Serving the Bottom Tier Markets

ITC eChoupal Experience Sharing

M.Srinivas Rao
(msrao@itcibd.com)
India Development Foundation
New Delhi -15th December 2003

© 1999-2003
© 1999-2003ITC
ITCltd
ltd #1
Scope of My Presentation

• For various reasons, people in the bottom tier got locked into a low income >
low expenditure vicious cycle
– Serving these markets would firstly mean creating conditions for higher
incomes for these people, rather than engaging in competitive marketing
to get a larger share of their small wallet

• Information & Communication Technologies give us the ability to develop new

business models, which enmesh the corporate objective of shareholder value
creation with the societal goal of poverty alleviation
– Effective execution of such business models involves a lot of non IT
work too…

© 1999-2003 ITC ltd #2

The Potential & The Constraints of Indian Agriculture are well known

Potential Constraints
Large arable land Fragmented farm sizes
Rich & Diverse Agro-climatic Heavy dependence on Monsoon
Zones

Strong institutional base in R&D Poor extension work at the farm

level

Large domestic consumption Numerous intermediaries

base

Attractive export markets Weak infrastructure &

inconsistent quality

© 1999-2003 ITC ltd #3

Consequently…

• This created the classic “chicken first?” or “egg first?” syndrome, as the
solution eludes us until we tackle all the issues at once and in concert
– Tackling any one, or even some, wastes a lot of resources without
enhancing the competitiveness of the chain

• That’s why we have,

– Plenty of Grain Stocks, yet Starvation
– Large Qty of Raw Material, yet Unviable Processing Units
– Many Processing Units, yet Not Much Value Added
– Lots of Consumers, yet Under-developed Food Industry

© 1999-2003 ITC ltd #4

Typical Character of the Indian Farmer

• Fragmented
• Dispersed
• Heterogeneous and
• Weak Infrastructure (Physical, Social, Institutional)

© 1999-2003 ITC ltd #5

…And the Implications

• Numerous intermediaries…
– …necessary, as they make up for lack of infrastructure
– …evil, as they block flow of information and run an exploitative cycle of
dependency through linked transactions

• Incomplete markets…
– …result in absence of risk transfer mechanism for the farmer
– …leading to a lock-in into the vicious cycle

© 1999-2003 ITC ltd #6

…And the Implications

• Numerous intermediaries…
– …necessary, as they make up for lack of infrastructure
– …evil, as they block flow of information and run an exploitative cycle of
dependency through linked transactions

• Incomplete markets…
– …result in absence of risk transfer mechanism for the farmer
– …leading to a lock-in into the vicious cycle

© 1999-2003 ITC ltd #7

Consequently, to enhance farm incomes, there is a need for a system which can

• …deliver an end-to-end solution

– with farmer having the freedom of choice !
– who should be able to take an informed decision !!

• …deliver effective service

– notwithstanding the fragmentation, dispersion, heterogeneity and weak
infrastructure !
– at low cost !!!

© 1999-2003 ITC ltd #8

The Value Chain - Farm to Factory Gate

Agri Input Retailer

Input
Cos
Stockist
Seed Kaccha
Fertilizers

Broker
Chemicals
Trader
Practices

Processor
Adat

Farmer
Pakka
Dept of Agri VLW

Govt
Univ.
Met Dep
MSP
Insurance
Practices
Adat
Weather

Money Lender

© 1999-2003 ITC ltd #9

Our Insights & Foresights

• Middleman is not a villain. He is actually making up for the weak infrastructure.

He has become a villain by blocking information flow & market signals
– Harness the power of IT to leverage his strengths, yet disintermediate him
from information flow
– And, use the collaborative business model to give the freedom of choice to
the farmer

• So long as the business description is commodity trading, the lemons problem

will persist
– Focus on unique customer needs and build a demand driven supply chain

• Combine the two-way flow of goods & services to build relationships and to
bring down the cost of last mile
– Interactive transaction and efficient fulfillment channel

© 1999-2003 ITC ltd #10

Insights …….

