Sunday, November 13, 2011
Will tata chemicals becoming national brand for pulses work?
"Tata chemicals has just become the first branded national player in pulses. Will entry into this segemnt, which has so far been avoided by big players, work?"
Arun Yadav, IIT KGP
Let’s begin by exploring the current market condition for pulses. India’s pulses production is around 16.5 million tons for the current year while demand is around 18 million tons. This gap is currently bridged through imports. The per capita income of India is increasing at a fast pace. As the income increases,the demand for non-cereal food, and hence the demand for pulses, is also expected to grow. After paying the cut to middleman, farmers get only 50% of what their produce costs in the retail market. The main difference is due to the inefficiencies of supply chain. Low productivity of farmers is another problem which further reduces their income.
The entrance of Tata Chemicals into the pulses market can be well justified as they have good presence in the FMCG market through Tata Salt and its variants. The main business of the company comes from fertilizers and chemicals. Tata Chemicals has 690 rural outlets known by Kisan Sansar in the Northern and Eastern parts of the country. Tata Salt-iShakti distribution chain currently spans 1.5 million outlets. Rallis, its subsidiary, has a customer relationship programme called Kisan Kutumb in Southern and Western India. Together, they touch the lives of over 5 million farmers across the country. Tata chemicals can teach farmers to increase their productivity by using good seeds and fertilizers. They can also reap the benefits of having a strong supply chain. It will help them to reduce the total cost involved. Needless to say, Tata will have the first mover’s advantage too. All the following arguments support the move taken by Tata Chemicals but the final fate is always decided by the market itself.
Payal Bangar,IIM S
Tata Chemicals forays into the selling of pulses under the “i-Shakti” brand extending from salt. This would involve in them going for contract farming; providing the farmers with the necessary production inputs like seeds, fertilizers etc. and selling an agreed quantity of pulses at pre-determined rates, schedule and quality levels. This concept is not new in the agro-industry, however in India contract farming has more demerits than merits that it can boast of. The primary problem that may arise is, if the farmers side-sells their products in the market rather than selling to Tata Chemicals as per the contract. The selling can be done to either a different buyer or another competing company offering a price higher than that specified in the contract. Another reason for the side-selling is that the other buyers generally pay in cash which is a more lucrative offer than waiting for prolonged periods for money to be paid through the proper channels by the company. Governance is major issue and the final profit margin will be very low.
Another frequent problem that arises is that the farmers use the inputs supplied for other cash and subsistence crops. This will be a clear loss for the company as the crop yields will be reduced and the quality will be affected. Also, the Retail sector is not organized specially for sale of the pulses etc. hence customer perception will have to be changed. Due to these problems faced by the company it will not be feasible for Tata Chemicals to go for selling of pulses by contract farming.