ITC e-Choupal initiative

Table of Contents

Introduction .............................................................................................................3 Problems identified..................................................................................................3 Analysis ..................................................................................................................4 Product/service....................................................................................................4 Place/Distribution.................................................................................................6 People / Stakeholders involved...........................................................................8 Physical evidence .............................................................................................11 Promotion ..........................................................................................................11 Cost Benefit analysis of this new business model ...............................................12 Sustainability of the ITC eChoupal Model ............................................................13 Economic sustainability.....................................................................................13 Social sustainability...........................................................................................14 ..........................................................................................................................14 ..........................................................................................................................14 Institutional sustainability...................................................................................15 Alternatives............................................................................................................15 Conclusion ............................................................................................................16

Introduction India is largely an agrarian country that is home to 72% of the population and 32% of the workforce. ITC eChoupal gave the farmers an alternate channel bringing in efficiency and discipline in the agri-input and output supply chain. But this does bring in a lot of issues related with various aspects of the organization, the various stakeholders involved and the processes that govern these inter linkages and relations.

Problems identified ITC has to have a trade off perspective between economic profitability and sociocultural development of the Indian farmer. This does give rise to issue that are the earnings enough to sustain the operations of this business model. This model does give rise to savings (as mentioned in freight and procurements), but does this model make economic sense: o The bottom line is that economic sustainability going forward is the biggest problem we feel ITCs International Business Division (IBD) has this venture under its arm, can this venture be used as a deterrent to growth of ITCs other divisions, considering the fact that this division requires huge investments if important goals and objectives have to be achieved India is a vast country with different crop and weather patterns across the country o Can the soybean model be replicated across different parts of the country, considering the intricacies and players involved in different crops are different ITC eChoupal gives the company an access into the rural hinterland, but going forward what are the different entities of their revenue stream is the key issue o What are the criteria on which Mr. Sivakumar can evaluate the new business opportunities?

How can Mr. Sivakumar allocate ITCs IBD resources effectively, when one does talk of resources we would take into consideration physical, financial, human and intellectual aspects? ITCs eChoupal model has been an effective tool farmers can utilize during various stages of agri-input and output supply chain steps, but has this venture done enough to generate overall socio-economic upliftment. The issues of concern here are: o Has it generated enough employment? o Is it prepared to face competition from agri-retailing? o Going forward is ITCs IBD focused enough to wane off any risks?

How does ITCs eChoupal initiative fit into the overall strategy of the organization, this would mean does ITC believe eChoupal is a CSR initiative or a revenue generating business process?

Analysis We would like to analyze the ITC eChoupal initiative with respect to the following:

Product/service ITCs eChoupal initiative is taking the choupal one step further by using technology as an enabler and a backbone. We need to have a look at the hierarchy of needs of the farmer in question, when we talk of hierarchy of needs; these range across the agri-supply chain. Across the supply chain would mean that these would be needed to be provided to the farmer at different points of the supply chain

Sorting Agri Implements Hierarchy of Needs

Agri Inputs Crop Insurance

Storage

Information/Advice Credit Market Access

ITC eChoupal when started initially was emphasis on a particular commodity i.e. soybean. The needs of the farmer are taken care by providing inputs related to sowing, weather, and more crucially providing the right mechanisms for market access. Agri inputs like fertilizers; information in the form of weather, price discovery, market conditions (mandi prices/volume/international state of the crop) and this information culminates in the form of market access to the end farmer. The eChoupal in the villages acted as a bridge to fill the gap between the farmer and him getting the best price for his product/grain. ITC too had a business motive behind this; the spillover effect of this help mechanism was ITC would get a better price for their exports because the end result would be that the farmers output is of a better quality The services mentioned above are provided by ITC with the help of the village Sanchalak who holds a very good report with the farmer as well as ITC. Hence

this helps in having a better span of control and at the same time building the brand equity of ITC. ITC fulfills its goals and objectives with the help of this endeavour. These goals and objectives are listed in the form of statements given by its Chairman and Head of its IBD division Mr. Sivakumar.

