How your plate is being innovated and what you don't see!
Caution: I have not been able to capture agri-supply chain's complexity in its entirety :')
This blog would have been impossible without the discussions I have had with Keshav and Rohit at BII and numerous founders in the course of my work over the last couple of months. It is a long blog and I am aware that it might be repetitive in places. I hope to improve on it and be more succinct as I write more.
Most of the food that we eat has perhaps not changed fundamentally for generations. Your grandmother/father probably relish the same dal (pulse) just as much as you do and so did your great grandmother/father! However, how that food reaches our plate is being disrupted and re-innovated at a speed which most of us don't appreciate. Having spent the last few days speaking to numerous agri entrepreneurs, I am spell bound by their zeal to sprinkle some sanity in the hullabaloo your food comes through. And, I hope that by the end of this blog you'll also appreciate the disruptors and creators just as much as I do.
But first, what is the 'Hullabaloo' all about?
Continue reading :)
High fragmentation, low marketable surplus
There are ~150 million farmers in India. Out of these, 85% of farmers own <2 hectares of land. India has >130 crops sown across ~140mn hectares contributing ~15% to GVA*. That's a lot of crops and a lot of farmers with very little area under cultivation per farmer.
Regional and seasonal variations leading to numerous varieties for each crop (demand-supply matching is of immense importance)
At the risk of over-simplification, let's follow the variations in one vegetable - potato. There are ~14 varieties produced across 25 states (6 states constitute ~90% of output) . Consumer preferences of size and flavour change across districts within a 200 km radius. Likewise, one variety of potato is suitable for processing while some other is suitable for table (cooking) purposes.
A truck can accommodate 1-25 tonnes of produce, hence somebody has to aggregate farmers' produce to make economical sense. However, not all farmers in a village would produce the same quality (in fact quality varies within a farm as well), hence someone needs to sort it, grade it, match each grade's lot to the right demand (processor needs large potato while homes need medium size potato). Hence now, at some location (this point is the local mandi/FPO in the present system), produce of multiple villages has to be sorted, graded and aggregated in order for full utilization of long distance transport (truck in this case).
But wait, there can be multiple grades (from or multiple states) going to one state which is 100s of KMs away from the supply point. Hence, someone at the demand point has to be able to distribute this to different sub-regions.
Couldn't follow this? Exactly my point, hullabaloo. And, note, this is just one vegetable.
Inadequate access of working capital
Most of the rural economy is working capital starved. Farmers require upfront payment as they plough back (another absolutely intentional pun) their earnings for the next cropping cycle. Hence, what could have been done by 3 intermediaries results in 4-5 intermediaries because you need some big folks at multiple legs to take take the working capital risk.
It is because of this hullabaloo that intermediaries are critical in India's agri supply chain.
Now that I have laid out what in my opinion makes agri-output supply chain so complex, allow me to summarize the value chain* 🙂
Chart 1: agri-output supply chain - a general framework
*This is a general framework - Agri-tech players, big corporates, modern retail and online aggregators all transact (procure from and sell to) with mandis. Plotting that on the chart would have made it too complex to read and hence decided to show only the unique leg that runs from large farmers. Furthermore, I classify supply chains in the following 5 categories with each supply chain having a different nuance (in all honesty, I believe that even this classification is an over simplification but it has served me well for identifying value proposition and problem statements till now). The 5 categories along with their nuances are given below:
Seasonal fruits and vegetables - higher contribution of large farmers, absence of govt. procurement, direct procurement by corporates, absence of supply side mandi and high role of importers (missing in the above diagram)
Potato, Onion, Tomato (POT) - higher contribution of small & medium farmers
Cereals and oilseeds - relatively higher procurement by government agencies for PDS, higher involvement of processors, driven by MSP
Fibres - Cotton, Jute - high contribution of FPO/cooperatives, very low contribution of local aggregators and commission agents
Spices - high involvement of cottage industries for processing (processors)
And allow me to summarize the sheer size of the industry as well before we move on to how tech startups are rewriting history😎
Gross value of agri-output in India is in the range of US$250-270b*
*(2017-18 output at 2011-12 prices adjusted for inflation)
Chart 2: Category-wise split of agri-output market
In numbers: stakeholders in agri output value chain
Table 1: number of stakeholders in the agri-output value chain
Now that I have explained what makes agri-supply chain so complex, I'll move on to map the agritech market landscape and finally explain how different players are solving for this and what models I believe will stand out.
Post-harvest market landscape
*Illustrative and not complete range of startups
Chart 3: Agri-output startups landscape
How are different people solving for this?
