Reliance 46325b

Inclusive Business Models – Prospects and Challenges

Indian Institute of Management

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Acknowledgement

This work was carried out with the aid of a grant from the Villgro Innovations Foundation in collaboration with the International Development Research Centre (IDRC)

Teaching notes have also been prepared for this case. If you are a professor who would like to use the case in class, please the author, Sourav Mukherji, at [email protected] to obtain a copy for educational use.

Reliance Retail’s Banana Value Chain S Mukherji

I thank Villgro Foundation for the financial assistance that they provided me for writing this case. I also thank senior management from Reliance Retail for their hospitality during the field trips that I had to undertake in rural Maharashtra and Andhra Pradesh for writing this case .

Reliance Retail: Creating Social Value through Banana Supply Chain “ the pictures of bananas in your elementary school text book that taught you ‘A for Apples’ and ‘B for Bananas’? The bananas were yellow in colour. However, the big bananas that you see in the Indian market today are all green in colour, often with black marks. This is because of improper handling and unhygienic methods of ripening the fruit. Reliance Retail is going to change all that”, says Mr. Ram Swamy, Head of Banana Value Chain in Reliance Retail, his tone full of optimism. And he could afford to be optimist, because in the past three years of its operations, the banana value chain 1 2 division of Reliance Retail had sold 13000 MT of bananas – the trademark big yellow ones , through Reliance Fresh outlets and more than that quantity through other retailers. Their efforts of developing an organized supply chain for bananas created livelihood for more than 2000 farmers, 150 intermediaries and 100 distributors across India, and generated employment for 500 labourers daily. The farmers’ share of consumer price went up from 28% to 42% and wastages in the supply chain reduced from 30% to 15%. Reliance’s best practices were also having positive impact on how its competitors were doing business. Following Reliance, some of them had started to employ better methods of ripening and transporting the fruit in crates – practices which minimized damages. While this might result in loss of competitive advantage for Reliance, Mr. Swami and his colleagues were not worried. After all, they were not into retail business or development of the rural supply chain with the sole intension of making money. They believed in the transformative potential that organized retail had for India by creating employment and enhancing income of India’s poor farmers as well as by making the end customer happy through price reduction. “Retail operations are expected to provide single digit EBIDTA. We could have made a lot more money by investing the same amount in Petrochemical business. The purpose here was not to maximize financial returns, but to create social impact while running a profitable business. Of course, when the income of the poor increases, we will have more customers”, explained Head of Reliance’s retail business However, everything did not go as planned. In 2006, Reliance had announced ambitious plans of investing US$ 5.6 billion in organized retail,. Dedicated supply chains of fruits and vegetables were planned to cater to such large number of stores. But because of a host of factors such as delay in delivery of properties, slump in demand because of economic downturn and political resistance drawing on the apprehension that organized retail would 3 4 drive out the traditional kirana stores , Reliance had to scale back its expansion plans. It was at this point that Reliance decided to supply bananas to other retailers, both in the organized and in the unorganized sector. In 2011, 45% of the bananas sourced by Reliance through its own supply chain was sold through Reliance Fresh outlets, while 55% was sold through other retailers. In some way, that changed the way Reliance looked at its supply chain of bananas. While earlier it was conceptualized as an essential back end process for its own retail operations, subsequently Reliance realized that an organized banana supply chain had much bigger potential. Since India was one of the largest producers of bananas, producing 25-30% of global output, Reliance could get into exports in a very big way if efficiencies earned

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MT refers to Metric Ton, equivalent to 1000 kgs Reliance sold Robusta variety of bananas – one of the common varieties available in the Indian market, typically large and green in colour even when fully ripe. The other common variety is Yelakki, which were smaller in size and yellow in colour when ripe. Apart from Robusta and Yelakki, there were about 200 other varieties of bananas available in the Indian markets 3 Mom and pop stores 4 rd th Source: Indian Express, 23 September 2008 & Business Standard, 12 January, 2009 2

from the supply chain could be leveraged to deliver bananas of global standards. Moreover, the experience earned from developing the banana supply chain as well as the infrastructure that was setup could be leveraged to source other fruits from Indian hinterland which could also be retailed in India and abroad. Thus, as Mr. Swamy and his colleagues reviewed the performance of the banana supply chain that they had painstakingly developed over the last three years, they wondered which growth trajectory their business should adopt in the next few years. Should they bring more banana growers within their fold and thus become a major supplier of bananas to retailers all over India or should they now focus on developing supply chain for other fruits instead of increasing supply of bananas or should they start developing the export market? While each of those options had costs, benefits and associated factors of business risk, Mr. Swamy and his colleagues also needed to keep in mind the benefits that their chosen option would create for the impoverished Indian banana grower. In 5 some of his recent public speeches the Chairman of Reliance Industries, Mr. Mukesh Ambani spoke about the conglomerate’s plan to focus more on agriculture and manufacturing industries so that every year Reliance could create employment opportunity for millions of Indians. Indian agriculture was believed to have US$ 500 billion business potential and it presented Reliance Industries with a unique opportunity of combining social benefits with business benefits. This, the Chairman felt, was his way of acknowledging the opportunity that society provided him with by allowing him to create an enterprise with limited liability. Background Reliance Retail Limited, a subsidiary of Reliance Industries Limited (RIL), was incorporated in 2006. In 2011, it operated 1150 value and specialty format retail outlets in 86 Indian cities and recorded a turnover of about Rs. 4500 crores. It was the first organized retailer in India to undertake the development of a supply chain for bananas. Banana was chosen among the fruits because bananas had near- unlimited demand and supply in India, was available all round the year and Reliance assessed that there was considerable scope of value addition by an organized player given the state of the existing supply chain. Believing that banana was no longer a ‘poor-man’s fruit’ and it represented a significant business opportunity, Reliance created a dedicated team (Figure 1 depicts the organization structure of the team) that would understand the various challenges of the supply chain and figure out the best possible ways of resolving them. The team realized that significant amount of losses were happening in the supply chain because of the unscientific way in which the fruit was harvested and transported and the unhygienic manner in which it was being ripened. Moreover, the presence of monopolistic intermediaries, who did not maintain any transparency in financial dealings, was resulting in low price realization for the farmer. This in turn was discouraging the farmer from growing bananas for his livelihood even while making the fruit expensive for the end customer. Therefore, interventions were necessary at multiple points in the supply chain to ensure that the customer got high quality fruit at a reasonable price and the banana grower got a higher share of the retail price such that growing banana became an attractive value proposition for the farmer. Traditional Sourcing of Fruits and Vegetables 6

