Mahindra War Room 2018 Agri-business Caselet

MAHINDRA AGRI-BUSINESS CASELET

ENTRY STRATEGY INTO FRUITS & VEGETABLES

Mahindra ventured into the manufacture and marketing of Tractors in the late 1950s,
pioneering the green revolution in India. In the decades between 1960 and 2000, the
tractor business expanded to over 40 countries, making Mahindra brand the largest
seller of tractors by volume in the world. Emboldened by the growth and market
dominance achieved by the Tractor business, Mahindra broadened their vision to
“FarmTech Prosperity” in the early 2000s. FarmTech Prosperity meant that Mahindra’s
goal would not just be to sell to the farmer as a customer, but to do everything that will
make the farmer prosperous. Enhancing farm productivity by providing them with
reliable Tractors and Farm Equipments was one way of making a farmer prosperous.
What are the other avenues to make the Indian farmer, Mahindra’s dear customer,
prosperous? Thus was born the vision of Agribusiness.

For the Indian farmer, poor productivity has always been a concern, arising from the
lack of access to quality “inputs” such as seeds. Backed by strong R&D, Mahindra
Agribusiness started helping farmers with key inputs to the farm, such as Crop-care,
Seeds, Agro-chemicals & Micro-irrigation, soil testing and advisory services under the
name of ‘Samriddhi’. Today, over 300 Samriddhi Centres across the country offer such
‘input’ services. Input-driven businesses grew during the 2000s, diversifying
Mahindra’s Farm related businesses. Subsequently, over the last 5 years, a parallel
“output-driven” strategy has evolved, with the goal of helping farmers to sell their
output for a better return than what they would otherwise gain. Farm produce
spanning Dairy, Edible Oil, Fresh Fruits, Pulses, Processed Foods and Basmati Rice
Businesses are now in various stages of pursuit by Mahindra Agribusiness.

LIVE BUSINESS CHALLENGE: ENTRY STRATEGY INTO FRUITS & VEGETABLES

India is the world’s second largest producer of fruits and vegetables, next to China. As
per the National Horticulture Board, around 307 MT of Fruits and Vegetables were
produced in FY18. But the recent growth of horticultural produce has been slow,
growing at a CAGR of about 3.8% over the last decade. The global trade of fresh fruits
and vegetables produce crossed USD. 100 Billion in FY16. India produces 15% of all
fruits and vegetables in the world. Yet, India has a measly 1.2-1.5% share of global
fresh fruit and vegetable trade. India ranks lower than even countries like Thailand and
Chile in global trade of fresh fruits and vegetables.

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The graph below shows the relative positions of some major exporters of Fruits &
Vegetables, highlighting how low India ranks relative to its potential:

Indian exports of fruits and vegetables (F&V, henceforth) peaked in 2016 with exports
of USD. 1.55 Billion. Onions, grapes, mangoes and bananas are some key
commodities which dominate the export portfolio. However, with competition from
South American and African countries, frequently changing government norms such as
MEP rates and distance from consumption centres, fresh fruit and vegetables exports
have dipped by more than 5% in FY18. This setback has shifted priorities of traders
towards export of processed fruits and vegetables such as dried chickpeas, prepared
cucumbers, gherkins etc helping to boost processed F&V exports by 16%.

The domestic consumption of Fruits and vegetables hovers around 181 MT. Even
among urban Indian consumers, F&V consumption remains below 300 grams per
capita, significantly lesser than the minimum recommended consumption of 400 grams
per capita. The domestic demand is expected to grow at 12% in the coming years,

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owing to greater awareness of health, rising youth population, growth in disposable

income and strong urban demand. Millennials also show greater inclination to try exotic
fruits and vegetables which has led to rise in domestic sales of produce like broccoli,
Imported Apples, Kiwis etc.

The F&V value chain is a complex mesh of producer, intermediaries and sellers. “Input”
businesses like seeds, crop care (fertilizers, insecticides, fungicides, herbicides,
nutrients etc.) form the bottom tier of the F&V value chain. Farmers also arrange for
other inputs like irrigation, labour and credit at the start of the sowing cycle for
vegetables. Due to the highly perishable nature of F&V produce, the window to market
is smaller compared to other agrarian commodities. Consequently, the need of
intermediaries like village merchants, middlemen, wholesalers and commission agents
of mandis is high, to aggregate market demand, manage sorting, grading, packing &
transport and absorb the risk of perishability. In case of a corporate intervention, some
of these intermediaries are removed as farmers directly sell their produce to the
company at a collection centre. The company then has the onus to transport these
goods to its distribution or processing centers post which they are ferried to modern
trade, businesses or exports as per the business model of the company. The presence
of many intermediaries in this value chain ensures that only a sliver of benefit is passed
on to the producer. Going by the data of some empirical studies by NAARC, only about
a fifth of the gross value of sales trickles down to the farmer.

