Dr. Rakesh Singh is Director, Durgadevi Saraf Institute of Management Studies, Mumbai.
One of the celebrated bottom of pyramid successes Hariyali kisan bazaar, a rural initiative of DSCL corporation has closed almost all the seventy five plus rural outlets spread throughout northern India. Hariyali was one among the initiatives corporate India had taken to create vibrant rural markets. Tata Chemicals Tata Kisan Sansar, ITC’s E-Chaupal, Mahindra Krishi Bihar called Subhlabh all started a decade ago.
Many other such initiatives started during the decade. These companies were intrigued by opportunities that rural markets offer and were hailed as great experiments. But despite the hype none of them seem to have been able to create a sizable business. Most of these initiatives are still evolving and struggling to scale themselves and sustain the business model. With the closure of Mahindra Subhlabh earlier and Hariyali in November last, a number of questions have arisen about corporate initiatives in Indian agriculture and rural markets.
Why has Hariyali failed as a business model? What are the threats in terms of scaling and sustaining such business models? Can such business model succeed in fragile rural business environment? What needs to be done?
Hariyali including all other initiatives had been the product of a very well thought out business model. These initiatives had the good intent of streamlining the agricultural supply chain where farmers are constantly exploited by numerous agents and intermediaries. There is huge appropriation of surplus by these intermediaries leaving farmers, processors and the final consumer worse off. The Draconian APMC act in India has been one of the biggest policy drags on agriculture in India just benefitting traders. What is interesting is that when we profile the risk of the farmers and agribusiness companies we find that they both face price, quality and quantity risk.
The farmer does not know what price he will receive for his produce, will he be able to sell all that he has produced and will he get the right price for his produce. Agri commodity companies do not know at what price will they be able to source their supplies, will they get the quantity they need and will they get the right quality of supplies. This increases the cost of doing business as transactions cost soar up in term of search, negotiation and monitoring amidst information asymmetry created by the intermediaries in the Mandis. Most of the above initiatives had this as a part of their integrated business plan for rural India. ITC for instance has been able to reduce transaction costs both for farmers and itself creating a win-win situation. Others have wanted to strengthen this prominent aspect of this model but have failed to do so effectively.
Indian agriculture suffers from poor quality of crop protection chemicals on one hand and an inefficient and corrupt distribution system in almost all the other agricultural input marketing primarily seeds and fertilizers. Quality and timely availability along with high cost due to black marketing has been a matter of great concern. Farmers are also unaware of the dynamics of optimal and sustainable use of these inputs. They often use overdoses of fertilizers and pesticides. Hariyali Kisan Bazaar a unit of DSCL was primarily into retailing of Agri-inputs like pesticides, seeds and fertilizers and had diversified into consumer expendables and durables to service the rural market through Hariyali rural retail chain. Disseminating right kind of information and helping farmers adapt to modern methods and processes also becomes an important aspect of this model as it helps build trust and also thus help in scaling the business. Hariyali along with other similar initiatives have the good intent of adopting this but they fail to make this component of their business model effective.
But Instead Hariyali kisan bazaar became high price point and fluctuating volume. The cost of distribution in remote of villages along with its supply chain cost going haywire. Going direct to the rural as structural options through has its own cons like huge proliferation of billing parties (high cost of complexity).
Ability of company depot to service these distributers is limited resulting in high stock levels at some place and stock-outs at other, increasing holding costs and managing these dispersed campuses requires increase in cost of sales force. The cost of land and rent makes it difficult to service these markets with low price points. High price points along with fluctuating rural incomes because of vagaries of rains and drought makes high price point inevitable for a low price point market making all such experiment unsustainable.
The failure of such experiment forces one to think what needs to be done to make such experiments viable and sustainable in future. Prahalad’s Bottom of pyramid market frameworks do provide a framework for corporates to understand the complexity and help create virtuous cycle of creating buying power, shaping aspiration, tailoring solutions and finally improving access. For all these to happen, Indian firms must learn to collaborate and succeed. Incremental business models will not work in these markets.