Dev Bhumi Histroy

7/23/2019 Dev Bhumi Histroy

1/20

July 2006

Revised March 2007

This case has been developed by Professor S.P. Raj of Cornell University and Atanu Adhikari,Sr. Lecturer of ICFAI, India and visiting research scholar at Syracuse University. Support of the Sathguru-Cornell executive program in India and the Food Industry Management programat Cornell are gratefully acknowledged. The contents are meant only for class discussion and are not intended to express opinion about an organizations dec isions and processes. Thenumbers provided in the case are a reflection of the situation but are not to be considered to bethe actual values. Please email [email protected] for permission to reproduce.

Indraprastha Ice and Cold Storage Ltd. (A)

It was late evening on the 30 th of April 2002. Sanjay Aggarwal, CEO of IndraprasthaCold Storage Limited (IPCSL) looked down from his office at the narrow busy street below,crowded with trucks and carts that were loading and unloading produce at the New Sabji Mandiin Azadpur, India. This was the largest fruit and vegetable market in Asia, and his office stood atthe edge of the market, overlooking its main entrance. Despite the clamor and chaos of themarket below, his luxurious, soundproof office was calm and quiet. He stood by his officewindow, watching the scene below and ruminating over the challenges his company faced.

Sanjays company was in the cold storage business serving the fruit and vegetable mar kets.About four years ago, in 1998, Sanjay had realized that Delhis cold storage service had becomea commodity. Price was the main factor for growers and intermediaries when they selected a coldstorage service for their produce. At the time, Sanjay had gathered his senior staff for a meetingannouncing:

We must differentiate ourselves from the rest to avoid a price war. And for that we have totransform the company in the next three years. We have to modernize our cold storage facilitywith 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.

Inspired by this idea, IPCSL commenced on a major technological transformation. It upgradedits cold storage facility by installing Controlled Atmosphere (CA) and Gas Controlled (GC)cooling units. Anticipating a sizable demand for superior cold storage services, Sanjay alsodoubled IPCSLs storage capacity to 11.0 million pounds by 2001. Despite his familysopposition to the huge investment that this modernization and expansion entailed, Sanjay wentahead with his plans sinking in a total of Rs. 1 60 million rupees ($1.144 million) with the help of financing from NABARD 2 and other national banks.

1 Rs (Rupees) is the currency of India. As on 31 st March 2002, 1 USD = 52.45 Indian rupees.2 National Bank for Agriculture and Rural Development (NABARD) is an Indian Government organization thatprovides finance to agricultural and rural development projects.______________________________________________________________________________________


2/20

2

The company began losing money steadily during the next four years. As IPCSL began itsmodernization and expansion drive their previously loyal customer base began migrating to othervendors as IPCS Ls storage capacity was affected by the ongoing reconstruction work. They alsolost the direct export business that had been cultivated with customers in the Middle East. Once

the new facility became ready, competitors began even more aggressive pricing and cold storagerates were reducing substantially in the market. Against a 10-15% reduction in rates across themarket, IPCSLs superior services at a premium had fewer takers. The modernization projectalso increased the companys overheads in administration, as better trained and higher paid staff were required to maintain the upgraded equipment.

As Sanjay took stock of his companys past, he was keenly aware that IPCSLs 11.0 millionpounds of highly sophisticated cold storage capacity was lying almost empty. Faced with a Rs.55 million ($1.05 million) debt, Sanjay knew that he could not sustain this venture for too long inthis manner. This was a family business that had spanned three generations and now it wasfacing its greatest challenge for survival. Sanjay would have to take urgent steps to revise his

business and marketing strategies. Many questions confronted him. Should IPCSL remain in thecold storage service business and continue with the same value proposition? Should it change itspricing policy? Would it be feasible for IPCSL to diversify into other related businesses? Someof his senior staff had worked with his family for over 25 years. Had he jeopardized theirlivelihoods by his over-ambitious modernization and expansion drive?

Company Background

In 1938, Debi Prasad Aggrawal, the grandfather of Sanjay Aggrawal, went to the U.K. intendingto purchase a textile mill to set up in India. His discussions with other business passengers duringthe long ocean voyage led him to change his plans and he decided to set up a sugar mill instead.He set up a sugar fac tory near Delhi in partnership with a friend which soon became Asiasbiggest sugar factory using the equipment he purchased from the U.K. Debi Prasad Aggarwalremained Managing Director of the sugar mill for nearly 25 years. Debi Prasads travels throughthe Indian countryside to persuade farmers to grow sugar cane for his mill had provided him witha first hand glimpse of the challenges of Indian agriculture. One major problem was thewidespread devastation of newly harvested crop because of inadequate st orage facilities. Indiastropical climate made preservation difficult, especially for crops like potato that were harvestedin the beginning of summer. Traditionally, farmers used to preserve their crops by storing themin ventilated rooms or heaping them in open fields under tree shade, covered with husk and mudand sprinkled water over them. These remedies tended to result in significant waste when largeamounts 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 evenquadrupling that of the standard price of potatoes during summer. This presented an excellentbusiness opportunity and he imported the latest cold storage equipment from the U.K. and set upthe first cold storage facility in Shidipura, Delhi in 1944. He managed this for well over adecade, using the facility for the storage of potato harvests from March until August each year.In 1958 his son, Jagdish Prasad Aggarwal, succeeded him as Managing Director. In early 1960,Debi Prasad lost control of the sugar mill to the other partners.