A host of challenges plague the stakeholders at different stages of the F&V value chain.
For producers, issues of credit for working capital, farming knowledge, market prices
of input and output, commissions paid at APMCs, margin lost to middlemen, low
acreage per farmer, lack of MSP support for horticultural produce, lack of
infrastructural support in terms of supply chain and cold chain solutions, lack of access
to grading and sorting facilities and lack of marketing knowledge are some of the
issues which impediment the path to financial self-sustenance.

The lack of infrastructure for post-harvest handling generates wastage of around

30%-40% of fresh produce before they even reach the market. This wastage is
generated at every step of the supply chain - during the initial storage of harvest near
the field, to its transportation to nearest mandi in absence of a Packhouse, from Mandi
to wholesaler and from wholesaler to retailer. Besides handling, the lack of temperature
controlled cold chain further decreases the shelf life of fresh produce.

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For wholesalers and retailers, Fruits & Vegetables become a costly proposition due to
the amount of real-estate required to successfully run a sale. Further, operational
expenditure in form of perishing commodity, logistics, refrigeration etc. is often not
compensated with ever decreasing margins and increasing competition. The lack of
fresh produce handling facilities at Mandis and APMCs further compounds the misery.
Organized players in F&V industry face challenges such as fragmentation of suppliers
due to low acreage per farmer, lack of knowledge and input availability among
producers, frequently changing policy norms (such as MEP), high working capital, real
estate for retailers, Perishable and risky current asset logistics, Price volatility for
exporters, increasing global competition, tougher quality norms of western countries
(residue, FTP, nutritional information, batch tracing), Lack of existing supply chain
infrastructure with cold chain solutions and lack of 3/4PL solutions in handling of fresh
produce.

Corporates and organized players can add great value in the F&V value chain by:

• Contract Farming and buy-back guarantee to bolster market driven production

• Credit and financial solutions for the farmers/FPOs

• Cold supply chain solutions including cold storage, grading, sorting facilities (pack-
houses) and logistics solutions (eg. temperature controlled trucks)

• Demand aggregation and direct retail to domestic consumers

• Import of F&V produce from across the globe for growing urbane population

• Export to institutional buyers outside India

• Marketing and branding to help in supply consolidation and product differentiation

• Setup of processing facilities and development of value-added products

• Distribution of quality input (seeds, crop care products) and dissemination of

farming knowledge

Currently, the domestic market is dominated by unorganized players who have a share
of about 96% of the total market. Solving the productivity problem for farmers is not
enough; getting them access to market and enabling them to get a fair return for their
produce is a major challenge to be addressed as well. Can Mahindra use their 6
decades of experience in this sector to make this happen? Can they bring real,
permanent prosperity to the millions of Indian farmers?

Recently, Mahindra Agribusiness started operations of their first Distribution Centre in

Delhi through Mahindra Greenyard Pvt Ltd, to remove inefficiencies that exist in the
F&V supply chain today, by sourcing directly from farmers and becoming a strong
backend partner for Modern Trade players and big wholesalers.

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Mahindra, besides being one of the largest exporter of grapes from India, also
commands a strong position in the European F&V market with its subsidiary OFD
(Origin Fruit Direct). OFD with its strong presence in the grapes and citrus categories
mitigates the seasonality and ensures year-round supplies of fruits. Mahindra also
acquired an e-commerce start-up called MeraKisan which operates with a farm to fork
model, sourcing directly from farmers and delivering it to the consumers, ensuring
higher return to the farmers and lower prices to the consumers.

With robust grassroot level sales channel through Samriddhi, strong sourcing network
and farmer connect with Grapes and input business, dynamic future businesses in
MeraKisan and MyAgriGuru, Mahindra Agribusiness has established strong footholds
across the value chain of Indian Agriculture. Also, with its global partnerships and
acquisitions, it has entered in key F&V consumption markets across 4 continents while
also establishing a strong sourcing network.

Given this background, evolve a strategy and execution roadmap with financials
for Mahindra Agribusiness to pursue the domestic opportunity in Fruits &
Vegetables and build a profitable business with revenue of INR. 5,000 crores in 5
years.

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