• Let’s look at a few cross-industry success stories for lessons…

– Wide & Deep penetration of our traditional FMCG retail channel
– Rapid scale-up of Public telephone booths
– Low cost reach & effective customer servicing by Cable TV Operators

• … And the lessons are,

– Unleashing the power of small scale entrepreneur
– Effectively utilising (and not eliminating) the channel intermediaries
– Yet, disintermediating them from the market signals and information flow

© 1999-2003 ITC ltd #11

Reaching eChoupal to the Farmer

• Sanchalak’, a lead farmer selected from within the village and trained to
interface between the computer (placed in his house) and the other farmers,
is designed as a 3-in-1 solution to

a. Overcome the literacy barrier

b. Keep the costs low
c. Effectively manage the relationships in the village

© 1999-2003 ITC ltd #12

In other words..

Kaccha

Agri Input Retailer

Input
Cos
Stockist
Seed
Fertilizers

Broker
Chemicals
Trader
Practices
Adat

Processor
Farmer Choupal
Dept of Agri VLW

Govt
Univ.
Met Dep
MSP Sanchalak
Insurance
Practices
Weather

Money Lender

© 1999-2003 ITC ltd #13

© 1999-2003 ITC ltd
Use of ICT in ITC eChoupal to build an end-to-end solution

• Real-time multicasting of market prices, to delink flow of information from

transaction Video
– enabling the farmer to take an informed & empowered decision (no sunk
cost of transporting the produce to the mandi before price discovery)
• Unbundling & rebundling of transaction components Video
– Knowledge (what to use), Information (when to use), Transaction
(ordering an input) – each from a different provider
• Decoupling Source of Knowledge from Delivery
– Integrates specialized back-end with contextual front-end
• One-to-one interactive ability of Internet, in conjunction with other facilities
like soil / virus labs
– Delivers customized farming solutions
• Broadband connectivity
– For remote services (crop diagnostics)

© 1999-2003 ITC ltd #15

Non ICT Ingredients of ITC eChoupal

• Interlocking network of partnerships brings the “best-in-class” information,

knowledge and inputs
– ITC + Met Dept + Universities + Input Cos + Samyojaks (erstwhile
Commission Agents)
• Community participation in design and execution
– Fountainhead of innovation
• Experimentation based Project Management model
– Roll Out, Fix It, and Scale Up
• New Organisation structure to manage this innovation effectively
– 3x4 matrix Link
• Accountability through Public Oath
– Video

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Key Success Factor Self Sufficient Infrastructure

Power Connectivity

Training

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Most Important Factor

Recover costs through the inherent value in transactions,

instead of charging the farmer

• Logistics savings between the farm and factory leg by eliminating certain non-
value-adding activities in Soya
• Margins from cost-quality optimisation by segregating at source (farmer level)
and matching with the needs of different customer segments in Wheat
• Price premiums from sophisticated global consumers (who are highly
concerned about food safety etc) through export of products traceable to
farms / practices in Aqua
• Service income from value added for the market participants through superior
price discovery using electronic trading platform in Coffee

© 1999-2003 ITC ltd #18

Transaction Costs

The Mandi Chain

Rs per MT

Trolley Freight to Mandi = 100

Filling & Weighing Labour = 70
Farmer Incurs
Labour Khadi Karai = 50 270
Handling Loss = 50

Commission to Agent = 100

Cost of Gunny Bags (net) = 75
Processor Labour (Stitching, Loading) = 35
505
Incurs Labour at Factory (Unload) = 35
Freight to Factory = 250
Transit Losses = 10

Total Chain 775 V V2

© 1999-2003 ITC ltd #19

Transaction Costs

The eChoupal Chain

Rs per MT

Trolley Freight to Mandi = 100

Filling & Weighing Labour = 70
Farmer Incurs
Labour Khadi Karai = 50 270
Handling Loss = 50

