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Food retail investment by e-tailers likely to boost Indian supply chain
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Friday, 01 September, 2017, 08 : 00 AM [IST]
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Shraddha Joshi, Mumbai
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Experts have opined that the nod by the government of India to Amazon, the American e-commerce giant planning to invest $500 million in food retail in the country, could facilitate the overall processable food product market with the even arrangement of the currently uneven Indian retail sector and act as a building block for the growth of the Indian food supply chain.
This step by the government seems to have reinforced the ease of doing business and opened huge doors in the sector to investors. In the wake of its decisions to permit 100 per cent foreign direct investment (FDI) in food retail and abolish the Foreign Investment Promotion Board (FIPB), the Department of Industrial Policy and Promotion (DIPP) has approved the proposals of various e-tailers to invest in food retail in the country.
Darshan Patel, analyst, Avalon Global Research said, “With the National Democratic Alliance (NDA) government (led by prime minister Narendra Modi) approving three FDI proposals in food retail worth $695 million from Amazon, Grofers and Big Basket, the sector will open up opportunities for new players, and is heading towards consolidation.”
“The decision to allow investment by companies such as Amazon, Grofers and Bigbasket will only enable the creation of a back-end infrastructure and bring in the latest digital innovations to the farm sector. Foreign companies will have to compulsorily invest a part of the funds in building infrastructure at the farm gate level to benefit farmers,” he added.
“The investment in the food processing industry is also expected to positively influence growth in areas such as food packaging, storage and transportation, among others. Companies like Amazon will be able to potentially control the supply chain end-to-end and not be dependent on third-party sellers on its marketplace,” Patel said.
“The investments would also certainly raise the food processing level in India, cut the wastage of fruits and vegetables by narrowing the gaps in the supply chain and control food prices, while increasing farm incomes,” he added.
Explaining the long-term impact of decision to allow such investments on the food processing industry landscape, Rinkal Dawra, senior research analyst, MarketsandMarkets, said, “The recent investments and expansions in the market by corporations such as Amazon, Grofers, Metro Cash and Carry India Pvt Ltd and Bigbasket are acting as building blocks for the growth of the Indian food supply chain.”
“Technology transfer is one of the primary practices that is expected to take place in the long run as a result of such investments. Advanced technologies and processes, such as cold storage facilities, refrigerated vans and pre-cooling chambers, can reduce the production of waste immensely,” she added.
Dawra said, “Earlier this year, Bigbasket, Haldiram and Amul and logistics company Balmer Lawrie were among the visionary leaders who received the approval to set up cold chain projects across India, with an approximate investment of $4.8 billion in cold chain projects. The projects will have distinct phases, beginning with on-farm grading and sorting, followed by the processing of food products, and thereafter, distributing it to the end consumers.”
According to the ministry of food processing industries (MoFPI), currently there are about 5,300 cold chains and very few refrigerated vans, which is insufficient for the country’s total horticulture production of 287 million tonne.
The newly-sanctioned projects are expected to create an additional capacity of 2,76,000 tonne of cold storage capacities. Such investments in local manufacturing units by multinational corporations (MNCs) will equip them with technological know-how, ultimately leading to increased efficiency in the food supply chain systems of India, along with reduction in wastage and post-harvest losses.
The entire food processing sector, as a whole, seems to have been affected with the recent development in the Indian food retail. Giving an insight into this, Dawra said, “Farming, as well as the distribution and marketing of food products, are likely to go through a definite change gradually.”
“The sectors that are expected to benefit from these developments in the food processing sector are technology, economy, consumers and employment,” she added.
“With respect to technology, cold storage infrastructure and back-end facilities are likely to develop. Once foreign players start setting up shop in India, tech transfers are likely to happen. The domestic market players are expected to benefit massively and the sector will experience a rapid growth in the next five years,” Dawra said.
“Industries such as food packaging and transportation are expected to expand with the expansion of the food processing industry. This growth will subsequently drive the nation’s economic growth in the long run,” she added.
“Employment generation is another advantage for the Indian economy, with these investments. Increase in foreign investments will mean a rise in the number of processing units, distribution centres, and facilities, ultimately generating more employment opportunities,” Dawra said.
The growing interest of foreign investors in the food retail sector are likely to put forth a strong growth partnership bond between the foreign and domestic players of the market.
The capital inflows from overseas will boost the manufacturing facilities of domestic players. The Indian market will work in harmony with global standards, ultimately streamlining the entire food processing industry.
Consumers are likely to benefit with easy access to a wide range of food products, convenience and adequacy in product information.
Highlighting the overall impact of processable food products on the country, Dawra informed, “In 2016, Bigbasket got an approval for FDI worth $156 million (Rs 100 crore). Investments by companies aim to strengthen back-end infrastructure and increase the number of collection centres and processing units.”
“An increase in the number of distribution centres and processing units will definitely create a standard model for the huge opportunity lying in the local processing market of food products in India. Additionally, these strategic investments could also lead to the expansion of warehousing and cold chain facilities of these corporations,” she added.
“A streamlined food processing market will improve the partnership bonds between supply chain components. The construction of storage facilities and improved transportation will reduce losses to Indian farmers,” Dawra said.
“Farmers will receive fair prices through direct selling to organised e-retailers. Excess reliability on intermediaries who often pay lower prices will be eliminated. Local suppliers and domestic manufacturers will also gain huge access to the market, as global retailers establish forward and backward linkages which can also be beyond national boundaries,” she concluded.
Background
Amazon got the nod for its proposal to invest approximately $500 million in India’s food retail sector. This was the first big investment plan by a major international company.
Besides Amazon, MoFPI had also approved proposals for investment from the Indian e-commerce sector, including Grofers and Big Basket, which are in the online grocery space.
MoFPI also expected potential investors to invest in back-end infrastructure (from farm to fork) and supply chain to strengthen the food processing ecosystem in the country.
Last year, Amazon, Grofers and Big Basket had submitted FDI proposals to the government to undertake retail trade in food products with an aggregate investment of $695 million.
Meanwhile, industry experts believed that this would have impact on the larger agricultural processes in the country.
Said Dwara, “Foreign investment in food retail would have a mixed impact on the agricultural processes. One of the possible benefits could be the development of superior models of integrated cold-chain infrastructure.”
“In addition, the practice of contract farming could intensify. Retail giants could purchase raw materials directly from farmers, eliminating middlemen and longer supply chains,” she added.
However, despite the positive impacts, the waiver of the traditional atmosphere of retail in India could lead to some unfavourable impacts as well.
For instance, the country’s largest e-grocers, such as Bigbasket, source about 80 per cent of their food products directly from farmers.
“Although the entry of super retail stores, such as these, is eliminating the need of middlemen, these chains will establish a demanding monopoly model of their own. Once the middlemen are removed, the farmers will be left with no option but to sell the products to these companies and receive their payments from these corporations, whatever they offer,” Dawra concluded.
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