Market - DOC by zhangyun


									      Market orientation when customers seem content with the status quo!

               Observations from Indian agri-business and a case study


                                             S. P. Raj*


                                         Atanu Adhikari**

*Distinguished Professor of Marketing, Whitman School of Management, Syracuse University,
Syracuse, NY, U.S.A. 13244 – 2450. Tel. 315-443-3147 e-mail:

Affiliated Visiting Professor of Marketing, Johnson Graduate School of Management, and
International Professor of Marketing, International Programs, Cornell University, Ithaca, NY

**Assistant Professor, ICFAI Business School, 3rd Floor, Astral Heights, Road # 1, Banjara Hills,
Hyderabad – 500 034, India, Tel. (0091) 9966547633 email:

The authors acknowledge the valuable comments of Mr. V.V. Sadamathe, Adivsor, 11th Planning
Commission, Government of India.
       Market Orientation when customers seem content with the status quo!

                   Observations from Indian agri-business and a case study

Introduction to what we are looking at and why it is of significance (this headingto be removed after editing)

Market orientation, in its quintessence, calls for detecting customer articulated needs as well as divining

their latent needs and successfully delivering value better than the competition. Various requirements

of market orientation put forth in the literature include: understanding the market through systematic

market intelligence, creating competitive differentiation, nurturing competencies, and cultivating an

organizational culture to successfully satisfy market needs. In the arena of agri-business many products

have become commoditized, especially in emerging markets that have historically experienced chronic

shortages and poverty. This resulted from an exclusive focus on increasing production and achieving

cost reduction. When an economic system and a system-wide business culture have had such prolonged

focus along these dimensions, the challenge is particularly acute as firms attempt to differentiate. The

challenge is further accentuated in emerging markets that present the dual responsibilities of seeking to

serve customers as well as to enhance the welfare of growers who are small scale farmers. However,

two slivers of opportunity with the potential for substantial growth are the rising aspirations of domestic

customers in emerging markets as their incomes increase and exploring “service” offerings as


In detecting and acting upon evolving customer needs, timing is a critical factor – too early, and

customers are not yet ready to appreciate the differentiator being offered; too late, and it becomes easy

for competitors to quickly duplicate, if they haven’t already begun to offer another way to satisfy the

customer need. In essence, the challenge in this dimension is one of appreciating when a latent

customer need “turns the corner” and becomes a felt or articulated need, and to what extent the firm

can surface customer recognition of the need. The second aspect that is explored in this chapter is one
that is fairly well acknowledged in developed markets but is under-appreciated in developing ones –

namely, using high quality service as a differentiator and using price-discrimination strategies for

customer segments whose willingness to pay for added service may be higher than the average

customer. This is all the more likely to be true in an emerging market such as India. As incomes rise, and

middle-class consumers raise their expectations they become more aware of global trends and the

products their counterparts enjoy in advanced markets. While all of this appears straightforward in

concept (even if challenging to execute in practice), there is a critical challenge that the agri-business

sector poses, especially in emerging markets. This alludes to the imperfections in the market system as a

whole from farmers, brokers, traders, and retailers to consumers, who may not all be ready for new

ideas and who have self-interests to preserve the status quo. Further, considerable information-

asymmetry exists in such markets. Some of this stems from the physical isolation of some of these

entities, such as farmers, from the succeeding stages in the supply-chain resulting in ignorance of

market information, misinformation and market imperfections fostered by other channel

intermediaries. These ideas collectively present a picture of riddles. Yet, this picture promises enormous

potential for firms that can envision a future market situation – one that is both economically lucrative

to the players in the value-chain and serves to improve economic welfare. Visionary market orientation

can here be seen as an instance of “doing good by doing right”.

While customers and competitors are the main focus in market orientation strategy, exogenous but

related factors that influence the long chain of entities in the producer-consumer link become important

when a firm’s actions have significant socio-economic repercussions along the entire value chain.

Organizational culture for market orientation within the firm is, of course, important; in the context of

emerging economies the system-wide culture of business practices takes on equal significance.
In this chapter we bring together these diverse considerations and their interplay in one particular firm’s

efforts in the cold storage industry to become market oriented in the agri-business sector of an

emerging economy – specifically, India. The set of activities in the value chain is rather long and, In

India, an arduous one, spanning growing, transportation, storage, processing and retail sales – each one

of which offers challenges and promise in any firm’s efforts to become more market oriented. We will

discuss the efforts made in recent years by several firms in India that are engaged in agri-business to

become more market oriented, as well as the public policy initiatives that are being undertaken to

facilitate this transition.

2. Background of Agricultural Transformation in India

Agriculture is arguably the oldest organized productive endeavor in the world. In stark contrast to the

developed world, India has undergone a rather slow transformation, both in adopting new agricultural

practices such as farm mechanization for harvesting and secondly in effectively organizing value-added

activities at a system wide level. Promotion of new practices is imperative in ensuring adequate

production of good quality produce without jeopardizing the welfare of cultivators and agricultural labor

numbering 89 million households of India’s rural population of 150 million households1. Value-adding

activities that we broadly refer to as agri-business, require investments that encompass agricultural

inputs, methods of transport, cold chain, processing, and retail. The terrain of development is rather

uneven, and the progress rather poor.