Place/Distribution Need for ITC eChoupal initiative Performance of ITCs IBD business unit o Target of achieving 2000 crores by 2005 Limitations of the traditional Mandi system o Issues in the agri supply chain, farmers not having access to quality inputs like sowing seeds and fertilizers, and pesticides. Operations of the Mandi System

Advantages of the mandi System Price discovery in the form of an open auction Wide reach and acceptance among farmers Social protection in the form of it being government mandated The mandi system is burdened with inefficiency, like inefficient bagging and weighing. Some amount of produce gets spilled over in the mandi, sometimes deliberately. This is in the form of spills of 0.5% of the original produce bought to the mandi. This translates into an economic loss of Rs: 100/ 100 kg. The farmer did not have the resources to analyze price trends.

Limitations of the mandi System

Other inefficiencies exist, the overnight stays near the mandi, crops are displayed in open air courtyards, and the inspection process is unscientific and arbitrary. Commission agents (CAs) may collude in pricing, they do collude in establishing the practices of the trade that uniformly favor agents and exploit the farmers situation. The CA inflates the price to buyers; without passing the benefits to the farmer. This was clear by the fact that sometimes CA used to buy at a lower price from the farmer and sell it to ITC at a higher price. This results in a loss to both the farmer and the buyer i.e. ITC.

But these inefficiencies themselves gave rise to a solution or a problem Removing the non-value adding parts of the supply chain and making the supply chain of soybean (we have to keep in mind that the focus was on a single commodity) and making the supply chain competitive and efficient. 1. Re-engineered supply chain via ITC eChoupal

Disintermediation o This would give ITC two important aspects of the distribution, control and cost reductions

o But at the same time these would also give rise to initial costs in setting up the infrastructure and the costs associated in reaching the end farmer and bringing him into your fold. The reason being For a long time these farmers have been trading with the CA in the mandi and they know that an open auction mechanism is the best, hence to jump onto the bandwagon of ITC does involve hesitation. This hesitation comes with the underlying pillars of trust and credibility. Table 1 Transaction Costs Mandi eChoupal Farmer Processor Farmer Processor (ITC) (ITC) Transport Commission to Trolley Freight to hub Commission to Sanchalak Freight CA (reimbursed) Labour at Transport Costs Storage & Handling at Mandi Hub Handling Loss Handling at Cash disbursement costs (spills) Mandi to Samyojak If we have a look at the transaction costs; the new supply chain formulated by ITC eChoupal model does bring in cost reductions and is beneficial for the farmer as well as the processor. People / Stakeholders involved This aspect is very important when an organization is venturing into rural India; the reason being the farmer is at the center of most of the business models. Hence dealing with the attitudes and beliefs of these individuals and gaining their trust becomes critically important. This aspect is also important in the social sustainability of the business model. The important players in this business model are: Farmer o He is the main seller and also a prospect consumer of your products through the eChoupal initiative.

o He is also an important element in the communication mix of the organization. This is a type of service that is going to bring farmers in the fold through the word of mouth advertisement. o The farmer is important because if he experiences credible and trustworthy services, he is going to spread the word around; he would buy more and also avail other revenue generating services o The direct benefits in the form of savings in the form of logistics costs; better price discovery and more importantly value added services in the form of critical information. Sanchalak o He is the grassroot salesperson of your eChoupal business model. He is the liaison between the company and the farmer. o He also gains additional income and more importantly intangible benefits in the form of praise and gain in social standing among farmers when he helps his co-farmers in the same village o Intangible benefits in the form of computer skills and improvement in communication skills o The important step should be that as competition emerges in the rural retail scenario; he should be motivated enough to continue his association with ITC. o At the moment there does exist no checks about his unlawful usage of the eChoupal equipment; but process checks and control mechanisms have to be in place to control his actions. His implication in unlawful actions could shake the very backbone of this business model. o He is also an important element in the communication mix. His word would carry power and would attract more farmers in the fold. Samyojak o He earlier was the agent for ITCs procurements from the mandi. In the new business model there are opportunities where he can additional revenue in addition to his commission

o His role in the new setup is more of a consultant and at the same does command excellent clout since an agent is exposed to many farmers and other crops. o His expertise should be utilized in getting across crops and involving more farmers in the eChoupal setup. o He is also an important element in conveying market information (mandi prices/local happenings). These entities spoken of are your major players in the business model; hence the company perspective should keep them at the center or the apex of the business model. The processes if necessary for alteration have to be kept in mind keeping the people perspective in mind. Secondly if ITC looks at the model from a development perspective; this does play a role but then we need to have a look at both sides of the coin. When this is said it means balancing economic profitability and assuming social responsibility at the same time. Sanchalak margins-3% gross margins over 3 months Samyojak margins-4-5% margins over 3 months and over the entire year

