Bad Roads, Red Tape, Burly Thugs Slow Wal-Mart's Passage in India

India has the second highest output of fruits and vegetables in the world, but more than a third of what is produced rots before reaching consumers. WSJ's Amol Sharma tags along on the journey of Indian produce from farm to table.

KHERI SHIKOHPUR, India—It is early afternoon and a beat-up Jeep is rumbling along a dirt lane in this north Indian hamlet, past a mound of burning trash. Suddenly the driver, with 60 burlap sacks stuffed inside and piled on the roof, approaches what looks like a sure dead end: a muddy riverbed.
But there is no hesitation here. With passengers riding on the hood and rear bumper, he plows on, nearly tipping over as his wheels spin out in sandy tracks and bounce through deep puddles.

The cargo is vegetables, and the aquatic crossing is merely another moment in a transportation ordeal that has become of keen interest to a host of multinational retailers—including the world's largest, Wal-Mart Stores Inc.
Last fall, following a relaxation in India's foreign-investment rules, the company said it was planning to open its first stores in the country in the next two years, tapping into a prized $490 billion retail sector. But to cash in, Wal-Mart and other foreign retailers will have to solve a fundamental problem: how to move goods into stores efficiently in a country that offers big retailers little in the way of modern logistics and is plagued by dilapidated infrastructure.
The hurdles are particularly daunting in the food sector, which makes up more than half of the revenues at the Bentonville, Ark.- based company. In the world of perishable goods perishing, India has few rivals. Lacking proper storage facilities, enough refrigerated trucks and adequate highways, the world's second-largest fruit-and-vegetable producer loses about one-third of its produce each year to spoilage, the government says, roughly $10 billion worth.
India also is bogged down by an entrenched system of government-imposed middlemen, the scope of which has few parallels, essentially an army of traders and agents who charge various fees along the way. That alone can increase farm-to-store costs sixfold, analysts estimate.

 

How a company that prides itself on well-controlled operations and low-cost products plans to take this on isn't known. To date, Wal-Mart hasn't provided many details on its strategy. It continues to deal with both political resistance in India to its entry and news of a bribery probe it launched into its nascent operations here. In remarks late last year to the Council on Foreign Relations, Wal-Mart's CEO Mike Duke said he remained confident in the company's ability to untangle the country's logistical knots.

"The people of India are missing on the opportunity right now because of the inefficiency of the supply chain," he said. "But I am patient, and I believe that over time the process will get worked out."
Still, retail experts say India is especially tough terrain that highlights a key issue for multinationals as they march on globally. Often, the attention on firms venturing far from home focuses on trying to pick the right products for the right culture, something Wal-Mart struggled with when it initially tried to market golf clubs to Brazilians and ice skates to Mexicans. But in India, the biggest hurdles likely will come well before the point of sale.
Wal-Mart could face "nightmares" trying to maintain an efficient and low-cost system, says Neil Stern, senior partner at Chicago-based retail consultancy McMillan Doolittle. "Distribution and logistics are a huge part of their competence."

India's Food Transportation Ordeal

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Sanjit Das/Panos for The Wall Street Journal

In the world of perishable goods perishing, India has few rivals. See a photo essay following Indian vegetables from the farm to the market.

