2008

FreshWheelers Inc.
Business Plan for an Initiative in Agri-Retailing

[FRESHWHEELERS INC.]
The Business Plan attempts to identify the weak links in the current Supply Chain of perishable food items and proposes a new services creating value for producer as well as consumer.

Contents
Background ................................................................................................................................................. 4 1. 2. 3. 4. Political Environment ..................................................................................................................... 4 Economic Environment ................................................................................................................. 6 Changing Social Environment ...................................................................................................... 8 Technological Environment .......................................................................................................... 9

Analysis of Existing Value Chain and Market Structure ..................................................................... 10 Identification of different F&V marketing channels.......................................................................... 11 Policy, Institutions and Infrastructure ................................................................................................ 12 Sourcing, Producing and Delivering functions of the value chain................................................. 14 Process mapping of the value chain ................................................................................................. 16 Business Opportunity............................................................................................................................... 17 Concept...................................................................................................................................................... 17 Target Customers..................................................................................................................................... 21 Financials .................................................................................................................................................. 21 Profit and Loss Statement................................................................................................................... 21 Sales Estimate ...................................................................................................................................... 22 Salaries and Wages ............................................................................................................................. 22 Capital Expenditure .............................................................................................................................. 23 Cold storage warehouse ..................................................................................................................... 24 Fuel and maintenance costs estimation ........................................................................................... 25 Exit strategy............................................................................................................................................... 26 Expansion plans ....................................................................................................................................... 26 Challenges ................................................................................................................................................ 27 Price Risk Management .................................................................................................................. 27 Production Risk Management ........................................................................................................ 27 Cost of meeting quality and regulatory compliance costs .......................................................... 28 Lumpy investments and small growers ......................................................................................... 28 Access to credit, technology and information to the farmers..................................................... 28 Success Factors for the venture ............................................................................................................ 29 Engaging participation- Organizing collectives and cooperatives ................................................ 29

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Infrastructure and Logistics................................................................................................................. 29 Technology and Education ................................................................................................................. 29 Financial Services ................................................................................................................................ 30 Coordination Integration and Cooperation ....................................................................................... 30

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Background
The fresh Fruit & Vegetable market in India for long time has been dogged by number of issues ranging from simple infrastructural issues to government policy and regulatory issues which potentially affect the voting patterns of the masses. India for over a decade now has been consistently among the top producers of Fresh Fruit & Vegetable in the world. But, its share in the total world trade of Fruit & Vegetable has never been too significant. The sector on suffers from high degrees of inefficiencies through the complete value chain from production techniques, post-harvest methods, marketing to price discovery processes. Its biggest opportunity lies in correcting these simple inefficiencies. The various barriers to the F&V industry are discussed below mainly under four heading

1. Political Discuss various regulatory and policy issues prevalent and their impact on the industry 2. Economic Discuss the Indian industry in context of the world supply and demand, the changing consumption pattern of the internal consumers and also the opening of the sector to private participation 3. Social Discuss the various social issues and related factors which have happened historically because of which the F&V market is significantly impacted 4. Technological Discuss the various technological drawbacks to Indian F&V farming and Industry in general and the initiatives taken by the government to correct the same

1. Political Environment
Barriers to APMC (Agricultural produce marketing committee) and the legislative reforms The Model APMC act The guidelines to the APMC act were given by the central government in the year 1968. But Agricultural Markets in most parts of the Country are established and regulated under the State APMC Acts. The whole geographical area in the State is divided and declared as a market area wherein the markets are managed by the Market Committees constituted by the State Governments. No person or agency is allowed freely to carry on wholesale marketing activities in market areas. The monopoly of Government regulated wholesale markets had prevented development of a competitive marketing system in the country, providing no help to farmers in

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direct marketing, organizing retailing, a smooth raw material supply to agro-processing industries and adoption of innovative marketing system and technologies. An efficient agricultural marketing is essential for the development of the agriculture sector as it provides outlets and incentives for increased production, the marketing system contribute greatly to the commercialization of subsistence farmers. Worldwide Governments have recognized the importance of liberalized agriculture markets. Task Force on Agricultural Marketing Reforms set up by the Ministry has suggested promotion of new and competitive Agricultural Market in private and cooperative sectors to encourage direct marketing and contract farming programmes, facilitate industries and large trading companies to undertake procurement of agricultural commodities directly from the farmers fields and to establish effective linkages between the farm production and retail chains. There is a necessity to integrate farm production with national and international markets to enable farmers to undertake market driven production plan and adoption of modern marketing practices. If agricultural markets are to be developed in private and cooperative sectors and to be provided a level competitive environment vis--vis regulated markets, the existing framework of State APMC Acts will have to undergo a change. The State has to facilitate varying models of ownership of markets to accelerate investment in the area and enable private investment in owning, establishing and operating markets. Working of existing Government regulated markets also need to be professionalized by promoting public private partnership in their management. Appropriate legal framework is also required to promote direct marketing and contract farming arrangements as alternative marketing mechanism. Therefore, there is a need to formulate a new model law for agricultural market. To facilitate this change in state APMC act, the central government has come out with the Model APMC Act, which gives guidelines to states to improve the existing APMC act. Currently more than 5 states have already revised their APMC act and about 12 are in the process of revision.

