ITC Steps up pace from Mandi to Market - The Economic Times
July 25, 2012
Providing Solid Foundation for New Business - E-Choupal network has boosted the FMCG business, but ITC needs to keep investing to deepen rural reach
When ITC recently declared that it had cut losses in its non-cigarette portfolio of personal care products and packaged foods by a record 35% in fiscal 2012, it raised hopes of a faster breakeven as against an earlier target of fiscal 2017. If the tobacco giant does succeed in making its fast-moving consumer goods (FMCG) operation profitable in less than five years, it may just be the less glamorous agri-business team at the back end that raises a toast.
In fact, that team has enough reason to celebrate even today, what with ITC lowering its FMCG losses quarter-on-quarter despite high investments in new launches. This is possible thanks to smart sourcing by the agri-biz division's e-Choupal network.
ITC's agri-business division flagged off e-Choupal more than a decade ago as an IT-driven marketing channel to align farm output with market demand. The agri-business arm, which runs the e-Choupal network, serves as the back-end source of raw materials that go into ITC's personal care products and packaged foods. The web-based e-Choupal network has now become a key driver for the FMCG business that comprises brands like Sunfeast, Aashirvaad, Vivel and Fiama Di Wills.
The non-cigarette FMCG business pared down losses from Rs 349 crore in 2009-10 to Rs 297 crore in 2010-11 to Rs 195 crore in the last fiscal. During this period, ITC invested on its basket of brands, with Rs 2,000 crore being pumped into the personal products and packaged foods business in fiscal 2012 alone.
Today, ITC internally evaluates its e-Choupal capabilities before foraying into any new category with a differentiated offering. For example, Aashirvaad multi-grain atta was launched after such an assessment.
Of ITC's agri-business division revenues of Rs 5,695 crore in 2011-12, internal sales for supplying commodities to the FMCG business stood at Rs 2,282 crore as per the latest annual report. ITC says the non-cigarette FMCG business is growing at a compounded annual rate of 40% since 2005-06. While chief executive (agri-businesses) S Sivakumar, says it will be difficult to quantify the profit implication e-Choupal has on the FMCG business, he reckons it will be significant.
What's more, ITC has started to monetise its e-Choupal network, which has 20 million rural consumers according to ITC estimates (the market-led model reaches 4 million farmers, each of whom on an average is part of a five-member household). The company is leveraging this captive base - few marketers can boast of such a sizeable one - by offering the platform to 160 companies who want to tap rural markets; it is also offering newer services like private healthcare and rural headhunting.
The network has also become a big rural sales and distribution channel for ITC. The company has started to sell its FMCG products in rural India through e-Choupal.
"e-Choupal is helping ITC build a strong relationship with the rural populace, which is one of the biggest growth drivers for the FMCG industry," says Anand Mour, senior FMCG analyst at Ambit Capital.
e-Choupal enables ITC to source commodities at a much lower cost than competitors. This is because it buys directly from farmers, which eliminates intermediates and multiple handling, thereby reducing transaction costs. Direct sourcing from farmers has enabled ITC to preserve the identity of the commodity. This, Sivakumar says, has allowed ITC to create differentiated premium products like Aashirvaad multi-grain atta.
Says Kurush Grant, ITC's executive director who is responsible for the FMCG business: "The ability of the e-Choupal network to preserve product identity from farm to factory is invaluable for all of ITC's agri-based FMCG businesses. These identity-preserved products enable us to give differentiated offerings based on varying consumer preferences across the country."
ITC officials point out that such benefits give the company room to manage product pricing; and this has enabled it to gain market share. A case in point: while almost all FMCG companies increased prices more than five times in the last 15 months, ITC increased prices just twice.
The e-Choupal network comprises 24 Choupal Saagars (rural hypermarts), which are owned by ITC, and 70 warehousing hubs outsourced through service providers. Choupal Pradarshan Khets act as demonstration and selling points for agriculture companies; and companies sell their products and service through Choupal Haats. ITC typically organises 60,000 Pradharhan Khets and 6,000 Choupal Haats in a year.
Today, more than 160 companies ride on the e-Choupal network including Bayer, BASF, State Bank of India, Bharat Petroleum, Nokia, TVS Motors, Maruti Suzuki India, Tata Motors and Monster.com.
Although ITC is investing in its FMCG portfolio, analysts tracking the company say it is going slow on creating physical infrastructure for e-Choupal. "Firstly, ITC is already present in key states for raw material procurement; and, secondly, the e-Choupal model is a high-cost structure," said an analyst with a top brokerage firm requesting anonymity.
ITC set up its last Choupal Sagaar in 2008. The company, however, attributes the slowdown in expansion to poor agri-reforms. "Rural infrastructure costs money, but that is factored into the e-Choupal business model and the return expectations. Slowing down in expansion is primarily due to the slowing down in agri-reforms after 2007," says Sivakumar. He adds that a few clauses in the APMC Act, Essential Commodities Act and Forward Contracts (Regulation) Act put sourcing restrictions on companies.