The process of buying and selling farm produce was highly regulated in India, through the State APMC Act that mandated that all fruits and vegetables be sold to licensed traders at designated auction markets (known as ‘mandis’ in India). This system, as it was envisaged, would provide maximum benefit to the small farmers by providing them the highest price through competitive bidding among the licensed traders. However, in practice, the system was riddled with problems. APMC license holders often formed cartels. They lent money to the farmers, who were perennially cash-strapped, obligating the farmers to sell their harvest only through the money 5

Speech to FICCI and to faculty at IIM Bangalore

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Agricultural Produce Market Committee Act

lenders, thereby forming local monopolies. The auctioneer also provided credit to the buyer, lent money to the farmer for personal consumption and often his financial business took precedence over trading of fruits and vegetables. Thus, there was little or no concern about productivity and quality. Most of the times, the ‘bid price’ at the auction had little relevance because the auctioneer would deduct money from it for his handling charges and for alleged poor quality of the output. Farmers who were financially dependent on him were not in a position to negotiate or demand transparency. The net result was a vicious cycle of low productivity and indebtedness among the farmers. In the last few years, many states in India amended the APMC Act to allow retailers to procure directly from the farmers. Thus, Reliance and several other organized retailers such as the Tatas, Godrej Agrovet and Aditya Birla Retail procured licenses to buy directly from the farmers. This provided the farmers with a choice at the farm-gate and created competition among the retailers. Moreover, when retailers procured directly from the farmers, the 7 farmers did not need to pay transportation and handling charges that they incurred when they sold through the mandis. Because of that the big farmer with large outputs no longer needed to go to the mandis, but did business with organized retailers and exporters from his farm. It was the small farmers who still needed to come to the mandis because the big companies did not reach them. Developing Intermediatories Agricultural Land Ceiling Act in India prevented corporations from buying large tracts of land for cultivation. Thus, unlike in many other countries, where corporations owned large farmlands and undertook cultivation through high degree of mechanization, Indian organizations had to source farm products from independent farmers or engage a group of them in contract farming. After weighing the pros and cons of these options, Reliance decided to source bananas from individual farmers without having any exclusive contracts with them. The average farm size in India 8 was only 3.3 acres and large farms (greater than 25 acres) ed for less than 1% of India’s 120 million farms . This meant that Reliance had to deal with a large number of small-landholding farmers, something that was very difficult for an organization such as Reliance to achieve in a cost effective manner. Moreover, being a large corporate entity, it would have been difficult for Reliance to earn the trust of small farmers who were used to dealing with local traders and auctioneers with whom farmers had long standing relationships. Therefore Reliance decided to develop intermediatories, someone from the local community who would act as a conduit, building ties between them and the farmer community. The vendors, as they were called by Reliance, were often banana farmers themselves who worked closely with Reliance’s field executives in planning and monitoring farm level activities of a large group of banana growers. Known as ‘hundikaris’ in local language, they performed multiple roles of consolidating supply, trading, operations management as well as convincing farmers to adopt better farming practices. Reliance’s field executive communicated to him the market demand which he equated with the volume that he could procure from different farmers. Overall, the vendor was responsible for organizing farm labor for harvesting the fruit and transporting the produce to Reliance’s City Processing Centres (C’s). Reliance executive explained to the vendor its standards and expectations about the quality of the fruit 9 and paid him based on his weekly supplies . The vendor in turn paid the farmers and the field labourers who were employed for harvesting the fruit.