The Sanchalaks and Samyojaks are important blocks in the supply chain ensuring delivery and pickup; but we need to keep in mind these are intermediaries afterall; hence if we look at the economic viability they do take away a considerable chunk of the operating margins of the company. Can the company do away with one of the intermediaries and the processes be re-worked.

Nature of leadership of Mr. Sivakumar Mr. Sivakumar in his endeavour to make the ITCs IBD unit contribute a significant percentage of revenues towards overall revenues of ITC (at the moment it is around 6%) has truly inspiring leadership. His ability to know the grassroot happenings and his ability to take risks because no one before has ventured into rural procurement in a big way. This

leadership will definitely work in favour of ITC going forward; because these people at the top decide your long term strategy.

Physical evidence The eChoupal set up in the various villages; gave the villagers a platform to come and avail the services with the help of the Sanchalak. The Sanchalaks home were one that they were used to earlier as the meeting place hence the familiarity and comfortability aspect with the environment was definitely there. The ITC hubs wherein the farmers had to take their produce for selling; had a tent provided and also a rest place; these were in stark contrast to the amenities provided at the mandi. 2. Problems and Additions It has to be looked at how ITC would contend with the power situation in the villages (inspite of having a UPS-the backup wouldnt more than 3-4 hours). Providing Gen-sets would entail further costs. Integrated facilities under one roof has to be bought into focus

Promotion There were no visible aspects of promotion in the traditional formats of mass media. But ITC eChoupal was based on trust and holistic development of the farmers involved. Hence it relied more on word of mouth or references. The farmer, Sanchalak and the Samyojak act as influencers; because in a rural setup these are the people whom the villagers trust and hence it becomes necessary for ITC to focus on these important individuals.

Cost Benefit analysis of this new business model1 We have done a cost benefit analysis of the new ITC eChoupal Business model. The key highlights are: We need to understand the revenue stream and the cash outflow of this business model, this does give us an idea of the economic sustainability of the new business model. o The cash inflow does occur in the form margins earned on the sale of agricultural inputs o The reorganization of the entire supply chain has bought benefits in the form of reduction in logistics costs; this is a large chunk of any costs involved while serving in the rural market o The outflow is in the form of Sanchalak and Samyojak margins and also the initial fixed costs involved in setting up of the eChoupals. According to our calculations (to recover the fixed costs in MP) this endeavour would take around 5-7 years (though they say around 3 years). These are based on our assumptions of procuring through the mandi and the eChoupal. We feel that the farmers would be very reluctant at first to switch over to this new setup. Cautions: This revenue stream is only for a period of June Sept. The entire eChoupal setup is vacant for the remainder of the season; other than a relation building exercise in which farmers access value added services of the eChoupal o Alternate revenue streams have to be added to the eChoupal infrastructure Crops other than soybean have to be added to the portfolio; this would entail in setting up additional eChoupals across the country (their pilot projects) with other crops; this would again entail costs and the break even may shift further Crop dynamics in terms of processes and people involved are so different all over the country; they could do it with soybean because they were already procuring in
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Appendix attached showing the details of the working and calculations

huge quantities from mandis prior to this model. Hence they knew the system, the CAs, farmers. But this may not be the case elsewhere. Secondly farmers as consumers have to be focused upon this can be in the form of continuous revenue stream throughout the year and employment generation opportunities should be the key. Hence the focus during the remainder of the year should be on Other Income.

