Identifier
Created
Classification
Origin
08NEWDELHI95
2008-01-11 11:00:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy New Delhi
Cable title:  

RELIANCE SLOWING DOWN ITS RETAIL ROLLOUT?

Tags:  BTIO EAGR ECON EINV IN ETRD EFIN PREL 
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ZNR UUUUU ZZH
R 111100Z JAN 08
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 9963
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHCG/AMCONSUL CHENNAI 2219
RUEHKP/AMCONSUL KARACHI 8417
RUEHCI/AMCONSUL KOLKATA 1535
RUEHLH/AMCONSUL LAHORE 4258
RUEHBI/AMCONSUL MUMBAI 1328
RUEHPW/AMCONSUL PESHAWAR 4729
UNCLAS SECTION 01 OF 03 NEW DELHI 000095 

SIPDIS

SENSITIVE
SIPDIS

USDA PASS FAS/OCRA/HIGGISTON
STATE FOR SCA/INS JASHWORTH AND SCA/RA MURENA
DEPT PASS TO USTR - CLILIENFELD/AADLER
DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA - ABAUKOL
USDOC FOR 4530/ITA/MAC/OSA/LDROKER/ASTERN
TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN

E.O. 12958: N/A
TAGS: BTIO EAGR ECON EINV IN ETRD EFIN PREL
SUBJECT: RELIANCE SLOWING DOWN ITS RETAIL ROLLOUT?

REF: A) 07 NEW DELHI 4801
B) 07 CHENNAI 438

NEW DELHI 00000095 001.2 OF 003


UNCLAS SECTION 01 OF 03 NEW DELHI 000095

SIPDIS

SENSITIVE
SIPDIS

USDA PASS FAS/OCRA/HIGGISTON
STATE FOR SCA/INS JASHWORTH AND SCA/RA MURENA
DEPT PASS TO USTR - CLILIENFELD/AADLER
DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA - ABAUKOL
USDOC FOR 4530/ITA/MAC/OSA/LDROKER/ASTERN
TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN

E.O. 12958: N/A
TAGS: BTIO EAGR ECON EINV IN ETRD EFIN PREL
SUBJECT: RELIANCE SLOWING DOWN ITS RETAIL ROLLOUT?

REF: A) 07 NEW DELHI 4801
B) 07 CHENNAI 438

NEW DELHI 00000095 001.2 OF 003



1. (SBU) SUMMARY: Reliance has ambitious plans to develop a
comprehensive "farm to fork" supply chain that will support its
front-end organized retail venture, but establishing solid backward
linkages to the agricultural sector will take time and recent
protests against it may require the company to proceed more
cautiously than it had anticipated. Reliance Retail's chief
executive of operations in New Delhi was optimistic about the
company's prospects and longer-term goals in its grocery business,
which as of the October 2006 launch included multi-year investments
of up to $6 billion and a planned rollout of 1,000 stores by
year-end 2007. However, a visit to a Reliance collection center and
central distribution center outside of New Delhi demonstrated the
fairly modest back-end operations to date of one of the largest
players in organized retail and suggests a slow pace at which the
private sector is reaching Indian agriculture.


2. (SBU) This cable is the first in a series that will address the
potential impact of organized retail on the agricultural sector.
Although the front end of the "retail revolution" has attracted
considerable attention through new stores and shopping formats,
these cables will focus on the back end of the supply chain and
examine a few of the business models being used by the private
sector to engage India's farmers. END SUMMARY.

BACKGROUND
--------------


3. (SBU) Organized retail currently accounts for only 3 percent of
India's retail industry but is expected to grow to 16 percent by
2015, according to TechnoPak Advisors, a Delhi-based retail

consulting company, due to rising consumer incomes, more women
entering the workforce, and greater availability of credit for
consumer durables, among other drivers. A number of private
companies are venturing into organized retail, particularly in the
under-tapped and highly profitable food and grocery segment. Food
and grocery is the largest category in India's total retail market,
with a share of 54 percent or over $150 billion in current market
size, but at 1 percent has the lowest organized retail penetration
of all categories, according to a December 2007 FICCI/Ernst and
Young study.