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Estimated to be Re 1/kg for transport and Rs. 0.5 / kg for handling and loading th Indian - Agricultural Economy and Policy Report , January 2009, accessed from www.fas.usda.gov on 14 September, 2011 9 The vendor was paid a commission of 25 paise / kg and the labouers 45 paise / kg. There was an acceptable loss of 8% by weight which was factored in while making payment to him 8

Dadasahib Patil, a vendor who had been working with Reliance in Solapur, sent about 300 truckloads of bananas to Reliance every year. On a typical day, he employed 20 farm labourers for loading a truck of bananas and sent two to three trucks a day to Reliance C’s during the harvesting season. He owned 80 acres of land across four villages, of which 20 acres was dedicated to banana cultivation. His annual income from banana sourcing business was estimated to be 4-5 lakh rupees. Thanks to Reliance, he transformed into an entrepreneur, adept at handling labourers, transporters and developing insights into modern farming techniques and supply chain management. Over a period of time, vendors like Dadasahib Patil grew in prestige within their communities, because of their ability in generating employment and on of their association with a large company like Reliance. Reliance’s field executives worked closely with the vendors, setting expectations and advising them in running field operations as well as assessing the quality of fruits. If any farmer approached the executive directly, he redirected the farmer to the local vendor. The field executive thus played an important role in developing Reliance’s relationship with the local community and it was expected that he would have a good command over local languages and possessed a high degree of familiarity with local traditions, customs and politics. “It has been always Reliance’s intention to work with the system and to enable the local farmers to grow. At the same time, we have to make sure that we are sourcing the desirable quality and quantity, which can only be achieved if the farmers adopt modern practices. It is a fine balance that can only be achieved by building a trustworthy relationship. Thus, we are in constant discussion with the farmers, explaining to them our expectations as well as trying to understand their constraints, even if we are not directly dealing with the individual farmer” , explained Mr. Parag Shah, Banana Value Chain Manager of Western India. Organizing at the Farm Reliance’s farm level intervention started with advising the farmers on sourcing of saplings. Farmers could buy saplings either from the open market at Rs. 3 / plant or buy banana tissues that Reliance Life Sciences division sold at Rs. 12-13 / plant. Though the initial expenditure was higher, plants grown out of banana tissues had higher output, needed shorter time to mature and provided greater predictability in of timing and quality. While Reliance left the final decision to the individual grower, it was usually their experience that once the farmer bought tissues, he came back for it next year because of the enhanced income that it produced, sometimes as high as Rs. 1.25 lakh / acre / annum. Banana was not allowed to ripen on plants. Green mature bananas were cut from the plants and transported to be ripened externally. The thick stem where bananas grew was known as a loom. Each loom comprised 10-11 ‘hands’ or subsidiary stems that grew about 130 bananas or ‘fingers’. Reliance provided farmers with bags, known as sleeves, to cover banana looms while on plants to avoid exposing the fruits to direct sun rays and to prevent attack of pests. Sleeves also enabled farmers to harvest plants that were at the border of the farms, which were otherwise wasted. Farmers were initially charged for the sleeves, but were paid back the money during the harvesting time, when they brought back the sleeves. This ensured that the bags were not re-used. Reliance used them as packing material during transportation. Reliance provided farm labourers with handling pads so that they could carry the looms on their shoulders instead of their heads, as was the usual practice. Reliance taught the labourers to ‘de-hand’ the bananas using nylon threads instead of sickles to reduce damage and wastage. De-handing at the farm-gate enabled early identification of low quality bananas. After de-handing, each of the bananas was washed in water that contained fungicide. Subsequently, they were dried, sorted, graded and carefully packed in crates. During the entire process, it was ensured that the fruit never touched the ground so as to minimize spots (damage marks) on the bananas. Transporting bananas in crates instead of looms reduced

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handling and transportation losses and minimized damage to the bananas in transit . While the earlier system involved having separate collection and distribution centres even at the field / village level, Reliance decided to do away with collection centres. Collection centres (aggregation centres) became necessary where the production per field was low and there was need to aggregate output from various fields before the minimum economic quantity for transportation was achieved. Reliance ensured that an entire truck could be filled with the output from one farm or a cluster of farms in same location, thereby eliminating one step in handling the fruits. Similarly, the distribution centres were co-located with ripening centres, which reduced another set of unloading and loading. This reduction was very important because bananas sustained maximum damage in course of loading and unloading and minimizing such activities directly added to the quality and shelf life of the fruit. Reliance estimated that in the traditional way of handling and transportation, there was about 20% loss resulting from damage and another 10% loss due to poor quality. It was difficult to sell those bananas to market segments. However, with the methods as practiced by Reliance, the losses due to damage were minimized and it was possible for the farmers to get average prices of Rs. 9.5-10 / kg from Reliance. The landed price for Reliance averaged between Rs. 12-12.5 / kg. One of the critical challenges for Reliance was to ensure steady supply of bananas all throughout the year. Usually, there was very high production during the period of July to October, resulting in shortage of labor and infrastructure for taking the product to the market. This was followed by two to three months when there was absolutely no fruit available for selling. Many farmers believed that bananas would not sell if mangoes were available in the market – therefore they tried to avoid a planting cycle that would coincide banana harvesting with availability of mangoes in the market. Figure 2 depicts the cyclicality in supply of bananas. Said Parag Shah, “Today, with lots of effort, we have been able to extend the growing season from three months to nine months. We need to stretch it further to twelve months. This will happen if we are able to convince the farmers to take some risks and plant off-season. Only then we will be able to maintain continuity in our operations”. Banana trees consumed significant amount of water. The typical input costs including fertilizers and pesticides were about Rs. 20,000 / acre. It was possible to get three crops from one sapling in 2.5 years at intervals of 12, 8 and 6 months respectively and farmer profitability was about Rs. 50,000 / acre in the first year and Rs. 100,000 / acre in the second and third years. After harvesting, the mother plant needed to be uprooted in order to allow the daughter plant to grow. However, many farmers did not like to uproot the mother plant because they believed that nutrients were ed on to the daughter plants from the mother plant. Reliance advised but did not enforce uprooting of the mother plant. Instead, it started to work on creating an economic incentive for the farmer to adopt the good practice of uprooting the mother plant. Therefore, Reliance started discussions with Gujarat University to develop technology that could make fibres out of old banana plants, which could be used for making bags. Table 1 provides the various locations from which Reliance sourced its bananas. Reliance endeavored to develop new sourcing locations, thereby reducing dependencies on traditional sources such as Jalgaon. Each of the new locations had unique challenges of their own. For example, Solapur, one of the areas which Reliance was 11 developing, had suitable climatic and soil conditions for banana. Moreover, its proximity to Ujjani Dam provided 10

