Agro Tech Foods and The Branded Pulses Segment

For the exclusive use of J. Rubiños Montero, 2023.
IMD776
18.12.2014
AGRO TECH FOODS AND THE BRANDED PULSES SEGMENT
IMD Professor Charles The Indian food industry was worth US$39.71 billion in 2013 and was
Dhanaraj, Professor Sandeep expected to reach $65.41 billion by 2020 owing to the rise in middle
Puri, associate professor at class income, changing urban lifestyle and the modern retail trade.2
IMT Ghaziabad, India and India was the world’s largest producer, importer and consumer of
Manjusha Subramanian, MBA pulses due to its high percentage of vegetarians.
student at IMT Ghaziabad,
India prepared this case as a Increasing GDP growth rate, consumer buying power and middle class
basis for class discussion aspirations toward branded products had led to the entry of many
rather than to illustrate either international brands in India in the past decade. The country had also
effective or ineffective handling witnessed a revolution in organized retailing with the emergence of
of a business situation. many big retailers such as Big Bazaar, EasyDay, Spencer’s and
Reliance.
This case has been written
solely on the basis of published Different authorities had observed an increasing trend in the rates of
sources. Consequently, the food adulteration. According to a survey carried out by the Food
interpretations and perspectives Safety Standards Authority of India (FSSAI), 13% of both packaged
presented are not necessarily and loose food items sold across the country were contaminated.3 This
those of Agro Tech Foods Ltd provided a further impetus for established companies in the food
or any of its employees. industry to foray into the growing branded pulses segment. Strangely,
until the end of 2013, no major player from the Indian food industry
had entered this segment. Only a few retailers had launched private
labels to cater to this growing market.
Agro Tech Foods, the Indian arm of ConAgra Foods USA, was
undecided as to whether it should enter the sector now and gain the
prime mover advantage or wait for other players to cultivate the
market and reap the benefits later. It also wanted to see whether the
Indian market was demographically, economically and
psychologically ready to make investments in branded pulses and to
pay a premium for them.
Copyright © 2014 by IMD, Lausanne, Switzerland (www.imd.org). No part of this publication may be reproduced,
stored in a retrieval system or transmitted in any form or by any means without the permission of IMD.
This document is authorized for use only by Jorge Rubiños Montero in 2023.
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Company Background
ConAgra Foods Inc., the parent company of Agro Tech Foods, was an American packaged
foods company headquartered in Omaha, Nebraska. It was the third largest food company in
the world,4 producing a wide array of food products including cooking oil, frozen dinners,
hot cocoa, hot dogs and peanut butter. Some of its major brands included PAM, Hunt’s,
Healthy Choice, Egg-Beaters and Bertolli.5 It was an extensively diversified international
food company, which operated across the food chain in over 35 countries.
Agro Tech Foods Ltd (Agro Tech) was a public limited company in the business of
marketing food and food ingredients to consumers and institutional customers.6 Its vision
was to become the best performing and most respected food company in India, as evidenced
