The biggest bottleneck for the organised retail industry to grow in India is an inefficient supply chain network. The traditional supply chain network, stymied with inadequate storage capacity, lack of transport network and third-party logistics is yet to mature in the country. There is little sharing of supply network amongst retailers themselves and the dominance of a host of intermediaries further aggravates the problem.
Unlike elsewhere, the supply chain in India is dependent on middlemen. Moreover, a large part of crop produce goes waste due to outdated post-harvest infrastructure. Though India is the second largest producer of fruits and vegetables in the world, only 2% of the produce is processed as compared to 30% in Thailand, 70% in Brazil, 78% in Philippines, and 80% in Malaysia. The government estimates that, every year, agriculture produce worth Rs 56,000 crore is wasted due to inadequate processing and cold storage facilities.
As a result a consumer in India pays five times more for his food than what the farmer actually gets, while in USA, this ratio is just 2:1. With rapid urbanisation and increase in disposable income, the demand for processed food will grow exponentially in the country. It is estimated that that an investment of US$ 28 billion would be required in the agro-food processing industry in the next five years.
The performance of food processing is directly related to the development of organised retailing in the country. In countries like Thailand and Brazil the entry of foreign retailers increased investment in the food processing sector since they not only source for domestic market but also for their chains in other markets.
In fact, organised retail backed by an efficient supply chain has the potential of raising the rate of growth of the food processing sector from 6% to 20% in the next five years.
For organised retailers in the country there is a greater opportunity to address the issue of cold chain network through an industry-sponsored consortium. A group of retailers can tie up with transportation and refrigeration providers and invest in a syndicated network. This will not only create a wide vendor base, but will also change the way perishable items are transported.
The most vulnerable part of the supply-chain network in the country is roads, rails, ports and airports. Globally, a better logistics infrastructure is sustained through these. Currently, in the country, 2.4 million kilometers of road is paved and more than a million kilometers is unpaved. Similarly, while our rail network exceeds 63,000 kilometers, one third of the network is still in meter-gauage. We also have a highly fragmanted trucking industry which is mostly dominated by local players and only a handful reliable national service providers operate in the country.
A highly fragmented logistics infrastructure pushes up the cost of retail products. In fact, India spends about 14% of its gross domestic product on its logistics system, as compared to 8% in developed markets. A report by McKinsey, says the logistics cost component of the total retail price is around 5% internationally, while in India it is as high as 10%. This is indeed a high error margin for an industry, which operates on wafer thin margins of 2-3%. Given the peculiarities of the Indian logistics market, it could prove to be a big hurdle for the growth of organised retail business in the country. The state governments can consider the public-private partnership model including construction and maintenance of roads thus sharing the responsibility of improving infrastructure with the private sector.
High level of human involvement in the supply chain causes delays and shortages. Use of information technology infrastructure is still very nascent in the country, which is a major deterrent to large-scale organsied retailing development. If organised retail has to grow, supply chains need to be realigned into agile and adaptable networks that can handle larger volumes, expand reach, balance costs and achieve scale.
saikat.neogi@expressindia.com