ITC’s Rural Symphony

 

Charles Assisi & Indrajit Gupta

HARDOI in western Uttar Pradesh is a little over 90 km from Lucknow, the state capital. It’s the kind of place you routinely see in Hindi films; mile upon mile of lonely stretches punctuated by villages steeped in poverty, an odd farmer thudding around on a motor cycle, gunman in tow, and wheat crops for as far as the eye can see. There’s nothing here to indicate that things are any different from what they have been for centuries. But appearances are deceptive. A few months ago, ITC’s International Business Division (IBD) trained its sights on Hardoi and the wheat it grows. Teams of ITC executives, trained in rural marketing, moved in to roll out Project Symphony, which chairman Yogesh C. Deveshwar reckons has the potential to transform the face of his company.

The folks at the hamlet of Arori, 12 km from the nearest highway, aren’t cued into the subtleties of Project Symphony. But that does not stop them from being a delighted lot. Thanks to the project, they now go to what ITC calls an e-choupal, where they use computers and the Internet to conduct their business. Life is easier for them now.

That’s good news for ITC. Because if ITC manages to capture the value of this wheat over the next couple of months through the e-choupals, it’ll be a step closer to its dream of being India’s largest integrated agri-produce processor which services 100,000 villages covering 10 million farmers by 2007. But ITC has a more audacious gameplan. It wants to create what Deveshwar calls "an information superhighway to connect the rural economy". That means using the e-choupals as a single point of contact between farmers and a range of suppliers of agri-inputs and consumer goods- Monsanto, Eicher, Nagarjuna Fertilizers, et al- that are testing the network.

So what does ITC hope to achieve with its e-choupals? And how is it different from other projects initiated around the same time by companies like Mahindra & Mahindra, Rallis, Tata Chemicals and EID Parry? In September 2001, we first saw the modelled being rolled out across soya farms in Dewas near Indore. The idea was to gain control over the highly competitive soyabean market in Madhya Pradesh, home to traditional soya giants like the Rs 2,400-crore Ruchi Industries that had a virtual stranglehold on the market. Since then, other ventures have struggled to scale up ITC’s soya choupals, on the other hand, are now all over MP and cater to more than 6,000 villages. Last year, the company traded soyabean worth Rs 160 crore. This season alone, it has traded more soya than it did all of last year. Even competitors acknowledge the achievement. Says Kairas Vakharia, CEO, Mahindra Shubh Labh: "They (ITC) have done a remarkable job."

The numbers may sound small in the larger scheme of things, but the subtleties of ITC’s e-choupal initiatives are already being picked out by management gurus as evidence of how corporations can smartly fill institutional voids in emerging markets using the power of information technology. In a recent article published in CIO, Mohanbir Sawhney of the Kellogg School of Management says: "ITC’s long-term vision for e-choupals is grand. But the company started with a modest and focused value proposition- helping farmers get a better price for their crops. This phased approach allows ITC to gain credibility through early successes and learn from its mistakes." Harvard Business School professor Krishna Palepu shares Sawhney’s sentiments: "It is a brilliant idea. If this experiment works, you will have for the first time, enough communication capacity to connect with a market segment that is currently undeserved, but clearly has the purchasing power. On this backbone, one can imagine other FMCG services and products being offered. But like everything else, it depends on execution." For students at the Kellogg and Harvard B-schools, the model is a case study.

At ITC’s headquarters in Kolkata, Deveshwar is well aware that the company is on to something big. Although specific numbers are hard to come by at this stage, ITC reckons that over the next three years, this project could add over Rs 100 crore to ITC’s bottomline on investments of Rs 30 crore so far.

But now, much of that gameplan hinges on the Hardoi experiment. It’s an uphill task. In fact, driving through Hardoi is like travelling in a time machine to the wheat belts of the American mid-west in the early 1900s. Just replace Hardoi’s gun-toting farmer with a rancher on horseback, gun slung over his shoulder. Back then, the problems were pretty much the same as farmers in Hardoi now live with- small regional markets and no standard grading systems for the wheat. Farmers, even if big, were exploited by traders, who often brought the wheat at low prices, claiming it was of poor quality or that there was weak demand. Storage, handling and transport facilities were limited. So intermediaries like traders were needed. Consequently, intermediary margins were high, accurate market signals non-existent, wastage rampant, and processing yields low.

Things are different in the American mid-west today. Its farmers produce 36 bushels of wheat per acre, one of the highest yields in the world, and its millers achieve flour extraction levels of 75%. Average waste levels of 2% are among the lowest in the world, and well ahead of the 8-11% in India. Wheat farmers in the US now get 92% of the delivered mill price as opposed to less than 70% that Indian farmers now take home. The transformation in America happened for one simple reason- the emergence of two large, integrated grain processors, Cargill and Archer Daniel Midland (ADM). They ensured a supply of high-yielding seeds, facilitated rural credit, set up infrastructure to store and handle grain, and pushed milling technology to improve extraction rates. That is why in the American mid-west, farmers now drive sleek cars on tarmac as smooth as silk. They continue to carry guns, but that’s a different story.