Several factors are at play in emerging economies like India that present a host of challenges and

opportunities for adding value to the customer. (i)The increasing physical distance between production

and consumption, and the resulting rise in unmonitored entrepreneurial intermediaries strains the

 Source : Report No. 498(59/33/1), Situation Assessment Survey of Farmers: Indebtedness of Farmer Households,
National Sample Survey 59th).
system in terms of reduction in transparency of information available to the players in the system. Thus,

instead of being value adding, they may be partially value-eroding. (ii) With India’s recent economic

boom, there is a concomitant desire for other value-added activities such as cold-storage, processing

and packaging, and enhanced retail experiences. (iii) As the basic food necessities to satisfy the hunger

of the population are met for most income levels, inadequacies in meeting the quality of nutritional

needs gain attention.

Increasing distance between farm and fridge

From about 1951 to the year 2001 the population grew from just over 350 million to over 1 billion2.

Consequently, as the burgeoning imbalance between agricultural production and population growth

became patently evident, the dire need to bridge the gap was addressed with single minded attention.

India managed to grow its agricultural output dramatically as a result of the “green revolution” over a

period of about 5 or 6 decades since its independence. During this period, the growth in agricultural

output as best exemplified in the production of staple grains including rice and wheat, rose from 50

million tonnes to 206 million tonnes. Fruits and vegetables production increased from 22 to 113 million

tonnes. It is remarkable that this growth occurred without the widespread acquisition and consolidation

of small farms by conglomerates. About 233 million were engaged in agriculture in 2001 operating or

working on 170,000 hectares of agricultural land and about 116,000 operational holdings with an

average holding of about 1.4 hectares or 3.5 acres. Over 60% of the operational land holdings were less

than about 2.5 acres (1 hectare). Medium to large holdings, averaging about 6 and 17 hectares

respectively, constituted 5.4% and 1.2% of the total number of holdings3. Although the drive for more

 Census India
 Agricultural Census Division, Ministry of Agriculture, New Delhi cited in AGRICULTURAL STATISTICS AT A GLANCE,
Aug. 2004.
effective agricultural practices was pursued, they could only be adopted in keeping with the necessity of

ensuring the welfare of small farmers. This limited the adoption of many advanced methods that

required scale of operation. As the population grew exponentially, the centers of employment

opportunity in manufacturing and service enterprises concentrated in urban areas encouraging the

people to migrate from rural areas to urban centers. This quickened pace of urbanization separated

large numbers of the population from the proximity of food production. Agricultural production and its

consumption which were traditionally in proximity to each other, slowly but inexorably drifted apart. For

example, in 1951 the split between rural and urban populations was about 300 million rural and 62

million urban; by 2001 it was close to 750 million rural and 300 million urban. (Census of India).

Challenges posed by the widening gap between production and consumption


The increased distance between production and points of consumption precipitates several challenges.

Foremost is the limited availability of infrastructure and modes of transport required to serve the

consumer population. The situation is aggravated by a weak infrastructure such as the lack of paved

roadways that result in prolonged delays in moving produce to markets. Modes of transport, including

trucks, are quite likely to be of inferior quality when compared to developed markets. Once again,

similar to its earlier march to freedom from hunger by focusing on volume of production even while

accommodating constraints placed to ensure farmers’ welfare, a recent study notes that India’s freight

rates are among the lowest in the world. Costs which range from 0.019 to 0.027 USD for an average ton

km is one of the lowest in the world, and lower than, say, the United States at 0.025 to 0.050 USD4.

 SOURCE: Clell Harral, Ian Jenkins, John Terry, Richard Sharp, The Efficiency of Road Transport in India: The
Trucking Industry, WB Background Paper, 2003. Cited in ROAD TRANSPORT SERVICE EFFICIENCY STUDY, Worl Bank,
Nov 2005)
As the World Bank report notes, “The industry’s structure, comprising transporters, broker agents and

small operators, is market driven and appears to be serving the market reasonably well. Given the very

low freight rates, one has to conclude it is an effective industry structure.” Interestingly though, the

same report goes on to state, “While the industry delivers very low freight rates, service quality is poor,

with low reliability and transit times nearly double that of developed countries. It is not adequate for

higher-value manufactures or the time-sensitive export trade which comprise a growing share of the

Indian economy.”

Maintaining quality and quantity

Secondly, availability of other facilities for post harvest management is severely limited and has become

more noticeable as consumers expect more. This rise in expectations is driven by a steadily improving

economy, particularly in urban areas. Per capita GDP has increased from a little over Rs. 10,000 in 1980

to close to Rs. 27,000 in 2006 in constant prices5.

Concomitantly, busier lifestyles of dual income middle-class households and increased access to

television content from international markets have further fueled the demand for convenience and

processed food products as well as desire for greater variety of food products. This desire for choice in

foods as well as value-added processed foods calls for an agri-business infrastructure that can facilitate

meeting this demand. For example, for most fruits and vegetables an adequate cold chain is mandatory

to yield acceptable quality of value-added products, or, say, to ensure their off-season availability.

    International Monetary Fund, World Economic Outlook Database, April 2006
Lack of infrastructure has resulted in considerable wastage; the loss has been estimated in the range of

Rs. 75,000 to Rs. 100,000 crores annually varying from 10% for cereals and pulses to 20% for perishables

such as fruits and vegetables6.

The first imperative of a free-India was to ensure availability of food throughout the year and

throughout the country. As attaining this goal has become more possible, the quality of agricultural

produce becomes a factor for consideration. Quality can be seen in various ways – freshness, uniformity,

and, in some sense most importantly, nutritional value. Eradicating hunger or under nourishment is a

somewhat different goal than eradicating malnutrition. Specific micronutrient deficiencies lead to

demand for food fortification processes. Deficiency in Vitamin A, and its negative consequences for

eyesight is but one example7. While adding nutrient value is one side of the coin, the wastage estimates

referred to previously may not necessarily include loss of nutritional value that occurs in the absence of

processing or cold store facilities. One study that sought to establish the benefits of well preserved

frozen vegetables found experimentally that whole green beans initially lost up to 30% of their ascorbic

acid (vitamin C) after 1 day, and after 14 days they retained only 40% at ambient temperatures of about

20 degrees C. (Ambient temperatures in India are typically much higher). Spinach, for example, retained

only 10% after 3 days. Frozen versions of these vegetables fared much better8.