Sanchalak = 50
Commission to Agent = 100
Processor Cost of Gunny Bags (net) = 75
505
Incurs Labour (Stitching, Loading) = 35
Labour at Factory (Unload) = 35 185
Freight to Factory 100 = 250
Transit Losses = 10
775
Total Chain 185

© 1999-2003 ITC ltd #20

The Scale Today

State (Crop)
MP (Soy, Wheat) 1,800
Karnataka (Coffee) 70
AP (Shrimps) 50
UP (Wheat + Rice) 900
Choupals 3000
Villages 12,000
Farmers 1,300,000

Adding Six New Kiosks Every Day

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The Numbers in Perspective

• Half way through the first Soya season, after we crossed the threshold level in
the number of Choupals set up…
– We bought 90,000 MT of Beans through Choupals (25% of our total buy)
giving an incremental contribution of Rs 25 Mn (60% of our total
contribution from this line)
– About 50,000 farmers earned an extra Rs 10 Mn
– And the Sanchalaks earned Rs 4 Mn as Commission

• One quarter of the Choupals have already returned our full investment, just
through Soya buying alone
– Half of the balance Choupals can pay back in the second year

© 1999-2003 ITC ltd #22

The Privileged Assets of eChoupal

• ICT Infrastructure:
– Computer
– Internet
• Multimedia
• Broadband
• Smart Card
• Physical Reach:
– Choupals within walking distance
– Multipurpose WH hubs within driving distance
• Key Intermediaries:
– Sanchalak (1 per cluster of 5-6 villages) 1500/state
– Sanyojak (1 per group of 10-15 choupals) 100/state
– ITC (support the farm produce marketing end)

© 1999-2003 ITC ltd #23

A who’s who of Indian industry

© 1999-2003 ITC ltd #24

The New Wave…..Sunehra Kal !!

• Using the “e”-choupal infrastructure of reach & scale & keeping the Sanchalak
as the pivot …..
– The launch of initiatives that can :
 Improve Farmer Livelihoods
 Long Term Community Impact programmes
– Pilot in 4 districts of MP & UP
 Livestock Management programmes
 Water Management
 Self Help Groups focusing on women
– Synergising the skills of
 ITC ‘s management skills,
 “e-choupal “reach
 The knowledge & experience of NGO’s

© 1999-2003 ITC ltd #25

Our Vision

• Rural India’s largest & most effective Interactive Transaction & Fulfillment
Channel
– Covering 200,000 villages across 14 States through 50,000 choupals
– 1/3rd of all Indian Villages
– Building capability to deliver superior shareholder value sustainably

• Also contributing to
– Enhancing global competitiveness of Indian Agriculture
– And, Raising the standard of living in Indian villages

© 1999-2003 ITC ltd #26

Enduring Value : The Global Context

• With the advent of globalisation, large multi-national corporations are coming

increasingly under scrutiny with regards to their social, ethical and
environmental policies

• Several Corporations have started ‘Sustainability Reporting’, using the triple

bottom line format i.e. Economic, Social and Environmental

© 1999-2003 ITC ltd #27

The Corporate Social Responsibility Ladder

• Responsible Implementation of Core business activities

• Poverty-focused social investment and philanthropy programmes

• Getting engaged in Public Policy dialogues and institution building

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The Opportunity …..

• …is to demonstrate, how ITC has added a fourth step in this ladder to create
the most enduring of values…

• …by building a structure, whereby our need for creating shareholder value is
enmeshed with that of the farming community in a mutually supportive,
interlocking and interdependent partnership

© 1999-2003 ITC ltd #29

 Our Mission
“Improve the Quality of Life in Rural India.”

© 1999-2003 ITC ltd #30

Thank You.

ITC Limited
e-Choupal
© 1999-2003 ITC ltd #31