3/20

3

Jagdish Prasad realized that fruits were more perishable than potatoes and there was a greatdemand for storage facilities for this type of produce. Seizing the opportunity, he beganmarketing his cold storage facility to fruit traders in Delhi, convincing them that they couldpreserve their surplus produce for off- season sales at a higher price. Jagdish Prasads effortsproved 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, andpistachios.

By 1960, competitors started to set up cold storage facilities and competition began to intensify.Jagadish Prasad realized the need for an association to bring together all cold storage owners sothat matters of common interest could be taken up with government agencies. In addition, hethought, the association could collectively decide on minimum storage fees for differentcommodities to prevent harmful price-cutting. He invited all the other cold storage owners toform the All India Cold Storage Association under his stewardship as the Founding GeneralSecretary.

In 1968, major chan ges took place that impacted Indias fledgling cold storage industry. TheDelhi Government began rolling out its development plan for the city which was finalized in themid-70s. Under the new scheme , all the industries in Old Delhi, including those in Sidhipura,were to be relocated. Azadpur, in New Delhi, would now be the central site for the fruit andvegetable market of the countrys capital city. Soon thereafter, industries, including the coldstorage units, began relocating to Azadpur. Two plots of land measuring 2,152 square yards(6,456 Sq. Ft) within this site were allotted by the Delhi Government to Jagdish Prasad andIPCSL.

In 1977, his 18-year- old son, Sanjay Aggarwal joined the companys board of directors and wasgiven the task of supervising the construction of the 5.5 million pound (125,000 boxes) 3 coldstorage facility in Azadpur. This project was successfully completed in 1980 and four years later,Sanjay traveled to the U.S, visiting cold storages across the country. He noticed that in the U.S.,the more technologically advanced cold storage facilities were using vertical integration to maketheir companies leaner and more cost effective. They also offered higher value by passing onthese cost benefits to the customer.

In 1998 Sanjay had been inspired to undertake a major modernization and expansion drive withinIPCS L. However, as he now looked out of his office window and reviewed his companys past,he realized how this drive had unfortunately coincided with the downturn in the Indian coldstorage industry. Service standards were falling, revenues were drying up, machinery was gettingobsolete and a vicious cycle of price-cutting was eating into the thin margins of profitability.

The Cold Storage Industry in India

Perishable produce, like fruits and vegetables, needs low temperatures after harvest since lowertemperatures slow down bacterial activity enabling preservation. The temperature and humiditynecessary for preservation depend on the type of produce and duration of storage. For example,fruits cannot be frozen and close control of temperature is necessary for long-term storage.

3 Boxes should be the unit of an alysis for calculating revenue.


4/20

4

Interestingly, most of the fruit in India goes towards direct consumption at the end of thedelivery chain. A very small proportion of this produce is further processed into juice,concentrates, squashes, jams, pickles etc. Compared with an eighty percent processing

proportion of fruit harvested in the U.S., less than two percent of Indias fruits are processed.

India is the second largest producer of fruits in the world, but nearly one-third of its produce iswasted for lack of post harvest, handling, and storage facilities. In this scenario, farmers areforced to sell their fruit immediately after harvest at low rates, just to realize their production,harvesting and transportation costs. Lack of profitability has tended to constrain the growth of the cold storage industry, despite the burgeoning demand for fresh fruit and vegetables from agrowing population. Presently the total cold storage capacity for fruits and vegetables is 22.8billion pounds against an estimated production of 286.65 billion pounds countrywide. Details of commodity-wise distribution of cold storages in India are given in Exhibit 1 ( See Figure 1 formap of India).

Cold storages in India have tended to be either single commodity or multiple commodity units.

These are used to store produce that is entirely owned by the storage owner or rented out eithercompletely or partially. The financial viability of a storage unit depends on the intended patternof use and the rental rate prevalent in the area, after the 35% taxation rate on gross income afterinterest and depreciation is taken into account. While the estimated life span of machinery iseight years, insulation 15 years and building 20 years, on average cold storages are fullydepreciated over a period of 12 years after construction is completed and service started.

