Agri-Input startups in India: Not just an e-commerce play
By Raghav Rungta, Associate Asha Impact
The agri-input marketplace (sale of seeds, fertilizers, crop protection etc.) sector seems to be one of the flavours of the month in agri-business in India. Numerous start-ups have tried, and continue to try, to address this sector. However, we would be remiss to say that this is a recent phenomenon. Large input companies, had already identified the opportunity to formalize distribution and retail of inputs, in order to take home a larger chunk of the estimated Rs. 60,000 crore industry.
The movement started in 2005, with input manufacturers such as DCM Shriram attempting to enter farming retail. Others followed suite — Godrej, Triveni, Coromandel, and most recently IFFCO — to name a few. However, majority of these companies fizzled out, with the exception of Coromandel, who is going strong with roughly 665 retail outlets in AP. Owning and operating last mile retail, turned out to be a significant challenge. A structured corporate approach, with its decision making bureaucracy and high cost base, combined with the challenge of maintaining a brand neutral channel, could not compete with the frugal efficiency of local entrepreneurs.
We should have taken a note from our neighbours Pakistan — where Syngenta, an agriculture input company with 22% market share in Pakistan in 2010, has done away with the traditional dealer based sale of inputs and has adopted a franchise based exclusive network. Franchisees are bound to only sell Syngenta products, work on a fixed commission and incentive structure and provide advisory services to farmers. This franchise base is now the singular go — to — market channel for all their products. The company started with 300 outlets in 1997and reached roughly 700 by 2010. Bayer and FMC have also moved into similar franchise based approaches (Singh 2017).
Yet, the relative inability of corporate India to own agri-input retail does not imply that the sector does not have significant issues that formalisation can address. Farmers routinely battle adulteration, product in-availability, arbitrary pricing, product tagging, and the ability to make an informed purchasing decision when procuring inputs for the next sowing season. Many a time the decision is driven simply by the advice provided by the retailer, a retailer who has his own motives to push the highest margin products, which might not be the best products for the farmers buying them.
Entrepreneurs across the country have identified this market issue and are trying various approaches to address the same. There are numerous companies operating in the space, from better known names such as Agrostar, BigHaat and DeHaat to newer companies such as Behatar Zindagi, Gramophone and Agribolo.
The fundamental thesis of input models is simple: provide high quality inputs, closer to the farmer, at competitive or better prices, with corresponding advisory and guidance services.
However, the sector is rife with challenges:
1. Farmer indebtedness: Farmers tend to be caught in debt cycles with local retailers, significantly reducing the addressable market.
2. Demand generation and aggregation: Demand generation at the last mile from small and marginal farmers, who remain scattered and difficult to access, is a perennial challenge.
3. Implementation guidance: The sale of a new input must be accompanied with guidance related to usage and implementation — however such advisory services are now defacto for any input marketplace model, an added cost base and not a revenue generating vertical.
4. Last mile delivery: The geographic spread and lack of customer density also leads to high logistics costs, which can be a significant crunch for business models delivering products to the consumer. Depending on postal services for delivery also significantly limits the ability to move high weight and/or liquid products (like fodder or bio-inputs); last mile delivery remains a significant challenge.
5. Seasonality in input purchases weakens the capital cycles of businesses
6. Building customer trust: For all the hoopla around technology and smart phone penetration in India, the stark reality from assessing multiple businesses in the space, is the requirement of an offline presence. This is probably the most interesting and counter-intuitive challenge to people not familiar with agriculture in India. The purchase of inputs is an essential livelihood purchase for farmers, and thus requires a significant amount of trust to be placed on the retailer/supplier. The intangible of trust is essential to understand. Given the CACs (customer acquisition costs), cost of service, and cost of delivery one is really taking a bet on the LTV (long term value) of a consumer making repeated purchases for his input requirements. The importance of retention in this space is far higher than traditional e-commerce models because the consumer is making highly targeted, well informed, seasonal purchases from your platform. Trust, is the foundation of retention, and retention is the foundation for all the LTVs we see companies projecting in the sector. Building trust in rural India, requires an offline presence.
The challenges seem to loom as large as the opportunity itself, but these are challenges that have been identified, and challenges that can be addressed. The ability to onboard a consumer to a new medium of purchase for an essential livelihood product, where formalization adds real value for the consumer (we will go over the perils of chasing formalization for the sake of formalization in another post) can create the foundation of a solid business. The opportunity to build and retain the farmer as a consumer on your platform is incredible.
Entrepreneurs are up to the challenge, and business models are evolving and adapting to the obstacles in the sector. There are varied and different approaches:
1. The input baskets stocked: Some startups have more exposure to products such as fodder and dairy supplements (high weight low value repeat purchases, hedging seasonality), others are focused on seeds and crop-protection(low weight high value. This is largely a function of target geography and delivery channel employed, covered below
2. Primary delivery channel employed: Some focus on moving inputs through the Indian Postal Service (in order to limit delivery costs), others build out their own last mile channel (improving farmer engagement and trust build-up), some use a combination of both
3. Geographic area/crop of focus: Companies largely focus on higher farming income, horticultural and cash crop producing states of the west and south. Having a geographic/crop specific approach allows companies to increase product specific volume, maximize bargaining power with suppliers, and thereby increase their margins when procuring inputs .
4. Methods of demand generation: Companies are employing a combination of IVR(interactive voice response)/ call-centers, offline camps, digital marketing, and/or offline demand aggregation through franchise village level entrepreneurs (VLEs). Some have even decided to purely service the existing retailer network in a B2B approach instead of targeting the consumer directly.
5. Value added services: A consistent value added service across most models is farming advisory. The level of efficiency and accuracy in handing out advisory can vary from model to model. This is key because targeted advisory allows targeted sale based on a given crop cycle and immediate requirements of a given crop. Targeted advisory can go a long way in establishing brand retention, and is a pre-requisite if one wants to introduce new products to a geography. We are also seeing numerous models attempting to service the entire value chain (procuring outputs from farmers as well) from the outset, to maximize the utility from farmer engagement and help address some of the challenges identified above. The fundamental precursor to maximising engagement is the offline presence of an organisation.
Needless to say, input purchase is a significant pain-point for our small holder farmers that needs to be addressed. It might be too early to say one approach is better than another, but tracking this space and seeing how models will evolve to service the sector, will be fascinating. Assuming the current hurdles are passed, differentiation will be the next challenge as models converge and adopt similar practices.
Do you have thoughts on the future of agri-business in India? Drop me a line on firstname.lastname@example.org and I’d love to discuss it further.