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2. Economic Environment
Change in consumption behavior & dietary patterns With the high rate of growth of the Indian economy (more than 8% over the last 5 years) and the improved lifestyles and incomes of the masses in the urban and semi-urban areas, there has been a shift in consumption pattern. India in the 70 and early 80 were striving hard to achieve self sufficiency in grains and other basic pulses. In the late 90s and early part of the 21 st century there has been a shift to production of fresh horticultural products, because of the increase in availability of expendable incomes. Also, with the increase in the number of people in uppermiddle and upper class, which has the capacity to pay a premium for healthy and fresh produce, is also acting as a driver for increased production of high quality produce and also the key driver for imports of exotic products.

Production Support Incentives The Indian government for a long time has given various production support services and incentives to the farmer. Incentives are chiefly handed to the farmers in the form of various subsidies at various levels Irrigation, Power, Inputs (Seeds, Fertilizers) and also production support in the form of post-harvest handling and marketing support. Subsidy in itself was given to the farmer on a social premise. But, at its current levels where the share of subsidies as a percentage of GDP is around 14.4%, it is important to notice that subsidies are becoming a bane for the country and are also leading to the various inefficiencies in the farming practices. There are numerous ill-effects that have been created by the so called subsidies due to which a different group of economists are against such subsidies. The basic premise of their view is that market is the best allocator of resources and decider of the price levels. According to them subsidies create market failure rather than remove them. For e.g. irrigation subsidy are meant for small farmers but the benefits are reaped by large farmers. In the Indian scenario these subsidies are taken away by the producers or the middlemen and they never reach the poor section of the society for whom the subsidies existed in the first place. For e.g. most of the food subsidy doesnt even reach the poor farmers. Also inefficient allocation of resources and wastage occur due to these subsidies. For e.g. subsidy in power transform into excess use of water leading thereby leading to depletion of ground water reserves. Further most of the subsidies are required for merit goods and not the non-merit goods. But the political scenario in India has lead to lobbying in favor of subsidy just to ensure more votes during elections. The way a government builds up subsidy is by way of Taxes. So generally the one who enjoys the subsidy should be taxed. But in fertilizer and food subsidies, the effect of taxation is applicable on all sections of the society whereas the benefits are enjoyed only by the affluent sections.

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 Public Private Partnerships and the entry of Private Players into Horticulture For a long time all aspects of Agriculture, (production, procurement, distribution and marketing) in India, has been a monopoly of the State Government. This has meant that at every step in the value chain there are severe inefficiencies. With the potential gold mine that Agriculture is and especially the fresh F&V market it, a number of private players have been showing a lot of interest in involving themselves with different aspects of the business. Hence the government in collaboration with the Private players is developing a number of Public-Private Partnerships projects in infrastructure development. Also the government is now allowing the private players to involve themselves directly in direct procurement activities (contract farming, corporate farming) and also in developing their own supply chains for F&Vs. An e.g. of the Private Sectors involvement in Horticulture is the Pepsicos Potato Farming activities in Punjab, Haryana and surrounding areas, Reliance Fresh direct procurement model, Mahindra Shubhlabs F&V procurement model and a few others. Apart from the involvement of the private players directly in procurement and production activities, there has also been an increased involvement of the private players in the development of PPP projects like the Modern Terminal Markets Project. These terminal markets would be built-owned and operated by corporate, cooperatives or other private bodies, while the government would delink itself from Operational issues and involve itself in Policy and regulatory issues and intervene only to protect the interest all involved players.

Rural Credit and Other Rural Financial Services - Distribution and Availability There is considerable unmet demand for rural credit. Local money- lenders continue to provide credit to the rural families, as the reach of institutional agencies to weaker sections has remained poor. Meeting the credit needs of 25 million nonfarm informal sector enterprises continues to be a challenge to the rural financial institutions (RFIs). Though the coverage of micro-finance scheme has expanded, still around 70% of the poor are out of this network. The micro-finance sub-sector of institutional credit has not explicitly targeted the agricultural sector. RFIs have bypassed tenants and hare croppers. More than 60% of the farm families are yet to receive the Kisan Credit Cards. The rate of interest charged by RFIs from farmers is considerably high. On the supply side, many commercial banks have closed nonviable rural branches because of rising nonpaying assets and the high cost of rural lending. For farmers to do well it is very important to provide timely credit and also support them with other financial services which could support their farming. With the sector now opening to private investments, a number of NBFCs have started investing money in Rural Finance and are also looking at working with Cooperative, SHGs and other NGOs to efficiently distribute this credit and services.

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 Government Intervention and Market failures Government through various Acts and regulation has made the F&V sector and agriculture a sector where private participants find it not lucrative to make investments in. The wholesale of F&V are controlled still in some states by the arcane APMC act. Though most states are in process of revising this act, its implementation in the previous decade has acted as a major deterrent to private participation in Horticulture. The essential commodities act and the MSP regime on some of the Horticultural products also made it difficult for private players to impose quality linked prices to these end products.

