The growth of retail is closely linked with that of cold chain in India, and a supply chain integration by the biggies is in the offing, says Vishal Sharma.
The low level of land holdings (below 1.5 hectare) in India means that that the average farmer needs to recycle his produce to cash in a short cycle. As a general rule of thumb, Indians consume vegetables from within a 150 km radius, deeming storage and transport of vegetables in cold chains low in priority. While India has around 4,500 cold storages, the actual number of modern facilities is minuscule—less than 30—with one company Snowman, a subsidiary of Gateway Distriparks, accounting for a majority of them. The cold chain industry is highly fragmented with most cold storages being family owned which offer conventional warehousing whereas the organised players extend more modern warehousing facilities.
Large scale production demands storage and distribution capabilities which are only just beginning to develop. Considering that less than 10 per cent of retail in India is modern, there hasn’t been an incentive to develop the infrastructure. The product is anyway sold on the streets, so who should bear the cost of a modern supply chain. It is significant that Reliance, Aditya Birla, Tata and Wal-Mart are all investing in the development of cold chain, warehousing and distribution along with modern retail.
Modern retailing will have important consequences for development of cold chains. Retailers have spent millions of dollars on expensive temperature control and display units at their stores. But when produce are received at 35-400 C, it is difficult to bring down the temperature at the retail unit. The expensive machinery has not been able to handle the loads and has suffered breakdowns and write-offs. The entire chain needs to be cool, entailing investment in refrigerated trucks. The micro size of land holdings means that small storage units of five to seven tonne need to be developed which can be used by farmers to keep produce at a much below ambient temperature.
Integrating and saving: McDonald’s knew this, and it is the reason they have spent the past 15 years investing in the supply chain. The storage facilities they encountered were primitive and the distribution even so. Like Wal-Mart, Macdonald’s knows that integration, by owning production and distribution chains, cuts costs across the supply chain.
Cold chains are difficult to develop. Where it matters, land is expensive, cooling units are not mobile assets so getting the location right is key. While the trade-off between distance and land is usually in favour of land, the high cost of operating cold storages in India is a dampener. In Uttar Pradesh, where the maximum conventional cold storages are located, load shedding during summer months can be as high as 10 hours a day. If the facility has to rely on expensive backup power it throws the economics out of gear. In the West and in China, cost of industrial electricity is 30-50 per cent less than in India. This is a reason why a trend to develop cold storages as company owned initiatives has started, ie, Adani Agrifresh and Fresh and Healthy cold stores in Himachal Pradesh and Rajasthan are such examples. The company is saving costs in the value chain through reduced wastage and will be able to absorb the high operating costs. For third party initiatives to prosper, customers of third party providers, in this case retailers and manufacturers, will need to share the savings with suppliers. Since price points for food in India are relatively low at the wholesale end, there is tremendous pricing pressure on facilities. Most unorganised players resort to shutting off cooling units in the dead of the night as the temperature drops to save on electricity. The change will come from greater consumer awareness. Consumers will have to accept to pay a little more for quality while the farmers and retailers will get more value through less wastage. Sadly in India things will not be that simple and only a major tragedy with respect to food and water contamination will drive change. Only then will the US Food and Drug Administration (FDA) style rule be enforced.
While India takes its time to change, around the world, consumers are used to convenience of all year round vegetables and fruits which augurs well for our exports. India is a natural supply area for the Middle East and South East Asia. The trade-off between distance and cost means that shipping distances of three to five days are the most that these products can bear but the market is huge.
The author is MD and CEO of Tuscan Ventures, an investments and advisory services firm in the logistics and transportation space. He is also Director at Cold Star Logistics, which is investing heavily in cold chain logistics.