The moot point is, can ITC do a Cargill? Perhaps not. "Building a vertically-integrated chain like Cargill will take huge resources, which would be impossible to sustain, says S. Sivakumar, CEO of ITC’s International Business Division (IBD). So what does ITC do? Simple. It builds an asset-light model. To figure how it works, you have to first understand how the model was developed and, more importantly, why it worked for soya.

Mission Impossible

To start with, think of a village square- the kind of place we call choupal in north India. Here people gather to smoke the hookah, watch TV, exchange gossip, laugh a while, talk work and the weather, before they finally head home. Quaint but not worth writing home about. Unless you enable it with a PC, provide access to the Internet, call it an e-choupal, and build a business model around it in a uniquely Indian way. Conventionally, a typical farmer sold his produce to a small trader called the kaccha adat. This man, in turn, sold it to a larger trader called the pakka adat. From here, the produce found its way to the local mandi (market), where a large trader came into the picture. Brokers touched base with these large traders and got the soya sold to a processor like ITC. Going through a loop as this meant procurement costs were as high as Rs 700 per tonne of soya. Add losses in transit and taxes and the numbers go up even further.

Conventional wisdom demanded ITC build infrastructure to perform the functions of these intermediaries. At this point, ITC’s first fundamental insight kicked in. "You can’t lop off all intermediaries. Each of them performs a valuable function," says Sivakumar. For instance, one intermediary aggregates the produce, another one takes acre of logistics, there’s somebody else who provides transportation. It is costlier doing it yourself.

Instead, he reckoned that disintermediation had to take place at the level of information flows. What it means is that because the farmer lacked the resources to take his wheat to the mandi, he had to rely on information provided by others in the value chain and, consequently, accept the prices offered. At the end of all this, the farmer ended up a loser.

"The intermediary has information and, thus, extracts a greater margin. So we said, if you bring this information to the farmer and go-betweens where they are adding value directly, you have a business model."

To do that, ITC first leased three soya processing and collection centres. These centres were created in the mid-90s and had, since then, gone under. Then it started scouting villages around these centres for lead farmers (sanchalaks) to head each choupal. The computer was placed at the sanchalak’s house and he was trained to use it. This way, ITC did not have to invest in kiosks. Farmers accepted the concept because the co-ordination was done by one of them. But the sanchalak had to be chosen very carefully. He couldn’t be too big a farmer because then his interest in making the choupal work would be low. And if he were a small farmer, the rest of his community wouldn’t accept him. Having put them in place, ITC started to pump information on daily mandi prices through the Internet into the sanchalak’s homes. It also supplied them with information on best practices in farming and weather forecasts. Farmers would gather as they did at choupals, check the prices and head out to the collection centres to sell their produce. The idea of heading out to the collection centres struck the right kind of chords among the farming community. Here, because systems were efficient, the transactions are completed in a few hours rather than days as they used to. So they came to the collection centres in droves. The sanchalaks, for their part in directing farmers to these collection centres, were paid 0.5% for each tonne of soyabean that originated from their choupal.

Then there were commission agents at mandis to be dealt with. Traditionally, these were the people who controlled information on prices and, hence, were quite powerful. The model knocked the wind out of their sails and they were understandably upset. "We were clear from the outset that intermediaries had a role to play and that e-biz couldn’t disintermediate them," says Sivakumar. So a new role was envisaged for them: they would be samyojaks, or co-ordinators. Not only would they use their ties in villages to nominate sanchalaks, but they would also be responsible for the relevant mandi documentation. In farflung villages, situated miles away from ITC’s processing centres, the samyojaks would also aggregate the grain and bring it to ITC. For this, he was paid a 1% commission. Initially, many were apprehensive, but over time, most of them came in because when the math was worked out, most intermediaries figured they weren’t losing anything. What they lost in margins per unit they made up in the increased volume they traded. At the end of all these exercises, ITC reduced the cost of procurement to Rs 200 a tonne from Rs 700 a tonne. That translated into immediate savings of Rs 500 for both the farmer and ITC.

Armed with these numbers, ITC started looking at how viable it would be if the project were scaled up. The math looked roughly like this. On an average, it cost Rs 40,000 to set up a basic choupal. In places where connectivity was terribly poor, and telephone lines to connect to the Internet still a pipe dream, ITC would have to invest in V-SATs. These investments jacked up costs by as much as Rs 1 lakh. ITC figures the money could be recouped in three sowing seasons (18 months). The numbers worked in their favour and they went all out to saturate MP. At the time of going to print, MP had 1,045 e-choupals spread over 6,000 villages that covered six lakh farmers.