4. (SBU) Private sector investments in infrastructure such as cold
chains and warehouses, new farming technologies, and contract
farming for new crops could revitalize the lagging agricultural
sector and potentially offer farmers an opportunity to participate
in a "retail revolution" that would cater to the Indian consumer's
growing taste for high-value agriculture (HVA),or fresh fruits and
vegetables. The Ministry of Agriculture, among other GOI
ministries, supports such private participation (reftel A) although
foreign direct investment in agriculture-related industries is still
minimal.


5. (SBU) However, highly-publicized protests from small vegetable
vendors, middlemen that extract considerable commissions from the
currently inefficient food procurement and distribution system, and
political opportunists at the state level since early 2007 have
slowed progress and forced companies to re-evaluate their
strategies. Reliance in particular has faced considerable heat at
its Reliance Fresh stores, being forced to shutter them in Uttar
Pradesh and scale down expansion plans in other states such as West
Bengal and Kerala.

RELIANCE HAS HIGH HOPES FOR FULL SUPPLY CHAIN MODEL
-------------- --------------


6. (SBU) ECONOFFs met on December 14 with Mr. Navneet Saluja,
Reliance Retail's chief executive of operations for New Delhi and
surrounding areas. He emphasized Reliance's long-term goal of
developing a full supply chain for HVA, which would eliminate
middlemen and offer both lower prices to the Indian consumer and
higher prices to the Indian farmer. Saluja highlighted Reliance's
vision of developing a two-way business stream between the company
and the farmer. Reliance would provide farmers with seeds,

NEW DELHI 00000095 002.2 OF 003


technology, training and microfinance to grow the types of produce
it sells in its Reliance Fresh stores. In return, Reliance
envisions that farmers would receive fully transparent and higher
prices for their produce, develop a comprehensive business
relationship with the company, and have a guaranteed buyer of
produce over the long-term to help eliminate seasonal uncertainties.
Saluja noted that Reliance eventually plans to set up cold chain
infrastructure, including warehouses and trucks, which will allow
the company to develop longer supply chains, reach smaller farmers,
and reduce the potential for waste if produce does not reach outlets
immediately.


7. (SBU) However, Saluja acknowledged that Reliance is in the
initial stages of this business model. Although the company has set
up a number of collection centers near its Reliance Fresh stores,
Reliance procures only about 60-70 percent of its requirements
directly from the farmer while procuring the rest through imports or
from local mandis, the government-regulated marketing yards that
were designed to consolidate the supply chain but have created
middlemen who cut into farmers' incomes. (Note: Private companies
must ask for state permission to source directly from the farmer,
and most states have amended their laws to allow this type of
interaction. End note.) Saluja estimated that farmers who sell to
Reliance generally receive prices that are approximately 15-25
percent higher than the mandi prices, depending on their ability to
meet specifications laid out ahead of time by the company's
representatives in the farming communities. Such specifications,
along with guidance on which brands of seeds and inputs to use, and
optimal timing of planting and irrigation, form a kind of informal
extension service to the farmers in Reliance's network.


8. (SBU) Overall, Saluja believes that developing a long-term
relationship with the farmer, rather than offering consistently
higher prices, is the best business model for agricultural retail.
Because prices are sometimes better at the mandi than what Reliance
can offer, the company has to provide additional incentives to win
dedicated producers. He noted that Reliance at this time does not
want to enter into contractual farming relationships (another
business model to be discussed septel) because of a lack of
enforceability of such contracts and the small, fragmented nature of
most Indian farms. Indian government statistics cite the average
farmer's holdings at 0.8 hectares of land, or about two acres, which
suggests that companies would have to contract with hundreds of
farmers to procure adequate volumes of produce.

GROUND REALITY SUGGESTS LONGER TIMELINE, SHORTER REACH
-------------- --------------


9. (SBU) Following the meeting with Saluja, ECONOFFs on December 28
toured a Reliance collection center and distribution center in
Haryana, about an hour outside of New Delhi. Two Reliance managers
first showed one of their Ranger Farms collection centers, a small
concrete holding area that consisted of two ten by ten rooms.
Farmers dropped off produce and were paid cash on the spot for goods
that met Reliance's specifications; this particular center collected
leafy greens, such as spinach, but had no cold storage capacity.
Reliance workers collected the produce for one or two hours and then
shipped the goods via truck to the nearby distribution center.
Regional manager Mr. Verma noted that this collection center
receives about three tons of fresh vegetables per day.