by its mission, “Nourishing Families and Enriching Lives” and its motto “Make a
Difference.”7
The company was incorporated in 1986 as ITC Agro-Tech to enter the oil seed and edible
oils business.8 In October 1997, ConAgra acquired a 51.3% stake in the company through its
investment arm, CAG-Tech Mauritius. As of 2012, CAG-Tech Mauritius held around
49.24% of the total paid-up capital of the company.9 ITC Agro-Tech’s name was changed to
Agro Tech Foods in July 2000. Agro Tech reported revenues of INR 76.5 billion for the year
2013/2014 (refer to Exhibit 1 for selected financials).10
The company had two major business segments: “branded foods” and “bulk and processed
commodities.” The major products in its portfolio were Sundrop, Health World and ACT II
(refer to Exhibit 2 for the company’s product range). Agro Tech had manufacturing units at
14 different locations in India. It adhered to the highest standards of food safety and hygiene
by engaging with co-packers to implement world-class quality standards. The entire
processing was based on the lean manufacturing concept.
The company had a robust distribution channel across 3,500 towns and 265,000 retail outlets
throughout the country.11 This extensive distribution channel, developed over the years since
the inception of Sundrop oil in 1989, would support the company’s expansion efforts for
distributing new products across the country.
In an interview with Motilal Oswal Financial Services Limited,i CEO Sachin Gopal
explained that Agro Tech was expanding its distribution across geographies. It planned to
increase its direct reach from the current 300,000 to 400,000 outlets to 500,000 outlets by
FY13.12
Sundrop Brand
Sundrop was one of the biggest brands in the premium segment of refined oil in India. It was
launched by Agro Tech in 1989 as sunflower oil in a predominantly groundnut and mustard
oil market.13 Sundrop offered a wide range of edible vegetable oils to meet the lifestyle
requirements of a varied consumer base in the market. The 25-year-old brand reported sales
turnover of INR 4.5 billion in 2013.14 According to the company, the Sundrop brand stood
on four pillars of “Health,” “Taste,” “Lightness” and “Vitality,” which had been built over
i
Motilal Oswal Financial Services Limited is a diversified financial services firm offering a wide
range of financial products and services such as wealth management, retail broking and distribution,
and commodity broking.
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the years through its strong and differentiated positioning, “The healthy oil for healthy
people,” which had a high recall value and consistent quality.15 Sundrop offered 100% purity
and offered the goodness of vitamins and other essential nutrients, which made it the ideal
choice for people looking for a healthy lifestyle.16
Agro Tech subsequently strengthened the Sundrop brand with the launch of new products. It
entered the ready-to-eat segment by launching rice-based Sundrop Yummeals in 2011.17 The
company had been striving to create value-added categories and move away the commodity-
driven categories. Ashish Sharma, vice president of marketing, explained, “We are about
creating benefit-driven categories in India.”18 In addition to groundnut and mustard oil, the
Sundrop franchise also included blended oil variants such as Sundrop Superlite, Sundrop
Nutrilite, Sundrop Heart and Sundrop Goldlite (refer to Exhibit 3 for the Sundrop product
range).
Branded Pulses Segment