Almost all retailers in unorganized markets sold bananas from looms and de-handing in traditional supply chains happened at the point of sales, sometimes even by the customers. 11 Ujjani Dam, also known as Bhima Dam on the Bhima River, a tributary of the Krishna River, is an earthfill cum masonry gravity dam located near Ujjani village of Madha Taluk in Solapur district of the state of Maharashtra.

farmers with plenty of water that was essential for growing bananas. The challenge in Solapur was to convince the farmers about the utility of banana farming, since most of them had been traditional growers of sugarcane. Sugarcane farming was less labour intensive and since farmers sold their entire output to farmer cooperatives, they did not have to worry about markets or fairness in pricing. Farmers typically earned about Rs. 25,000/acre from sugarcane over a 14-16 month crop cycle. Gradually, Reliance was been able to convince the farmers to diversify into bananas, which, because of steady increase in market prices (Refer to figure 3), generated more income for the farmers. Said Jatinder Patil, Sarpanch of Kandar village, “We were in sugarcane business because of steady market. If we get a steady buyer, proper rates and payment on time, we can grow bananas. (Banana) traders from Delhi visit us only for a few months. They do not give us fair prices. We do not trust them. With Reliance, there is transparency. We hope Reliance opens a sugar factory here!” While addressing a group of farmers in the same village, Mr. Swamy said, “Focus on increasing production and reducing waste. That is the best way to increase income. Don’t chase high prices, because customers will not pay high prices for bananas. Unlike sugarcane or wheat, the government does not fix the price for bananas. Therefore you will earn more if you increase yield and reduce cost”. The challenges in Osmanabad, another location that Reliance was developing, were different. The climate in Osmanabad was dry, the farmers were dependent entirely on rainfall and the average yield per acre was lesser compared to other locations such as Solapur. The average farm size was smaller and the farms were dispersed. No big trader or organized retailer went to Osmanabad for banana sourcing. Banana prices there were cheaper by about Rs. 0.5 / kg and Osmanabad was close to Hyderabad, a large market. In Osmanabad, Reliance advised the farmers to use drip irrigation for banana cultivation and helped them to procure state subsidies that were available 12 for drip irrigation . Reliance was developing alternate sources realizing that they might not be able to get adequate supply from Osmanabad. Reliance estimated that they sourced close to 50% of the total produce of Osmanabad which amounted to about 2000 MT per season. Typically 1200 banana plants were grown per acre and 300 plants were harvested every week from an acre of 13 plantation. The output of about 7 -7.5 tones was carried every week in a truck to Cs and the whole farm was harvested over a month. Reliance used a particular variety of foldable “honeycomb” crates that ensured that maximum number of bananas could be packed within a given space without damaging the bananas in any way. It took a truck about 16 hours to cover the distance between Solapur, a sourcing centre and Mumbai, the nearest C and the journey resulted in 2% weight loss of the fruits. However, if transportation was made using refrigerated trucks (known as Reefer vehicles), there was negligible weight loss. Reefer vehicles cost 30% more, 14 and handled marginally more number of crates . But the biggest gain was realized from better quality of the product. Therefore Reliance planned to tie-up with transporters who could provide them with refrigerated vehicles for transporting the bananas.

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The government subsidized the cost of drip irrigation to the extent of 50% and provided an additional amount of Rs. 40,000 / hectare 13 25 kg of output per plant, taken in 385 crates, each with about 18 kg of bananas 14 Reefer vehicles can carry 420 crates

