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Land Of Plenty

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 The largest cash-and-carry experiment in India will take place over the next five years in a state that offers no concessions in the form of land or electricity. What, then, makes Punjab so attractive to back-end operators? Take a look at the line-up: Metro Cash and Carry (MCC) has signed a Rs 900-crore MoU with the Punjab government to set up six stores in the state in five years and work with 15,000 farmers. Bharti-Walmart has spent Rs 32 crore on its first store in Amritsar and plans to spend over Rs 500 crore to open 15 others in north India, of which eight might come up in Punjab. 

 
While France-based Carrefour had no plans for Punjab for now, the world’s second-largest retail group in terms of revenue, UK-based Tesco is considering Punjab for its Rs 300-crore investment plans in order to leverage easy 
access to farmers. It could mean there could be two Tesco stores in the state by next year.
 
There are four key reasons for Punjab’s newfound popularity: a favourable political climate, farm-to-fork connectivity, agrarian wealth that companies can translate into profitable global private label strategies, and an eager, NRI-driven consumer base.
 
  The Road To Punjab
2003
Cash-and-carry opens up, as 100 per cent FDI investment is allowed in wholesale trade.
2003
German firm Metro opens first cash-and-carry in Bangalore. Works with 46,000 farmers.
2007 
Bharti ties up with Walmart for back-end joint venture; drops Maharashtra and Karnataka to  choose Punjab. Metro’s licence to work directly with farmers is not renewed in Karnataka owing to political turmoil in the state.
2008 
Metro sets up shop in Mumbai, Hyderabad and Kolkata. Plans to open four stores in Kolkata, but runs into trouble over agricultural produce marketing committee licence. Metro signs Rs 900-crore deal with Punjab. 
2009
Bharti Walmart opens two cash-and-carry outlets in Punjab. Metro also moves ahead in Punjab, while awaiting licence in Karnataka.
Punjab’s gain has come from losses elsewhere. For instance, MCC’s Rs 400-crore investment in Karnataka and Rs 350 crore in Andhra Pradesh, Maharashtra and West Bengal have seen mired results. Its agricultural produce marketing committee (APMC) licences have not been renewed on time in any of these states owing to red tape and other obstructions. A dejected MCC found Punjab’s helpful political environment and a promise of a level playing field very attractive.
 
The state’s administration has plenty of reasons for placing agriculture on top of its priority list, unlike, say, Karnataka that promotes IT. Agriculture forms 26 per cent of the state’s revenue and 90 per cent of its population is directly involved in it. It suits the present regime in Punjab, to break the infamous nexus between officials of the administration and middlemen (arthiya), bringing benefits to farmers (small farmers are the pocket borough of the ruling Shiromani Akali Dal (Badal) party in Punjab). 
 
Unlike other states, Punjab’s proposed amendment to the APMC Act for agricultural reforms is in line with the Centre’s recommendations. At present, the Act in most states mandates that companies have to procure produce from mandis. Punjab, however, allows not just direct access to farmers, but also permits contract farming for a longer period. Food and agri-products are major constituents of the cash-and-carry business.
 
But first, the economics. Punjab’s agrarian fecundity makes available high-quality produce at local wholesale prices. “We have tied up with 65 farmers in Punjab and 15 per cent of the farm produce in our supply chain is directly sourced from these farmers,” says Raj Jain, managing director of Bharti Walmart. “We want to work with farmers, develop local suppliers and create local beneficiaries along the supply chain,” says Jain. The company will go for expansion only if the Punjab experiment is successful.
 
Equal Opportunity
The Punjab government wants to create a level playing field in the business of agri-sourcing by amending the APMC Act, which will allow private companies to work directly with farmers for 10 years instead of the present 30 months.
 
Moreover, Punjab is a market ready for malls. Other than a few small and mid-size malls in Ludhiana and Jalandhar, there are no large malls in the state. The state has a large population, including a huge base of non-resident returnees with exposure to retailing in western countries that understands the dynamics of large malls and offers a receptive clientele.
 