The pulses market in India was forecast to grow at a CAGR of 6% to reach 35.1 million
tonnes by 201819 (refer to Exhibit 4 for sales and forecast of pulses by category). It was a
highly unorganized market with the organized sector accounting for only 3% of the market
share.20 Retail channels accounted for 77% of total pulses volume sales in 2013, with food
service channels claiming the remaining share of 23%.21 Production within India accounted
for only 14 to 15 million tonnes and only 1% was branded consumer packs.22 Standard and
low priced pulses were sold loose; the premium ones were sold in packets. Only a few
companies like Tata, Adani Wilmar, Global Commodity and Mahindra sold branded pulses
in the Indian market. Another characteristic of this market was the high number of
intermediaries in the value chain, which resulted in a spike of about 18% to 22% in the retail
price.23 In addition, poor harvest management accounted for about 10% wastage in pulses
alone.24 Food processing industries in India attracted foreign direct investment (FDI) worth
$5,360 million during the period April 2000 to January 2014.25
As of 2014, Indian laws prohibited export of pulses, since local demand was far excess of
local supply. The government’s emphasis on domestic production and the export restrictions
played a major role in getting different companies to launch their own brands of previously
imported pulses, such as yellow pigeon peas (toor), split mung beans (moong), split red
lentils (masoor), black chickpeas (chana) and black gram (urad). However, according to the
forecast for 2014/2015, total imports of pulses would account for 3.41 million metric tons,
and total exports would account for 0.23 million metric tons. India imported pulses from
countries such as Canada, the US and Russia. Analysts predicted a demand and supply gap
of 19 million tons for pulses alone in the year 2020, which was also leading to increased
imports.26
Analysis of the retail selling prices (RSP) of consumer brands and loose pulses products of
equivalent categories revealed that the price premiums attributed to consumer brands ranged
from a minimum of 7% to a maximum of 27% of the RSP across branded pulses in different
urban centers, with the average brand premium being 18%.27 A study on the pulses that
consumers sampled across major cities in India revealed that the majority were ready to pay a
premium of 10% to 15% for branded and packed pulses provided they were able to deliver
some unique value.28 Furthermore, it was observed that branding had a significant effect on the
distribution of margins across the value chain with the “brand propagator” getting a higher
share in gross margins and retailers losing out on their margins due to strong brand pull.
The managing director of Adani Wilmar, Pranav Adani, remarked:
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We see a big future in the branding of all commodities. Just as we have witnessed consumption
of edible oil in branded form, we anticipate a similar conversion from the purchase of loose
unbranded pulses to the branded form.29
According to the managing director of Lakshmi Overseas Industries, Balbir Singh Uppal:
India is the largest producer, consumer and importer of pulses. The regional players limit
themselves to one or two types of pulses in their portfolio leaving a huge scope for a national
player to enter and revolutionize the way the industry works.30
Ashvini Hiran, COO of consumer products business at Tata Chemicals, observed, “We are
providing consumer unpolished pulses with low moisture content ensuring speedy cooking
and an increased shelf life of six months.” He added that the demand was good across tier 1
and tier 2 cities, where sales were through modern trade channels and malls.31
Value Chain for Pulses Segment