Aimed at encouraging the growing industry, in 1998, the Government through its AgricultureMinistry introduced a new Capital Investment Subsidy Scheme for the construction, expansionand/or modification of cold storage units catering to horticultural produce. This wasimplemented jointly by the National Horticulture Board (NHB), the Ministry of Agriculture andNABARD. Also known as the Post Harvest Management (PHM) scheme, it covered facilitiesthat were constructed under gas controlled technology and controlled atmosphere technology 4.Proposals for constructing agricultural storage facilities that are approved by NABARD becomeeligible to receive loans from banks at reduced interest rates because NABARD providesrefinancing to banks at specially reduced rates. In addition, NABARD approved projects becomeeligible for subsidies from the National Horticulture Board for up to 25% of project cost to amaximum of Rs 0.45 per pound of storage and 11 million pound of total project storage capacity.Storages built to international quality standards usually cost Rs. 2.73 per pound (Rs. 120 per box)for ordinary storage, Rs. 6.82 per pound (Rs. 300 per box) for Gas Controlled storage and Rs.13.64 per pound ( Rs. 600 per box) for CA storage facilities. Up-gradation of existing ordinarystorage to gas controlled storage will cost Rs. 4.55 per pound (Rs. 200 per box). Constructioncost of a deep freezer costs the same as gas controlled storage i.e. Rs. 300 per box capacity.

Under this Capital Investment Subsidy Scheme, the project cost would depend on the capacityof storage chambers and the technology adopted. Subsidy was initially funded as an interest freeloan distributed in phases, which was then converted into a subsidy after completion of theproject. The Government imposed a limit on the permissible subsidy amount at Rs. 5 million ($95,330) per project for a maximum project cost of Rs. 20 million, and was aimed at projects that

4Source: National Cooperative Development Corporation Activities & Programs - Storage & Cold Storage


5/20

5

had a maximum of 11.0 million pounds capacity. Of the remaining Rs. 15 million, the coldstorage owner had to invest Rs. 5 million on their own. NABARD could, however, approvehigher loans for projects that exceeded the 11.0 million pound capacity. Banks charged interestrate at 9% per annum for NABARD approved project which is approximately half of the interestrate they used to charge directly. Borrowers were given a repayment period of up to nine years,

with a grace period of 2 years and all projects so financed needed to be completed by March2002 (See Exhibit 2 ).

Fruit Production and Transportation in India

In most parts of India, growers harvest fruits manually, placing them in padded baskets to avoiddamage and then transported from the orchards for grading and packing. During grading they areplaced in different lots based on their size and quality. Packing is mostly done in layers withincorrugated paperboard cartons. On average, fruits are handled five to six times before beingdispatched to consumer markets for sale ( See Exhibit 3 ).

Indias fruit output has been increasing every year and its annual production of 97 billionpounds, approximately ten percent of world production, makes it the second largest producer of fruits in the world. Commonly produced varieties are apple, mango, banana, pineapple, chikooand grape. Fruits like mangoes, bananas and grapes perish faster - ten days from harvest inordinary cold storage - while in a gas controlled storage, grapes could last for two months, andapples can be stored for much longer up to two months in ordinary storage, four months in gascontrolled storage and even six months in controlled atmosphere storage ( See Exhibit 4a, 4band 4c ). Mangoes and bananas, however, do not lend themselves to longer periods of storage.While most fruits are sold during harvest season, apples are sold throughout the year in India.

Most of the apples harvested in India come from the states of Himachal Pradesh (HP) andJammu and Kashmir (J&K) which annually produce 1.1 billion pounds and 1.9 billion poundsrespectively. Local fruit consumption in both these states is estimated at less than 2% of itsharvest. All excess production therefore, is transported from orchards to road heads, loaded intotrucks and dispatched to different destinations. To protect farmers from the exploitation of transporters, the State Government of Himachal Pradesh fixes the transportation cost per boxfrom various parts of HP to Delhi. The approximate cost for transporting a 44 pound standardsize box of apples from HP to the markets at Delhi, Mumbai, Kolkatta or Chennai via ordinarytruck is Rs. 20, 40, 45 and 50 respectively. Transportation from J&K, 560 miles from Delhi, tothese markets costs twice as much as from HP, which is 350 miles from Delhi. However, most of the apples from these two states are shipped directly to the New Azadpur Market in Delhi forsale or onward dispatch.

Last column of Exhibit 1 shows the distance of several cities from Delhi and the time taken byvehicles to cover that distance. Poor road conditions and ongoing construction of nationalhighways and state highways throughout the country lead to slow transportation of fruits .

Fruit Marketing In India


6/20

6

With seventy-five percent of fruit growers in India marketing their produce themselves, theremaining twenty-five percent of growers contract their orchards. These are leased to pre-harvestcontractors for lump sum payments with a joint inspection of the produce before handover. Onfinalization of the contract, the contractor acts as the producer in marketing the produce.

A number of market intermediaries are involved in transferring produce from the growers to theend consumer. Delhi Azadpur market is the main market for apples; more than 80% of the applessold at Azadpur are dispatched from Himachal Pradesh and Kashmir. Since it is noteconomically viable for apple growers to hire transportation separately, fruit produce istransported through forwarding agencies who transport the produce of several farmers on a trip.These agencies send the produce, most often by open trucks 5, to nodal points like Delhis NewAzadpur Market charging approximately two percent for this service. Once there, designatedcommission agents take charge of the unloading, storage and sale of the produce at a further rateof six percent of the sales amount. These fees, along with the costs of packing and loading, areborne by the growers. Wholesalers in this distribution chain buy produce from the commissionagents 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 purchasingcustomers (See Exhibit 5 for value addition of each entity). Therefore, the typical marketingchannel for produce like apples flows as shown in the figure:

The capitals Azadpur Market has remained theprincipal market for apples produced in India.Commission agents approach growers, offeringthem advance loans at the commencement of thefruit season as a way to get business from thegrower. When the harvest is sold in the market,these loans are deducted along with othermarketing costs, from the cost of sale. Because of the paucity of market information available togrowers, they tend to dispatch their producefaithfully to known commission agents in nodalmarkets, collecting payments according to ratesset by the agents. Very few growers are aware of prices prevailing in different wholesale or retailmarkets across the country. In fact, very fewlarge- scale growers visit even Delhis nodalmarket during sale of their produce. Because of this they remain largely unaware of the higheroff-season rates at which agents sell their producethat had been kept in cold storages.