Ripening Operations Upon their arrival at the Cs, bananas were checked for right size, girth and visual attributes. Subsequently the fruits were taken to the ripening chambers. Reliance considered ripening to be one of its major value additions in the banana supply chain. In order to keep a tight control over quality and hygiene, Reliance owned all its ripening facilities. Ripening was done in ethylene gas chambers that were co-located with its Cs. Reliance set up 12 C’s across India. Table 1 gives the capacity and location of Reliance’s ripening facilities. A typical distribution centre with ripening capacity, such as the one at Juinagar, was setup at a cost of about Rs. 700 lakhs. It processes 100 MT of fruits and vegetables daily, received from Mumbai, Pune and Nasik. It processed 12 – 13 MT of bananas daily, out of which about 5.5 Tons was shipped to Reliance Fresh stores and 7.5 Tons to general trade and other retailers. Banana required one day of pre-cooling and four days of ripening at low temperatures. At an optimized level i.e., when full capacity was being used, there was insignificant difference in ripening costs vis. a vis. those followed by 15 the unorganized sector, which typically used carbide based chemicals for ripening fruits . A typical collection centre dealt with 25-30 farmers daily and more than 50% of Reliance’s total procurement was procured directly from the farmers. This ensured that the benefits of disintermediation were ed on directly to either the farmers or to the customers. 90% of the payments were made directly to farmers’ bank s, which developed banking habits of the farmers as well as helped Reliance with the float. Said Mohit Kanodia, Head of Supply Chain, “For bananas, we need to develop intermediaries (vendors or hundikaris) in order to scale the operations. The APMC structure, at times, leads to inefficiencies with middlemen controlling the market but not adding much value. We are developing intermediaries who will be transparent in their dealings”. Overall, Reliance was able to achieve 50% reduction in wastage in fruits and vegetables compared to traditional supply chains. The quality of bananas available in the market went up and there was enough indication that customers were willing to pay higher prices for better quality of fruits. Figure 5 shows the typical losses, consumer gains and additional farmer margins when Reliance’s banana value chain is compared with traditional supply chains for bananas. Distribution to Markets from Cs After ripening, bananas were distributed from the Cs to the markets through three channels. These channels are depicted in Figure 4. About 45% of the output was delivered to Reliance Fresh outlets. Of the remaining 55%, significant portion was sold through semi-wholesalers in the open market while the remaining was sold to other organized retailers. Almost all organized retailers who were competitors of Reliance Fresh sourced their bananas from Reliance. The organized retailers often had internal quality control systems and the price to them included transportation losses, transportation cost and Reliance’s margins. The semi-wholesalers picked up the entire mix, i.e., bananas of various qualities and paid Reliance directly. They incurred their own transportation costs and delivered fruits to the open market retailers. Realizing that some of the semi-wholesalers might have cash flow problems, Reliance started working with financial institutions to extend credit facilities to them.

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Carbide based chemicals were highly toxic and using them for ripening fruits was legally banned in India under Section 44 A of Prevention of Food Adulteration Act. Carbide was found to have harmful effects on human brain, liver and kidneys and was especially dangerous for children. Industrial grade calcium carbide could contain traces of arsenic and phosphorous, both of which were harmful

Organized retailers operated on quantity based requisitions while Reliance asked its distributers to provide weekly demand estimates. This demand was aggregated from across the markets and ed on to central sourcing planner in Mumbai. There, a weekly sourcing plan was created, which was communicated back to the field. At the field, this demand was broken down into a daily plan and Reliance field executives along with the vendors decided the sourcing clusters. Consistency in supply was critical, since stock-outs weakened the trust that retailers had developed in Reliance. The retailer had the option of purchasing fruits from the mandi to meet the demand, in case Reliance was unable to supply to them – however, they started to depend on Reliance because of the quality of fruit that Reliance supplied them. Since it took one day to transport the harvested bananas and one day for pre-cooling before the bananas were put in the ripening chambers where they stayed for four days, there was two days of buffer stock that was built in the operations. This was usually enough to deal with variations in demand and supply. Thus, any anticipated shortfall could be communicated to the retailer four days in advance. In rare cases, Reliance bought bananas from the open market to make up for the shortfall. If increase in demand could be anticipated, such as during a religious festival, Reliance was able to make adjustments in its supply chain to meet greater demand. For example, on the day of 16 17 Shivaratri in 2010, Reliance supplied 55 MT of bananas to the Hyderabad market . However, even that was not enough most of its retailers who demanded more fruits. Existing semi-wholesalers had a stranglehold over small retailers who sold bananas from push carts or small shops in wet markets. They tied up the retailers through multiple financial obligations and were not eager to follow transparent practices that Reliance wanted them to adopt. Reliance thus decided to develop new semiwholesalers, often people who were earlier auto-rickshaw drivers. 22 year old Satyanarayan, one of Reliance’s nine distributers in Hyderabad was a case in point. He started by delivering bananas to the market in his auto-rickshaw, earning Rs. 1 / kg. A few months later, Reliance gave him additional responsibility of collecting back the delivery crates along with payment from the retailers. Finally, he became a distributor for Reliance, paying Reliance to buy fruits, distributing them to 13 push cart retailers in the city and collecting money from them at the end of the day. On a daily sale of 800 kg, he earned a monthly income of Rs. 7000. Likewise, Ramesh, who used to earn Rs. 4000 / month as a personal driver, earned Rs. 7000 – 10,000 / month after becoming Reliance’s distributor. Only two out of nine distributers in Hyderabad were formerly semi-wholesalers while the rest were developed by Reliance to become micro-entrepreneurs. Mr. Muhammad Ali who ran a fruit and vegetable chain in Hyderabad named “Fresh and Crunchy” was one of Reliance’s customers. He bought one Ton of bananas daily from Reliance and sold at Rs. 22-24 / kg, which he claimed commanded a of 33%18. He owned five stores that sold 600 kg and three push carts that sold 400 kg of Reliance bananas. “Even if the local fruits are cheaper by Rs. 10 / dozen, customers demand Reliance fruits. I have capacity to double the intake from Reliance, since I have 15 stores and can even put more push-carts on the streets”, said Muhammad. Likewise, Wahid, who owned a fresh fruit outlet “New Golden Fruits” in up market Secunderabad said,

