19 Aug, 2011, 04.01AM IST, radhika nair,ET Bureau
Indian Organic firms expect to beat slowdownDespite the looming threat of a global economic slowdown, India’s organic entrepreneurs are upbeat on the prospects for an emerging industry. In an industry long dependent on exports, these firms are now finding that rising consumption of organic products by middle class Indians is creating a brand new market opportunity.
Rajashekar Reddy Seelam, founder of Sresta Natural Bioproducts, which sells under the brand 24 Letter Mantra is planning to increase acreage under organic cultivation.
“We intend to invest around $15 million next year,” said Reddy. Since 2004, when the company was launched, the firm has entered into contract farming arrangements with 10,000 organic farmers. The plan next year is to increase cultivation to 70,000 acres. Reddy’s optimism stems from the estimated 50% growth in demand for organic products in India that is providing a buffer in a time of global slowdown.
“We are continuously increasing shelf space for organic products, which is still a small part of our overall business,” said Thomas Varghese, CEO of Aditya Birla Retail, who runs the More chain of supermarkets.
The Indian organic industry expects its total turnover, including exports, to go up from 675 crore in 2010 to 4,000 crore by 2012, according to the International Competence Centre for Organic Agriculture (ICCOA).
The domestic growth comes at a time when industry players estimate that India’s organic exports are growing at 6-7%, down from a pre-recession high of 13-14%. “I don’t think things will get worse,” said Sresta’s Reddy, who along with his peers in the industry are battling multiple issues on the ground as they seek to meet the ambitious growth targets.
Higher prices for organic products are still an impediment. If a household shifts completely to organic food products, the extra spend comes to around 1,500 per month, according to organic producers.
But entrepreneurs justify the higher cost-to-customer as organic farmers need the incentive of higher price since they bear greater risk by avoiding pesticides and incur the cost of certification.
“We have higher per unit transport costs too as our volumes are much smaller compared to non-organic food. Similarly our storage costs are also high,” said Bangalore-based Pro Nature’s co-founder and CEO Varun Gupta, whose company procures, processes, brands and supplies organic food products.
Started in 2006, by Gupta and his wife Nidhi Gupta, Pro Nature-branded products retail in Bangalore, Chennai, Hyderabad, Pune and Mumbai and has 3 crore in revenue.
For farmers who supply to organic retailers the cost of certifying their produce as organic costs 9,500 to 19,000 per man day. Companies are now supporting farmers to get this certification. “We provide farmers with know-how and help in the certification process. We work with them to put the internal controls in place,” said a Suminter Organics spokesperson, who did not wish to be named.
Suminter is one of the best known organic companies in the country and was started in 2004 by Sameer Mehra. The company works with small and marginal farmers, mostly in Maharashtra and Gujarat, and has a processing unit in Indore. All the food products they process are exported and almost 60% of the cotton is exported. In 2008, it raised funds from Nexus Venture Partners.
To beat the hurdles, entrepreneurs are using novel methods. IIM-Ahmedabad alumnus, Aparna Bhatnagar decided to sell online to keep operating costs low. She launched the e-commerce portal Green and Good Store a little over a year ago. Unlike most other organic ventures, Bhatnagar focuses on non-food products and retails organic apparel, home furnishing, stationery, cosmetics and handicrafts sourced from other certified producers. Bhatnagar has consciously kept prices low, with some apparel priced as low as 300. “Consumers should not have to pay extra for choosing to buy an eco-friendly product,” said Bhatnagar.
Another entrepreneur trying to exploit the e-com platform is Sivakasi based organic cotton fabric and bed linen manufacturer, Creative Textures. The company, which was launched in 2005, turned fully organic in 2008. Today, Creative Textures has a turnover of 12.5 crore and it exports 25% of its total production, while the rest is sold to domestic garment manufacturers, who in turn export the finished products. “We plan to start online retail for the UK market very soon,” said CEO R Balaji, who has already contracted warehouses in UK.
Companies say they need to start investing in marketing and advertising to acquire new customers. But, marketing costs are a burden for organic retailers. “Many of these companies are small players and do not have the financial muscle to support a marketing budget,” said Hemendra Mathur, managing director of SEAF India Agribusiness International Fund.
Entrepreneurs are now trying to overcome this handicap. Last month, Sresta’s Reddy launched a month-long nationwide “Freedom from Pesticides” campaign to raise awareness among consumers. As part of this campaign, consumers can bring any non-organic food products and the company will give them organic products at no charge. “Market development will accelerate growth. We have so far got a good response for our campaign,” said Reddy.
While Sresta’s initiative may be a start, organic entrepreneurs concede the Indian market is a long way away from more developed western organic markets. The US organic food and beverages industry was at almost $27 billion in 2010 and represented approximately 4% of overall food and beverage sales in 2010, according to data sourced from the Organic Trade Association (OTA), a North American organic industry body. The western organic sector is also witnessing acquisitions, a sign of an industry reaching scale.
Among the more prominent acquisitions this year, were the buyouts of Danival, a French producer of organic foods, and GG UniqueFiber, a Norwegian natural foods company, by the US natural and organic food company Hain Celestial, which had $1.05 billion in sales. “We are five years away from such a scenario in India, where organic firms would have reached a scale to acquire or be acquired by a larger company,” said Pro Nature’s Gupta. But Indian entrepreneurs are confident they are on track to reach that target.