3. Changing Social Environment

Land fragmentation (Small farmers becoming smaller) In developing economies land reform, in particular land redistribution has occupied a central role in debates about poverty particularly chronic poverty alleviation in rural areas. Even if it were accepted that land redistribution could alleviate poverty the enthusiasm for such redistribution needs to be tempered with consideration of the potential efficiency effects of land fragmentation. The fragmentation of land holdings could rise with land fragmentation. In turn, land fragmentation could lead to sub-optimal usage of factor inputs and thus to lower overall returns to land. The factors contributing to this could be losses due to extra travel time, wasted space along borders, inadequate monitoring, and the inability to use certain types of machinery such as harvesters. Fragmentation of land is widespread in India and it is believed that fragmented nature of land holdings may play a major role in explaining low levels of agricultural productivity. The average land holding in India is between 1-2 hectares and more than 70% of the farmers can be categorized under Small and Marginal Farmers. Because of this most farmers involved in farming grow for self consumption with very little marketable surplus. Another issue with small land holding very particular to Horticulture is that a large part of the farm land would naturally get allocated to grain and pulses with little meant for high quality F&V farming. Land consolidation, contract farming and corporate farming are ways to overcome the issue of fragmentation.

Self Help Groups- New breed of rural entrepreneurs The biggest issue with the supply chain in India today is the last mile delivery of any available service or a product. Absence of cost-effective distribution channels has meant that rural Indian has consistently received low quality or no service or product. This has led to the development of a rare breed of rural entrepreneurs who have organized themselves as Self Help Groups, cooperatives or other Non- Government Organizations to provide the required services to the farmer or the rural India.

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 Migration & Urbanization\Livelihoods At a macroeconomic level, the services and the manufacturing sectors have been consistently growing at above 9% over the past 3-4 years, while agriculture has shown an average growth of less than 2% over the same period. This has obviously meant that people in rural India have started migrating out of villages to places where daily wage jobs are made available. A phenomenon that has ensued out of this urbanization is the development of peri-urban livelihoods and cultivation. A lot of these rural workers grow vegetable on the land available besides the railway tracks and other small lands inside urban cities for primarily selfconsumption and to some extent sell it in the market.

4. Technological Environment
Improvement in Production technologies Post green revolution, these has been a major thrust on the continuous improvement in the technology in agriculture. Use of HYV of seeds, use of high quality seeds for better quality produce, scientific use of fertilizers, use of micro-nutrients, improved irrigation techniques have been some of the changes that have happened over the past decade. In horticulture in particular Orchid management techniques have gained a lot momentum. Because people have seen a large potential in terms of exports and high end consumer in India for high quality and exotic fruits and vegetable, large Orchids which are professionally managed have started cropping up. With the interest in contract farming and corporate farming increasing because of the lowered government intervention in the F&V sector, improvement in extension services and in techniques of agriculture is being noticed.

Improvement in Processing and Post-harvest technology More than 25% of the fresh F&V produce is lost in the post harvest stage. This has pushed the government and also the private sector to set up post-harvest technologies to extend the life of fresh produce. The government has also taken a number of initiatives to set up Food Processing industries, Food Parks and Export zones in around the production centers to reduce wastages and also help improve quality of produce. ICT Catalyst across supply chain initiatives One of the biggest problems in Indian agriculture was the number of intermediaries involved between the farmer and the consumer. Studies have shown that in horticultural products the farmer gets only about 30-40% of the final price at which a consumer buys. Hence, because of the excessive intermediation, neither the consumer nor the farmer was being benefitted. Use of ICT technology in making the supply chain more responsive and efficient has been another trend which is fast coming up. The farmer who for a long time was disadvantaged because of his need for information, is now exposed to all necessary information and data and now has the ability to take his own decision in a much more informed manner. 9|Page

Analysis of Existing Value Chain and Market Structure

A broad scan on the Indian F&V market shows that, fruit marketing especially for fruits with high market demand like certain varieties of Apples, Mango and Citrus fruits, is well established with large growers and exporters practicing grading, adhering to quality standards. For fruits like grapes, citrus fruits, apples, etc., which are required in the processing industry, standardized procurement and marketing systems have evolved over period of time efficiently In case of other fruits like Chiku, melons, Sitaphal, bananas, Bers, Litchis, etc., which mostly cater to domestic market, grading and quality are major issues. In case of vegetables which are mostly produced for local markets by a large number of small and marginal farmers (low income producers), the major challenge is price discovery. The existing Agricultural produce market committee (APMC) system facilitates the marketing of F&V commodities but unlike food grains and other staples which have price supports, price risk management of F&V commodities is a great challenge due to their high perishability. Across the board with few exceptions post harvest and handling losses is a major challenge in Indian context due to weak infrastructure. Around 15% to 20% of semi perishables (Vegetables like Potato, onion) production and 20% of perishables (Most of the other F&V) production is lost after harvest at various stages of handling through the value chain. Pesticide residues, pests and pathogen infections and contamination with heavy metals are other issue with reference to export of these commodities. There are several other hurdles with respect to marketing fruits and vegetables in an environment of weak infrastructure that India has, in terms of logistics, warehousing and information. We need to the dimensions of fruit and vegetable market efficiency in terms of net realization of the consumer rupee to the producer. This assumes greater importance in the emerging market scenario when India is rated among the top countries in the world as predicted by ATK, Global Retail Development Index (GRDI). Further within retail sector food and groceries segment has the highest projected growth with a CAGR of 77%.As Food products trade on razor thin margins, volumes and significant economies of scale are going to play a vital role in the success of the emerging retailing industry in India. The advent of these new retail formats as a business opportunity and ever increasing competition in this space has forced all the major retailers concentrate on cost cutting measures. The major focus is on restraining procurement costs.

