Wal-Mart faces sourcing challenge in India

Last Updated 16 October 2012, 16:21 IST

As Wal-Mart Stores Inc ramps up its operations in India, it needs to find more farmers like Yogesh Todkari.

His acre of cauliflowers is big, leafy, and a deep shade of green, thanks to modern irrigation and quality nutrients and seeds - all provided by the world’s largest retailer. Most farmers in India, though, don’t meet Wal-Mart’s standards.

Investing in farmers to help them improve quality and efficiency, and getting around the army of costly middlemen, will be key to whether global chains like Wal-Mart and Tesco Plc succeed where local operators have failed to make a profit. It will also be a test of whether India’s politically fraught decision to allow in global supermarkets in order to modernise its food supply chain proves to be the right one.

“We plan to procure as much as we can via direct farming so the procurement from traders in local markets is as little as possible,” said Krishnakant Reddy, in charge of direct farming in south and west India for Wal-Mart.

Wal-Mart, by far the most aggressive foreign supermarket operator in India, expects to open its first store selling directly to the public in 12-18 months, and aims to turn a profit in 10 years, something it hasn’t managed in China after 12 years. To get there, Wal-Mart plans to sign up 35,000 farmers over the next three years, up from the 6,700 it has now. Fresh produce accounts for about 30 percent of Wal-Mart’s sales in its wholesale outlets in India.

Wal-Mart must buy in small batches from small plot-holders in a country where more than 80 per cent of farms are under 2 hectares. That means contracting with thousands of farmers will still yield only a few thousand tonnes.

“It’s going to be a huge challenge and requires a lot of work on the ground,” Reddy said.

Wal-Mart is trying to learn from the difficulties of local chain operators such as Reliance Industries and Shoppers Stop, most of which rely on middlemen after struggling to establish a strong direct farm supplier base.

Skirting the entrenched network of middlemen isn’t easy. States require all farm produce to be sold through government regulated markets, and impose registration and transaction taxes on buyers, in addition to fees charged by middlemen operating in the markets.

In some states, including Karnataka, buyers can purchase directly from farmers, but still have to pay taxes and fees both to the APMC and middlemen.

Traders were among most vocal opponents of letting in foreign retailers. There are an estimated 50 million small traders involved in the farm-to-store agriculture business across India, according to Confederation of All India Traders.

The region near Pune is one of India’s most productive for horticulture, and Todkari is among only 600 farmers to have met Wal-Mart’s standards. The retailer targets a small number of farmers who are respected locally and can convince others to work for the grocery giant.

The farmers Wal-Mart selects are suited to modern irrigation, have higher yields and are capable of crop rotation. Wal-Mart’s investment in farmers is part of the $100 million initial spending India requires foreign chains to make under the retail reforms.

Wal-Mart buys more than a dozen fresh produce items from the Narayangaon area, including cabbages, tomatoes, onions, grapes, cauliflowers and pomegranates. The US-based retailer has tie-ups in north India with logistics companies to send fresh produce to store by refrigerated truck - a facility it will extend to other farm bases as procurement volumes increase.

(Published 16 October 2012, 16:21 IST)

Follow us on