Marketing Costs and Margins

5 Since most of the fruit produced in India is transported on road, this has posed some challenges to the industry.Road infrastructure, especially in the remote, fruit producing areas, is still developing while alternativetransportation like the railways, although cheap for smaller consignments, is not available for bulk transportationdue to the hilly terrain.

Typical marketing channel forproduce

Producer with Forwarding Agent

Commission Agents

Wholesaler

Sub Wholesaler

Retailer

Consumer


7/20

7

There are two types of marketing costs incurred by fruit producers. The first is the cost of picking fruit from the orchard and selling it to wholesalers in Delhi (see Exhibits 5 and 6 ).However, producers ship their produce in bulk and not all of it is sold the day it reaches themarket. 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 sixmonths later. Sometimes, producers deliberately store some of the produce for sale off-season.With this, producers incur the second type of marketing cost in cold storage charges. These couldrange from Re 0.23 to 0.45 per pound per month for Indian fruits and Re 0.45 to Rs. 1.35 perpound per month for imported fruits. All cold storages in Delhi charge a months storage fee asminimum charge whereas cold storages in Mumbai pro-rate charges for fractions of the month.In fact, there are other costs borne by producers including transportation, commission,loading/unloading, spot payment and entry charges in the market and at the state borders.Whenever additional charges are paid, they are debited to the producers account. In DelhisAzadpur market, for example, the prescribed commission rate is 6%, although in practice up to10% is paid to compensate for advances taken by the growers when the growing season began.

The New Sabji Mandi At Azadpur

The New Sabji Mandi at Azadpur, covering an area of about 43 acres, is the biggest fruit andvegetable market in Asia and one of the worlds biggest markets in volume of produce handled.(Exhibit 7 ). It is the main market for traders and the National Distribution Center for fruits likeapple, banana, orange, grape and mango. It was constructed by the Delhi Development Authority(DDA) in 1977 which then allotted shops to traders numbering about 3660 commission agentsand wholesalers. The New Sabji Mandi functions as a regulated market to safeguard the interestsof producers, traders and consumers by checking unethical and illegal practices like under-weighing, short payment, delayed payments, unauthorized deductions and exploitation byintermediaries.

Growers ship their produce to the New Sabji Market via road transportation directly to theirpreferred commission agents. These commission agents, locally known as Arti , receive andunload the produce and auction it to wholesalers. Excess produce is kept in cold storage and themarket is monitored until its sale to wholesalers at off-season rates.

Sales are conducted by artis in two ways: closed auction and open auction. The former iseffected through handshakes with the commission agent taking the hand of the biddingwholesaler and signaling the price under a handkerchief to keep the transaction priceconfidential. Wholesalers use three units of prices when bidding: Note (Rs. 100), Dhake (Rs. 10)and Dhari (Rs. 5). If the bidder first grasps three fingers of the commission agent under thehandkerchief a nd says note, and then holds four fingers and says dhake it implies a bid of Rs.340 (3x100 + 4x10) for a box of apples. After soliciting bids from all the participatingwholesalers the commission agent finalizes the sale at the highest bidding price. In an openauction, the commission agent openly calls for bids and sells the produce to the wholesaler whooffers the highest bidding price.


8/20

8

Commission agents prefer a closed auction and state two reasons for this. First, he wants to beable to sell the produce to a wholesaler who pays on the spot even if he bids slightly less than thehighest bidder who may be perceived as having a high risk of default. Second, some wholesalerssell to retailers who have retail outlets in upscale areas where higher income consumers shop.These wholesalers are usually able to sell the fruit at a price premium. Consequently, such

wholesalers are willing to pay more than those who sell to retailers in middle-classneighborhoods. Closed auction gives commission agents the ability to price accordingly whenselling to wholesalers who cater to high income areas relative to those who sell in middle-classneighborhoods. Closed auction ensures a level playing field in bidding to allow purchase byretailers who cater to lower income areas. Once the produce is bought by wholesalers it is sold tosub-wholesalers or retailers who may also keep it in cold storage to get a better price off-season.

The Cold Chain System

The cold chain system is an integrated system in which fresh produce is chilled at very lowtemperatures (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 lowtemperature, it must remain at that temperature so that bacterial growth is minimized. Since fruitsprovide a good medium for bacterial growth, their removal from the cold chain at any pointenables rapid growth of pathogenic cells at the higher temperatures. These cannot be eliminatedeven if the fruit is returned to cold temperature thereafter. Thus the Cold Chain System ensures acleaner, healthier and better quality of fruit to the consumer.

