How did ITC's Business Model revolutionize Indian agriculture?: ITC's Business case study thumbnail

How did ITC’s Business Model revolutionize Indian agriculture?: ITC’s Business case study

Hi everybody, every now and then we keep hearing about the pathetic state of farmers in our country. And in spite of employing more than 50% of the workforce, the condition of the Indian agricultural sector has been so bad that every day 28 people dependent on agriculture commit suicide. And every time we hear this news 99% of us curse the government, we feel sorry for the farmers and we just move on until another news comes in. And in this process of shallow activism, whenever ever try to understand what exactly is the problem of the farmers at the ground.

But you know what, guys, while every singlemedia house and politicians have been using the state of farmers for their own advantage,the Indian tobacco company has been working on a revolutionary business strategy, andhas improved the lives of 4 million farmers across 35,000 villages in India. And the best part is that they have achievedthis not by doing charity, but by deploying a world class business strategy that has evendoubled the income of farmers. And if you understand the strategy properly,you will not just be able to tap into a million-dollar business opportunity in the Indian agricultural space. But you’ll also be able to understand how can companies like Zomato and Grofers become.

Profitable in the next five to 10 years? So the golden question is, what exactly is this strategy? How will it help zomato and grofers becomeprofitable, and more importantly, what are the business lessons that we need to learnfrom this wonderful case study. This video is brought to you by goDutch, butmore on this at the end of the video. This is a story that dates back to 1999 when the agricultural export division of ITC was not performing well at all. During that time, soyabean was a primary exportcommodity of ITC, and in 1999 4 million tonnes of soyabean or 80% of the produced soybeanproduce of India came from rural Madhya Pradesh.

80% of this produce was turned into soya meal that was used in poultry and cattle feed. And eventually ITC exported soya milk to countries such as China, Pakistan, Bangladesh and even United Arab Emirates. And the remaining 20% became edible oil, which again was a highly nutritional high demand product. So the soybean industry overall was supposed to be very, very profitable. And the farmers who produced soybean was supposed to be extremely rich. But guess what? The soyabean farmers in Madhya Pradesh wereleading a miserable life, most of them struggling.

In debt when they didn’t even have enough capital for the next season. And at the same time, even companies likeITC that were procuring these crops were not able to make healthy profits. So the question was, when soybean was in such high demand in the international market, how is it possible that neither the farmers nor the export companies were able to make healthy profits? Well, as it turns out, it was because of a major inefficiency in the supply chain of soybean. And this is how it worked out.

On paper, there were three elements in thesupply chain, the farmers, the apmc or the agricultural produce market committee, andthen we had export companies like ITC and the wholesalers. So ideally, the farmers were supposed to produce their crops and they were supposed to take it to the apmc. APMC was nothing but a body of licenced tradersset up by the government to ensure that farmers are not exploited by open trade. It’s also called as the mandi. So at of mandi, only government licenced traders could buy the produce from the farmers and.

No other trader was allowed. So theoretically, these traders were supposedto auction for the crops, and the highest bidder procured the crops from the farmers. This way, the farmers are supposed to getthe best prices and they were supposed to be rich. But in reality, this was far far away fromthe truth for three major reasons. Firstly, the mandis are about 30 to 50 kilometresfar away from the farmers and more than 80% of the farmers in our country are still smallfarmers. So most of them either had storage facilities,nor could they afford transportation facilities.

Therefore, they either had to rent a truckor they had to sell it to a junior contractor who then sold it to the senior contractor,who then took it to them mandi. So to put that straight, they either had tobear the cost of transportation or they had to sell their produce to the middlemen atan extremely low cost. Secondly, the farmers had no way to find out what exactly was a price being offered at a particular mandi on a particular day. As a result, they only had to rely on word of mouth and take the risk of travelling 50 kilometres with the hope that the word of mouth was true. And lastly, since no other trader was allowed to procure crops from the mandi, the licenced.