Solution #1:The disintermediation revolution
A lot of young startups are trying to disintermediate the supply chain by taking over all roles of traditional intermediaries (working capital, storage, risk transfer). Startups such as Waycool, Otipy, Vegrow and the like are truly the disruptors. However, stepping into shoes of centuries old intermediaries is no cake walk (pun-intended).
Challenges of disintermediating:
Matching supply and demand at all times - inconsistent quality across season, regions and consumer preferences makes it difficult to match demand and supply. At times, players might have to procure from sources other than farmers (mandis and aggregators) which reduces margins.
Controlling wastage - ~30% wastage in storage and transit. Aggregators have the leverage to pass part of the loss to the farmer/consumer and bear part of it on their own. New age players do not have such a leverage and hence need intensively control it. Lower the better but in my opinion <3% is a healthy number.
Being operationally efficient - traditional intermediary businesses are family run (younger brother is the CFO, elder brother is the COO and sons are VPs*) businesses with ancestral shops. Dealing with transporters, mandi mafia, govt. etc. can all require a lot of, well, let's just say industriousness. Hence, it is difficult for new age businesses to operate at similar efficiency as the traditional players. After all, disintermediation in agri is not a pure-tech play!
Scalability - This is linked to (3.). Disintermediation requires feet on ground (someone has to check for produce quality, grade it, load it and so on). Hence, there is a risk that the business might stay constrained in a limited area or limited crops (limited crops can be good, more on this later). While if the business makes money, staying constrained is an area is not bad, it's the venture capitalist in me speaking (we think if it can be a multi-billion dollar business) that sees it as a challenge.
*gender disparity is high - did not come across any female participant in traditional intermediary businesses
But what makes it attractive?
Truly empowering farmers - new age startups typically offer higher margins to farmers (~5% higher than traditional intermediaries). In my opinion, new age startups will play a key role in doubling farmers income by 2025. Farmers and startups are interdependent on each other for each other's progress!
Higher margin - There is ~25% margin in the supply chain between the producer and the consumer which is up for grabs for new age players. This is of course a lot higher than B2B trading businesses (traditional) where margin for each player in the value chain typically ranges between 5-10%
Control over quality - I have realized that consumers in India and elsewhere in the (developed and developing world) are willing to pay a premium for the right positioning. Being in full control of the supply chain offers you to the opportunity to build the right positioning and get a larger share of the consumer's wallet. Consistent quality and being true to the positioning is the key to retention and faster top-line growth.
Knowing all stakeholder (B2C) - Disintermediating and owning the supply chain end to end gives you access to data on all your stakeholders (farmers, consumers, transporters and anyone you engage with) which is a gold mine for any tech company. This provides an unparalleled opportunity to build a pseudo-platform. Dehaat for example already has businesses on the producer side (farmer) and consumer side (retailer in Dehaat's case). Knowing stakeholders enables you to launch the products that stakeholders need (know your customers better than they know themselves) which enables even higher wallet share, user retention and customer love. Licious for example already offers not just raw, fresh meat but also spreads, salamis etc., all based on user data and feedback.
Solution #2:Enablement - an anti-thesis
Some startups are digitizing traditional intermediaries and hence enabling them with technology to do their business better. Most of the enabler plays offer B2B trading platforms and marketplaces (connecting farmer to processors/corporates; farmer to aggregators; small aggregators to large aggregators). These platforms are are able to broaden traders' archaic trading networks, prevent distress selling, offer transparency and provide convenience (for credit, bookkeeping and logistics). This space is witnessing heightened activity from startups such as Bijak, Agribazaaar, Agri10x, Onato and numerous others are coming up.
Challenges of enablement business:
Behavioural change: trader networks are decades old and are built on trust with business being done over telephone, goods being sent hundreds of miles away without any clear visibility on payments or quality and record is kept on paper bills. Hence, conducting business via an app with new traders is a behavioural change which is not easily induced. If enablement startups fail to induce this change, such a platform will not be able to even takeoff. One also has to ensure that bulk of the activity is happening on the tech platform. If players leave the system to complete the transaction, it can lead to 2 outcomes - participants can start doing the business online or some may engage in deceitful activities thereby creating lack of trust- and lead to the platform failing.
Building the marketplace: Since agri supply chains are so complex (refer to blog 1), it is extremely difficult to create liquidity on the platform. Building a playbook across multiple crops in this business is extremely difficult because of different nuances. However once cracked, this liquidity can serve as a key defence (see below for more on this).