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For its part, India's central government acknowledges the litany of headaches, but has called for $1 trillion in public and private investments over five years to modernize infrastructure. Over bitter local opposition, it has moved forward on opening its doors to more foreign investment by retailers. In the fall, it permitted foreign big-box chains to open stores in the country for the first time with local partners, when only wholesalers had previously been allowed.
With 1.2 billion consumers and an expanding middle class, India has long been an irresistible target for big-time retailers. That is especially true for Wal-Mart, which is facing stagnant growth at home but promising results elsewhere. For the nine months ending Oct. 31, international revenue grew 7.6%, compared with 4.4.% in the U.S. If foreign retailers can crack India, the market could be as large as $80 billion by 2021, according to a study by Indian retail consulting firm Technopak Advisors.
Were a country to write a script about frustrating the Wal-Mart way, India could well be its author. Middlemen, tiny farming plots and bad road conditions aren't unique to India. But retail experts say the scale of the problems is unlike any it has faced in the 27 countries it operates in.
With a fleet of 55,000 tractor-trailer trucks, third-party shippers and its own massive distribution centers, the company is accustomed to fine-tooth tracking and direct sourcing.
But that won't be possible in India, where farms typically are no larger than one to three acres, and number in the millions. By state laws, these farmers must take their harvest to government-run wholesale markets and generally can't sell directly to retailers. Food goes on circuitous journeys through multiple government markets and middlemen before reaching consumers.
If not on rural dirt roads, many of those trips are taken on highways so poor that trucks can manage only about 186 miles a day, compared with roughly 500 miles in the U.S., according to a 2010 report by McKinsey & Co. Improper food storage, meanwhile, occurs throughout the journey from field to store, whether it is vegetables left out on flatbed trucks for hours or in storage facilities that typically date to the Cold War.
In all, India has just 6,200 cold-storage facilities, most built to store potatoes and now with only enough capacity for 11% of what the country produces, according to a report by India's YES Bank, 532648.BY -3.31% which provides advisory and financial services to agribusiness.
The cost of upgrading those facilities is unknown, as is the ability of the country's already overwhelmed electricity grid system to run new ones. For its part, India has mandated that foreign supermarkets invest a minimum of $100 million in capital, with 50% going into back-end infrastructure such as cold storage and transportation. The government itself is planning $4.2 billion of investments in the next five years to upgrade the food-supply chain.
Saumitra Chaudhuri, a member of India's Planning Commission and the prime minister's Economic Advisory Council, says only big foreign companies have the deep pockets to set up costly rural infrastructure. "We can't solve this problem. It's something the private sector has to do," he says.
However it is funded, even the smallest change couldn't come soon enough here in the Kheri Shikophur region in northern Uttar Pradesh state, where the challenges Wal-Mart and other big retailers would face are in stark relief. The village itself has only about 4,000 people, and it tries to support more than 100 farms.
Ramesh Chand, a 50-year-old farmer with eight children, says about one-tenth of his crop is bottle gourd, used for vegetable curry, but that transporting the crop to sell isn't worth it if prices are too low. With no local facilities to store it to wait for the market to improve, he is sometimes forced to throw it out, which he recently did with 100 pounds worth. "If only there was cold storage near our farm," he says.
Far from selling directly to a retailer, farmers from this region send their produce to the first link in the country's supply chain, the Chhutmalpur market. Rusty tractors, horse carts and trucks traveling over riverbeds arrive with everything from eggplant to cauliflower to coriander. The Chhutmalpur market is officially sanctioned by Uttar Pradesh state's Agriculture Produce Marketing Committee, a body that strictly controls where fruits and vegetables can be bought and sold. Indian states began passing laws to set up such regulatory committees in the 1950s on the theory that farmers would be fleeced if their sales weren't overseen by the watchful eye of the government.
This level of bureaucracy alone represents a substantial burden for Wal-Mart or any other big retailer. There are now more than 7,000 APMC-approved markets nationwide with over 413,000 licensed traders and 214,000 licensed "commission agents" who hawk farmers' goods on their behalf and take a cut of the transactions. Produce often goes through several of these markets, being touched by five or six middlemen before reaching a retailer.
Critics say the setup—the U.S. and most nations have no equivalent—is steeped in inefficiency and is a major contributor to India's persistently high food-price inflation, which averaged 9.4% from April to November. A 2011 report by the National Council of Applied Economic Research, an economic think tank based in New Delhi, blamed the network of middlemen for roughly one-third of food-price increases.