For this, refrigerated trucks are required for transportation. At present, these are available in twocapacities in India: 22,500 pounds and 6,615 pounds. A typical 22,500 pound capacityrefrigerated truck costs approx. Rs. 2 million while a 6,615 pound capacity truck costs approx.Rs. 1 Million. The former travel up to 2500 miles on a round trip and may make three such tripsa month whereas the latter are used for short haul and may travel up to 625 miles on a round tripand make an average of four trips in a month. Thus the fixed cost per trip for a 22,500 poundcapacity truck works out to about Rs. 6,000 with a variable cost of Rs. 12.87 per mile. Similarlythe fixed cost of a 6,615 pound truck is about Rs. 4,000 with a variable cost of Rs. 6.44 per mile.

Very few transportation companies in India maintain refrigerated trucks in their fleet and the fewthat do, use them for transportation of milk products. A number of agents are involved in themovement of produce from grower to the customer. Each of them has a vital role to play inensuring that the freshness, quality and firmness of produce is effectively maintained fromharvest until sale, making this an extremely challenging task. With the higher costs involved inthe Cold Chain System, horticulture produce that is transported by refrigerated truck commandsa 5% premium during season which increases to 10% off-season.

Indraprastha Cold Storage Limited

Conscious of the increased competition and the vicious cycle of price cutting the industry wasengaging in, Sanjay had decided to differentiate IPCSL from the others. His modernization andexpansion drive had doubled the companys capacity to 11 million pounds . There are three kinds


9/20

9

of cold storage technologies available at Indraprastha, and it currently has seven chambers of varying capacities for different types of produce.

Gas Controlled Cold Storage

Approximately 6.6 million pounds (150,000 boxes) of the companys cold storage capacityoperated under the gas controlled technology. This had been imported from the U.S. where it wasused 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 mostfruits. With this technology, fruits like kiwi and red grapes can be stored for up to two monthswhereas they would spoil in ten days in ordinary cold storages.

Controlled Atmosphere (CA) Cold Storage

About 220,500 pounds (5000 boxes) of the companys cold storage capacity operates under thecontrolled 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 changesthe ratio of the constituent gases in the atmosphere to minimize the respiratory activity of thestored produce.

Deep Freezer Storage

The company had also constructed a 2.2 million pound (50,000 boxes) deep freezer to store milk products, ice cream and sweet corn. Deep freezers operate on the principle of maintaining anegative temperature of -50 0 F to -68 0 F.

Pricing

Following its modernization and expansion drive, IPCSL has priced its services at Rs. 20 permonth per box (of 44 pounds) of Indian fruits and imported apples, and Rs 60 per month per boxfor imported fruits like kiwi and red grapes. This compared unfavorably with the other coldstorages at the New Sabji Market which were still charging Rs. 10 per box for Indian fruits withno premium for imported fruits. Sanjay felt his higher prices were necessary as the variable costof operatin g IPCSLs upgrad ed facilities was approx. Rs. 7.50 per box per month; double that of the competition. Presently, fixed costs are Rs. 6 million which would be doubled if the capacityutilization crosses 5.5 million pounds However, given the competition, Sanjay consideredreducing his storage price by five rupees per box per month and was anticipating an increase indemand to at least 5.5 6.6 million pounds a year as a result..

Organization

As CEO of IPCSL, Sanjay had delegated operational responsibilities to his Director. ThreeManagers reported to the director, one overseeing Technical Operations, the other Finance andthe last HR and Administration. The organization has two types of employees, direct andindirect. Direct employees hold clerical, supervisory and business function responsibilities, andare also involved in transportation and security aspects of IPCSL. Indirect employees are


10/20

10

contract laborers deployed by labor supply contractors. Indirect employees work on the floor andare mainly involved in loading and unloading of fruits.

Competition

In Delhis cold storage m arket alone, out of 91 storage facilities, 26 units operated at more than4.4 million pounds of storage capacity each ( see Exhibit 8 ). Most of these units are located inthe two areas of New Sabji Market and the Lawrence Road Industrial Area about nine miles fromAzadpur. All these units have multipurpose facilities storing several horticultural and milk products in separate compartments. However, besides IPCSL, none of the others operated gascontrolled technology or controlled atmosphere technology. Sanjay Aggarwal felt that thegovernmental subsidy cap resulted in the proliferation of lower quality facilities. According toMr. Sandip Mittal, the managing director of Delhi Cold Sto rage, one of IPCSLs competitors,service was the differentiating factor. Thus, he had introduced a 24-hour, 24/7 cold storageservice to cater to traders who could not keep their produce waiting, especially when storing highvalue imported fruits like red grapes and kiwi which sell for Rs.100 a pound. Imported fruits

like Washington apples, Fuji apples, red grapes and kiwi that are routed through the Mumbaiport, are primarily kept in cold storages in Mumbai itself ( see Exhibit 9 ).. A small quantity of approx. 340,000 pounds per month is stored at NSM, Azadpur.