Monetization: B2B trading platforms are a low margin business (~10% gross margin) and the take rate in marketplaces can be even lower (~1%-5%). Hence, the platform needs to have multi-billion dollar GMV to have a sizeable revenue.
Building a platform: Having a platform-building a marketplace for multiple legs of supply chain, and offer value added services- can increase the blended take rate. However, building this platform is again a big execution risk because of difficulty in prioritization.
But what makes it attractive?
Market size: Refer to chart1- I believe that B2B marketplaces will be a winner takes most market where there will be a pan-India leader. With <5% of the overall agri market, the leader can be a multi-billion dollar business creating immense value for all shareholders.
Fragmentation in the market: There are ~5million B2B traders in India. As long as bulk of the suppliers and buyers on the platform are MSMEs (which should be the case as it is reflective of the market), both sides of the market place are highly fragmented. This means that enabling discovery of new business partners, ensuring better price discovery and building a layer of trust is a huge value proposition in itself.
High margins (post monetization): If the company succeeds in monetization, the revenue has high margin (>70% gross margin) because marketplaces and trading platforms relatively have lower on ground operations vis-à-vis full stack, disintermediation plays.
Defensibility: Once there is enough liquidity on the platform, it is highly defensible because of strong network effects. Stakeholder's engagement (retention) and wallet share growth (~60% in steady state, higher the better) will reflect a defensible business being created.
Platform play: Refer to point 4 for what a platform will look like. However, since it is a winner take most market in my opinion, it'll be the leader who will build the platform loaded with value added services in parallel.
Global play: India accounts for ~3% of global agri-exports. Since a B2B platform will have traders as well as farmers, it can also digitize traders engaged in exporting agri-produce and take a pie of this rapidly growing market. In fact, full stack players with high quality produce can use such marketplace for international trade.
Once ancillary services are now becoming core
I believe that agri-fintech, warehousing, quality assessment and traceability do not get the limelight they deserve. Multiple startups such as Arya collateral, Ergos, Agnext etc. are making this space coming of the age and I'll talk more about it in subsequent blog posts!
What do I believe in?
Big businesses can be built by disintermediating the supply chain for 4-5 high value crops alone
Fruits such as mangos, pomegranates etc. are high value crops with each supply chain being >US$2b in value alone. Hence, if a new age player can enable the complete supply chain (farmer to corporate, farmer to producer and farmer to consumer) with tech, reducing wastage and offering better prices for 4-5 crops only, it can be a large business in itself. Vegrow is working on a similar concept and is a very interesting company in this space.
However, I believe that it won't be possible to build a big business by disintermediating the market for numerous crops with unrelated supply chains and low value crops because of the unique challenges that India faces which have been discussed in earlier sections.
Big businesses can be built by establishing a clear market positioning in the D2C vertical alone
Consumers in tier-I cities in India are becoming increasingly conscious about what they are buying and who they are buying from. Hence, if startups can clearly identify the segment they want to serve, consumers are willing to pay a premium for fulfilled brand promise and consistency both of which are absent in the traditional market and offerings of online dry grocery players.
Some startups which are building along a similar line:
B2B marketplaces are interesting if they enable trading of multiple crops pan-India
While, top of the pyramid in tier I and tier II cities at best will be willing to pay a premium for positioning, I believe that ~80-90% of Indian agri-markets will continue to be run by intermediaries. While some intermediaries may become redundant as new-age fin-techs, agri-warehousing and agri-logistics companies emerge, at least 2-3 level of intermediaries will still exist in most crop supply chains. Hence, pan-India, B2B marketplaces will play a key role in bringing this 80%-90% of the market on line and in fact may end up offering some of these value added services in partnership with other players, thereby playing a key role in rooting out redundant intermediaries in agri-supply chains. However, as I mentioned earlier, since this is a winner take most market, on who will ultimately win can be challenging today. Bijak, Agribazaar and Onato are some interesting companies which have made tremendous early progress in this space.
In conclusion,
One thing is for sure, we are in the middle of an agri-supply chain revolution and how your dinner reaches your plate will change dramatically in the next 5-10 years. Hopefully, farmers and small traders will also get the benefit of the long due tech intervention in agri-output, and agri upstarts of the 2020s will be responsible for a lot of that!
Sources:
https://www.agroworldindia.com/fpo.php
https://www.investindia.gov.in/sector/food-processing#:~:text=The food processing industry engages,%2C beverages%2C and dairy products.
http://mospi.nic.in/sites/default/files/publication_reports/KI_70_33_19dec14.pdf
Conversations with industry experts and startup founders
Preety interesting take on Agritech business. Thanks for writing it :)
Detailed