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A Hindu festival celebrated every year in reverence of Lord Shiva where bananas, among other fruits, are offered to the Lord, leading to demand spike 17 12 MT to Reliance Fresh, 8 MT to other big retailers, rest to the semi-wholesalers 18 He indicated that Reliance bananas retailed for Rs. 40 / dozen while others retail at Rs. 30 / dozen

“Customers come here from long distances and pay higher prices because they appreciate better quality of Reliance bananas. These bananas shine better and have longer shelf lives. The process used by Reliance (for ripening) is better, giving the fruits better appearance and better taste”. Wahid wanted Reliance to supply him with more B-grade bananas, possibly because he made higher margins on them and because he sold fruit salads that did not need A- grade bananas. Export Potential for Bananas Banana was one of the most widely traded commodities in the world. Global trade in bananas happened from Central America and Philippines to Europe, Middle East, Japan, Singapore and Taiwan. In Central America and in Philippines, the climatic conditions were suitable for banana and farmers came together providing large fields for cultivation. Governments in many of these countries provided implicit subsidies for banana exports. However, bananas from Central American countries such as Honduras and Ecuador were becoming more expensive and Philippines did not have more land that could be brought under cultivation. Therefore large banana companies such as Chiquita and Dole19 were in search of new sources. India20 and Sri Lanka were potentially new sources for bananas. India could become a big hub because it was well connected on the East to Singapore and Taiwan and on the West to Europe. However, India lacked the quality as well as the kind of infrastructure necessary for a quick turnaround that is essential for bananas. India was also a large banana consumption country. It was dominated by local traders and one could not do business in India unless companies tied up with the local traders. Fragmentation of sources was also the reason why international export companies did not operate in India. Abroad, where farming was corporatized, exporters worked with large farmers who owned 1000 – 3000 acres. China however followed a different model where farmers created large agricultural cooperatives21. Individual farmers leased out their own land to the cooperatives while continuing to work on them. Thus there was aggregation of outputs, enabling them to be linked to markets. Said the Head of Reliance’s Retail business, 22

“Banana can be a billion dollar opportunity and we can have an equivalent of Operations Flood in bananas. However, we need to evolve a model that is suitable to Indian conditions. It is important to realize that only 20-30% of a farmer’s produce can be exported, while the rest will have to be consumed locally. Thus, one’s export strategy needs to be complemented by what one does in the domestic market, both with better and not so good quality bananas. This is where one of the exporters went wrong – they only focused on export quality bananas and left the farmers in the lurch when the fruit quality was not up to the mark. The farmers naturally felt cheated. Someone will have to get the three elements together –

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Dole Foods was world’s largest in this domain with turnover of US$ 6 Billion. They own 70 ships. 60-70% of their revenue was earned from bananas and pineapples 20 With 7.8 lakh hectare under banana cultivation, India was one of the world’s largest producers of banana, producing 27 million MT of banana annually 21 Chinese Agricultural Cooperative (CHAODA) was listed in Hong Kong Stock Exchange 22

Operation Flood was a rural development programme started by India’s National Dairy Development Board in 1970. One of the largest of its kind, the programme objective was to create a nationwide milk grid. It resulted in making India the largest producer of milk and milk products. It reduced malpractices by milk traders and merchants and helped in alleviating poverty and famine levels from their dangerous proportions in India during the era. At the heart of Operation Flood was village milk producers cooperatives.

proper genetics (of the fruit), farmer engagement and link to international markets. Since one cannot have corporatization, cooperatives are possibly the way to go. One needs to form farmer cooperatives and provide them with international best practices. One needs aggregation, even while maintaining the sanctity of the individual farmer.” Creating Social Value Social welfare and community development was the core of RIL’s Corporate Social Responsibility (CSR) philosophy. The company’s strategy was to have close and continuous interaction with people and communities proximal to its manufacturing units in order to bring about qualitative changes and to the underprivileged. When RIL setup its petrochemical plant at Jamnagar, Jamnagar used to be a drought prone area with inadequate infrastructure and there was dearth of basic amenities such as water, healthcare and education. Reliance developed the entire infrastructure necessary to provide good quality of life to its employees. Apart from creating large number of jobs through its factory, Reliance helped local entrepreneurs start small ventures such as establishing hotels or running transportation services. Reliance also planted thousands of trees which, over a period of time, made Jamnagar one of the largest producers of mangoes in India. It also brought down the average temperature of the city. Reliance’s other CSR activities included Gokul Gram Yojna that provided drinking water to people in drought prone areas of Gujarat, Project Drishti that provided eye treatment to the local community free of cost, public health centre adoption, women empowerment through skills training and initiatives to combat TB and HIV AIDS. In 2010, Reliance setup Reliance Foundation to create consistency among its various CSR activities. The foundation defined its philosophy and identified areas of focus, which would enable its group companies to decide which kind of socially responsible initiatives they should undertake. The CSR philosophy of Reliance Retail got reformulated around this period where “community” was brought in as one of the five core dimensions of retail strategy, along with ‘customer’, ‘colleagues’, ‘finance’ and ‘operations’. Reliance Retail realized that in order to achieve its business objectives, it needed to work with the community, defined as suppliers and people who lived close to reliance retail outlets. This led to their working closely with farmers and local entrepreneurs. 23

