VZCZCXRO3784
RR RUEHAST RUEHBI RUEHCI RUEHLH RUEHPW
DE RUEHNE #0291/01 0291055
ZNR UUUUU ZZH
R 291055Z JAN 08
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 0200
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHCG/AMCONSUL CHENNAI 2337
RUEHKP/AMCONSUL KARACHI 8455
RUEHCI/AMCONSUL KOLKATA 1650
RUEHLH/AMCONSUL LAHORE 4283
RUEHBI/AMCONSUL MUMBAI 1446
RUEHPW/AMCONSUL PESHAWAR 4749

UNCLAS SECTION 01 OF 03 NEW DELHI 000291 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
SCA/INS FOR JASHWORTH/TFITZGIBBONS 
EEB FOR NWEBER 
USDA PASS FAS/OCRA/HIGGISTON 
USTR FOR CLILIENFELD/AADLER 
DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA - MNUGENT 
USDOC FOR 4530/ITA/MAC/OSA/LDROKER/ASTERN 
 
 
E.O. 12958: N/A 
TAGS: BTIO EAGR ECON EINV IN ETRD EFIN PGOV
SUBJECT: ITC'S GRADUAL, BACK-END RETAIL MODEL WORKING 
 
REF: A) NEW DELHI 000095 B) MUMBAI 000019 
 
NEW DELHI 00000291  001.2 OF 003 
 
 
¶1.  (SBU) SUMMARY: Despite the recent backlash against organized 
retailers and subsequent re-evaluation of business models for some 
players in the industry (reftels), established players such as the 
conglomerate Indian Tobacco Company (ITC) are more optimistic about 
their prospects in the fresh produce business.  ITC officials are 
working closely with farmers, building long-term relationships, and 
planning to expand operations to take advantage of the company's 
unique foothold in agriculture, which was originally established 
through its e-Choupal operations that directly serve farming 
communities.  ITC's slow development of a fuller, albeit shorter, 
supply chain than most of its competitors appears to be serving it 
well, and the future of its retail outlets in markets like 
Hyderabad, outside the five major metros, seems bright. 
 
¶2.  (SBU) SUMMARY CONTINUED: This cable is part of 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 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. 
 
ITC FOCUSING ON LINKS TO THE FARMER 
----------------------------------- 
 
¶3.  (SBU) On January 18, Congenoffs met with Mr. Praveen, ITC's 
sourcing executive for its horticultural retail business.  (Note: 
ITC, a company that is over a century old, launched its 
agro-business arm in 1990, focusing primarily on agricultural 
exports. End note.)  Praveen took Congenoffs to see ITC's complete 
supply chain for fresh produce in Hyderabad, which links farmers to 
consumers within a single day and is limited to a narrow geographic 
area.  He explained that ITC first entered this market in August 
2006, opening stores that - unlike its competitors - only sell fresh 
fruits and vegetables under the name Choupal Fresh, "choupal" being 
the Hindi word for "gathering place."  (Note: Most of the other 
organized retailers include a variety of goods in their grocery 
stores, including processed food items, staples such as lentils and 
rice, and even apparel, in an effort to become "one-stop shops" for 
consumers.  End note.) 
 
¶4.  (SBU) The first stops on the tour were two farms in Vantimamidi, 
a town about 40 kilometers from Hyderabad.  The first farm, which 
was five and a half acres, grows red and yellow capsicum peppers and 
celery for ITC.  The second farm - which was about twelve acres - 
grows a variety of crops for ITC, including gourds, sweet corn, 
broccoli, lemons, and tomatoes.  Praveen explained that because many 
of these crops are not native to India, an "extension team" - which 
consists of six local agricultural specialists and three ITC 
corporate employees - visits the farmer weekly to help properly 
plant and tend their crops.  He emphasized that ITC provides the 
ideas for these types of crops to farmers based on the demand at its 
Choupal Fresh stores, and verbally guarantees farmers that the 
company will buy all such produce.  As a result, the company takes a 
revenue hit if the new crops fail to sell well.  Praveen highlighted 
the case of celery, which was not selling well at the stores because 
customers did not know how to cook or serve it.  (Comment: This 
example contradicts his earlier statement that new crop ideas are 
demand-driven, indicating that the company probably experiments with 
a variety of crops for consumers. End comment.) 
 