Traders formed a cartel and instead of auctioningfor the highest price, they all quoted the same price which was way below the standardprice of the produce. For example, if one quintal of soyabean wassupposed to be sold at a base price of 8000 rupees giving the farmer a profit of 2500rupees per quintal, what the traders would do is all of them would quote a price of 6000rupees only. Why? Because 1700 farmers have already travelled50 kilometres and they cannot go back and they couldn’t sell their produce anywhere else. So the farmer had no other option but to sell his crops at a bare minimum profit of 500.

Rupees to the licenced traders. And worst case, if the farmer sold it to the junior contractor, then the profits would go down further from 500 rupees to less than100 rupees to sometimes even at a loss. And to make matters worse, even after dragging the price down to a mere 500 rupees. The mandi traders did not pay the farmersright away, and they took the hard on produce at an unofficial credit and paid the farmersonly when they made a profit. And this time of credit would range between one week to even one month. And this pathetic system put the farmers ina very very dangerous vicious cycle. Since the farmers did not have enough cashflow.

It led to low investment into farming equipments,and other essential inputs like pesticides and fertilisers. This led to low production leading to low margins, which again led to a cash crunch. In fact, even today, this is a state of most of the farmers in our country. And at the end of the day, in 1999, the farmerswere losing 60 to 70% of the potential value of their crop with the agricultural gainsof only 25 to 30% of the global standards. But you know what, guys, this is when ITCcame out with a revolutionary initiative called the E-chaupal initiative, and they installeda super amazing tool called the computer in the remotest villages of India in 1999 itself.

And under this initiative, ITC supplied a windows PC and internet connection and a dot matrix printer to all the village centers in its canopy. To take this forward, they launched a websitecalled soyachaupal.com, which consisted of three of the most important information tabsneeded for the farmers, data and weather reports to help the farmers decide what is the besttime to sow his seeds and to prevent him from sowing seeds at the wrong time. Number two was the best practices section. For example, 18 inch spacing was considered to be best practice. However, many farmers were spacing the seed rows nine inches apart, which eventually resulted.

Into less yeilds. And thirdly, they had the Market Informationsection that gave the important market metrics, including the daily price and volume tradedat the mandis and the ITC centres. And this was supported by other importantpages like the q&a section, the new section and even the crop Information section. Secondly, they appointed a lead farmer calledthe sanchalak who was responsible for helping the farmers out with a computer operation. And he was given a commission of 0.5% on thebasis of the farmers productivity. So because of the incentive, he automaticallyworked hard to help the farmers out with the.

Computer operation and to enable them to improvetheir productivity. And thirdly, ITC convinced the governmentto allow the company to procure the produce directly from the farmers with the promisethat they will provide reasonable cost and will build an efficient and profitable supplychain. And that is all Ladies and gentlemen, theimplementation of the E-chaupal began in 1999. Back then ITC had five processing units inMadhya Pradesh and 39 warehouses making a total of 44 touch points, covering 80% ofthe farmers in Madhya Pradesh, to which the farmers could bring the soyabean produce. The best part was that these points were only20 to 30 kilometres away from the farmers.

As compared to the 30 to 50 kilometre rangeof the mandis. And this amazing setup ladies and gentlemen,changed the way the farmers of Madhya Pradesh traded soyabeans. And this is how the system worked out. First of all, the farmers were given all theimportant information through the E-chaupal computers, which included everything fromweather forecasts all the way up to the seed sowing techniques. Therefore, the farmers were confidently ableto invest in their crop. This reduced the risk of the spoiled cropsand at the same time it increased the yield.

Then after the harvesting was done, they coulddirectly have a look at the website to see how much price was being offered at the apmcand the ITC centre on a daily basis. Eventually, they could compare the pricesand then decide where to go to have higher profits. In this case, ITC even reimburse the transportationcost to the farmers because of which, they do not have to depend on the contractors tosell their yield at a bare minimum profit. After that, when they arrived at the ITC centre,the processing facility also included a soil testing lab. And here’s where top great scientists offeredthe best recommendation for fertilisers or.

