should be the best practice,” he said.

 

“Logistics parks are important for better quality, better hygiene, better standards and desired price points for the products,” commented Sawhny at Bharti Retail. Food Parks are more focused on processing fresh produce and are therefore, equipped with processing units inside the park together with the collection centres and the terminal markets as well. “These processing centres are equipped with cold storage, grading and packaging units outfitted with the latest technology. This will also help in preserving the fresh produce for a longer time – maintaining their shelf lives, even process them and enable them to be consumed long after the production season,” Sethi pointed out..

 

“For modern retail chains, there is a need for centralised system of sourcing, preserving, distributing and dispatch followed by a decentralised process of sales. This needs the efficacy of technology,” says N Srinivas, technical director of Lloyd Insulation.

 

 

Since modern trade in India is still at a developing stage, adopting the right technique at this stage can avoid wrong decision making by marketers, say the experts. As viewed by Vittal, investment in technology is very important, provided that it should be in innovation as well. Besides fresh produce and processed foods, innovation and value addition to food products is essentially important to meet the growing demand.

 

According to Someshwar at PepsiCo India, “Investment in branding is insufficient in a market of quality-led product preference. Technology-driven innovation is more sustainable, believable and meaningful. At a time of crisis, technology, products and price points play a significant role in the brand’s growth as well as the category’s growth,” he commented.

 

Biyani emphasises that the job of a modern retailer is to sell innovative and value-added products and create more consumption. “We are in the process of introducing an efficient and appropriate system to create new products, new categories and new brands.” But this has to grow with the support from technology, states Kapur at RIL. “Technology should be used to create opportunities; it can drive the consumption of fortified and nutritionally improved food products in India,” he added.

 

 

Besides innovation and value addition, one of the most important aspects of food is the assurance of safety of the product. Food safety is the core issue in determining the standardisation of the product. In the supply chain process, it is actually a cost reducing factor and a contributor to the growth potential at this moment. Therefore, according to the experts, to ensure the safety and quality of the food products, implementation of technology in testing the food products is a most important factor of sales. In the developed countries of Europe and the USA, before reaching the retail stores or the consumers’ tables, laboratories play a vital role in testing food products as they are basically packed and branded. But in India, where the majority of supplied food to the retail stores is loose, unpacked and unbranded, the procedure of testing should mostly be followed at different stages of the supply chain process. “We need laboratories at specific stages throughout the supply chain process – rather than only at the end – because otherwise it becomes unaffordable for us and hence for the consumers. We need advanced technology for intervention throughout the supply chain to ensure safely consumable products,” stated Kapur.

 

Prof. Thomas Reardon, co-director of IFPRI believes that a retailer should have the methods of proving the value propositions – where he can show that he has reduced the risk posed by unsafe and inconsumable foods – to consumers. “For that hehas to concentrate on the threshold investment in technology between the back-end and front-end operation of the pre-existing system.” Affirming this, S Dave, director, APEDA, says, “One goes to the organised retail store because he expects a certain safety and quality assurance from the retailer. Therefore, retailers should set up own risk-based analyses based upon technology, which would also lower the input cost.”

 

For packaged food manufacturers in India, the assurance of safety lies in the standardisation of the process and practice of the production. “Not taking into consideration what happened in the farm level, as food manufacturers we bank upon the end product. We depend on the standardised process of technical traceability through which we can detect the contamination in food and then purify it,” says Vilas Shirhatti, CTO, Marico India. According to him, in a country like India, only investing in technological expertise can ensure best practices – from farm to the retail store. For Marico, the testing centres are close to the farms where – with the help of the tabletop models – the raw ingredients are selected for final production. 

 

This educates the farmer about the entire process. Of late the company has begun communicating with farmers through emails and short message services from mobile phones about the requirement of the product and methods to produce it. “What needs to be done at the basic level is the training of the farmer that qualifies him and ultimately ensures highly quality of the product. But in a large country like India, for 130 million farmers, high-end technology is essential to implement the system across millions of fragmented land holdings,” Shirhatti says.

 

 

In a retailers’ market, retailers are ultimately accountable to their customers; it is their responsibility to introduce and make the maximum use of technical traceability of the product from the farm to the retail shelves, especially if the product is not branded. And for manufacturers, before processing and packaging, traceability of the raw ingredients helps in reducing the risk factors of the final product.

 

“In technical terms the most appropriate method is using the Geographical Information System (GIS), which enables in mapping and preparing the database of the farms and tracing them to their exact locations because traceability is important in managing the risk factors in case of farm produce,” says Kristian Moeller, MD, GlobalGAP Germany. According to him, in India when organised retail is just about beginning to grow, data mining processes, which would be labeled as “field passport” to farmers, can help in setting up an efficient production process whereby buyers and processors can access farms, can oversee the application of pest control methods and can even check the probability of cross contamination, if any, at the production level. The practice has already been started by government organisations like APEDA where at least 40,000 farmers are already bar-coded and certified. Now the next step is to follow the GPRS system to get the process more intensified and also to take it across the country. “We have a project of getting two million farmers incorporated in the system in the next two years for the export market.

 

But for the domestic market, we would request the participation of all major retailers who have the infrastructure and also need of the system,” says Dave at APEDA.

 

“This would reduce the cost to the retailer in the process of procuring hygienic food for his consumers. The main focus should always remain on traceability; for any reason one can always go back to the origin of the product, lowering the number of testing and sampling procedures and thus the cost,” added Kurt Peter Raezke, director, testing and analysis, Intertek Food Services, Germany.

 

The “Field Passport” process is a huge success in the west, stated Moeller, where the input suppliers, fertilizer companies, retailers and farmers are all registered and connected to the same network. In this system, as the fields are registered, field data is available from sowing the seed to the use of the pesticides and other methods applied from pre- to post-harvest. The profiles of the farms and the farmers are built even for a group of small farms, which allows the entire system to be managed centrally, reducing the overall cost of the operation. But all of this has to come from an enabled system of technical expertise. “A vast change has already occurred in the food industry in India and more is yet to happen. India should follow the “Diamond” system of coordination like Indonesia, Mexico and other developing countries where the retailer remains at the apex position and the back-end suppliers such as seed companies, fertilizer companies, wholesalers and farmer groups remain at lateral positions coordinating with each other and forming a responsive and accountable system,” Thomas suggests.

 

“Considering the current consumption trends, food will remain the single largest spending category between now and 2025 and per capita spend on food is set to double driven by the huge consumer base of 206 million households,” Vittal points out.

 

Coupled with this rise in pure demand will also a jump in aspiration for quality, adds Sumit Saran, director of SCS Group. “Indian industry cannot ignore the demand of the time. What is needed is collaboration to raise the engagement of technology. With the help of the government, retailers and manufacturers have to come together in a collaborative way to implement the best agricultural practices in India, with a focus on the risk factor analysis of the quality of products that they are selling.”