Consumer concerns

 Agro-Processing Industries in India – Growth, Status and Prospects, R.P. Kachru, studies have noted even higher losses reaching as high as 40% (The Rising
Elephant: Benefits of Modern Trade to Indian Economy, CII – PricewaterhouseCoopers, 2005)
 The Micronutrient Report: Current Progress and Trends in the Control of Vitamin A, Iodine, and Iron Deficiencies,
John. B. Mason, Mahshid Lotfi, Nita Dalmiya, Kavita Sethuraman and Megan Deitchler, International Development
Research Centre 200,
 “A Comparison of the vitamin C content of fresh and frozen vegetables, D.J. Favell, Food Chemistry, Vol. 62, No. 1,
pp. 59-64, 1998.
Also, as incomes rise, concerns evolve from feeding the population to ensuring food safety. For example,

concerns over the potential side effects from use of agricultural inputs such as chemical fertilizers may

drive the desire for organic produce, certainly for exports at the present time, and even for domestic

consumption at a future date. As noted in estimates from a study by Rabobank, only 1.3% of fruits and

vegetables undergo secondary processing compared to 12% in the Netherlands, and as high as 80% in

the U.S. The study notes the evolution in value-added food processing levels as economies develop. The

ladder of evolution is: staples - processed mass market foods - snacks and prepared meals - to

convenience foods, and finally at the top of the ladder, diet/functional/organic foods; India is estimated

in this study as now entering the stage of snacks/prepared meals.

Intermediaries in the supply chain

When growers or small-scale food processors sell directly to consumers who are geographically in

proximity, they are able to readily assess demand and other market information. However, as this

proximity is broken, the task of relaying market information to the producers is left to intermediaries.

These intermediaries are subject to a variety of conflicting pressures including, of course self-interest,

resulting in the producer receiving distorted or quite often, no worthwhile market information. While

this can be a concern even in developed economies, communication technologies, being more

abundant, tend to ameliorate the problem. In India, however, players at almost each stage of the chain,

and most certainly the farmer, are cut off from the realities of the end-market place and end-consumer

due to the absence of adequate communication infrastructure. In addition, as the number of ‘hands’

touching the produce or relaying the information increases, quality is eroded, both of the goods being

transported and the information being transmitted.

3. Brief overview of market orientation and barriers
A firm that practices the philosophy of market orientation seeks to sense, serve and satisfy customer

needs better than the competition. It is as much a philosophy as a practice. Some of the key aspects of

market orientation involve systematized ongoing attention to acquiring and utilizing market intelligence,

investing in product and service development that create competitive differentiation, and fostering an

organizational culture that internalizes this philosophy and expresses it in all its actions. The marketing

literature has identified high market and technological turbulence as ripe conditions for seeing the full

benefits of market orientation on firm performance. In the case of emerging markets, domestic firms

are typically protected by government regulations from the winds of change from the outside, and this

can often lull domestic firms into preserving the status quo. When governments decide that economic

growth is possible only by opening markets to international influences, they set up the conditions for

turbulence, oftentimes unleashing a tsunami for existing businesses. Not being used to sophisticated

business practices such as systematically gathering market intelligence or investing in ideas and

technology for new products and processes, these businesses flail about in their efforts to become more

market oriented. In developed markets, information gathering, methods of transmission, and its

utilization in product and process development have been continually refined over the decades. On the

other hand, in emerging markets, the historical lack of demand for such market information has severely

limited the information industry and information infrastructure. Occasional entrepreneurial insight and

vision coupled with limited trial and error by experimentation become substitutes for the systematic

development and utilization of the “information infrastructure” that is lacking.

Although the systematic “sensing” of market needs and trends, and competitive offerings yields

substantial benefits in staying competitive, the widespread availability of such information to all

competitors in the market levels the playing field and raises the overall quality of business practices.

Firms advantaged by unique insights and new product and process development capabilities are

bestowed with a competitive edge in “serving” the market by effective differentiation. Access to
technological inputs and skills to convert ideas into products are essential ingredients for successful

differentiation. In emerging countries, even when entrepreneurial vision provides the insight, absence of

technical know-how and skilled labor severely limit the ability to offer innovative solutions to the


It becomes important to nurture an organizational culture that values inter-functional coordination and

empowers all levels of employees to focus on the customer to understand their needs and develop

innovative solutions to satisfy them. Inter-functional coordination can produce superior results in

customer satisfaction as a result of developing solutions for customer needs that are holistic in

approach. Leadership that actively encourages such an orientation becomes an essential prerequisite

for achieving market orientation in the firm. In emerging economies rampant unemployment and

consequent concerns of job security and deference to senior management may tend to restrict the free

flow of ideas upwards from the front lines of customer contact that is so essential for a culture of

market orientation to thrive. This calls for a leadership that is visionary in sensing the market as well as

in earning the trust of employees to be open in sharing their ideas.

