Five years ago, Anuradha S did not so much as glance at the rack marked ‘health’ tucked away in the far aisle of her neighbourhood supermarket, a dusty shelf half full with a motley assortment of ‘organically grown’ rice, ‘diabetic atta’ and ‘diet chivda’ piled in an uninspiring jumble. She considered buying ‘natural’ pepper once, but never found it the next few times she went. “I always thought organic food was meant for rich people who could afford exclusive shops,” says the 43-year-old home-maker. “Now, there are so many brands and the prices are better. Rice, atta and spices, of course, and even masalas, sooji and dry fruits.Organic rice is only about ₹10 more per kilo than my ‘regular’ rice.”
It isn’t only Anuradha. Not too long ago, most upper middle class families in India would have struggled to explain even what ‘organic’ food was all about. Those numbers haven’t diminished drastically, but awareness and acceptance of the benefits of chemical-free produce (no pesticides, no synthetic fertilisers) has grown enough that organic food is no longer restricted to trendy, upmarket grocery stores or a solitary shelf at the local supermarket. As demand for organic food has increased it has found itself on shelves labeled under ‘natural’ and ‘organic’ produce. That’s good news for the 600,000 organic farms in India, which are finally finding a market for their products. And this demand is making organic food companies business-like in their supply chain and marketing efforts. Granted, interest from private equity investors is still to translate into headline-grabbing deals, but there’s little doubt that organic farming is in full bloom.
Retail, whether modern trade or the unorganised corner-store variety, works on a simple creed: jo dikhta hai, woh bikta hai. For organic food producers, at least, this is an unwelcome truth. Uncertain that there would be enough takers for organic produce, supermarkets and large grocery stores didn’t bother giving them front-shelf space. You couldn’t really blame them. Organic food may be healthier but it’s certainly not the better-looking alternative. Unpolished rice and dals don’t look as attractive as processed cousins and fruit and vegetables are non-uniform in shape and size and could well sport insect damage (no pesticides, remember?).
Being relegated to the backshelves perpetuated a vicious cycle—the lack of visibility meant there were even fewer takers for organic produce. And it didn’t help that organically grown food was often more expensive than conventional equivalents (the economies of scale were just not there).
A healthy business
In the past few years, people are more conscious of what they’re ingesting in the name of food and for many, it seems reasonable to pay extra to ensure no unwanted chemicals make their way into grocery bags. Research firm Netscribes identifies increasing health consciousness among consumers as one of the key drivers for the organic foods in its Agriculture and Food Industry in India 2011 report.
But it’s not only about demand pull, although that is the prime reason why the organic business is growing. The rising interest in organic cultivation has also been encouraged by affordable certification (now ₹500 per farm per year, down from ₹2,000-5,000 earlier), and better prices for farm produce. All of which also means lower prices for organic produce, bringing it within the reach of a wider customer base. About 4.43 million hectares is currently certified as organic, of which 1.7 million hectares is cultivated. “Last year, there was an 18% increase in area [under certified organic cultivation] and production increased by 20% over the previous year,” points out Dr PVSM Gouri, Advisor, National Accreditation Body, and Consultant, Agricultural and Processed Food Exports Development Authority.
Until recently, almost all this produce was exported—globally, organic produce is a $50 billion-plus market, with the US accounting for over half the demand. But, as domestic interest in organic foods increases, companies are turning their attention inwards. Organic India, for instance, has offices in nine countries and until five years ago, was exporting 70% of all it produced. “Now we sell only 30% overseas,” says Amit Kapur, Group Product Manager, Organic India. “The Indian market has grown so much that we want to expand here.”
Retailers agree. “Organic produce is a differentatiator for Sec A clients. Sales of the organic category in our stores have grown 300% in the past three years,” declares Mohit Kampani, Chief, Merchandising and Operations, Spencer’s Retail. To be honest, that’s not saying much. Organic foods are still only a tiny fraction of overall food and beverages sales. No official numbers exist but estimates place it at a minuscule ₹200 crore, organised and otherwise. But worldwide, over the past several years, there’s been a 4-5% consumer conversion to organic foods—in the US alone, sales of organic food and beverages have grown from $1 billion in 1990 to $26.7 billion in 2010, which is about 4% of overall F&B sales.