10. (SBU) The collection center manager Mr. Rameshwar explained
that the facility, which buys from roughly 100 farmers in a
20-kilometer radius, is closer for some farmers than the local
mandi, allowing them to save money on transportation. In addition,
the company's "field officers" - local representatives in nearby
villages - inform farmers of the company's procurement needs a day
in advance, often via mobile phones, and ensure an ongoing
relationship with the farmers. The field officers also communicate
Reliance's produce specifications and offer farmers techniques to
minimize rejections - currently at about one percent of all produce
at this center - due to defects, hygiene issues, or size. The
officials did imply, though, that each collection center works a
little differently in terms of communicating with farmers and
offering incentives.


NEW DELHI 00000095 003.2 OF 003



11. (SBU) Verma relayed that Reliance's farmers tend to own just
0.1 to 0.2 hectares of land, or up to half an acre, which would
place them among India's marginal farmers. Critics of organized
retail have charged that the private sector will likely work with
only larger farmers because of their consolidated landholdings and
ability to produce needed quantities, creating an economic divide
within agricultural communities and disadvantaging smaller, poorer
farmers who could potentially gain the most from the retail
revolution. However, Reliance's stated willingness to forge
relationships with any farmer that meets their specifications could
help alleviate this issue.


12. (SBU) ECONOFFs then visited the central distribution center
about 15 kilometers away, which cleans, sorts, and packages the
goods before shipping them to local Reliance Fresh stores. The
center collects 100 tons of produce daily from the eight collection
centers in the Delhi area and ships them to about 80 Reliance Fresh
stores in the vicinity. The 20-acre lot included a cold storage
area, in which workers in below-zero temperatures cut and packaged
fresh vegetables for shipment. Despite the size of the warehouse,
technology was still minimal and most work was
done by hand. Verma noted that the labor was mostly local and that
the distribution center employed about 750 people.


13. (SBU) End to end, Reliance's supply chain surrounding Delhi is
fairly short and limited to the 150-kilometer area immediately
around the city. None of the trucks had cold storage capacity, and
produce had to be moved daily and in short distances to reach
Reliance Fresh stores in time. Even for longer hauls of produce
that is not locally available, Verma indicated that, for right now
at least, Reliance is using third-party cold chain transport
companies rather than establishing its own fleet of refrigerated
trucks.

COMMENT
--------------


14. (SBU) Although Reliance is beginning to establish backward
linkages to farmers, the company is proceeding slowly on the ground
- a stark contrast to its speedy rollout of front-end retail shops,
which now number about 430 nation-wide. This suggests that Reliance
does not yet have a defined procurement strategy - either using
government-regulated mandis, dealing with farmers directly, or an
optimal mix of both - and may be experimenting with several options
before settling on one that works best. A brief conversation with a
farmer who sold produce directly at the collection center during the
visit revealed his wariness about whether Reliance will last in this
business. He further noted that he does not want to engage fully
with just one buyer lest he lose his relationships with others.
These trust issues suggest that Reliance will need to form solid
relationships with farmers to establish support on the ground, at
least in northern states, where the issue has been more volatile
than in southern states (ref B).


15. (SBU) In addition, Reliance's infrastructure development for
agricultural retail is still rudimentary and does not extend much
beyond major cities. Reliance has yet to develop cold storage
capacity - except for processed or imported goods - which at the
moment leaves many Indian farmers too physically distant to do
business with the company. In developing the infrastructure for a
full supply chain, Reliance would be taking the majority of the risk
through considerable time and investment, with no guarantee that
farmers will deliver the produce it requires at the front end.
Although such a business model would help Reliance reach smaller
farmers and establish the desired vertical integration, the recent
political backlash in some areas over its foray into organized
retail may be prompting the company to rethink at least the pace of
its long-term plans.

MULFORD