Customers

IPCSL has three types of customers who can be classified into large, medium and small traderswho may be commission agents and wholesalers ( See Exhibit 10 for more details of the types of customers). The end customers are the Indian consumers buying fruits off-season, a marketprofile that has changed significantly in the last six years (see Exhibit 11 ). The increased incomeof the Indian middle and upper middle classes has influenced consumption patterns with up to60% of their available income being spent on discretionary items like consumer goods, healthand entertainment. These higher income classes have become increasingly health conscious andthose in the urban and semi-urban areas are consuming more fruits as part of their daily foodintake. The preferred place to purchase fruits and vegetables is the neighborhood market, smallstreet shop or the 'pushcart vendor'. In India, almost 90% of fruits are sold through such un-organized retail outlets. The main reasons of such type of un-organized retail selling in Indiaare: (1) Proximity of fruits as they are available in lanes and streets of the residential colonies.(2) Consumers perceive that fruits available in neighborhood market are fresh as the refrigeratedfruits may be few months old. (3) Price of fruits in the organized retail stores are considerablyhigher than neighborhood market or push cart vendors.

However, fruits are also sold in organized retail chains like Food World, Food Bazaar, Namdhariand Safal (see Exhibit 12 ). In season, the organized retail chains purchase directly from themarkets while off-season, purchases are made through wholesalers and sub-wholesalers.Wholesalers also supply fruit to hotels and restaurants in Delhi and nearby cities. Kiwi andimported grapes are stored for 15 days to one month, whereas the average storage time of applesis 3 months, and two months for all other fruits.


11/20

11

A commission agent, Mr. Das, however, opined that there was minimal quality differencebetween produce kept in an ordinary cold storage as compared to that kept in a gas controlledstorage, especially if storage needs were only for a short duration. What was crucial was theambient temperature as another agent stated:

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 isvisible

The Crisis a nd Sanjays Dilemma

In the last financial year ending March of 2002, IPCSL had doubled its revenue; however, it wasstill well below the threshold necessary to cover the cost of its operational and financingexpenses. Its net loss had marginally declined to 18.3% of revenue from the earlier high of 21.7% ( see Exhibit 13 ). Although the company had witnessed a steady demand for storage spacefor imported fruits, the demand for space for domestic fruits had declined significantly.

Sanjay speculated two reasons for the crisis. First, the market had underestimated the valueaddition of IPC SLs upgraded cold storage. They were still more concerned about short-termcosts instead of long-term benefits. Second, there was rampant and unsustainable price-cutting inthe market. As Sanjay complained, Our competitors have re duced their rates to such a level thatit is almost at our cost . He also suspected that some of the competition was insisting oncomplete lot orders only and so customers were unable to split their produce into smaller lots forvaried storage.

The IPCSL management team believed that they offered the best quality in Delhis cold storagemarket. One of the company s senior managers advised Sanjay:

New services do not succeed immediately. If we are sure about our original plan, we should wait for some more time and observe the market. We are in an industry where our customerslack formal education. Ultimately, we are selling the benefit of technology and it does not spread overnight.

However, at the same time, Sanjay was concerned about the repayment of the company loan andthe high interest rates they were paying that was eating into company profits. If a fundamentalchange in company strategy was essential to turn IPCSL around, it needed to be effected soon.He saw two immediate options: to reduce rates by 25% retaining only a 50% premium over thecompetition, or to slash his operating costs. He was also mulling over the idea of diversification;buying fruit directly from the growers, storing it in his facility, and selling directly to retailers inseason and off-season. It was late in the evening and Sanjay decided to call it a day. He asked histeam to think about these issues as he picked up his briefcase and got ready to drive home.


12/20

12

Figure 1: Map of India (Source: http://www.hicomind.org.nz/introduction.htm)
http://www.hicomind.org.nz/introduction.htmhttp://www.hicomind.org.nz/introduction.htmhttp://www.hicomind.org.nz/introduction.htm


13/20

13

Exhibit 1: Commodity-wise Distribution of Cold Storages in 12 Major States and TheirDistance from Delhi. (Capacity in Million of pounds)

State MultipurposeFruit and

VegetableMilk and MilkProduct

Distance from DelhiMiles. (No. of days)

No. Capacity No. Capacity No. CapacityAndhra Pradesh 178 1290 11 28.47 17 32.9 932 (5)Bihar 51 465 0 0 0 0 630 (4)Chandigarh (UT) 4 24.5 0 0 0 0

148 (2)Delhi 51 258.6 1 0.12 9 10.5 -Gujarat 91 545.5 2 2.34 32 28.92 569 (3)Haryana 59 336.8 0 0 6 2.96 124 (1)Himachal Pradesh 4 5.19 6 13.45 1 0.21 348 (4)Jammu & Kashmir 12 69.4 0 0 2 0.25 544 (7)Maharashtra 168 788.6 93 39.9 72 43.15 874 (5)Punjab 36 272.3 0 0 2 23.35