¶5.  (SBU) Praveen then explained ITC's price discovery process for 
crops that it does not guarantee to buy, i.e. traditional crops such 
as tomatoes.  The company's local representatives go to the mandis - 
government-regulated markets - in the early morning and report back 
the benchmark mandi price that day.  ITC then offers that price to 
farmers with whom it has a relationship - usually via mobile phone 
calls - which saves the farmer the commission usually paid to the 
mandi-based trader and the transportation costs of bringing produce 
to the mandis. 
 
¶6.  (SBU) Instead, ITC's farmers bring the produce directly to an 
ITC collection center, which is generally closer to the farm, and 
 
NEW DELHI 00000291  002.2 OF 003 
 
 
receive cash on the spot.  Praveen stated that ITC holds a state 
Agricultural Produce Marketing Committee (APMC) license to buy 
directly from farmers in Andhra Pradesh (AP).  (Note: AP is one of 
several states that allows this type of business relationship 
between farmers and organized retailers, but there are still some 
states where retailers are obligated to source from mandis. End 
note.)  Praveen stated that ITC has not faced any protests from 
middlemen, although he estimated that about 60 mandi traders had 
been put out of business by ITC's direct tie-ups with farmers in the 
Hyderabad area.  He noted that the traders were looking to develop 
their own produce markets or alternate businesses. 
 
¶7.  (SBU) Praveen highlighted that ITC works with about 400 to 500 
farmers in Hyderabad, the majority of which own between three and 
five acres of land.  (Note: According to Indian government 
statistics, the average farm size in India is about two acres and 
these farmers would technically be in the slightly larger "small 
landowner" category.  The second, 12-acre farm would technically 
fall under the "medium to large" category.  End note.)  Praveen 
related that ITC's Choupal Fresh stores procure about 75 percent of 
their goods from these farms.  They still rely on the mandis for 
about a quarter of their produce, but are working to reduce this 
figure. 
 
SHORT SUPPLY CHAIN, MINIMAL INFRASTRUCTURE 
------------------------------------------- 
¶8.  (SBU) After visiting the farms, Congenoffs visited one of ITC's 
two collection centers in the Hyderabad area, which was a short 
distance from the farms on the local highway.  The two centers 
together sent roughly 75 percent of the procured goods directly to 
Choupal Fresh outlets that day, with the remaining 25 percent sent 
to a central distribution center.  The collection center was 
remarkably similar to the "Ranger Fresh" centers run by ITC 
competitor Reliance Retail (reftel A), which consist of two concrete 
rooms that hold fresh produce and have no cold storage capability. 
Praveen explained that farmers generally dropped off their produce 
at varying times during the day, and ITC would then ship the goods 
out shortly thereafter.  Posters on the wall explained ITC's quality 
standards for different produce items. 
 
¶9.  (SBU) The next stop was a visit to a distribution center called 
Agility, which is run by a separate logistics company and partially 
leased by ITC (as well as three or four of its competitors) for its 
warehousing and distribution needs.  Praveen explained that because 
of its maximum one-day storage and short supply chain, ITC does not 
need refrigerated trucks.  ITC's leased area included a cold storage 
unit, sorting and grading tables, and a ripening room.  Praveen 
noted that ITC would consider building its own warehouse if demand 
for its produce grows significantly. 
 
¶10.  (SBU) The last stop in the chain was the original Choupal Fresh 
outlet, a small but clean store in Hyderabad that sells only fresh 
fruits and vegetables. Mr. Praveen noted that the company has six 
other Choupal Fresh stores in the Hyderabad area, and also operates 
in Pune, Maharashtra, and Chandigarh, Punjab.  Praveen asserted that 
although Reliance can offer lower prices, it cannot offer the same 
quality that ITC's stores can, and quality is the ultimate 
determinant in the consumer's mind of where to shop. 
 