Sustainability of the ITC eChoupal Model We believe that sustainability would be achieved when economic, social and institutional sustainability is achieved. We would like to examine the sustainability of the eChoupal business model

Economic sustainability This is achieved when a given level of expenditure can be maintained over time. o The critical element here is this model/venture profitable and does your organization have the financial resources to sustain the initial years of not being able to breakeven. o As discussed earlier new revenue streams have to be added. Mr. Sivakumar has to leverage the reach of the eChoupal model to act as an efficient marketing channel for ITCs own products or other companies products o The options in mind have to be evaluated keeping in mind the resources and the capabilities that it has or can be acquired: The options mentioned are mostly agri-inputs in the form of seeds and fertilizers. There would be issues related to channel conflicts with the traditional distribution channels. This could result in undercutting among the various players. Hence it would be detrimental in the long run.

Credit and Insurance are moving the farmer up the value chain in terms his needs. This does hold immense potential as there is a huge potential in terms of tapping the savings of the rural consumers. The insurance density is very low and introduction of new products in the form of weather insurance could definitely generate revenue in the form of commissions and brokerages. There would be issues in the form of credit risks and hence there have to be mechanisms by which the receivables could be routed through another organization (like FMCG/ consumer durables).

Social sustainability This is achieved when social exclusion is minimised and social equity maximized. o ITCs eChoupal has done remarkably well do include the farmers at every step of the supply chain; this has been done by providing them information and more importantly market access. This has reduced exploitation by the traditional intermediaries and bought about their social upliftment. o We believe every new project or a business model has to have performance metrics in mind; we believe the success of the eChoupal at the moment more than monetary is The ability to get farmers in its fold This is the biggest indicator of social sustainability and this venture we believe is not only a combination of volume game but also one of margins. The reason being you are selling a differentiated service accompanying a very generic commodity (food grains and volatile). Hence going ahead this has to be kept in mind.

Institutional sustainability This is achieved when prevailing structures and processes have the capacity to continue to perform their functions over the long term. o At the moment there are existing structures and processes in place; but going ahead it is important to note that scalability would give rise to issues. The model has worked very well with the soybean crop; but considering that ITC would have limited exposure to other regions and their vegetation. These structures and processes would have to be modified or altered to suit local requirements. o A very good example of institutional sustainability was the incorporation of the CA into the business model. o We feel going forward ITC has to keep the following points in mind: Well-defined processes and rules in place Participatory policy formulation and decision making processes Effective organisational structure that creates a framework within which the livelihoods of the stakeholders can be continuously improved.

Alternatives

The EChoupal Roadmap As we have mentioned earlier, we believe this model is sustainable if economic sustainability is achieved with the help of both value and volume. Hence it is necessary to scale the number of outlets; get into various states with diverse crops. Organic growth with an increase in the number of outlets. These outlets should have revenue streams sustainable over the entire year. Some methodologies are

o ITC has to leverage its eChoupal infrastructure to sell third-party products, providing rural market research services, and in the social sector, to provide services like health advisories and enable e-governance. o ITC eChoupal should provide best of the class retailing and shopping experiences to the rural consumers by building retail shopping complexes that provide integrated facilities under one roof. There exists potential to brand these outlets providing all the facilities under one roof. o We believe the ITC hubs have tremendous potential in the form of rural health care. o ITC eChoupal has the potential of delivering quality education services to the rural areas leveraging the physical and digital infrastructure developed for commodities sourcing and consumer retail services. o Scaling up of the eChoupal initiative by offering multiple services under one roof for the rural population. This includes a marketing platform, storefront for agri-equipment, personal consumption products, health centre and insurance counters. Technology platforms such as the mobile reach must be harnessed to improve services and scale up operations. Look out for external funding in the form of FDI in back end operations. This will infuse much needed finance helping it scale in its operations. We believe finance should not be a problem as ITC as a parent company does have the power to scale further. Conclusion India holds tremendous potential in the rural retailing front. Providing market access to farmers and information is just one of the means of generating revenue. ITCs eChoupal initiative we can say is more of a CSR initiative as probably we all know the gestation period to break even is tremendous. But looking at the forecasted figures of Mr. Sivakumar for his IBD unit; achieving economic profitability is also the key. The competition would also be more potent in the years to come; but then we feel that the ITC eChoupal initiative is sustainable and scalable and achieve overall economic development

of the farmers in the rural countryside. But going forward ITCs focus should be on leveraging the strength of its rural reach to cross sell other products thereby achieving volumes and adding value to the stakeholders involved.