Inputs to the value chain of the pulses segment included good quality seeds and fertilizers.
Due to the uncertain nature of rainfall, farmers resorted to various institutions such as banks,
zamindars (rich land owners), and sometimes even huge retailers to insure themselves
against uncertainties such as the weather, quality of seeds and consistency of produce.
Farmers procured inputs such as government-subsidized seeds and fertilizers or directly from
the market at a premium.
Distributors were an integral part of the value chain in charge of stocking the products from
the manufacturers and distributing them within a stipulated geographical location. They also
decided on the pricing of unbranded commodities such as loosely sold pulses, cereals etc.
Wholesalers and retailers helped to get the products to small retailers (mom and pop stores)
in a given locality. They were also responsible for the transportation and other infrastructural
requirements for the pulses (refer to Exhibit 5 for value chain of pulses segment).
The end consumers demanded high quality and branded pulses, they wanted them to be
easily accessible and at low cost. With the advent and rapid growth of the modern trade
channel there were fewer intermediaries in a value chain. Modern trade retail giants had also
started procuring pulses directly from the farmers, processing, branding, packaging and
selling them to consumers at a premium (refer to Exhibit 6 for standard industry margins).
Major Players
Only a few companies like Tata Chemicals, Adani Wilmar, Rajdhani and Mahindra sold
branded pulses on the Indian market. Major players in the branded pulses segment included:
Tata Chemicals
Tata Chemicals forayed into the pulses market with the “I-Shakti” brand in December
2010.32 Their underlying claim was to bridge the demand-supply gap in the industry and
market. The company introduced five variants of pulses namely: pigeon peas, split mung
beans, split red lentils, black chickpeas and black gram. In the online shopping era in which
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customers were used to getting their products delivered to their doorstep, Tata Chemicals
came up with “Dal on Call”ii and implemented it successfully in Mumbai, Delhi and
Bangaluru. By 2013, it had 2,400 retail outlets across 21 states and had appointed the famous
chef Sanjeev Kapoor as its brand ambassador.33
Tata Chemicals had an operational tie-up with Rallis India, its agrichemical subsidiary.
Rallis sourced high-yielding seeds and pesticides to the farmers and instructed them on their
usage. Tata Chemicals also brought the produce and marketed it, this was a win-win situation
for farmers, who were wary of producing pulses because of the risk involved in the
destruction of the crops due to pests.
The company used the existing Tata Salt distribution network to gain efficiencies in
operations to distribute the pulses in India’s 21 states. In addition, the pulses were widely
available in large and medium format stores as well as neighborhood retail stores.34
Adani Wilmar’s Fortune Pulses
Adani Wilmar Limited was a $140 billion joint venture between two global corporations:
Adani Group of India and Singapore-based Wilmar International Limited, the leading agri-
business group and leading merchandiser and processor of edible oils.35 Adani’s brand of
pulses, launched in late 2013, included Arhar Dal, Chana Dal, Chana Kabuli, Chana Kesri,
Masoor Dal, Moong Dal, Rajma and Urad Dal.36 The pulses were distributed through the
same network as Fortune edible oil which catered to about 1 million outlets.37
COO Angshu Mallick, however, remained wary of the competition posed by retailers’
private labels:
We are ready to launch our pulses in consumer packs. However, it is not going to be easy as
retailers prefer stocking their own brands. This applies for branded masalas and condiments as
well, where preference is given to private labels of retailers as they get better margins.38
During the initial phase, Adani Wilmar planned an investment of INR 1 billion for a
processing unit with a capacity to mill 600 tons per day at Kanpur or Kolkata.39
Mahindra Pulses
Mahindra’s turnover (including its agribusiness division) was INR 4.3 billion at the
beginning of 2014. It aimed to reach INR 10 billion by 2016 by launching its own brand of
pulses. According to Ashok Sharma, CEO of Agri and Allied services, the company would
initially only target wholesalers for distribution.40
Rajdhani
Rajdhani, in the north Indian market, was a subsidiary of New Delhi-based Victoria Foods
Ltd. It started as a flour mill in 1966 and later went on to include a large range of agri-based
products to its portfolio. The product range of this $50 million conglomerate included whole-
wheat flour, gram flour and over 22 varieties of pulses.41
ii
Translates as “Pulses on Call.”
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Private Labels
Considering the low penetration of the branded pulses segment, companies with larger retail
networks and strong supply chains were making efforts to build a national presence. Future
Group, Reliance, EasyDay, MORE and Spencer’s, for example, were developing their own
private labels to exploit this growing market. Future Group had a strong network of trusted
and high quality suppliers and a deep understanding of the local markets, which helped it to
meet the required standards for the products. Most of these big retailers gave consumers the
choice between loose and packaged pulses.
Food Adulteration in India

