Headed for a Cooler Future
As India wastes 40% of its produce before it reaches the shelf, the time is ripe for a revolution in food collection, storage and distribution in this country. To take advantage of it, downstream retail and CPG companies will need to work a little differently and build new capabilities
After Independence, successive Indian governments placed a premium on food security. At a time when private capital was restricted, the government invested in everything from universities to promote agricultural technology to roads and warehouses. It was an important area and was given due importance. However, execution has not been a strong point for successive Indian governments and, like medical services and education, food product transportation and storage has been a shambles with poor effectiveness to show for.
The waste of fresh produce in India is the stuff of legend. The amount of food lost each year is unbelievable. When the total loss of grains, fruits and vegetables is added up, the sum comes to around Rs 44,000 crore a year. To put this in perspective, consider a Planning Commission document on the 10th 5-Year Plan. The Commission estimated that the value of commodities distributed through the entire PDS system of nearly 500,000 ration shops is only Rs 30,000 crore. Consider the human cost of the wastage of food that is grown using petrochemical fertilisers and invaluable water. It is well known and widely publicised that most of this loss is caused by the lack of proper storage and transportation facilities.
Times are changing. From a period when everyone looked to the government to make an impact, we are seeing private entrepreneurs of all sizes and shapes step in and provide basic services. By and large, it has been a good shift for the country. People lead much better lives as the government has stepped back from providing commercially viable services to the private sector and focused on regulating these services. Companies are growing and generating jobs on a phenomenal scale in industries like telecom, healthcare, express delivery and private security.
Similarly, given that the size of the opportunity is so large, it is clear that improvements in food procurement, transportation and storage will happen. It is also clear that this will necessarily cover products requiring temperature control and so will involve cold chains.
Current State and Plans
The cold chain industry in India is highly fragmented, with over 3,500 companies of various sizes operating in this space. To use a quintessentially Indian term, “organised” players account for only 10% of this number. Most of the capacity is concentrated in UP, West Bengal, Gujarat and Punjab. Given this profile investment has been somewhat unplanned and somewhat skewed based on local knowledge and preferences. For example, about 75% of the storage facilities are only suitable to store fresh vegetables and fruits, being in the 0° to 10° C range. There is similar concentration in the refrigerated truck population, with 80% of refrigerated vehicles being used to transport milk.
Since both the farm end and the retail end have been fragmented for a long time, it is not surprising that we have such unplanned, and unreliable, cold chain facilities. With the growing sophistication of retail and an increasingly sophisticated consumer, the pull from the downstream supply chain will increase. This will be in terms of product range, freshness and reliability of supply. In order to meet these requirements, the sector will have to undergo a veritable transformation. In doing so, it will face three challenges - that of capital, operating costs and talent.
Plans on the capital front
The National Centre for Cold Chain Development (NCCD) was set up by the Government in 2012. The Government itself is investing USD 15 billion in facilities over the next 5 years. Further, it is promoting private investments in this sector and has cleared it for 100% FDI. A further 100% capital depreciation rate will help kick start investments.
Operating costs will be higher
Because of the power situation and the inherently more complex maintenance requirements of a cold chain infrastructure. This infrastructure will include temperature controlled warehouses and refrigerated trucks. Power shortages of the duration that rural India and small towns face can be crippling. Like in telecom towers, the need for back-up generators will drive up operational costs. Similarly, servicing the refrigeration units in warehouses and trucks will require expenditure. This will have to be at the levels needed to support service networks across the company. All this will involve cost structures higher that what traditional providers of warehousing space are accustomed to dealing with.
Need for skilled technicians
About 10 to 15 years ago, when warehouses started seeing computer systems to handle inventory records and invoicing, there was a challenge in getting computer operators to remote locations. Now, we will face the challenge of getting trained technicians to maintain equipment across the length and breadth of the country. Even drivers of refrigerated trucks require special training.
While these challenges are not small, they are inherently commercially viable. The pricing of fresh produce and the elimination of waste will more than offset the higher cost involved. Consider this: if we can run rural BPOs at world class levels in small towns, this problem too will get solved. In doing so, we will generate new businesses and jobs in areas that need them.
Perspective of the individual company
Both the government and new enterprises have a large role to play in this changing landscape. But it is not only the two of them that haveto change. Downstream retail and CPG companies that intend to use these facilities will also need to make changes. Most of them are accustomed to operating in low-cost, low-productivity environments. Their cost frameworks are used to traditional and very low costs, often with terrible productivity, because nothing else was available. Their business plans and control systems will need to change to adapt and exploit this new environment. What are the main internal challenges that companies using these facilities are likely to face? Again, there are three broad areas: strategic capacity planning, operational optimisation and cost accounting systems.
Today, most downstream distribution and retail companies have very rudimentary longterm planning processes. Since getting any warehousing is a challenge, the need to profile and work out capacities, based on product portfolio projections is not done at present. Similarly, since the overwhelming majority of truckers own 2 to 3 vehicles, there is little fleet planning that is possible or done. This will need to change when specialised facilities are required. Long-range business planning that typically shapes product portfolio decisions will need to factor in logistics capabilities.
Operationally, most companies have not had robust planning and scheduling capabilities. The available infrastructure was usually so unreliable that detailed planning and tight execution was simply not feasible. The low levels of cross docking in this country are testimony to this fact. However, when cold chains build up, the cost of poor planning and scheduling will increase. There will be less leeway to make errors in capacity requirements and taking temporary space to tide a festival rush or a promo. So, accuracy of warehousing capacity scheduling will become critical and so will fleet utilisation planning. The latter is a new skill for most companies. They will need to invest in people in logistics just as they have invested in people in factories.
All this will need a different approach to cost accounting and benchmark setting. Firstly, costs will go up. Given the kind of infrastructure that logistics teams have been working with in this country, this is long overdue. It is only by accepting this fact that we can break out of the low-cost, low-productivity cycle we currently operate in. Further, many cost accounting models in companies tend to focus on cost elements and not cost systems. So, there are targets for reducing individual cost elements, such as cost of warehousing per square foot or cost of trucking per ton km. However, the cost of loss in productivity caused by poorly designed or maintained warehousing is often lost and passed on to the third party service provider. The cost of keeping trucks waiting is negotiated down with small-time truck owners. While this is happening sales is lost because the required SKU has not been unloaded from a waiting truck. Damaged goods increase because of poor handling in warehouses that are little more than shed. In attempting to hold costs by cutting down these 3rd party margins, departments save money, but the company loses money overall.
Whichever way you look at the problem of wasted food, from a moral or an economic perspective, there is a crying need for rapid change in this sector. Cold chains are needed and are needed soon. There is a strong economic argument for setting them up, but to really latch onto them and make a difference downstream retail and CPG companies will also need to change. If this happens, the impact can potentially be larger than a Make In India campaign.
The author is Partner & Managing Director – Indian Operations, CGN & Associates India Pvt Ltd