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Consequently, the longer supply chains have come under severe scrutiny and a need for alternative channels for procurement of agricultural produce was realized. There have been many initiatives in this direction starting form direct procurement from the farm gate to contract farming. We therefore attempted to explore value addition in different procurement channels keeping in view an emerging scenario, where India is poised towards a paradigm change in food and groceries retailing.

Identification of different F&V marketing channels

The market channels were identified with respect to study of procurement models as existing in different parts of India are as follows.(Source: Interviews with DMI,NHB and professionals, APMC functionaries).Given below are the Fruit marketing channels.
1. Producers (Contract farming with Agro processing industry) transport to the Collection centres or Factory 2. Customer (F&V Company) coordinates production of a specific quality produce (Contract farming with procedural and product quality specification) & picks up the produce from the producer. Involvement of third party facilitators like financial institution (banks,Insurance,) government institutions, Research and educational institutions and agri-input companies. 3. Producers (Contract farming with Retailer or F&V company without specification) transport to the Collection centers or Factory 4. Producers-Village level middleman(Aggregator)-Transporter-APMC mandi-CA-Wholesalertrader-Retailer-Consumer (Traditional Channel) 5. Producer- mandi-Consumer 6. Producers-Producer cooperative-APMC-CA-Retailer or (Producer-Producer cooperativeCA-Exporter-CA-Importer-Retailer/Wholesaler-Consumer) or (Producer-Producer cooperative-F&V company)-Maha grape model 7. Producer-SHG(Microfinance institutions)-mandi-Consumer

The above seven channel variants are indicative of both the existing and emerging Fruit marketing scenario in the country. Channel variations are based on the roles of different intermediaries and the coordination level of the dominant player. Like in the channels 1 to 3, the customer, F&V Company is the channel master which coordinates different supply chain players to improve chain efficiency. Similarly in channel-6 the producers cooperative coordinates the sale of the produce, especially to meet export requirements. Given below are ten variants of Vegetable marketing channels.
1. Producers (Contract farming with Agro processing industry) transport to the Collection

centres or Factory ( Vadilal, Nestle,Priya foods) 2. Customer guides production of a specific quality produce(Contract farming with Agro

processing industry) & picks up the produce from the producer.(PEPSICO model)

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3. Producers (Contract farming with Factory.(Field Fresh-Bharti model) 4. Producers-Village level trader-Retailer

Retailer) transport to the

Collection centres or

middleman(Aggregator)-Transporter-APMC

mandi-CA-Wholesaler-

5. Producer-SHGs-APMC-Commission Agent-Retailer 6. Producers-Producer cooperative-APMC-CA-Retailer 7. Producer-SHG-mandi-Consumer (Farmers market-Allotment to SHGs,DWCRA groups,Farmer mandals) 8. Producer-Village level middlemen/transporter-APMC-Vendor's cooperative-Vendor-Consumer (SEWA sahakar mandali model) 9. Producer-Producer's cooperative-APMC-Vendor's cooperative-Vendors-Consumer (Potato farmers cooperative model) 10. Producer- mandi-Consumer

Policy, Institutions and Infrastructure

Under the existing APMC system, APMC mandi serves as the primary market-maker between the farmers and traders. Prices at the 7500-or-so regulated mandis are dependent upon local demand and supply factors, and farmers have no choice but to accept the price offered by the traders through the APMC. There is no knowledge of F&V commodity prices prevailing elsewhere. Also, at APMCs, only licensed traders may purchase produce, and private buyers, such as the corporate houses now entering food retail in a big way, are kept out. "APMCs encourage monopolies. Traders also too face some risks in the current system, although they often make huge profits by controlling prices. They have to carry the risk of defaults in the marketing chain, and also have no dispute redress system to turn to when complexities arise. The major value addition from these commission agents is credit risk leveraged by their ongoing relationship with the producers. In addition to assuming credit risk these intermediaries also engage in bulk breaking function. a) The Commission agents (CAs) have a dominant role and have strong linkages with APMC functionaries, vegetable traders and farmers. (Each Commission agent has a two storey office cum stall at the Mandi, where in the physical transactions take place on the first floor and the financial transactions take place on the second floor (which is connected to the first floor), where the accountant employed by CA makes payments to the farmers). b) Most of the farmers have long standing relationships with the CAs due to their dependence on CAs for working capital and credit needs. 12 | P a g e

c) The auction based price discovery is not followed in the vegetable market at all and price fixation happens based on negotiation between buyer and seller based on their claims of quality and freshness of produce. d) The notice board at the entry of the market yard mentions previous days prices and arrivals and this information is vital for price fixation. e) There is an element of price stickiness in determining prices on a particular day which is used by CAs to their advantage in charging lower prices to farmers even when overall supply is low and selling at higher prices to vegetable vendors. CAs have an advantage with respect to seeking information from various institutional sources compared to vegetable vendors and farmers. f) One of the biggest issues with price discovery is the daily price range. The price for a single commodity, on an average leis between a range of Rs 50/- to Rs 150/- . Every commodity transaction therefore has a minimum, maximum and a modal price. This price range is based on negotiation between producer and CA and is not strongly linked to market arrivals: Information asymmetry between arrival information and price fixation during auction period exists which increases this range, leading to realization of different prices to different producers and vendors. g) The vegetable vendor actually pays up the 6% commission to the CA and 0.5% market cess, in addition to weighing charges and other miscellaneous expenses which amount to further 1%-1.5%. h) Apart from individual vegetable vendors(small shops, Mobile carts, Kirana, Thelawallahs, Individual vendors, mobile Pheriwallahs ) and small retailers (Fresh and Green shops),Organized retail stores also purchase from the APMC mandi from specific CAs who can source produce of requisite quality

i) Although most of the sellers in the mandi are farmers, a considerable number of village level
middlemen or aggregators also bring the produce to the market. Sometimes these middlemen also act as transporters and the agents of large wholesale traders who in turn operate through the faade of CAs in the APMC. This suggests that already a certain kind of vertical coordination exists within the trader community which prevents the percolation of benefits to the producers.