Some examples of value-added initiatives throughout the value-chain

There is considerable potential in the agri-business sector for adding value at each stage of the chain. No

attempt will be made to systematically enumerate all the initiatives that have been undertaken in India,

but to highlight a few of them as illustrations. These examples have been chosen to reflect how these

can be initiated by firms of all sizes, from entrepreneurial ventures to huge companies. What makes any

of these initiatives interesting is that the “status-quo” is usually profitable but these are examples of

organizations that reached out to offer even more value with a vision of the future. This section then

sets the backdrop for a more detailed look at the case of a cold storage firm – Indraprastha Ice and Cold

Storage to better appreciate the challenges and nuances in providing a value added service.
The chart below provides an overview of the various stages in the value-chain and examples of value-

adding initiatives at each of these stages. A brief description of what each of these initiatives offers in

terms of value enhancement to the system is then described. This discussion is not intended to be an

exhaustive enumeration of value-adding possibilities, but merely seeks to highlight the possibilities and

their potential.

                       Value-added                   Growing        Transport      Storage       Processing Retail

KanBiosys              Organics productivity             XXX

Golden rice            Fortified seeds                   XXX

ITC eChoupal           Market information                XXX

Indraprastha Ice       Quality of perishables                           XXX           XXX
& Cold Storage

VitaRice               Fortification processing                                                     XXX

Spencer’s Daily                                                         XXX                                        XXX

KanBiosys is revisiting the development of microbe based fertilizers that were first introduced in India in

the 60’s but was ignored as chemical based fertilizers took over the market. However, now, as the issue

of overuse of chemicals in agriculture has become prominent9, including yield fatigue from over-use of

inputs such as chemical fertilizers, renewed interest in alternative approaches is gaining interest. With

its own R&D efforts MFC has launched microbe based fertilizers that help growers slowly reduce the

overall use of chemicals in the various agri-inputs that typically include fertilizers and pesticides. Clearly,

introducing this kind of agricultural input can add value to certain customer segments, especially those

interested in more organically grown produce which can yield much better prices for the grower and all

players in the agri-business sector. Golden rice essentially approaches the issue of nutritive value of a

 “Perspectives of soil fertility management with a focus on fertilizer use for crop productivity,” S.Ayala and E. V. S.
Prakasa Rao, CURRENT SCIENCE, VOL. 82, NO. 7, 10 APRIL 2002.
key staple in India by introducing fortification in the seed thereby avoiding the need for micronutrient

supplements that the consumer needs to add to their diet. Lack of education, low income levels, and

non-availability of supplements are often barriers to adding supplement to the diet. The value-added is

less “visible” but perhaps more important for the health of the consumer and savings from the

reduction in health care costs.

ITC is a very large conglomerate with a portfolio of businesses in various sectors including agri-business.

Interest in assuring consistent and high quality of raw materials for packaged food products led the

company to develop an innovative service to farmers called eChoupals. Essentially, the eChoupals were

information centers in rural areas that are operated by ITC franchisees who are small local

entrepreneurs and provide farmers access to real time market information and advice on farm inputs

using computers connected to the internet. One of the key values provided to the grower is market

information on prices and demand which attempts to bridge the distance between producer and market

that was noted earlier in the context of urbanization and the separation of farmer and the market place.

New technologies have tremendous potential for adding value. These technologies span the spectrum

from developing seeds that are fortified and pest resistant through genetically modified seeds such as

Golden Rice and bt Eggplant, to VitaRice that processes an important staple such as rice for fortification.

VitaRice10 is a technology that is being developed to convert broken rice into whole kernels fortified with

iron, zinc, vitamin A and other micronutrients and ensure a low glycemic value. Starting with broken rice

that is of lower value and is 30% cheaper than whole rice can result in the same final price as whole

grain rice but offer the nutritional value that can be of value in the struggle to eradicate malnutrition.

 Manufacture of a Fiber Enhamced, Nutritionally Superior Rice Product by Supercritical Extrusion (SCFX), Docket
No. D3724, Syed Rizvi and Kwan-Han Chen, Cornell University, Rizvi and Mulvaney, 1992.
The value of such emerging technologies becomes evident as consumers and policy makers in emerging

countries begin to appreciate the importance of nutrition and fortification,.

Specific Case Study: Indraprastha Ice & Cold Storage11

To best appreciate the richness of the intricate web of issues involved we then discuss in depth a specific
case study of a ‘Small and Medium Enterprise’ in the cold-storage business in the post-harvest end of
the agri-business chain. This company decided to make a bold break away from the prevailing business
model and sought to change the competitive field by introducing new cold storage technology to a
rather staid and old service sector. The road from farm to fridge is fraught with severe value-eroding
forces; almost one-third of fruits and vegetables grown in India are estimated to perish, and more lose
nutritive value as they wend their way to market. Lack of good storage prevents selling this produce off-
season at a higher price and also smoothing out the supply to the market in season to maintain prices.
As such, cold storage facilities offer tremendous potential for preserving value. The authors have studied
this company in developing a case to illustrate these issues and have gained an in-depth understanding
and appreciation for the context, challenges, and the firm’s efforts to find a way out of the quagmire.
Although this one firm’s initiatives are specific to its regional market, its practices may be viewed as a
prototype of how to lead market oriented change in the face of myriad obstacles. The firm’s customers
are middlemen with entrenched business practices and interests; their suppliers, the growers are
unaware of market conditions; and IPCSL is, in effect, a facilitator in preserving value. In order to change
the business model, the firm needed to look at product and information flows both upstream and
downstream along the entire supply chain to understand the motivations and preferences of the various
players. The challenge in this context has been to educate the growers who are small farmers and the
firm’s customers who are predominantly middlemen brokers or agents about the value proposition of
the new technology that comes at a higher price to them, and to find ways to motivate their self-
interests. IPCSL is a player caught in the middle of the value chain and has to either optimize on the
status quo or work toward a vision of the future.