ITC LEVERAGING REPUTATION, RELATIONSHIPS 
----------------------------------------- 
¶11.  (SBU) Finally, Congenoffs met with Srinivasa Rao, the head of 
new initiatives at ITC's International Business Division (IBD).  Rao 
highlighted ITC's long-standing relationship with farmers and the 
agricultural community, which originated with its work in tobacco 
production decades ago.  In 2000, ITC gained a foothold into 
agricultural retailing through its e-Choupal venture, in which the 
company set up computer kiosks in villages to allow farmers to check 
real-time market prices for commodities such as rice and soybeans. 
The farmers could then choose to sell their harvest to the mandis or 
directly to ITC, which offered competitive prices as well as 
extension services such as technical training.  (Note: The e-Choupal 
program has been praised by development agencies as a model for 
providing innovations and opportunities to poor farmers.  End note.) 
 Rao emphasized that building these relationships with farmers gave 
 
NEW DELHI 00000291  003.2 OF 003 
 
 
ITC a direct link to the agricultural communities in which it 
operated; the company now runs 6,500 e-Choupal kiosks shared among 
40,000 villages, and can reach over 4 million farmers in eight 
states (Madhya Pradesh, Maharashtra, Rajasthan, Haryana, Karnataka, 
Andhra Pradesh, Uttar Pradesh and Uttarakhand). 
 
¶12.  (SBU) Rao asserted that ITC entered the fresh produce segment 
to expand on its business initiatives and reach out to smaller 
farmers as a form of corporate social responsibility, but was 
upfront that the company was looking to cash in on the organized 
retail boom in India.  He stated that ITC's goal for this business 
segment was to eliminate middlemen and provide a faster, cheaper 
farm-to-plate chain using a direct, deep, and year-round 
relationship with the farming community.  Rao emphasized ITC's 
commitment to the farmers, noting that the company's agricultural 
scientists spent several months with them on soil and water testing 
to determine which crops could work and then providing the training 
and techniques required for production.  He said that the business 
is new for ITC and still developing, but claimed that the farmers 
are already doubling their yields and incomes based on the extension 
services that the company provides.  Rao said ITC hopes to 
eventually create a two-way flow between the company and farmers, 
exchanging produce and agricultural inputs at better-than-market 
rates.  He believes that this can create a "virtuous cycle" for the 
agricultural community, in which both the company and farmer need 
each other to succeed. 
 
¶13.  (SBU) In terms of other models for organized retail, Rao 
believes they do not offer the farmer adequate choices and do not 
create "inclusive growth."  Rao gave an example of failed contract 
farming in which only two percent of farmers honored a signed 
contract with a company because prices had increased at the mandis, 
and since contracts are essentially unenforceable, the company was 
left without adequate produce.  With ITC's model, Rao explained, the 
farmer always has the choice to sell at the mandis but the company 
will virtually guarantee them a better price, because it will not 
charge the 10 percent commission fee demanded by traders.  However, 
Rao believes that contract farming can work with niche products such 
as baby corn, which is not regularly traded at the mandis and can 
provide a farmer who takes a risk in planting a more unusual crop 
with the security of a guaranteed buyer. 
 
¶14.  (SBU) Overall, Rao and Praveen were both optimistic about the 
company's prospects in the fresh produce business segment.  Rao 
mentioned that the company plans to expand to 50 cities from three 
cities now within three or four years, and would like to establish 
about 10 Choupal Fresh stores in each metro area.  Praveen explained 
that the company wants to extend its Hyderabad presence to 15 stores 
by March 2008, which may result in more collection centers and 
possibly ITC's development of its own cold storage capabilities and 
infrastructure.  (Note: While moving slowly on retail stores, ITC 
has also been involved in wholesaling.  Its Choupal Fresh stores 
sell wholesale to small retailers, while ITC also sells wholesale to 
other organized retailers and wholesale markets.  End note.) 
 
 
COMMENT 
-------- 
¶15.  (SBU) ITC's slow approach to organized retail - a focus on 
developing farmer relationships at the back-end of the supply chain, 
its gradual rollout of retail stores, and its cautious expansion to 
newer geographic areas - appears to give the company a lower profile 
and stronger standing in the areas where it operates.  ITC's 
reputation and long-standing ties to farmers also seem to help the 
company establish a firm link in this new market.  However, it is 
not clear if the company would be as successful in other parts of 
India - notably the north - where the issue is more contentious. 
ITC does not appear to be reaching the most vulnerable and poorest 
segments of the agricultural sector in their short and narrow 
business model.  However, it is apparent that ITC wants to be a 
player in this business for the long term and, seemingly unlike its 
competitors, plans to pay adequate attention to the farmer to 
achieve that goal. 
 
MULFORD