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Sourcing, Producing and Delivering functions of the value chain

There have been significant changes in the world economy in the past decade with reference to i) Synergy and reorganization of production systems into global production systems ii) Changing competitive scenario within domestic production systems. This has led to business opportunities across the value chains which interact in complex ways. F&V value chains are one of the most important area where such transformation is underway across the world to meet the changing demand needs of the consumer and market. Several new marketing initiatives which are based on supply chain perspective are emerging within India and elsewhere. Some of the broad categories which depict the role of different market institutions and respective interventions are given in the table given below. Although the founding principles of APMC system and the Directorate of Marketing and Inspection (DMI) have been to increase the net share of producer in consumer price which over the years could not be accomplished effectively due to the stranglehold of commission agents in the mandi system and the weak infrastructure environment with respect to highly perishable commodities like fruits and vegetables. The infrastructure effect is apparent in the enormous post harvest losses and the wastage happening due to handling by multiple intermediaries before the product reaches the end consumer. Further the seasonality in production of F&V leads to irregular arrivals in the market affecting the supply and hence leading to price volatility.

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Table 1: Roles and intervention of different market institutions(Modified from IFPRI framework) S No 1 Role of Institution Reduction asymmetry of Information Type of intervention Group based contact Peer monitoring mechanisms New Value chains-Modern intermediaries Codes on quality standards 2 Reduction of transcation costs Vertical coordination Vertical integration Farmers groups and cooperatives Contract farming 3 Reduction of Logistics communication costs and PPP Business-NGO relations Community based management 4 Reduce policy induced barriers Local and central policy alignments Coordination among jurisdictions 5 Reduction barriers of non-economic Protection of the low-income producers through subsidies Affirmative action

Source; Chowdary ,2005 The price discovery process for vegetables in APMC markets is based mostly on the daily arrivals (Supply) and the diktats of market power of large traders who operate through licensed commission agents. This is due to the large number of small vegetable producers and equally large number of small retail vendors who produce for the local markets and form the backbone of the vegetable supply chain in India. Especially vegetable price volatility in India is famously known been to bring down governments (Onion prices and elections) as these prices affect the common mans necessities and are indicator of inflationary trends in the economy. Similarly there have been many anecdotes and stories in the media about how farmers throw away huge amounts of perishable vegetables like tomato due to low prices as it is not economical even to transport the produce to the market. In case of fruits, the market channel is more organized towards servicing across longer distances and regional markets and transport and warehouse (Cold chain) players have a predominant role in market processes. 15 | P a g e

Process mapping of the value chain

Vegetable Supply chain:
PRODUCERS (VEGETABLE FARMERS)

Self Help Groups

Farmers Cooperative Society

Village level middleme n

Transporte r cum middlemen

Contract farming/Co llection centreAgro processing industry

Contract farming/Collecti on centersRetailer

Mandi or Farmers market

APMC MARKET

Consumers Cooperative

Commission agent cum trader Lender

Vendor (Cart/stationary)

Vendor Coop WholesalerTrader cum STOCKIST/CO LD CHAIN/WARE HOUSE

Retailer

Subwholesaler

CONSUMER

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Fruits Supply chain:

Business Opportunity
The wide range of products consumed and lacuna in the current service level gives an opportunity to organize the business with help of efficient supply chain and a better value distribution. The daily sales volume from even a tier II and tier III city is so high tapping a tiny portion can be substantial. Farmers deter the current contract farming format of participation as it binds them on selling price basis which they predicts as a loss of opportunity, thus the profit sharing model will provide the needed flexibility as they wish. An Ernst and Young report says the food and grocery retail segment is estimated to be $152 b.

Concept
In light of the mentioned background we propose a new vertically integrated supply chain serving the concept of from farms to plates. The underlying idea of the concept is to remove the existing inefficiencies of the current supply chain and work on an inclusive growth model where

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the farmers are given their fair share of profits and the saving from the efficient supply chain are passed on to the consumers. For example the existing margin leads to inefficiencies to the tune of 65% and only 35% is what farmer receives of what a consumer pays. A 10% distribution will increase farmers margin to 45% and reduce consumers price by 10%. The procurement will be done directly from farms and occasionally from the existing mandis. The idea is to estimate and generate demand on the downside with retailing and marketing and secure the supplies from upstream by associating farmers alongside. The farmers association is based on the profit sharing concept wherein on every take-off from farm the farmer will know the market price and his share of profit. Farmers credit cycle will also be supported with the financing activity of the firm. Downstream, we will be having small retail outlets at strategic locations known as FreshWheelers. These outlets will serve the function of sales and marketing and will be the last mile of the supply chain. Efficient order can be booked by phone and internet and will be delivered by these FreshWheelers. Proposed Supply Chain
Farmer

Bulk storage

Material Flow

Transport

Information flow
Cold storage warehouse

Retail chain/ Hotels and Restaurents,front end retail

Consumer

As we can see from the diagram the efficacy of the proposed supply chain comes from the synchronized flow of material as well the information. This is to ensues the transparency in the system and make it more efficient. We think the ability to reciprocate to consumer need as well 18 | P a g e

as the producers dilemma of what and how much to produce can be efficiently handled with the help of an integrated system, which we believe could make a lot difference in the current market scenario.