Having done that, one thing was clear to ITC. Soyabean, at the end of the day, is only a 5 million-tonne crop in MP. Wheat in UP, on the other hand, is 14 times bigger. If they are to be players of long-term consequence, they have to tackle wheat. But replicating the soya model for wheat is quite another story.

Mission Hardoi

As our car approaches Hardoi, V. Sreedhar and Rakesh Pandey, managers at ITC’s Hardoi office, excitedly point at the crop. They think it is looking good. The temperature, at about 8 degree Celsius, is just right. "A day’s rain and all will be perfect," says Sreedhar. We finally break journey at Sant Ram Singh’s house. He was among the first to sign on as a sanchalak for the wheat choupal. The managers are greeted with the best palak pakodas in the world and warmth reserved for close friends. Over the last couple of weeks, Sreedhar and Pandey have been travelling routinely to Hardoi and meticulously documenting the characteristics of every strain of wheat each farmer in Sant Ram Singh’s village grows and punching it into massive databases. It’ll come in handy when they start tuning the finer aspects of their revenue model with the wheat crop.

After all, wheat is very different from soya. The numbers tell you that. After eliminating the inefficiencies that existed on the wheat value chain in much the same way it did with soya, ITC has, until now, managed to save between Rs 55-65 per tonne, shaving off almost 10% of the procurement cost. When IBD worked backwards, they figured that with these kind of savings, they’d never be able to recoup their investments on the choupal. At best, they could manage 30% of their costs. From ITC’s perspective, that just isn’t good enough in the long run.

Remember what we told you about the lack of standard grading systems in North America during the early 1900s? The problem is acute in Hardoi. It is compounded by the fact that the Food Corporation of India, the largest grain procurement agency in India, does not really care what it buys.

Because the high quality wheat that goes into making their bread is available only in limited quantities, companies like McDonald’s can scale up operations only to a limit. Or for Britannia, the system makes it difficult for them to produce premium biscuits. Even packaged wheat flour (atta), a market ITC hopes to be in when its Aashirvaad brand is launched. In atta, penetration never took off and currently hovers at just around 3%. The problem here really is one of inconsistent quality.

"The other thing," says Sivakumar, "is that atta preferred in Delhi is very different from that liked in Mumbai. Few people understand these subtleties and nobody addresses these problems." Is these concerns are addressed, ITC reckoned it could charge premium prices and make Rs 1,000 from every tonne of wheat it traded in. Equally importantly, farmers would be paid adequately for premium quality produce.

To do all of this, the origins of the wheat being offered ought to be tracked down. And that’s where the databases Sreedhar and Pandey are putting together come into play. When what each farmer produces is known, the wheat can be segregated at its origin. This makes it easier for IBD to sell wheat that meets the exacting specifications of McDonald’s or Britannia. Or. For that matter, ITC could sell various strains of Aashirvaad at various price points depending on the quality.

There are other attendant benefits in preserving the identity of the wheat. For instance, take sharbati, a grade of premium wheat. It sells for about Rs 12 a kg. There are grades of wheat similar to sharbati, but do not command a premium. ITC could blend wheat costing, say, Rs 7 with the more expensive sharbati, create the same texture, properties and taste, pay the farmer Rs 8, sell it at Rs 12, and still make a clean kill. That is often the standard practice among most processors.

Having said that, reaping the benefits of ‘traceability’ won’t be easy. Not enough premium wheat is grown in the country- largely a function of the fact that until now, incentives to grow premium wheat didn’t exist. This means a few things to ITC’s short- and medium- term future. While there are a few dozen wheat strains that grow across the country, ITC will have to take a call on what strains of wheat to promote. Then it will have to build sufficient incentives for farmers to grow the kind of wheat ITC wants. Says a food analyst who declined to be named: "I guess it’ll be at least three years before ITC can hope to reap the benefits of inducting traceability into their business model."

Mission Impossible II

Until now, this story has revolved almost exclusively around a single domain: how in the world does ITC plan to fine-tune its procurement models and reduce inefficiencies? Let’s look at it from another perspective. Assume an ideal world where investments from the soya choupals are recouped in three seasons and those from wheat in five. At the end of this time frame, anything else ITC chooses to do with the infrastructure is either free or comes at a marginal incremental cost. The infrastructure includes assets in terms of computers, modems and solar panels for connectivity; a presence in strategic locations and warehousing facilities; and finally, relationships built over time with samyojaks, sanchalaks and farmers.