While the quality of pulses was an important aspect, it was often difficult for the customer to
identify good quality pulses, especially when they were loose. According to the authorities
there was an increasing trend in the rates of food adulteration. In 2008 only 7.8% of the
samples presented in the laboratories were contaminated, in 2009 it was about 11% and by
2010 the rates had shot up to 13%.42 While not alarming, such rates definitely posed a matter
of concern from the public health perspective, particularly in terms of the very young and the
very old. Some examples of adulterants included iron filings in tea leaves, barn dust added to
spice powders with synthetic colors, and lead chromate in pulses.43
Many NGOs and activists urged the government to raise awareness about adulterated food
among the public since it could be harmful and in the long run might even prove fatal. The
adulteration could be partially attributed to the fact that the pulses and cereals industry was
highly fragmented with small retailers looking for margins and compromising on quality.
However, for big brands it was an opportunity to come up with standardized and safe products
and to sensitize customers to the issue, thereby increasing their foothold in this unorganized
market place. Many customers relied on the general merchant’s advice when buying pulses. In
this respect, branded pulses could set a benchmark for quality. Quality assurance from big
companies like Agro Tech could help the customer to make a conscious choice of a consistent
quality branded product.
Challenges in the Branded Pulses Segment

With the advent of branded pulses, the primary challenge was getting Indian consumers, who
were accustomed to buying loosely sold pulses from retailers, to change their habits.
Although consumer behavior toward branded products was changing, it was difficult to
estimate the change in customers’ attitudes toward the branding of commodity items.
Another significant challenge was that India’s agricultural produce still largely depended on
monsoons. Climate change phenomena such as El Niño caused uncertain monsoons that
could affect the produce of crops. Farmers were already skeptical about producing pulses,
and poor weather forecasts and global warming made them even more averse to it.
The dominance of private labels in retail chains posed another threat that could significantly
affect the presence of other brands at one of the major channels of distribution – modern
trade. Retail owners might try to squeeze margins on their own brands to highlight their
presence in the stores, which could act as deterrent to many brands or companies trying to
make a significant investment in this direction.
In addition, some general challenges continued to affect the Indian retail industry, such as
lack of adequate infrastructure, poor roads, unavailability of skilled manpower, price
fluctuations, cost escalations, supply chain issues, high costs of real estate, inconsistent
government regulations and price wars among retailers.
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Indian Consumers and Their Evolving Preferences

Indian consumers were also evolving in terms of lifestyle, habits, tastes and preferences.
With the advent of retailing malls and multiplexes there was a transformation in the shopping
habits and purchasing behavior of the average Indian consumer. The affluent and upper
middle class in India were generally brand conscious and their purchasing decisions tended
to be influenced by vanity and pride. According to estimates, over 50% of the population
were under the age of 25 and the majority of them were educated.44 This generation grew up
in the post-liberalization era and were more receptive and adaptive to lifestyle changes.45
According to an extensive study conducted by McKinsey and Company to examine
consumer behavioral patterns with the extensive retail penetration in emerging economies,
67% of Indian consumers reported a lack of trust in retailers.46 They believed that unless they
knew the retailer personally they were being cheated by them. This information could help
retailers gain the trust of Indian consumers by communicating a price-quality assurance to
them.
The report estimated that organized food retail would amount to only 5% to 15% of the total
food retail industry by 2015,47 limited by its inability to match kirana (convenience) stores in
providing fresh goods on a daily basis, offer home delivery and be located close to home.
The category’s advantage would be an ability to offer prices lower than the maximum retail
price and to create private labels. In some of the top 10 cities where real estate was available,
share of organized retail in food could be as high as 20% to 30% as it was then in Bangalore,
Hyderabad and Chennai.48
Many Indian consumers were moving toward organic foods despite their high cost. Mukesh
Gupta, director of Morarka Organic, attributed it to rising disposable incomes and improved
awareness about the health benefits of organic foods:
From 2007 to 2012, the average middle class income in India has shot up. The consumer is
willing to pay more for good quality food.49
It was therefore up to companies like Agro Tech to make the most of the opportunity that
this shift in shopping experience was offering.
Conclusion
Industry observers felt that favorable macroeconomic indicators, rising disposable income,
general awareness and depleting trust in loose food products would assist the adoption of
packed pulses. The fact that vegetarians made up a large proportion of the Indian population
would further ensure that demand for pulses remained strong. Increased production and
government policies to reduce food inflation would help to keep prices relatively stable,
which would also support growth in the consumption of pulses.
Agro Tech was clearly looking to become the most respected food company in India and it
had to take appropriate steps to sustain its growth plans. With the rising share of organized
retail and the increased preference of Indians toward branded products, should Agro Tech
attempt to tap this emerging market? If so, what should its strategic objectives be and how
should it position itself in order to hold its own among the competition? If it decided to enter
the segment, what brand name should it choose? Should it launch the pulses range as an
extension of its flagship brand Sundrop or should it launch a new brand?
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Exhibit 1
Agro Tech Selected Financials (INR billion)
Parameters MAR'14 MAR'13 MAR'12 MAR'11