Branded organic staple companies are counting on a similar conversion in India as well. If that happens even over the next couple of decades, it should translate into a ₹20,000-30,000 crore market. “As we better manage our harvest cycles and consumers become more aware, the market is going to be huge,” says N Balasubramanian, CEO of the Hyderabad-based Sresta Natural Bioproducts, which sells organic staples under the 24 Letter Mantra label.
Perhaps it’s the lack of scale that is deterring PE investors from acting upon their declared interest in this new business. Also, quality is paramount in organics with even a slight contamination resulting in the entire lot being dumped. Procuring multiple SKUs from multiple states, processing them and maintaining organic fidelity is very hard. Hence, there aren’t too many large companies where PEs can invest. “The strong challenges faced by this market have led to minimal investments,” concurs Gaurav Kumar, Manager, Netscribes. “But it has strong prospects and is expected to see a growth in investments soon.”
So far, there have been only two PE investments in organic brands: $15 million in Sresta by Peepul Capital in December 2011 (an earlier round by VenturEast Fund Advisors fetched only $1.4 million) and the March 2008 investment of $20 million by Nexus India Capital in Mumbai-based Suminter India Organics. “This is a tough space in which to execute and scale the business,” says Sandeep Singhal, Managing Director, Nexus. “You need an entrepreneur and founding team that is equally comfortable dealing with global companies like M&S and McCormicks as with farmers in Gujarat and Karnataka.”
Breaking it down
Organic produce is not easy business. It starts with the certification—a farm can be certified organic only after three years of zero-chemical cultivation and a product only if it stays chemical-free through the supply chain till it reaches its consumer. If there is a time-lag and produce is improperly stored (with chemical fumigation or insect repellants, for instance), it loses its organic integrity. There’s also the lack of adequate storage.
At present, the entire crop has to be procured, processed and stored by the farmer or the organic company—there is no state support. “We would like the government to maintain organic stocks as they do for wheat and rice,” says Raman Prabhakar, Director, Brahm Arpan Organic, maker of the Health Fields brand of organic staples.
Higher risks and lower yields make companies wary of investing in resource hungry marketing campaigns that could otherwise help them increase sales. “We can’t afford to advertise yet,” concedes Varun Gupta, Founder and CEO of Bangalore-based ProNature Organic Foods. Instead, organic brands are banking on word-of-mouth publicity and attractive packaging to draw consumers. They’re also turning to social media. Others like Fabindia use their retail network to promote organic produce. It’s working—from 70 products when it started stocking organic produce in 2004, Fabindia now has a portfolio of over 350.
To Market, To Market
As the market develops, supply chain dynamics have improved. Morarka Organic Foods’ Down To Earth has an IT-enabled platform to track 250,000 farmers in 19 states; procurement is channelised through 70,000 farmers at any given time. 24 Letter Mantra, which has grown at a compounded annual rate of 60% in the last three years, is also focused on the entire value chain, from contract farming to retail. The company works and promotes 10,000 small and marginal farmers across 40,000 acres of land in 14 states.
Economies of scale have also played their part in the growth of the organic produce market. “Twenty years ago, we used to hire one mule to haul 20 kg of produce up to the roadhead,” says Dr Vandana Shiva, Founder of Navdanya. “Per unit cost was naturally very high.” Now, “As the number of organic farmers goes up, they will be able to aggregate and bring their produce to a trading point,” says Mukesh Gupta, Director, Operations, Morarka. While most brands belong to traders in organic produce, “Navdanya is the only organic brand that is farmer-owned,” says Shiva.
Apart from doing away with chemical fertilisers and pesticides, a major head of expense and reason for farm debt, organic farmers have been returning to traditional practices like crop rotation, cow-dung manure and neem-ginger pesticides. “I have learned that once we farm our land the organic way, we don’t need to add anything at all,” says D Muthuraj, Farm Manager, NanNilam Organic Farms, Kancheepuram District. “On the contrary, if we interfere with additives, yield falls.”
That’s almost how the business has also grown—on its own, without outside interference.