Price mechanism and discovery In case of vegetables which are mostly produced for local markets by a large number of small and marginal farmers (low income producers), the major challenge is price discovery. The existing Agricultural produce market committee (APMC) system facilitates the marketing of F&V commodities but unlike food grains and other staples which have price supports, price risk management of F&V commodities is a great challenge due to their high perishability. Hence FreshWheelers would adapt a revenue sharing model. With most farmers being marginal and poor, their ability to procure high quality high yield seeds and other agricultural inputs is severely restricted. The farmers would also be supported in their cash credit cycle and inputs like seeds will be given Price Mechanism Free market Producer Strength and processor Weaknesses Price volatility Producers vulnerable to information symmetries Administrative Prices APMC Producer and processor Public sector bears risk Equity concerns Producers do not get

choice and efficiency

protected from market risk Contract Growing Producer protected from risk

benefit from higher prices Processors vulnerable to low prices Contract Processing Processor market risk protected from Producer bears risk Low incentive for

processor to innovate Revenue Sharing Market shared risk and benefits producer

between

and processor 19 | P a g e

The USP of the business is the vertical integration of the vegetable product supply chain and the service levels offered to customers. The fruits and vegetables would be procured directly from farmers and the cost of procuring is taken as 35% of sales value. Solving infrastructure issue is setting up cold chain or other distribution centers. This is highly critical for the especially the food and vegetable segment considering the perishable nature of the product. Infrastructure in the entire supply chain right from production clusters to the markets ought to be fed up including grading, pre cooling, packaging, storage and marketing of fresh farm produce. Owned transportation vehicles would be used, and responsive supply chain models would be used to maximize efficiency. For procurement, considering the Pune city as the location of business inception, we identify four major procuring destinations. Based on our sales projections, there would be a requirement of four 8 ton Tata 1516 type trucks (80km per trip) and four 1 ton Tata 407 type trucks (30 km per trip) For distribution well have small shops at different residential locations in the city with no fixed construction (movable and all steel made) called as Freshwheelers. Considering Pune as our business market we would start with 20 such Freshwheelers. We would have a central storage warehouse (2000 square feet rented) which will be temperature controlled. An online database of inventory levels of different SKUs at each point and Freshwheelers would be maintained. The vegetables to the Freshwheelers would be distributed through Tata 407 type minivans from warehouse. The Freshwheelers would be an 8*8*10 non fixed structure shop which would be air controlled to maintain freshness of the vegetables. The pricing of the products will be done on the real time basis, and the risk due to price variations is mitigated by revenue sharing model viz EOQ or Fixed Period models will be used to maximize the efficiency of the gains and minimize the operating losses evident in the current system, the savings in the supply chain will be passed on to the customers.

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Target Customers Target customers would be middle class customers who are very particular about price and quality; for the home delivery and fast response, the working customer who dont have time to shop due to hectic office hours. Orders would be taken online through internet (at the online site) and telephonically (through toll free numbers). The nearest Freshwheelers would be identified and the demand would be furnished by home delivery with a minimum limit on purchase. The point of sales would also be the shop itself. The second type of customers i.e. hotels and restaurants would also be supplied with vegetables via delivery at their respective locations. Also the surplus supplies would be sold to front end retails, like big bazaar, spencers and subiksha

Financials
Profit and Loss Statement
(in Rs.) Sales from Consumers Sales from Restaurants Total Sales 2009 26000000 11406250 37406250 2010 28600000 12546875 41146875 2011 2012 31460000 34606000 13801562.5 15181718.75 45261562.5 49787718.75 2013 38066600 16699890.63 54766490.63

Cost of goods sold(45% of sales) Gross Income Expenses Fuel & Maintenance Costs Inventory costs Rental SG & A Salaries Depreciation (@20%) Total Expenses Gross Profit Tax Net Profit

16832813 18516093.75 20367703.13 22404473.44 20573438 22630781.25 24893859.38 27383245.31 847128.89 931841.7778 1025025.956 1127528.551 26562.5 29218.75 32140.625 35354.6875 300000 330000 363000 399300 300000 330000 363000 399300 8488000 9336800 10270480 11297528 2120000 2260000 2260000 2260000 12081691 13217860.53 14313646.58 15519011.24 8491746.1 9412920.722 10580212.79 11864234.07 34% 34% 34% 34% 5604552.4 6212527.677 6982940.444 7830394.489

24644920.78 30121569.84 1240281.406 38890.15625 439230 439230 12427280.8 2260000 16844912.36 13276657.48 34% 8762593.938

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Sales Estimate
Sales Estimation ( in RS.) Total number of families per shop Number of shops Family(size of 4) consumption per week total annual consumption Number of restaurants Average number of meals by consumers in a day Consumption cost per meal by a person Total sales from hotels and restaurants Total sales( in Rs.) 100 20 250 26000000 10 50 62.5 11406250 37406250

Volume(kg) Average vegetable consumption per person per day Average vegetable consumption per person per week Total consumption for a family per week Total annual volumes from retail shops Total volumes from hotels and restaurants Total annual volumes Miscellaneous & Selling expenses approx average vegetable cost per/kg

0.4 2.8 11.2 1164800 72800 1237600 300000 22.32143

Salaries and Wages

We have identified the following personnel for the operations of the company. We would be requiring proficient operations managers, to overlook the operations within the company. The key operations are would be the procurement side i.e managing the trucks, schedules costs and time taken. Similarly at the distribution side we would need operation managers, for distribution efficiency and minimizing losses. They would be required even for the warehouse management. Drivers and delivery guys will perform different rolls, of picking up and offloading goods, and also home delivery. The original partners would also be given salaries.

