VZCZCXRO9702
RR RUEHAST RUEHBI RUEHCI RUEHLH RUEHPW
DE RUEHNE #0095/01 0111100
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 
 
 
¶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