150 (2)Rajasthan 62 451.6 0 0 8 3.93 165 (2)U.P.& Uttranchal 30 192.13 4 7.9 2 1.77 146 (2)

Exhibit 2: Funding Pattern of Agricultural Directorate of India

NCDC to State Government State Government to Society / Company Marketing ActivityTRANSPORT VEHICLESLoan 50% Loan 50%

Subsidy 25% Subsidy 25%

75% 75%(balance from members)

F&V PROCESSING UNITSLoan 70% Loan 70%

Share Capital 22.5%92.5%

(balance from members)CONSTRUCTION OF GODOWNS/RETAIL OUTLETSLoan 65% Loan 50%Subsidy 25% Subsidy 25%

Share capital 15%90% 90%

(balance from members)COLD STORAGE (Assistance dovetailed with NHB for Back-Ended Subsidy)Loan 65% Loan 50%Back-Ended Subsidy (BES) 25% Back-Ended Subsidy (BES) 25%

90% 75%(balance from members)


14/20

14

Exhibit 3: Average Price (44 Pound Box) of Domestic Apples (Himachal and Kashmir)With More Than 80% Eating Quality

Name of grade Diameter of Fruit at base.

WholesaleRate inseason (Rs)

Wholesalerate in off season (Rs)

Retail pricein season(Rs)

Retail pricein off season(Rs)

Number of apples ineach box(Rs)

Extra large(special)

3.0 inch 730 930 1,340 1,730 80

Large (fancy) 2.7 inch 630 780 1,090 1,430 100Medium(selected)

2.5 inch 530 630 890 1,180 125

Small(commercial)

2.2 inch 480 580 790 1,080 150

Extra small(janta or massmarket)

2.0 inch 380 480 590 880 175

Average 550 680 940 1,260

Exhibit 4a: Cold Storage Technologies Gas Controlled Cold Storage

Gas controlled storage technology reduces the production of ethylene, a naturallyproduced gas present in the atmosphere and a trigger for ripening of most fruits. Theproduction rate and sensitivity to ethylene depends on the type of produce stored whichcould be problematic in mixed storage areas. For instance, the ethylene level in an applestorage room would be 100 ppm whereas the ethylene level in a kiwifruit storage roomwould be as low as 0.01 ppm. Gas controlled technology also senses the ethylene content

within the cold storage atmosphere and then uses a catalytic ethylene scrubber at hightemperature to produce carbon dioxide and water which modifies the atmosphere. A CO 2 sensor sounds an alarm when the CO 2 content in the cold storage area exceeds the humantolerance limit.

Controlled Atmosphere (CA) Cold Storage

This technology is widely used for varied produce and is the most commonly usedmethod of storing apples. It uses a natural process of storage that changes the ratio of theconstituent gases in the atmosphere to minimize the respiratory activity of the storedproduce. Since fruits absorb oxygen from the atmosphere and emit carbon dioxide, waterand heat, in a controlled atmosphere the oxygen is extracted and purged with nitrogenand carbon dioxide. The room is then sealed for upto 6 months, depending on off-seasondemand. The storage temperatures vary and could be as low as 30.2 0 F for pears and ashigh as +57.2 0 F for some tropical fruits. Controlled atmosphere temperature for applesvaries between 33.8 0 and 37.4 0 F. The maximum permitted CO 2 can also vary from 1% to30% depending on the product type. If the oxygen-carbon dioxide ratio becomes too low,the produce could become anaerobic, with the tissue dying and fermenting.


15/20

15

Exhibit 4b: Effect of Storage on Eating Quality

Source: http://www.nraes.org/publications/nraes22.html

Exhibit 4c: 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
http://www.nraes.org/publications/nraes22.htmlhttp://www.nraes.org/publications/nraes22.htmlhttp://www.nraes.org/publications/nraes22.html


16/20

16

Exhibit 5: Marketing Cost and Margins of Domestic Apple in season(excluding storage costs).

Description Rs. Per box of 44 PoundsCost break down Total

Expenses incurred by the grower 175* Net price received by the grower 280 Wholesalers purchase price 455Expenses of wholesale trader 6

Market charge @1% 4.5Handling and carriage 1.5

Wholesale trader's margin 90Sub-wholesaler's purchase price 551Sub-wholesaler's margin 100Retailer's purchase price 651Retailer's expense 65Carriage and handling 5Produce waste 60Retailer's Margin 224Consumer's purchase price 940

* See exhibit 7 for details of expenses

Source: Horticulture Information Service, NHB. Calculation is based on available wholesale and retailprice in Delhi, market visit and anecdotal information.


