In store: Sourcing challenge for Wal-Mart

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

“They train us and assist us right from when the crop is sown to when it's harvested. They give us a higher price than the market for better quality,” said Todkari.

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 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, who is in charge of direct farming in south and west India for Wal-Mart, which already operates in India through 17 wholesale stores.

India recently let in global supermarkets, despite heavy political opposition, in the hope of improving the supply chain and bringing down wastage and costs in a country where one-third of fresh produce rots and food inflation is persistent.

Wal-Mart expects to open its first store selling directly to the public in 12-18 months, and aims to turn a profit in 10 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 per cent of Wal-Mart’s sales in its wholesale outlets in India.

The retail giant 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 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, who opposed the government’s decision to allow in supermarkets and includes both traders and local markets run by state Agricultural Produce Marketing Committees (APMCs), 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 the most vocal opponents of letting in foreign retailers, a move whose impact will be dulled by allowing states to opt in or out. Under populist pressure, most states plan to keep global operators out, at least for now.

There are an estimated 50 million small traders involved in the farm-to-store agriculture business across India, according to the Confederation of All India Traders.

Handpicked

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.