Background of company

In 1938, before India’s independence, Debi Prasad Aggarwal, grandfather of the current CEO, Sanjay
Aggarwal, went to the U.K. intending to purchase a textile mill to set up in India. His discussions with
other business passengers during the long ocean voyage led him to change his plans and he decided to
set up a sugar mill instead. He set up a sugar factory near Delhi in partnership with a friend which soon
became one of the biggest sugar factories using the equipment he purchased from the U.K. Debi
Prasad’s travels through the Indian countryside to persuade farmers to grow sugar cane for his mill had
provided him with a first hand glimpse of the challenges of Indian agriculture. One major problem was

  This section draws from the case study “Indraprastha Ice & Cold Storage (A),” ECCH case number xxxx, written by
the authors.
the widespread devastation of newly harvested crop because of inadequate storage facilities. India’s
tropical climate made preservation difficult, especially for crops like potato that were harvested in the
beginning of summer. Traditionally, farmers used to preserve their crops by storing them in ventilated
rooms or heaping them in open fields under tree shade, covered with husk and mud and sprinkled water
over them. These remedies tended to result in significant waste when large amounts of produce needed
to be stored for longer durations and for distant markets. Because of this wastage, supply shortages
occurred and this often led to prices doubling, or even quadrupling that of the standard price of
potatoes during summer. This presented an excellent business opportunity and he imported the latest
cold storage equipment from the U.K. and set up the first cold storage facility in Shidipura, Delhi in 1944.

Jagdish Prasad, his son, realized in 1958 that fruits were more perishable than potatoes and there was a
great demand for storage facilities for this type of produce. Seizing the opportunity, he began marketing
his cold storage facility to fruit traders in Delhi, convincing them that they could preserve their surplus
produce for off-season sales at a higher price. Jagdish Prasad’s efforts proved successful and soon his
cold storage facility was being used for storing apples, oranges, pomegranates, watermelons and dry
fruits like dates, and nuts like almonds, cashews, and pistachios.

By 1960, competitors started to set up similar cold storage facilities and competition began to intensify.
Jagadish Prasad realized the need for an association to bring together all cold storage owners so that
matters of common interest could be taken up with government agencies. In addition, he thought, the
association could collectively decide on minimum storage fees for different commodities to prevent
harmful price-cutting. He invited all the other cold storage owners to form the “All India Cold Storage
Association’ under his stewardship as the Founding General Secretary.

In 1977, his 18-year-old son, Sanjay Aggarwal joined the company’s board of directors and was given the
task of supervising the construction of the 2500 MT cold storage facility in Azadpur, in the new mandi
that the Government of Delhi had just established. This project was successfully completed in 1980, and
thus Indraprastha Ice and Cold Storage (IPCSL) was born. Four years later, Sanjay traveled to the U.S,
visiting cold storages across the country where he noticed the more technologically advanced cold
storage facilities in operation.

The Entrepreneurial Vision

In 1998, Sanjay had realized that Delhi’s cold storage service had become a commodity. Price was the
main factor for the intermediaries who were agents for the growers when they selected a cold storage
service for their produce. At the time, Sanjay had gathered his senior staff for a meeting announcing:

“We must differentiate ourselves from the rest to avoid a price war. And for that we have to transform
the company in the next three years. We have to modernize our cold storage facility with new technology
to provide higher value to the customer and charge a premium for the better service. This is the only way
we can survive in this environment.”

Sizing up the competition
In Delhi’s cold storage market alone, out of 91 storage facilities, 26 units operated at more than 2000
MT of storage capacity each. Most of these units are located in the two areas of New Sabji Market and
the Lawrence Road Industrial Area about 15 km from Azadpur. All these units have multipurpose
facilities storing several horticultural and milk products in separate compartments. However, none of
the others operated gas controlled technology or controlled atmosphere technology that was now being
offered by IPCSL. Sanjay Aggarwal felt that the governmental subsidy cap resulted in the proliferation of
lower quality facilities. According to one of IPCSL’s competitors, service was the differentiating factor.
Thus, he had introduced a 24-hour, 24/7 cold storage service to cater to traders who could not keep
their produce waiting, especially when storing high value imported fruits like red grapes and kiwi which
sell for Rs.220 per kg.

Sensing market need

Sanjay and his staff spoke with several customers in the mandi who were the commission agents for the
growers; but most of them did not see the need for an improved facility which also meant higher costs
for them. One commission agent, who had started as a young boy of 8 years working at a mandi several
decades ago, and now a successful commission agent, for example opined that there was minimal
quality difference between produce kept in an ordinary cold storage as compared to that kept in a gas
controlled storage, especially if storage needs were only for a short duration. What was crucial was the
ambient temperature:“…In winter, when the outside temperature is low, fruit remains good in most of
the cold storages. However, when the outside temperature shoots up, the difference in quality is

Market driving initiative – leap of faith?

Despite this market feedback, IPCSL embarked on a major technological transformation as Sanjay felt
that actually making such a facility available would convince potential customers even though they
balked at the idea when presented as a concept. He also saw the end-market evolving in a different way
– the building desires in the emerging middle and upper-middle classes and growth of an organized
retail sector to satisfy them.