In October 2010, Reliance Foundation launched a programme “Bharat India Jodo” or BIJ with the focus on improving economic condition of smallholder farmers through input , technical assistance, post-harvest and marketing . As part of the programme, they linked agricultural experts with farmers, especially those from highly impoverished areas of rural India. These experts provided farmers with tools, techniques and knowhow, worked closely with them for improvement in farm level productivity and facilitated formation of farmer cooperatives. Reliance Foundation sold 0.5 million banana tissues annually to about 8500 farmers. These tissues were developed by Reliance Life Sciences. Micro-propagation or tissue culture included rapid clonal propagation as well as weeding out potential viruses. In case of bananas, tissue culture reduced the crop cycle to about nine months and when complemented with drip irrigation, tissue ensured availability of fruits all throughout the year. This benefitted the farmers in of greater output and higher price realization.

23

Literally meaning “unite India and Bharat” referring to the wide gap that existed in India between the urban upper / upper middle class and the rest of the country. The urban upper and upper middle class had benefitted from India’s policy of globalization and liberalization (since they were English-speaking, they referred to their country as India) while the rest of the country comprising the lower middle class and the poor in urban and rural India was yet to see economic improvement in their lives as a consequence of India’s economic growth. Since most of them did not know English they referred to their country as Bharat, which was India’s indigenous name

However, banana tissues needed to be handled very carefully and despite receiving advise from Reliance Foundation, some farmers found it cumbersome and resisted its acceptance. The farmers also tended to plant bananas only between June and August, a mindset that Reliance Foundation found difficult to change. Since most of the planting took place within this short period it was not possible for Reliance to buy their entire production. About 30% of the farmers who bought tissues from Reliance Foundation sold bananas to Reliance, while the others sold in the open markets. Overall, it was Reliance’s intention that synergies available within the group should benefit the smallholder farmer with Reliance Life Sciences providing tissue cultured plants, Reliance Foundation team pitching in with farmer engagement and education programmes and Reliance Retail enabling the post harvest handling and market access functions. Building Partnerships In 2011, realizing the necessity of inputs from specialist companies in plant nutrition management, disease and pest control, Reliance Retail tied up with M/s Yara International, a Norwegian company manufacturing specialized crop specific fertilizers, BASF India which specialized in fungal and bacterial disease control and Swal Corporation for pest control. Demonstration plots were laid where the three companies carried out their recommended practices for the entire crop cycle at their own cost to demonstrate to the farmers the benefits of best practices. Such demonstration plots were laid in different sourcing locations in north, central, west and south India in order to establish suitability of recommended practices for all agro- climatic zones as well as to understand how such practices needed to be customized to suit different environments. Banana growers were able to notice the difference in growth of fruits in the demonstration plots after the first month and started enquiring for specialized fertilizers and sprays. This enabled the agro-input companies to sell their products and to establish their efficacy across different locations for banana crops. It would also result in substantial improvement in quality and yield of fruits which would be beneficial both for the growers as well as for Reliance. Reliance also engaged qualified agriculturists from the local population to work as Technical Facilitators in each of the locations. It was however not binding on any of the farmers who adopted Reliance recommended practices to sell to Reliance. Reliance Retail also benefitted from products developed by other companies within their group. For example, the Polymer division of Reliance Industries developed polypropylene material which could be used to make bags that would act as fruit cover. These bags had special properties to exchange gas and moisture and were expected to last for more than two years. Reliance planned to conduct trials with these bags and it was expected that the new bags would reduce cost of fruit bunch cover by 30%. Diversification Back in his office, Mr. Swamy was shuffling through a report prepared by his team about the potential of developing a similar supply chain for papayas. An summary of this report is given in Appendix 1. Among other companies, Adanis developed supply chain for apples, while the Mahindras developed a supply chain of grapes meant for export. However, they encountered problems because of the seasonal nature of the fruits. Their engagement with the farmers was only for 2-3 months of the year resulting in idle capacities for the rest of the year. There were similar problems for companies that intended to develop supply chain for mangoes, where even the pulping mills for export could not be kept engaged round the year. Papayas were non seasonal, had high market demand and had widespread availability – making them ideal candidates for developing an organized supply chain. However, unlike in other parts of the world, where the size of papaya is very standardized, papaya in India had very high variation, which could create some problems for organization of the supply chain.