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Employee Shopkeeper Drivers & delivery staff

Number Compensation Total 40 30 60000 72000 2400000 2160000

Operations manager Accountants Sales personnel GM Salary partners Total salaries

8 1 2 1 2

160000 96000 96000 360000 1000000

1280000 96000 192000 360000 2000000 8488000

Capital Expenditure

Trucks (8-10 ton) Trucks ( 2-3 ton) Freshwheeler shop Warehouse Setup, refrigeration Total Capex Total working capital requirement Total funds required

Quantity Costs Total 4 1000000 4000000 4 500000 2000000 20 1 215000 300000 4300000 300000 10600000 7481250 18081250

Based on sales projections and inventory days of 7 days, the trucks required would be as mentioned in table. Higher ton trucks are for procurement from fields and the lower ones are for distribution in the city to the FreshWheeler shops. Warehouse would have refrigeration levels, so that the freshness would be maintained as long as 7 days, and for the very same reason we have kept the inventory days at warehouse to be 7.

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The FreshWheeler shops would have solar power source. There would be 8 12 V solar panels each costing Rs 8000. It would have a generator backup for emergency situations. The refrigeration unit would keep temperature around 10 degrees. It would have a telephone facility for home delivery notifications. Two employees per shop were made sure by personnel estimation

Estimates Shop strucure cost Solar panels required Refrigeration unit Telephone installation Generator for backup Total shop cost

Description 8*8*10 steel non fixed 8 12V solar panels

Costs 125000 64000 10000 1000 15000 215000

Cold storage warehouse

It would be rented at strategic location in city, and equipped with refrigeration facility and storage facility. Refrigeration would preserve the freshness of vegetables and increase their shelf life, warehouse would have 7 days inventory at the maximum.

Cold storage warehouse Area Requirement Rental Total annual rental 2000 sq feet 25000 300000

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Fuel and maintenance costs estimation

Using the sales value projection and inventory life and truck capacity the fuel costs and maintenance costs are calculated. Also average inventory costs are calculated using cycle inventory will have holding costs of 10% Fuel costs for procuring Total sales volume(m ton) Number of truck trips(4 trucks every week, 52 times annualy) average Distance per trip( km) Total travel Truck mileage per litre(8 ton) Diesel requirement in litres Diesel costs Fuel costs distribution Total sales volume(m ton) Truck capacity Number of truck trips average Distance per trip( km) Total travel Truck mileage per litre Diesel requirement in litres Diesel costs Total Fuel costs Maintenance costs(Rs 2/km) Total Fuel and maintenance costs Cycle inventory Average inventory approx average vegetable cost per/kg Average inventory cost Inventory costs at warehouse at holding cost 10% 1237.6

204 200 40800 4 10200 408000

1237.6 3 412.5333 100 41253.33 6 6875.556 275022.2 683022.2 164106.7 847128.9 23.8 11.9 22.32143 265625 26562.5

*Average Inventory days at warehouse should be 7 days in cold storage.So lot size is sales / 52 Hence considering small lot size small trucks have to be used 25 | P a g e

Exit strategy
The project envisages its current value around Rs. 3 crores (discounted at a hurdle rate of 14% for 5 years). The positive outlook of IRR comes around 39% (considering only the short term 5 years cash flows) Thus the exit options for a VC funding could be invest for the period of 5 years reap the benefits of 38% IRR, or we can make an arrangement of annual payments on funding. For example considering a rate of return of 25% a repayment plan could be as follows. Fund Schedule Assumptions Initial Funding Rate of Return Duration (Years) Yearly Installment Year Amount Left From Last Year Interest Principal Payment Total Payment Balance 18081250.00 25 5 6723453.86 2009 1 2010 2 2011 3 2012 4 2013 5

18081250.00 15878108.64 13124181.94 9681773.56 5378763.09 4520312.50 3969527.16 3281045.48 2420443.39 1344690.77 2203141.36 2753926.70 3442408.38 4303010.47 5378763.09 6723453.86 6723453.86 6723453.86 6723453.86 6723453.86 15878108.64 13124181.94 9681773.56 5378763.09 0.00

Expansion plans
We plan to launch the venture at Pune. The main reason for choosing pune city is that it is a fast growing city owing to its allegiance to software industry and it has a healthy mix of our target consumers that we want to pursue for the venture. Later down the line with healthy cash flow from Pune venture and learning we can scale it up to other tier 2 and tier 3 cities. We may not go metros until we have enough capabilities to pursue the venture as it might be a costly affair to establish in the metros.