( Cr.) ( Cr.) ( Cr.) ( Cr.)
Sales Turnover 7,648.20 7,889.20 7,045.40 7,207.10
Other Income 0.90 28.80 24.70 49.30
Total Income 7,649.10 7,918.00 7,070.10 7,256.40
Total Expenses 6,945.60 7,246.60 6,506.60 6,912.60
Operating profit 703.50 671.40 563.50 343.80
Gross Profit 683.10 671.10 562.80 517.00
Interest 20.40 0.30 0.70 1.30
PBDT 662.70 670.80 562.10 515.70
Depreciation 0.00 0.00 0.00 0.00
PBT 575.40 604.40 505.90 471.00
Tax 144.60 188.00 144.50 153.20
Net Profit 430.80 416.40 361.40 317.80
Earnings Per Share 17.68 17.09 14.83 13.04
Equity 243.70 243.70 243.70 243.70
Source: http://profit.ndtv.com/stock/agro-tech-foods-ltd_atfl/financials-historical-yearly accessed on

July 31, 2014
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Exhibit 2
Agro Tech’s Product Range
Brand Range
Superlite Advanced
Sundrop Heart
Sundrop Goldlite
Sundrop Olivea
Sundrop Nutrilite
Sundrop Oils Sundrop Nutrifit
Sundrop Lite
Sundrop Heartlite
Sundrop Superlite
Sundrop Slimlite
Sundrop Peanut Butter Sundrop Peanut Butter
Sundrop Snack Break Sundrop Snack Break
Crystal Oils Crystal Oils
Microwave Popcorn
ACT II Popcorn Instant Popcorn
RTE (Ready-To-Eat) Popcorn
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Exhibit 3
Sundrop Product Range
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Exhibit 4
Sales and Forecast of Pulses by Category (Total Volume 2008-2018)
(F): Forecast
Source: Euromonitor International from official statistics, trade associations, trade press, company
research, store checks, trade interviews, trade sources
Exhibit 5
Value Chain for Pulses Segment
Farmers Wholesalers
Inputs Distributors and Retailers End consumers
• Seeds • Cereals • Stocking • Reach • Low price

• Fertilizers • Pulses • Transportation • Transportation • Branded
• Insurance • Oilseeds • Pricing • Infrastructure • Accessible
• Mom and pop • Good Quality
stores
Modern Trade
x Branding
x Processing
x Packaging
x Multinational
Giants
Source: Compiled by the authors
Exhibit 6
Standard Industry Margins in Pulses Segment
Stakeholders Margins (%)

Distributors 5-8
Retailers/Wholesalers 10-20
Modern Trade 30-40
Source: Compiled by authors
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References
1
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2
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30
31
32
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47
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49
E. Kumar Sharma, Pure Grain, Business Today, 17 February 2013.

Agro Tech Foods and The Branded Pulses Segment

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AGRO TECH FOODS AND THE BRANDED PULSES SEGMENT

Branded Pulses Segment

The managing director of Adani Wilmar, Pranav Adani, remarked:

Value Chain for Pulses Segment

Adani Wilmar’s Fortune Pulses

Food Adulteration in India

Challenges in the Branded Pulses Segment

Indian Consumers and Their Evolving Preferences

Parameters MAR'14 MAR'13 MAR'12 MAR'11

Sales Turnover 7,648.20 7,889.20 7,045.40 7,207.10

Other Income 0.90 28.80 24.70 49.30

Total Income 7,649.10 7,918.00 7,070.10 7,256.40

Total Expenses 6,945.60 7,246.60 6,506.60 6,912.60

Operating profit 703.50 671.40 563.50 343.80

Gross Profit 683.10 671.10 562.80 517.00

Interest 20.40 0.30 0.70 1.30

PBDT 662.70 670.80 562.10 515.70

Depreciation 0.00 0.00 0.00 0.00

PBT 575.40 604.40 505.90 471.00

Tax 144.60 188.00 144.50 153.20

Net Profit 430.80 416.40 361.40 317.80

Earnings Per Share 17.68 17.09 14.83 13.04

Equity 243.70 243.70 243.70 243.70

Source: http://profit.ndtv.com/stock/agro-tech-foods-ltd_atfl/financials-historical-yearly accessed on

• Seeds • Cereals • Stocking • Reach • Low price

Source: Compiled by the authors

Stakeholders Margins (%)

Source: Compiled by authors

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