IPCSL’s immediate customers were primarily commission agents and some wholesalers. The end
customers are the Indian consumers buying fruits off-season, a market profile that has changed
significantly in the last six years. The increased income of the Indian middle and upper middle classes
(see Exhibit A) had influenced consumption patterns with up to 60% of their available income being
spent on discretionary items like consumer goods, health and entertainment. These higher income
classes were becoming increasingly health conscious and those in the urban and semi-urban areas
began consuming more fruits as part of their daily food intake. The preferred place to purchase fruits
and vegetables was the neighborhood market, small street shop or the 'pushcart vendor'. In India,
almost 90% of fruits are sold through such “un-organized” retail outlets for a number of reasons.
Consumers prefer the convenience of the push-cart vendor who visits the residential areas daily.
Consumers’ also perceive the fruits available in neighborhood markets to be fresh as the refrigerated
fruits may be old and not well preserved. Price of fruits in the organized retail stores are considerably
higher than neighborhood market or push cart vendors, in addition to the fact that organized retail is not
well established.

In season, the organized retail chains purchase directly from the markets while off-season, purchases
are made through wholesalers and sub-wholesalers. Wholesalers also supply fruit to hotels and
restaurants in Delhi and nearby cities. Without high quality cold storage facilities consumers’ perception
of the quality of fruit in retail stores was, indeed, well-founded.

The value offering

 IPCSL completed upgrading its cold storage facility in 2002 (???)by installing Controlled Atmosphere
(CA) and Gas Controlled (GC) cooling units12. Anticipating a sizable demand for superior cold storage
services, Sanjay also doubled IPCSL’s storage capacity to 5000 MT by 2001. Despite his family’s
opposition to the huge investment that this modernization and expansion entailed, Sanjay went ahead
with his plans sinking in a total of Rs.13 60 million rupees ($1.144 million) with the help of financing from
NABARD14 and other national banks.

    Gas Controlled Cold Storage: Approximately 3900 MT of the company’s cold storage capacity
operated under the gas controlled technology. This had been imported from the U.S. where it was used
by NASA to grow wheat in outer space. This technology reduces the production of ethylene, a naturally
produced gas present in the atmosphere and a trigger for ripening of most fruits. With this technology,
fruits like kiwi and red grapes can be stored for up to two months whereas they would spoil in ten days
in ordinary cold storages.
Controlled Atmosphere (CA) Cold Storage: About 100 MT of the company’s cold storage capacity
operates under the controlled atmosphere technology. This technology is widely used for varied
produce and is the most commonly used method of storing apples. It uses a natural process of storage
that changes the ratio of the constituent gases in the atmosphere to minimize the respiratory activity of
the stored produce.

13                                               st
     Rs (Rupees) is the currency of India. As on 31 March 2002, 1 USD = 52.45 Indian rupees.
  National Bank for Agriculture and Rural Development (NABARD) is an Indian Government organization
that provides finance to agricultural and rural development projects. Aimed at encouraging the growing
industry, in 1998, the Government introduced a new Capital Investment Subsidy Scheme for the
construction, expansion and/or modification of cold storage units catering to horticultural produce.
NABARD approved projects become eligible for subsidies from the National Horticulture Board for up to
25% of project cost to a maximum of Re 1 per kg of storage and 5000 MT of total project storage
capacity. However, storages built to international quality standards usually cost Rs. 6 per kg for ordinary
storage, Rs. 15 per kg for Gas Controlled storage and Rs. 30 per kg ( Rs. 600per box) for CA storage
Fruits like mangoes, bananas and grapes perish faster. For instance, grapes last about ten days from
harvest in ordinary cold storage while in a gas controlled storage, they could last for two months.
Apples can be stored up to two months in ordinary storage, four months in gas controlled storage and
even six months in controlled atmosphere storage (See Exhibit B). While most fruits are sold during
harvest season, apples are sold throughout the year in India. Kiwi and imported grapes are stored for 15
days to one month.
Challenges in the system
Transport and Cold Chain
In most parts of India, growers harvest fruits manually, placing them in padded baskets to avoid damage
and the fruits are then transported from the orchards for grading and packing. During grading they are
placed in different lots based on their size and quality. Packing is mostly done in layers within corrugated
paperboard cartons. On average, fruits are handled five to six times before being dispatched to
consumer markets for sale. Since most of the fruit produced in India is transported by road, this has
posed severe challenges to the industry. Road infrastructure, especially in the remote, fruit producing
areas, is still developing while alternative transportation like the railways, although cheap for smaller
consignments, is not available for bulk transportation due to the hilly terrain. Poor road conditions and
ongoing construction of national highways and state highways throughout the country lead to slow
transportation of fruits. The complexity of the system adds up in a number of costs that the grower
incurs. (Exhibit C)

In contrast, a cold chain system is an integrated system in which fresh produce is chilled at very low
temperatures (0-4 degrees Celsius or 32-40 degrees Fahrenheit for apples) at specific humidity rates
(95% RH for apples), in an unbroken link from harvesting through the stages of transport, storage,
distribution and retail sale to the consumer. Once produce is cooled to a low temperature, it must
remain at that temperature so that bacterial growth is minimized. Since fruits provide a good medium
for bacterial growth, their removal from the cold chain at any point enables rapid growth of pathogenic
cells at the higher temperatures. Thus the Cold Chain System ensures a cleaner, healthier and better
quality of fruit to the consumer. Very few transportation companies in India maintain refrigerated trucks
in their fleet and the few that do, use them for transportation of milk products. As a number of agents
are involved in the movement of produce from grower to the customer. each has a vital role to play in
ensuring that the freshness, nutritional quality and firmness of produce is effectively maintained making
this quite a challenge. With the higher costs involved in the Cold Chain System, horticulture produce
that is transported by refrigerated truck commands a premium during the season which increases
further in the off-season (Exhibit D)