Preliminary discussions ons with the farmers had yielded mixed results. Farmers were re apprehensive about papayas because of its susceptibility to virus attacks, resulting in some farmers losing their entire crop in successive years. Therefore, they were unwilling to take chances aagain. However, others were re hopeful because they thought that sourcing planting material from Reliance Life Sciences and follo following wing good farming practices would reduce chances of crop losses because of virus attacks. A furrowed brow on an otherwise cool cool-as-a-cucumber Mr. Swamy indicated that this issue needed to be given eper thought before his team could plunge into action. much deeper

Figure 1: Organization Structure of Banana Supply Chain Team at Reliance

Figure 2: Average Volume of Banana Sourced by Reliance Exhibits High Degree of Cyclicality

Figure 3: A Rising Trend in the Average Selling Price of Bananas (Prices Indexed)

Figure 4: Comparing Reliance’s Banana Value Chain with Traditional Banana Supply Chain (Indexed cost / price per Kilogram)

Note: 1. Data represents typical cases and is illustrative only 2. Retailer is buying higher and selling lower per kg in case of Reliance because of greater longevity of fruits and lesser wastage 3. ‘Wastage and Handling losses’ comprise moisture loss, ripening loss, de de-handing handing loss and other wastages 4. Source of ‘Additional margin for farmer’ comprise harvesting, loading, transportation, unloading unloadi charges and agent commission which the farmers do not have to bear in case of Reliance because either they are not applicable (e.g., agent commission) or borne by Relianc Reliance. 5. The Retailer’s selling price in Reliance Value Chain is applicable for Reliance Retail stores

Table 1: Reliance’s Sourcing Locations and City Processing Centres S.No

C Location

Ripening Capacity (MT)

Sourcing area

State

1

AHMEDABAD

20

Rajpipla, Asodhar, Osmanabad

Gujarat, Maharahstra

2

BANGLORE

8

Pulivendla, Trichy

Andhra Pradesh, Tamil Nadu

3

CHENNAI

20

Pulivendla, Theni

Andhra Pradesh, Tamil Nadu

4

DELHI(KUNDLI)

30

Jalgaon, Barwani, Asodhar, Gorakhpur

Maharashtra, Madhya Pradesh, Gujarat, Uttar Pradesh

5

HYDERABAD

12

Elluru, Pulivendla

Andhra Pradesh

6

INDORE

8.5

Barwani

Madhya Pradesh

7

JAIPUR

8.5

Jalgaon, Barwani, Asodhar

Maharashtra, Madhya Pradesh, Gujarat

8

MADURAI

15

Theni

Tamil Nadu

9

MUMBAI

30

Akluj, Osmanabad

Maharashtra

10

RANCHI

6

Calcutta, Elluru

West Bengal, Andhra Pradesh

11

VIJAYWADA

6

Pulivendla, Elluru

Andhra Pradesh

12

VIZAG

6

Pulivendla, Elluru

Andhra Pradesh

Appendix 1: Excerpts from the Report on Feasibility of Establishing a Papaya Value Chain India produced 2.6 million MT of papaya per annum, with AP, Karnataka, Maharashtra, Gujarat, MP, Chattisgarh, and Jharkand being the major production belts. Papaya was available throughout the year, had a lot of therapeutic value and was very popular among the consumers. Like any other tropical fruit, it was difficult to handle. Papaya was normally cultivated on smaller plots unlike banana which was cultivated on large acreage. Papaya was highly disease prone, mainly to viral attacks. At the fruiting stage the papaya grower contracted the entire field to middle men for fixed amount. Major markets for papaya were located in the north Indian states of J&K, Punjab, Haryana, Delhi, UP and Rajasthan. Traditionally, papaya was harvested when it was green. Green papaya being quite hard was easy to transport. It was ripened at the destination using calcium carbide. It took about three to seven days to ripen the full lot of papayas. About 25% of the fruit was lost in the process because of multiple handling and vulnerability of papayas to fungal infection. After studying the existing supply chain Reliance realized that in order to improve the quality of the fruit, it had to be harvested when it was mature and not when it was green. However, mature fruit was soft and could not be handled and packed loose. Therefore, they developed Styrofoam net packing in which the whole papaya could be inserted, which provided a cushion and prevented fruits from rubbing against one another. An Indian supplier was identified for Styrofoam nets and the farmers were advised to allow the fruit to mature to full extent on the tree. They also trained vendors on identifying fruits with right maturity, harvesting, fruit treatment, grading and packing. As in case of bananas, vendors were responsible for fruit procurement, engaging farm labour and transportation to Cs. At the C fruit was kept in ripening chamber and was ripened to full colour in two to three days. The new process had several benefits. Farmer got higher yield with fully matured fruit. Styrofoam packaging provided visibility of entire fruit to the customer unlike paper wraps that were used traditionally. It reduced fruit damage to less than 5%. The fruit has better shelf life at consumer end and customers appreciated the better taste that was a consequence of harvesting the fruit when it was mature. However, the new process had its own set of challenges. Styrofoam packaging added an extra cost of Rs. 1.20 per kg. Transportation cost increased by 30% because less fruits could be loaded per crate. The chances of papaya acquiring viral diseases at the farm were higher because the fruit was allowed to mature before harvesting. In winter, because of low night temperatures, the fruits took greater time to mature while its vegetative growth continued. This resulted in heavier fruits, about 2 kgs., which was often unacceptable to the retail customer, who typically favoured weights below 1.5 kg. Therefore, Reliance team (the same team that handled banana) started to work on two aspects. First, they needed to help farmers in controlling viral attacks and to promote new areas which were viral free. Second, in order to reduce cost of packaging they decided to import Styrofoam nets from China which was 10 to 15% cheaper. Reliance linked the farmers with agri-input companies who could assist growers by providing good planting material and controlling diseases. Farmers were advised on ways to control fruit size in winter. In all around 450 acres of papaya cultivation was being monitored in AP and supply chain was setup to cater to the Hyderabad market. Reliance had started similar work in other states and expected to cover all major locations by 2012.