Agricultural marketing regulations have stunted India's logistics sector too, thwarting companies that could otherwise help retailers set up modern supply chains. Bangalore-based Snowman Logistics operates 17 cold warehouses and 150 refrigerated trucks, making deliveries to 4,000 retailers per day. The company wanted to enter the produce business as an end-to-end carrier of goods from farms to stores. But it couldn't get a license from states. Today, its cold-chain technology is used to handle mostly imported foods such as Haagen Dazs ice cream and Ferrero Rocher chocolates.
In the Chhutmalpur market, the commission agents sit outside on plastic chairs, waiting for farmers and licensed traders to arrive so they can broker transactions and take a cut. To signal a deal is done, they shake hands with the traders underneath a white cloth.
In a country where many people already are upset with the idea of a foreign retail invasion, these workers could well be among the fiercest opponents to Wal-Mart's foray into India. Government-licensed traders and agents believe their jobs could be in jeopardy if foreign retailers try to bypass them. That will only increase the gap between the rich and the poor, say trade groups for the agents.
"If big foreign companies start buying directly from farmers, it will be a big problem for us," says Yogender Kumar, a commission agent at the Chhutmalpur vegetable market. "It will be the start of a war between both sides."
After passing through the agents and traders, produce from here moves in trucks on a 140-mile journey to New Delhi, often on a two-lane road so pot-holed and bumpy that top speeds are 15 miles per hour.
According to drivers, the trip may include a visit from local thugs demanding bribes for safe passage. It is just one of many human road hazards in India, such as farmer protests that shut down major rural arteries for hours.
The thugs, burly villagers armed with wooden canes called lathis, set up barricades on the road. They pose as legitimate local officials, even handing out receipts to victims, the drivers say. Local police say they haven't heard of the problem. Drivers say they don't think reporting it would help.
In the end, the produce will land in New Delhi in another, larger government-sanctioned market, "Azadpur Mandi", with more middlemen and poor storage, before finally being sold to small retailers or shipped to yet another wholesale market. In a single day after a farmer receives his payment, the price for a vegetable can shoot up 500%.
In the face of all this, analysts say, it is unlikely Wal-Mart will try to replicate its U.S. supply operations, which are focused primarily around massive distribution centers supporting up to 100 stores. Raj Jain, president of Wal-Mart's India unit and chief executive of its local joint venture with Bharti Enterprises Ltd., says the company has gotten a head start by opening wholesale businesses. The venture, which has opened 20 outlets since 2009, has given Wal-Mart experience linking up with farmers in some parts of the country, as well as dealing with decrepit roads and storage facilities.
Mr. Jain says the company has signed up 7,000 farmers, and plans to reach 35,000 by 2015. He is critical of the middlemen system that would impede large-scale expansion. Farmers "have to go to a set of brokers who essentially have a cartel—they have no option or choice," he says. The answer, he says, is for state governments to relax their rules. "If we want to become big one day, then reforms would be required," Mr. Jain says.
Such changes will be difficult. Mr. Chaudhuri, at India's Planning Commission, says the government has been pushing individual states to reform agricultural regulations to allow any retailers, domestic or foreign, to bypass middlemen when buying perishable products. Two states have implemented the changes and eight more have promised to do so, he says, but the country has 28 states.
Wal-Mart has built up expertise in other markets that could prove valuable in India. In Central America, Wal-Mart's Mr. Jain says, the company got experience procuring food from small landowners and upgrading an outdated supply chain. In China, Wal-Mart had to deal with regional restrictions on where it could set up stores for several years. In Brazil, the company's successful "Todo Dia" outlets are examples of small stores targeting low-income consumers.
But the company's biggest international successes have come when it acquired or formed partnerships with well-established local players, as it did in Mexico and the U.K. In India, modern retailers account for just 7% of the market. The rest is made up of 12 million mom-and-pop shops.
"It's the least mature market they've ever had to enter," said Mr. Stern of McMillan Doolittle. "They have to look at it like, 'We have to create a new playbook.'"
That playbook is only going to get more complicated. Some local politicians, for example, have seized on news, disclosed by Wal-Mart, that the company is conducting an internal probe into whether some employees of its Indian operations bribed officials—part of a larger investigation into several of its global operations. Wal-Mart has suspended several Indian employees but has declined to provide details, saying it is taking appropriate steps and remains committed to the Indian market.
Even real estate—finding room for Wal-Mart and other big retailers to open large stores—will be a hurdle, given the country's scarcity of affordable space in big cities. Already, retail-industry consultants say the company may have to drop its trademark supercenters in favor of smaller shops in some places.
"Foreign retailers in general need to be prepared to sustain losses in India for years to come," says Natalie Berg, global research director for retail consultancy Planet Retail. "India will be quite a slow-burner for them."