Harjinder Kumar, 39, is one of them. He runs a catering outfit in Gurdaspur, roughly 50 km from Bharti-Walmart’s lone Best Price store near Amritsar, which already has 18,000 consumers. Kumar started his business after returning from Sydney six years ago. “When I heard about a cash-and-carry store coming up here, I knew I would be saving a lot,” he says. “I have saved nearly Rs 35,000 on every trip to this store. I have seen such stores in Sydney. There, too, it was part of our daily life.” Informal data from the government show that about 45 per cent families in the state have had at least one member abroad in the past 10 years (Punjab’s per-capita income is Rs 19,500 against the national average of Rs 6,929).
 
There are other advantages, too. “Punjab’s cities are well-connected to towns and villages, and there is good supply of power,” says an executive at Metro, Bangalore. “This is the key for the success of wholesale retail.”
 
The Politics Of Business
Till date, the link between agrarian Punjab and corporate retail was very limited; Mahindra Shubhlabh’s aggregation of 72,000 acres of farm land four years ago being a rare example. And now, chief minister Parkash Singh Badal and team are revisiting the subject of farmers and large retail.
 
The cash-and-carry model is expected to be beneficial to the state treasury. “Earlier, a nexus between traders and officials made tax evasion possible,” says Manpreet Badal, Punjab’s finance minister. “With these wholesalers coming in, transparency in tax collection would be valuable for the state.” Further, in small towns, cash-and-carries will bring access to new products and create jobs.
 
Punjab’s traditional rich farmers provide distinct benefits. The state’s contribution to the national rice production is 9-12 per cent, which is 1.5 per cent of the global rice production. Both rice and wheat could be sold abroad by the retail companies under their private label — cash-and-carry firms are particularly interested to develop private, in-house labels, which they can sell abroad at higher mark-ups.
 
Currently, Walmart supplies its private label to Bharti’s ‘Everyday’ front-end retail stores in Delhi. Walmart’s private label is already selling items such as honey, flour, pickles and spices as ‘Great Value’ in these stores. It sources honey and pickles directly from farmers in Punjab. “The volumes of the cash-and-carry business are driven by hotels, restaurants and caterers,” says Ajay d’Souza, head of Crisil Research. “Sourcing food is a key component of their business.”
 
Walmart and Metro are working with suppliers on packaging, stock control, inventory processes and management. The key to all this is the global private label strategy that will emerge from their Punjab operations. “As we develop suppliers locally, we would like to turn some of them into exporters,” says Jain.
 
Cautious Optimism
In spite of all this optimism, the global wholesalers and retailers should not doff their hat to the Punjab government just yet. Already, six of Walmart’s 15 ‘Easy Day’ stores with Bharti have shut shop as buyers continued to prefer kirana stores — opening so many stores simultaneously was, perhaps, too optimistic.
 
In fact, Walmart might find it easier to work with kiranas in Punjab than a front-end retail chain as direct wholesaler margins are better. Cash-and-carry firms discount their products and sell in bulk. “The Punjab experiment could be important to retail policy-making,” says an analyst. “Its success will determine whether other Indian states still want to be under the influence of middlemen.”
 
 
THE EXPERIMENT: The success of cashand-carry stores in Punjab will determine the very survival of the business model in the country
Like other chief ministers, Badal wants to keep his farmers away from middlemen. He feels consumers (read kirana stores) could procure produce at prices cheaper than those involving middlemen. This approach changes the game in favour of retailers desperate to touch base with farmers and get a grip on India’s supply chain. Ironically, a decade ago, their prospects in Karnataka were akin to what Punjab holds out now. In Karnataka, when in 2008 the then government exited office, enterprises from software companies to retailers felt the pinch of a new government that had other business interests. In Punjab too, Mahindra Shubhlabh’s 72,000 acres disappeared when the government changed in the state.
 
The big cash-and-carry stores are looking at a sustainable business model. In Punjab, they want private labels, access to farmers, and an experiment that will define the second phase of their India strategy. Metro’s first phase of stores in Bangalore has really not taken off in a big way, but it can sustain losses for long and, in the past three years, it has expanded to Kolkata, Mumbai and, recently, Hyderabad. But Punjab may have six Metro and six Walmart stores in the next five years. Both companies say that if their operations in Punjab fail, they will not build business in India. It seems the survival of the cash-and-carry model in India is being put to a test. Will this model crash or carry? Watch with cautious optimism.
 
bweditor at abp dot in
(This story was published in Businessworld Issue Dated 18-01-2010)