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Challenges
Price Risk Management
Price Risk refers to the input and output price volatility which farmers are exposed to. Such volatility is mainly due to the instability of the markets for inputs and outputs in the agricultural sector. The fluctuations in price are largely due to: The seasonal fluctuations in demand Lack of information about market prices Lack of alternative market avenues Inability to hold tradable surpluses until the producer gets a better price National policy level changes Volatility in the global market.

A volatility in the output prices leads to losses for the farmers. Input price volatility leads to increased costs for agricultural inputs. Majority of the Indian farmers are small and marginal farmers, holding less than 2 hectares of land. They cannot afford to hold on to their produce to sell it at a later date to avail better prices. So they are highly susceptible to output price risk. Similarly, these farmers are almost completely dependent on monsoons for irrigation. Therefore, the time for input cultivation is also not in their hands. Hence, input price risk is also a very real threat to them. We try to mitigate this to risk by forming Farmers association which is going to be a group of small farmers when combined together they will have a larger land bank and this can cut on their production costs by virtue of economies of scale.

Production Risk Management

Production risks refer to the high variability of production outcomes. This variability is due to yield and revenue loss because of: Unpredictable nature of the weather Seasonal fluctuations Pest infestation Diseases

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Insurance can play a pivotal role in covering production risks, which would help reduce the vulnerability of the farmers to economic losses. This risk can be mitigated by providing proper assistance in gathering meteorological weather forecasts and proper agricultural consultancies from the experts.

Cost of meeting quality and regulatory compliance costs

When the question of sourcing from small farmers comes, one of the major issues is meeting quality standards. The success of the few of the Indian fruits exports like apples etc is because large players intervened and ensured quality standards. However, meeting quality standards comes at a cost; the cost of implementing quality, and the possible tradeoff of taking a hit on quantity. Also, agriculture and its related industries are highly regulated in India. Large players face regulatory costs in terms of compliance, standards etc. These costs are then passed on to the smaller farmers

Lumpy investments and small growers

For a small farmer to enter into the value chain of big agricultural companies, they need upfront lumpy investments. Such investments would include facilities for cold storage, for quality assurance etc. For a marginal farmer with less than 2 hectares of land, such upfront investments are out of scope. Therefore, adequate support in the form of formation of Farmers association will help the cause.

Access to credit, technology and information to the farmers

Access to credit is one of the foremost requirements for farmers. With most farmers being marginal and poor, their ability to procure high quality high yield seeds and other agricultural inputs is severely restricted. Due to this, the output is sub-par. Due to this the prices fetched by the output is less. This again leads to distraught ness of the farmer. Its a vicious cycle. Hence there is a grave need for agricultural credit with reasonable terms and with reasonable amount of flexibility. In the absence of such a system, farmers usually depend on moneylenders who charge exorbitant interest rates. Also, due to lack of flexibility and dependence on extraneous factors such as monsoon etc, produce/price is much lesser than expected.

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Availability of technology and information is also a huge requirement and therefore a huge challenge. Adequate weather information will lead to proper planning of crops. Couple with proper technology like the right seeds etc, and one might be looking at a bumper harvest. Similarly, proper information about the prices of produce in different markets would remove information asymmetry and therefore lead to farmers getting the maximum for their produce.

Success Factors for the venture

Engaging participation- Organizing collectives and cooperatives
As mentioned in the challenges, for small farmers to organize themselves and provide for credit, quality measures, technology is a big challange. This is mainly due to the upfront investment needed. Hence its necessary to work towards these objectives in a collective manner. The success of Shree Renuka Sugars is a case in example of the cooperative structure, coupled with proper management can turn around an ailing firm into a highly successful venture.

Infrastructure and Logistics

Infrastructure and logistics are a must for any value chains success. In our case it includes need for proper storage and warehousing facilities, need for adequate and timely transportation etc. These are extremely critical for a the agricultural sector products like fruits, vegetables, poultry etc which are of a perishable nature and need facilities to store and transport. Hence the availability of infrastructure and logistics is very much a critical success factor for inclusive growth.

Technology and Education

For inclusion of small and marginal farmers into the value chain of the venture technology and education are a must. Technology in terms of better inputs, better practices, quality and regulatory compliances is required. Technology is also required in terms of usage of better tools or machinery, which can increase the yield. An increase in yield would mean higher revenues at even lower margins and a situation that the farmer earns more, and also the company sources for less. Hence there is a win-win situation for both the company and the farmers.

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Education is required to properly utilize and respect technology. It is also required to avail the services like weather information, price information across markets etc. Education is also in terms of learning how to use new technology; in terms of agreement to adoption of new technology; understanding the vale derived from being a part of a large value chain.

Financial Services
The one most important issue that the Indian small farmer is grappling with is finance. Be it credit, be is risk management through insurance, be it availability of banking services, there are huge shortcomings and huge gaps which need to be filled. Price risk and product risk can be managed to a large extent if there are robust credit facilities and insurance facilities extended to small farmers. Investments in technology and education require contribution from the farmers end; again a question of credit. Hence a robust system for financial services is the most important critical success factor for inclusion of small farmers into the value chain of large corporate.

Coordination Integration and Cooperation

As mentioned, the Indian small farmer is actually small. They hold lesser than 2 hectares of land on an average. They dont have the financial or the technical might to get the pre-requisites for entering huge value chains. Hence, they need to cooperate among themselves and also need support from outside agencies like the big corporate themselves or NGOs or government bodies. These external agencies can help coordinate the efforts of these small farmers; they can integrate their skills; their produce; their competencies and therefore

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