Additives based on the chemical compositionof the farmers soil sample. And lastly, the farmer was given cash on deliveryfor the sale of his products immediately and this was a very big deal because it enableshim to buy fertiliser and other essential products that were needed for the next season. And this wonderful system, ladies and gentlemen,turn the disastrous, vicious cycle into a virtuous cycle by which the farmers had goodcash flow, which led to high investment into farming equipments that led to high productivity,eventually giving them thicker margins and better cash flow. On top of that, in spite of all these reimbursements,this setup was so amazing that even ITC ended.

Up saving $3 per tonne on transportation,and at the same time, the farmers are able to earn $8 extra per tonne. Furthermore, this move turned out to be extremelyprofitable for ITC, because they got raw material from the farmers at a low cost. And were able to use that for their fmcg division. And today, each E-chaupal initiative alreadyhas become the largest initiative among the internet based interventions in rural India,reaching out to more than 4 million farmers across 35,000 villages in 10 different states. And today, these crops include soya bean,coffee, wheat, rice, pulses, and even shrimp.

This is the incredible story of the E-chaupalinitiative. And this brings me to the most important partof the episode and that are the lessons from the case study and the business opportunitiesarising in the Indian agricultural space. Before we move on, I want to thank our wonderfulpartners for today’s episode and that is goDutch. People just like the farmers were stuck ina dangerous vicious cycle because of not having enough cash flow. Have you realised that knowingly or unknowinglyeven we are stuck in a vicious cycle because of not tracking our expenses, because if youdon’t know how much you will be spending, you don’t know how much you will save.

And if you cannot project your savings, you can not make strategic investment decisions. And eventually, this little complacency endsup costing us a lot of money in the future. And that’s where our partners go dutch comein. goDutch is an AI powered personal expense manager, which helps you track your bills across UPI,multiple cards and bank accounts without making any manual entries. I’ve been using goDutch for three months now. That’s way before they sponsored us. And you know what, guys, I have used many expense management apps in the past three.

Years. And I’m saying this from my heart that goDutchis by far the most beautiful expense management app I had ever used. It’s called the school AI bot that gives you a crystal clear analysis of your expenses, which has helped me a lot to plan my investments properly. So if you want to track your personal expenses without lifting a finger, just download the app from the link in the description, and it will immediately tell you your last three months spends in less than five seconds. Moving on to the lessons from the case study.

There are three important lessons to learnfrom ITC’s E-cahupal initiative. Number one, technological accessibility, government regulation and cash rich stakeholders are the three pillars that can catalyze the growth of rural sectors of India. In this case, the farm bill now legally allows companies to procure the produce directly from the farmers without seeking special permission. And thanks to Jio kisaan, farmers can now witness the next level of the E-cahupal initiative. Secondly, we are seeing the rise of extremely cash-rich -and not-so-profitable companies like Zomato and Swiggy, who are building ab2b supply chain in order to supply raw materials directly to the restaurants.

And this is where projects like zomato hyperpure come in. And just like ITC cannot own the supply chain,but only make it super efficient and profitable both for themselves and for the farmers. If this is done by rest of the companies,the inefficiency caused the apmc traders will get eliminated resulting into huge profitsto grofers, zomato, swiggy, and other companies. And lastly, most importantly, if you’re someonewho wants to invest into organic farming or hydroponics please read about something calledcontract farming because it’s opening up new supply chains that will eventually presentyou with game changing business and investment opportunities.

And if you find something worth sharing, please feel free to drop a comment or write an email to us Via subscribing to our Newsletter. That’s all for today guys, if you learned something valuable, please make sure to share it with your friends on social media. And for more such insightful business and political case studies please subscribe to our newsletter.

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