17/20

17

Exhibit 6: Average Marketing Cost per box/bag of Apples from Farm to Sale at NSM,Azadpur Mandi - borne by a Himachal Grower

Items Apple Marketingcost/box(44 pounds)Normal

With hiddencostsconservativeestimates

1 Cost of Grading/packing 12 122 Cost of Box (CFB) 45 453 Transportation cost upto loading point in the

orchard2 2

4 Forwarding agents commission 2 25 Transportation cost up to road head (a) 10 106 Loading and Chaukidari (b) 2 27 Transportation cost up to Azadpur Market by

ordinary truck 20 20

8 Octoroi (c) 2 2

9 Market fee 2 210 Dalla /Unloading (d) 1 211 Commission @ 6% 36 60*12 Gate pass at APMC 5 513 Mandi Charges at NSM, Azadpur @1% 6 613 Misc. Expenditure (Telephone, Postal

Dharmada, etc.)0 5

14 Total Cost 145 175

*The commission agent typically collects an additional 4% from the wholesaler which iseffectively 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 pointto 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 tranport

Exhibit 7 : Salient features of NSM, Azadpur at a Glance

Area of New Subzi Mandi, Azadpur 43.65 AcresNo. of Big Shops in NSM 438No. of Small Shops in NSM 796No. of Blocks in NSM, Azadpur 4Rate of Commission 6%Rate of Market Fee 1%Source: APMC, Azadpur official web sites.


18/20

18

Exhibit 8: List of Cold Storages in Delhi(Capacity of more than 4.4 Million Pounds are listed)

Capacity in millions of pounds Number of Storage Facilities

4.4 7.5 million pounds 107.6 10.0 million pounds 910.1 18 million pounds 7

Exhibit 9: List of Cold Storages in Mumbai a and Nagpur b (Capacity of more than 4.4million pounds are listed)

Name & Address of Cold Storage Capacity in Million Pound Products StoredByculla Cold Storage, Mumbai 5.7 MultipurposeGreater Bombay Milk Scheme, Mumbai 5.0 MultipurposeShiv Cold Storage, Mumbai 5.9 MultipurposeWadhwani Cold Storage, Nagpur 20.3 MultipurposeShree Ganesh Cold Storage, Nagpur 19.0 MultipurposeAfzal Cold Storage and Ice Factory, Nagpur 22.8 MultipurposeHeliwal Sheet Garth Pvt. Ltd., Nagpur 24.3 Multipurpose

a Mumbai is the capital of Maharashtra (exhibit 1)b Nagpur is a city in eastern part of Maharashtra.


19/20

19

Exhibit 10: Customer Profile of IPCSL

CUSTOMERS Total Volume**in 2001 (Pounds)

Total Volumein 2002 (Pounds)

Large customersImported Apple 31064 2,147,864Kiwi and Imp. Grapes &Pears 7248 501,168Indian Apple 2,607,897 3,725,568Other fruits 1,043,159 1,490,227Vegetable (IMPORTED) 2,608 37,255Total 3,691,976 7,902,082

MediumImported Apple 6,213 429,573Kiwi and Imp. Grapes &Pears 1,450 100,232Indian Apple 521,579 745,113Other fruits 208,632 298,045Vegetable (IMPORTED) 522 7,450Total 738,396 1,580,413

SmallImported Apple 3,106 214,786Kiwi and Imp. Grapes &Pears 725 50,117Indian Apple 260,790 372,556Other fruits 104,316 149,022Vegetable (IMPORTED) 260 3,726Total 369,197 790,207

** Indicates the total volume of fruit that enter IPCSL for storage during the entire year. Eachbox is then stored for an average of 15 days to 3 months depending on the type of fruit (p. 10)

Exhibit 11: Changing Profile of the Indian Population: 2001 - 2002

Number of Households(in 000 s)

% growth from 1995 1996 Annual Household Income000 (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


20/20

Exhibit 12: Some organized fruit retail outlets

Store NameNo. of Outlets

TypicalStore Area(sq. ft.) Locations

NeighbourhoodStores

Margin Free 273 1,200 KeralaSafal 279 600 DelhiSubhikhsha 143 500 Tamil NaduNamdhari Fresh 7 500 Delhi, Karnataka

Supermarket

Foodworld 93 3,500Tamil Nadu, AndhraPradesh, Karnataka

Nilgiri's 30 2,000 Tamil Nadu

Hypermarket

Foodbazar 5 5,000

Delhi, Mumbai,Hyderabad, Kolkata,Bangalore

Exhibit 13: Revenue Statement of IPCSL (In Rs)

Statement of earning for financial year 1998 - 1999 1999 - 2000 2000 - 2001 2001 - 2002Revenue

Export 418,260 280,000 0 0Other income (including Storage charge) 5,708,064 5,669,500 5,003,485 10,355,698Total Sales 6,126,324 5,949,500 5,003,485 10,355,698Cost and expenses

Cost of goods 504,097 312,546 0 0Depreciation 338,952 426,217 373,657 4,286,181

Total Cost and expenses 843,048 738,763 373,657 4,286,181Gross Profit 5,283,277 5,210,737 4,629,828 6,069,517

Sales, general and administrativeexpenses 5,147,921 4,604,725 4,727,647 5,429,131

Interest & Financial Cost 921,861 1,179,437 987,926 2,525,482Operating Income (pre-tax) -786,505 -573,425 -1,085,745 -1,885,096

Tax 0 0 0 0

Net Income After tax -786,505 -573,425 -1,085,745 -1,885,096Note: These are reflective of the situation and are not meant to be treated as actual values

Documents

Dev Bhumi Histroy