The point here is a simple one really: why shouldn’t these channels be used to sell whatever the farmer needs? More than anything else, that’s what chairman Deveshwar is banking on. "With the choupal infrastructure in place, we are hoping to create a system that allows a two-way flow of products and services to the rural economy," he says.

In MP, for instance, ITC tied up with Monsanto to sell high-yielding varieties of seeds. Here, the sanchalak collects money from farmers and places firm orders. Monsanto ensures delivery. The sanchalak earns a commission of 2-3%. The samyojak, who now serves a distribution point for sanchalaks in his catchment area, gets a 1-3% commission for his services. As for ITC itself, it collects anywhere between 2-3% for each transaction conducted on the network it has built. Why seeds? For that matter, anything from FMCG and consumer durables could be delivered through the network. Lanterns and gas-based stoves, for instance, are in high demand where power shortages are endemic. Having said this, a pertinent question emerges. What does ITC bring to the table that could lure companies targeting rural areas? Theoretically, the answers are fairly simple.

First, sanchalaks are as close as any company can get to the end customer. This means they hold the potential to pick up market signals and consumer information first and transmit them back to the distribution channel. For companies on the network, this means having a finger on the pulse of rural India.

Second, the way most FMCG companies currently operate, they are most viable while servicing populations above 100,000. Remember the cliché India lives in its villages? The cliché continues to hold true. There are enormous pockets of widely dispersed markets where population sizes are below 2,000. ITC, with 1.5 million outlets across the country, an army of mobile traders and cycle-based distributors claim to understand the nuances of catering to these populations. So the value proposition here really is that by going on board with ITC, a potential seller does not have to invest in the infrastructure.

Finally, there is the business of endorsement. A company using the network can ask ITC to endorse a product. ITC may do that if the product meets certain specifications.

There is no rocket science involved with the revenue model here. ITC simply takes a small transaction fee for every deal that takes place on its network. The upside potential is huge. The market for agricultural inputs in India has been valued at Rs 175,000 crore. As against this, the tobacco market, where ITC is the strongest Indian player, is worth only Rs 15,000 crore.

So far, from the pilots that ITC has run, things haven’t quite gone ITC way. Until now, the network has generated just about Rs 7 crore. To a large extent, this is a function of the fact that ITC has, until now, dabbled only the products – chemicals, herbicides and seeds, for instance- that are sold strictly on cash payment. Rural India doesn’t always work that way though. The current demand for rural credit is in the region of Rs 143,000 crore. This reality hasn’t been lost on ITC. That is why the company is trying out various initiatives to integrate credit into its portfolio of offerings. This includes offering kisan credit cards and roping in banks like ICICI with interests in offering rural credit to opt in to the network. The second issue that’s impeding the network from taking off are channel conflicts. Most players trying to sell in the rural markets have invested in sales and distribution channels. Admits Sivakumar: "Channel conflict is a very live issue." There are glitches to be ironed out. But don’t forget India lives in 6 lakh villages.

The Next Step

While the wheat experiment in Hardoi will test the robustness of ITC’s model, the company isn’t waiting for the results. "We realise we must keep investing in the model, keeping in mind our corporate strategy of gaining access to the rural economy. Results are bound to come," says Deveshwar.

In its existing markets, the model is expanding at the rate of five choupals every day. In 2004, the company will start setting up e-choupals in 11 other states including West Bengal, Rajasthan, Maharashtra, Tamil Nadu and Kerala, where the company will explore horticulture, paddy and possibly cotton.

Of course, much of all this will depend on whether the gun-toting farmers of Hardoi give the project a thumbs up.

BUILD A COMMUNITY-CENTRIC MODEL

(or lessons from e-choupal implementation)

Allow the community to manage itself

To build trust, ITC carefully hand-picked a farmer as a sanchalak to lead a community of farmers. Since he is typically a person of stature in his community, the sanchalak finds it far easier to enlist the support of his brethren. Of late, to strengthen community ties, ITC has begun offering rewards for community-building efforts.

Don’t disintermediate, instead redefine roles

ITC took care to ensure that it did not knock out the intermediaries like the commission agent from the value chain. Instead, it gave them a new role without disturbing their income flow. As a result, the channel did not react adversely and become a hindrance.

Put existing relationships to use

ITC’s cigarette distributors came in handy when the company began setting up the wheat choupals in UP. Cigarette volumes had begun to plateau, so these wholesale distributors were open to a new revenue stream. They became samyojaks. They became responsible for storage, mandi documentation and maintaining records.

Offer immediate gains for buy-in

Since ITC’s model offered immediate gains for farmers rather then savings some time in the future, it was easier to sell the concept.

Customer feedback as a source of innovation

Any new initiative is first tested with the sanchalaks to check if it would be viable. Besides, regular choupal meets are held. These help generate new ideas.