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Distribution’s Disruptive Duo
Business Today Magazine - 18 Jan 2004

Deveshwar and Sivakumar have used digital technology and the very Indian concept of a gathering place, choupal, to redefine the dynamics of distribution.

By Moinak Mitra

One day in the spring of 1999, ITC Chairman Yogi C. Deveshwar was closeted with some of his key managers in the company’s headquarters, Virginia House in Kolkata. ITC is one of India’s oldest professionally run companies- it was founded in 1910- and Deveshwar, an engineering graduate from the Indian Institute of Technology, Delhi, one of its most respected managers. In 1991, the government handpicked him (on loan from ITC) as the Chairman and Managing Director of Air India, the state-owned national airline, a position he held till 1994. Since 1996, when he was named to head ITC, Deveshwar has had to manage the company’s uneasy relationship with its single-largest shareholder British American Tobacco. And he has had to constantly think about a Plan B for a company, much of whose revenue come from cigarettes.

Growing awareness of the hazards of smoking- Deveshwar himself gave up smoking three years ago- is shrinking the market for cigarettes, even in India, and the government is considering banning all cigarette ads. Tobacco companies, if the government has its way, will not even be allowed to sponsor sports events or teams, something that almost left the Indian cricket team without a sponsor in February 2001 when ITC’s Wills brand, the then sponsor decided to be proactive and move on before it was forced to. In his seven years in office, YCD, as most people know him, has scripted several Plan B forays: these include a growing emphasis on the company’s hotels business and diversifications into information technology, ready-to-wear apparel and ready-to-eat foods, and confectionery- the man himself is said to be partial to Minto, a brand of mints his company acquired in March 2002.

The meeting wasn’t about any of these; it was about the company’s International Business Division (IBD). Although its name doesn’t say as much, the IBD is India’s second-largest exporter of agricultural produce, including soya, wheat, sesame, pepper, shrimp, and coffee. In 2002-03, the division contributed Rs 1,040 crore to ITC’s revenues of Rs 11,024 crore. India’s archaic laws regarding agriculture (corporate farming, for instance, is a no-no), and a legacy of fragmented land holdings makes this business a difficult one to manage. It is replete with inefficiencies, middlemen, and logistical snafus- the perfect setting for a radical solution.

The discussion was heading nowhere, so Deveshwar suggested to one of ITC’s brightest young managers, then still in his thirties, that the solution would probably require an entirely new model for the business, one that used the power of the internet to hook things up, and together. The manager was S. Sivakumar, now 43, and the Chief Executive of the IBD.

It must be factors related to history and geography that make the Institute of Rural Management, Anand (IRMA, for short) a very different kind of B-school. Anand, after all is home to the Gujarat Co-operative Milk Marketing Federation (GCMMF), India’s most successful co-operative. And IRMA was founded by Verghese Kurien, the architect of Operation Flood, the world’s largest dairy development programme. Not everyone who passes through IRMA ends up working for a developmental institution, but the school does leave its mark on most.

Even as a graduate student at Silver Jubilee College, Kurnool, Sivakumar craved "a career option that would combine development and management." He was set to take the entrance examination for the Indian Administrative Service or enroll in a MBA programme when he heard about IRMA, and 1981 saw him headed for a 60-acre campus characterised by verdant lawns, abundant foliage, and black-faced monkeys.

Deveshwar’s brief appealed to Sivakumar. Here was a chance to look for a solution that was an equal mix of the yin and the yang; that satisfied the usually conflicting objectives of community development and private profit. And so, he and his team set out to create a business model that would improve the lot of farmers, take the company closer to them, render middlemen redundant, and improve efficiencies all along the chain.

Misrod (population: 3,000) is a village in the central Indian state of Madhya Pradesh that isn’t famous for anything, not even the soyabean most of its farmers grow. In June 2000, it was here that ITC decided to kick-off the implementation of the solution Sivakumar had put together: it was an internet-enabled one that was at once knowledge-based and customer focussed, all three novelties in the agricultural commodities business. At the core of the solution was the concept of e-choupal, a hybrid word ITC created combing the e of e-biz with choupal, the Hindi word for a village gathering place. The front-end of the e-choupal at Misrod was an internet kiosk that enabled the village’s populace access the www; the back-end, an IBD portal (now available in Hindi and Marathi) that provided farmers with information on agricultural inputs, best practices in soyabean farming, the market price, and the weather apart from serving as a trading platform. Result: "A typical farmer’s income in Misrod is up 25 per cent," says Sivakumar. "But the real impact has been the empowerment of farmers."

Today, ITC has 3,000 e-choupals connecting 18,000 villages across Madhya Pradesh, Uttar Pradesh, Andhra Pradesh, Karnataka, and Maharashtra. Apart from, the company boasts three more portals, (for coffee traders in Karnataka and the site is available in English and Kannada), (wheat farmers; Uttar Pradesh; English and Hindi) and (shrimp farmers; Andhra Pradesh; English and Telegu). And it has spent around Rs 60 crore on the initiative.

Sivakumar’s masterstroke, one that often gets overlooked, was his approach to separate the flow of information in the commodities chain, from that of the products. Middlemen typically controlled both. In the e-choupal model, the internet takes care of the information bit: the IBD appoints a local farmer sanchalak (conductor in Hindi) to serve as an interface between the computer and other farmers-he gets a commission of 0.5 per cent on the produce sold. And rather than appoint someone aggregate, store and transport the produce, Sivakumar thought it a good idea to use the existing middlemen rendered that much powerless by the fact that they no longer controlled the flow of information. ITC rechristened these individual samayojaks (co-ordinators): each samayojak earns a commission of 1 per cent on transactions.

The e-choupals have helped ITC’s IBD improve the quality of products it sources and reduce costs (on soyabean it saves Rs 250 a tonne). In the business of agricultural commodities, where margins can often be as slim as 1 per cent, that’s a lot. Then, there’s what it has done for the farmer. None of this, however, is as relevant as the e-choupals’ transition into an alternative distribution system in a country where the potential of the rural market has never fully been tapped. Today, 60 companies, including the likes of Nagarjuna Fertilizers, Monsanto, Eicher, BPCL, TVS Motor, Hero Cycles, LIC and ICICI Prudential sell their products through the e-choupal network: ITC earns a commission of anything between 3 per cent and 40 per cent on these. Not surprisingly, Deveshwar, expects the e-choupals- the network would cover 1 lakh villages by 2010- to bring in more revenues than the cigarette business by the end of the decade.

Sivakumar, a carnatic-music aficionado with a knack for understatement is loath to take credit for the e-choupal revolution. "This was no one’s idea," he says, adding that some "15-20 management concepts" and a synthesis of the business models of five different companies, "seeds major Cargill, ITC’s own tobacco division, retail monolith Walmart, American credit card company Capital One, and online auctioner eBay" have gone into it. Still, someone had to put it all together and come up with a radical solution to reach India’s 700 million rural populace. Someone did.