Intermediaries in the distribution channel:
A number of market intermediaries are involved in transferring produce from the growers to the end
consumer. The typical marketing channel for produce like apples flows as shown in the figure (see
Exhibit D for a typical channel). Delhi Azadpur market is the main market for apples; more than 80% of
the apples sold at Azadpur are dispatched from Himachal Pradesh and Kashmir. Since it is not
economically viable for apple growers to hire transportation separately, fruit produce is aggregated by
forwarding agents who transport the produce of several farmers on a trip. These agents send the
produce, most often by open trucks, to nodal points like Delhi’s New Azadpur Market charging
approximately two percent for this service. Growers designate their preferred commission agents,
locally known as Arti, who receive and unload the produce and auction it to wholesalers. Excess produce
is kept in cold storage and the market is monitored until its sale to wholesalers at off-season rates. This
is the business that IPCSL and other cold storages vie for. The designated commission agents charge the
growers six percent of the sales amount. These fees, along with the costs of packing and loading, are
borne by the growers. Wholesalers in this distribution chain buy produce from the commission agents
and dispatch it to different states of India for further sales by sub-wholesalers. Sub-wholesalers sell the
produce to retailers within their area who finally market it to purchasing customers (Exhibit E).

Information asymmetry:

Very few growers are aware of prices prevailing in different wholesale or retail markets across the
country. In fact, very few growers visit even Delhi’s major market during sale of their produce. Because
of this they remain largely unaware of the higher off-season rates at which agents sell their produce that
had been kept in cold storages. Usually only 50% of the fruits are sold the same day while 35-40% is sold
within a month thereafter and a small percentage (10-15%) is kept in cold storage to be sold up to six
months later.

In Delhi’s Azadpur market, for example, the prescribed commission rate is 6%, although in practice up to
10% is paid to compensate for advances taken by the growers when the growing season begins. The
New Sabji Mandi functions as a regulated market to safeguard the interests of producers, traders and
consumers by checking unethical and illegal practices like under-weighing, short payment, delayed
payments, unauthorized deductions and exploitation by intermediaries.

Sales are conducted by artis in two ways: closed auction and open auction. The former is effected
through handshakes with the commission agent taking the hand of the bidding wholesaler and signaling
the price under a handkerchief to keep the transaction price confidential. Open auctions, on the other
hand, are similar to any public auction with the Arti calling out the highest bid received and exhorting
other buyers to bid higher.

Economic Value to the customer offered by IPCSL:

Following its modernization and expansion drive, IPCSL has priced its services at Rs. 20 per month per
box of 20 kg of Indian fruits and imported apples, and Rs 60 per month per box for imported fruits like
kiwi and red grapes. This compared unfavorably with the other cold storages at the New Sabji Market
which were still charging Rs. 10 per box for Indian fruits with no premium for imported fruits. Sanjay felt
his higher prices were necessary as the variable cost of operating IPCSL’s upgraded facilities was approx.
Rs. 7.50 per box per month; double that of the competition.

A simple back-of-the-envelope calculation was used to educate the customer of the value of storing at
    Life of kiwi in ordinary cold store is 10 days.
    At most 2/3 rd container can be sold within 10 days, about 1/3 rd of kiwi would perish.

    Price of kiwi is Rs.100 per kg. So Rs. 33 per kg is wasted.
    In IPCSL cold storage kiwi can be stored for 2 months and the entire container can be sold

    Ordinary cold storage rate is Re. 0.50/kg/month.
    IPCSL charges Rs. 3/kg/month.
    Hence, in 2 months, IPCSL charges Rs. 6 (Rs. 5 extra from ordinary storage) as rent but
    saves Rs. 33 value of fruit.
So, IPCSL storage adds value of Rs. (33 – 6) or Rs. 27 per kg of kiwi fruit to the grower

While the logic was clear, the new facility did not gain traction in the market despite offering the agents
free storage on an experimental basis so they could tangibly experience the added value. Sanjay
speculated two reasons for the crisis. First, the market underestimated the value addition of IPCSL’s
upgraded cold storage. They were still more concerned about short-term costs instead of long-term
benefits. The commission agent was more interested in quick turnover of produce and was quite busy
and profitable with the current business practice. Furthermore, growers would be unaware of the
potential benefits to them as they had delegated rights to the commission agent. Second, there was
rampant and unsustainable price-cutting in the market. As Sanjay complained, “Our competitors have
reduced their rates to such a level that it is almost at our cost.” He also suspected that some of the
competition was insisting on complete lot orders only and so customers were unable to split their
produce into smaller lots for varied storage.

Emerging from the paradox

        IPCSL continued facing such adversity for a few more months. Customers were reluctant to store
their produce in IPCSL because of the high price and continued storing in competitors’ cold storages.
Wholesalers who were selling imported fruits and a few big sellers who were selling fruits in the off-
season began to use IPCSL as they could see its value better and had an immediate need. At this time
IPCSL extended a promotional offering to customers at the mandi. They could store a portion of their
produce at IPCSL free of cost and compare the difference after one month with that stored in an
ordinary storage. However, this also did not work. Aggarwal, however, was adamant about not reducing
the price. He felt he would then be acknowledging that the improved quality of service was not worth
every extra rupee. Convinced of his strategy, he wanted to stay true to the price.

         IPCSL also started storing and selling imported fruits and vegetables directly to wholesalers.
Fruits like Kiwi, grapes, Washington Apples, citrus, pears etc., were imported and stored in the cold
storage. IPCSL’s modernized cold storage can store these fruits much longer than ordinary cold storages
with little loss of quality. It also imports and stores vegetables like super sweet corn, green peas etc.
IPCSL also received two large orders for milk and medicinal products in the deep freezer section from
Amul and Mother Dairy15. Slowly but surely, IPCSL began to refine and refocus its customer – product
mix to align with the new technology and service offerings and began to tiptoe into backward and
forward integration.

