Price-setting, payment and credit

Expert interviews exhibit a mixed picture with regard to price-setting. Some experts suggested that modern retailers have more decision-making power over prices due to their ability to buy in bulk (Representative of CII FACE,

personal communication, February 2014). Others said that modern retailers’

price-setting does not differ from that of traditional retailers because their market shares in India as well as their procurement volumes are still too small: “The prices are dictated by the prices, they will be similar in both value chains. The prices will not be dictated by modern retailers because they have such a small share” (Representative of Global Agrisystem, personal communication, February 2014). One expert even remarked that one big domestic chain switches suppliers according to prices so it merely responds to market developments instead of exerting influence (Representative of APMC of Madanapalle mandi, 2014). Data gathered during interviews with the three stakeholder groups seems to support this view, but there are still salient differences between modern domestic and international chains.

Modern domestic retailers have a certain bargaining power but still have to benchmark to the mandi price. When sourcing from mandis, domestic retailers’ buyers negotiate with commission agents. Out of 6 supermarket buyers that were sourcing from mandis, only 1 received market information from the corporate headquarters. All the other buyers were allowed to negotiate prices freely. 2 out of 6 said that they set the prices themselves while 1 said that “the mandi price is the benchmark price”. In the case of direct sourcing through a collection centre, modern domestic retailers also referred to the mandi price. Out of 5 domestic supermarkets that operated a collection centre, 3 bargained with the farmers over prices but always benchmarked on the mandi price. From these 3 supermarkets, 2 never paid less than the mandi price; 1 of the supermarkets followed the corporate policy of a “minimum support price” that was always to be paid to the farmer. The third supermarket’s prices were unpredictable: sometimes they paid more, sometimes they paid less.

Out of the 2 supermarket chains that did not bargain with farmers, 1 simply always paid the mandi price while the other one did not negotiate but received the prices from their headquarters. In this case, however, the collection centre encountered problems: because headquarter quotations were never higher than mandi prices, farmers would rather not sell their A-grade produce to them. Trying to impose their own prices thus put the domestic supermarket chain in a position in which it could not acquire the quality produce it needed. Another modern domestic retailer’s employee said that their influence on the price was very limited due to price fluctuations.

Selling-prices were fixed by headquarters in three cases; others did not give details.

International retailers seem to enjoy more price-setting power than domestic supermarkets although they still observe the mandi price.

When sourcing from the mandi, 2 of the 3 international supermarkets we interviewed observed the mandi price but then set prices for their suppliers without negotiating with them. One international supermarket negotiated with its suppliers; however, its buyer was not completely independent in the negotiations but received certain information and advice from the category manager. In the case of direct sourcing through a collection centre, the results were mixed: international supermarkets observed the mandi price but then set their own price; some put a premium to get higher quality; others paid less than the mandi price. Respondents underscored that selling to a collection centre below the mandi price could still be profitable for farmers because transport costs were less and no commission applied.

Of the traditional retailers interviewed that sourced from the traditional value chain, none had any influence on the price. In this supply chain, the produce goes from farmer to commission agent to traditional retailer or to another trader before reaching the retailer. Prices are set in negotiations between commission agents and farmers depending on supply and demand (and often, based on yesterday’s price) and traditional retailers simply have to take the price that they find at the mandi or rythu bazaar that they source from.

On the whole, modern retailers in India have more price-setting power compared to traditional retailers who mostly do not negotiate at all; but retailers are far from dictating prices. Hypothesis 1 thus cannot be fully accepted with regard to price-setting. According to expert interviews, the lack of broad decision-making power with regard to price is due to the small quantities that are currently procured by modern retailers. The market share of modern retail is still too small to have significant influence and the volumes sold and procured are not sufficient for bulk buying. In addition, contract farming, which enhances retailers’ influence on farmers, is not conducted for tomato retail in India. It became clear in the expert interviews that, because of high price fluctuations and because of small farm sizes in general, long-term contract farming was impossible to negotiate.

Some modern retailers engaged in modified “contact farming”: farmers were registered with them, farmers received purchasing orders and certain support from them, but were not obliged to sell to them just as the retailer is not obliged to buy from farmers. The reported phenomenon of farmers

being “locked” in contracts with retailers who then dictate prices below market price thus does not exist, at least for tomatoes in India.

Modern retailers in India cannot procure at prices below market price.

The only exception is when retailers establish collection centres in remote villages that tend to be more attractive for farmers because of lower transport and marketing costs. They also cannot procure at considerably higher prices because Indian consumers are very price-sensitive¹⁶ so they would not be able to cover their costs.

With regard to payment periods, farmers − irrespective of the chain they sold to − very rarely reported delayed payments and if so, only in one case did the delay exceed three days. Farmers delivering to the mandi normally received their money in cash and within two days. With regard to credit, commission agents can easily provide credit and advance payments to farmers. They also provide credits to their own customers, that is, traditional retailers, which considerably increases their power in the chain. In the traditional value chain, commission agents are thus probably the most powerful actors.

For traditional traders payment periods vary considerably between 1 and 45 days; they pay their suppliers in cash, via cheque or bank transfer.

During the interviews, modern retailers stressed the fact that, in contrast to commission agents, they provided secured payment to farmers. Domestic supermarkets paid farmers within two days to one week in cash, via cheque or bank transfer. One international wholesaler even developed a special credit card system (called PD Card) to pay its farmers without the involvement of any intermediary. As farmers did not mention reliable payment periods as an advantage however, the attractiveness of modern retailers probably results more from stable prices and reliable weighing systems as well as less transport and marketing costs for the farmers.