         Subsequently, Aggarwal decided to solidify this evolving strategy to diversify in a planned
manner into higher value fruits and vegetables in addition to integrating backward and forward. He
started a holding company, Dev Bhumi Cold Chain Pvt. Ltd. to focus on the backward and forward
linkages for fruits, with IPCSL under its umbrella continuing as the cold storage facility. He set up a
procurement network by coordinating a dedicated farmers’ group in Himachal Pradesh (HP) who started
working with him. Providing them with pre and post harvest support enabled him to gain the farmers’

      IPCSL purchased three large refrigerated trucks for transporting apples directly from growers in
Himachal Pradesh. These refrigerated trucks maintained the cold chain from orchard to storage in Delhi.
Two small refrigerated vans were purchased to deliver apples to its several retail customers in Delhi.

          In addition, the company also procured apples from HP and transported them to the storage
facility using open trucks. It then stored these apples in its cold storage for a few months and sold them
after the season was over to get a better price. (Is this for wholesalers and smaller retailers noted
below?) Dev Bhumi soon began supplying fruits to over one thousand small street side retail shops and
to two larger retail chains: Namdhari Fresh and Safal in Delhi. The company has six sales people who
look after selling the fruit to retailers.

         The new strategy began working for IPCSL. There was a visible difference in quality of fruits that
came out of IPCSL compared to other cold storages. While apples stored in other cold storages used to
sell at Rs. 70 per kg, retailers procuring from Dev Bhumi used to sell their apples at Rs. 88 per kg. A
similar difference was observed in the wholesale market as well. A 20 kg box of apple stored in other
cold storages sold at Rs. 900 whereas the same size apple stored in IPCSL was sold at Rs. 1100 per box.
The additional value created by IPCSL was visible to many sellers and they began to change their minds.
They slowly started keeping their produce in IPCSL to obtain the added value; the market was beginning
to value the change.

        Indeed, the best endorsement of this whole initiative to improve the state of affairs in the cold
storage business was evident in the actions taken by the commission agent whose original skepticism
was noted earlier in this section. He is now building a small short term (few days) cold storage facility in
the basement of his mandi offices with a view to preserving value even as he tries to get rapid daily
turnover in produce. Some of the older storages are being renovated to better facilities. One of the

15 Mother Dairy is a Rs. 10 billion company having 1100 retail outlets in and around Delhi.

earliest stages of market orientation is to recognize how customer needs can differ by segments and
fine tuning offerings better. This is most certainly happening at the mandi and allows a new equilibrium
to be established allowing many cold storages to operate profitably.

        Despite the enormous financial risk for a small enterprise “being the change you wish to see” is
surely bringing about a systemic market orientation.

Exhibit A: India’s Emerging Middle Class

    Number of Households               % growth from 1995 – 1996        Annual Household Income

           (in ’000’s)                                                          ’000 (RS)

                20                               300                            >10,000

                40                               256                          5000 – 10000

               201                               219                          2000 – 5000

               546                               189                          1000 – 2000

               1,712                             163                           500 – 1000

               9034                              133                           200 – 500

            41,262                                43                            90 – 200

            1,35,378                              3                               <90

Exhibit B: Appearance of Apples Stored in CA/GC Storage (top) and Ordinary RA Storage (bottom)

                  1 month old apples                                4 month old apples

  GC Storage               RA Storage                  GC Storage              RA Storage

Photographs taken on site by the authors
Exhibit C: Typical Expenses borne by a Himachal Grower – from Farm to Sale at NSM, Azadpur Mandi

                                  Items                                    Apple cost/box(20 kg)

1    Cost of Grading/packing                                                          12

2    Cost of Box (CFB)                                                                45

3    Transportation cost upto loading point in the orchard                            2

4    Forwarding agents commission                                                     2

5    Transportation cost up to road head (a)                                          10

6    Loading and Chaukidari (b)                                                       2

7    Transportation cost up to Azadpur Market by ordinary truck                       20

8    Octoroi (c)                                                                      2

9    Market fee                                                                       2

10   Dalla /Unloading (d)                                                             1

11   Commission @ 6%                                                                 60*

12   Gate pass at APMC                                                                5

13   Mandi Charges at NSM, Azadpur @1%                                                6

13   Misc. Expenditure (Telephone, Postal Dharmada, etc.)                             0

14   Total Cost                                                                      175

*The commission agent typically collects an additional 4% from the wholesaler which is effectively borne
by the grower.

(a) Road-head is the first main road point from the firm of the growers.

(b) Choukidari is the amount given to the watchman who looks after the produce in loading point to
prevent stealing.

(c) A type of tax taken by Govt. of India for transportation of material from one state to another.

(d) Dalla is a type of agent who takes unloading contract in ports, mandis and other transport points
Exhibit D: Average Price (20 kg Box) of Domestic Apples (Himachal and Kashmir) With More Than 80%
Eating Quality

Grade of Fruit                       Wholesale price (Rs)         Retail price (Rs)

                                     in season       off season   in season      off season

Extra large (special)                730             930          1,340          1,730

Large (fancy)                        630             780          1,090          1,430

Medium (selected)                    530             630          890            1,180

Small (commercial)                   480             580          790            1,080

Extra small (janta or mass market)   380             480          590            880

Average                              550             680          940            1,260

                              Exhibit E: Typical Marketing Channel for Produce
                                      Producer with Forwarding Agent

                                            Commission Agents


                                                 Sub Wholesaler



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