Sunrise 2.0 Case Study: Unilever’s Inclusive Tomato Supply Chain in India

Sunrise 2.0 Case Study:

Unilever’s Inclusive Tomato Supply Chain in India

Written by Michele Bruni and Hannah Schiff

epven, Ltd.

CONTENTS

• Critical Success Factors

• Market Structure and Enabling Environment

• The Chain Analysis

• Value Propositions

• Business Models

• External influencers

• NBM Scorecard

• Inclusivity

• Sustainability

• Open Questions

• Reflections and Lessons

SUMMARY

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• Market opportunities for new sourcing strategies and business models

• Value- and trust-based chain relationships (strong shared social capital)

• Conducive political and policy environment

• UL leadership in generating collaboration

• Evolving role of processor co-investing with farmers

• Potential for UL to scale-up and replicate in India

COMMITTMENT

• Terms of payment – Terms of payment of 7 days (at delivery of product to UL factory)

• Co-investment and guarantor role of buyer

• Bayer Food Chain Partnership Model – providing extension, monitoring, training and inputs to directly to

farmers.

• Internal Structures - Both Unilever and Bayer have proven their commitment by creating dedicated teams and

support structures to deliver sustainability and inclusion beyond traditional procurement and sales functions.

SOFT SKILLS AND MIND-SET

• Leadership from UL Sustainability and Supply Development – generating commitment and trust, and bringing

together the actors needed to success with a fragmented supply base.

• Transparency and shared social capital - between Varun Agro and farmers and between UL, processor and

other actors allows to understand incentives and gains.

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CRITICAL SUCCESS FACTORS 1/2

“Other buyers aim at volume and price only, while Unilever understands what are the deep issues and problems”. Varun Agro

WIN-WINS

• Partnering with Public Sector – sharing risks and transaction

costs, aligning visions (more local value addition)

• Substituting import from China – Lower cost to UL, benefits to

smallholders

• Contract farming – allows increased resilience to volatility and

price spikes, better crop planning, reducing risk perception, and

transaction costs.

• Increasing sustainability and yield through IPM, hybrid varieties,

drip-irrigation, sound technical assistance, monitoring,

information flow.

2 – Aligning Lead Firm Procurement with Strategy

- Cost-savings on top of sustainability

- Risk sharing and favorable time to payment

- HUL Sustainability and Supply development function fundamental for delivering sourcing strategy and relationships

3 – Evaluating Product Nature and Chain Structure Fit for Inclusivity

- Opportunity and need (119M small-scale farms in India)

- High crop suitability and value addition opportunties

- Win-win with farmers through reduced volatility

- Postive feedback loops between sustainable sourcing and inlcusion, mainly yield increase

- UL can absorb more grades than mandis at a stable price

- Alignment with Government priorities

CRITICAL SUCCESS FACTORS 2/21 – Setting a Clear Strategy for Sustainable Development

Global level partnerships generating on the ground collaboration:

WEF & GoM, Bayer CropScience Global and Bayer CropScience India.

5 – From Pilot to Scale and Mainstreaming

-Supplier as enterpreneur embed in farming community

-HUL Staff intrapreneurship

-Increased demand and GoM support to value addition

- Better infrastructure and support networks

-Shared vision with Bayer and solution-based approach

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4 - Supporting Suppliers to Apply Inclusive Business Models

- Collaboration, leadership, long-term committment and trust-based partnership

- Enterpreneurship in Varun Agro

- 7 days time to payment, flexibility and understanding in times of crisis and volatility

- Holistic support to supply-base development and essential role of Bayer

- Successful PPP and supportive policy environment

MARKET STRUCTURE AND ENABLING ENVIRONMENT

Influencing Inclusion

• Importance of aggregation from a fragmented supply base (reducing transaction cost)

• Access to information and services and investment for upgrading

• Long-term investment on smallholder sourcing from GoM

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Policy dimension

• Changes in APMC Act

• Changing consumption patterns and growing market

• Government investment and subsidies reducing transactional cost and helping “raising all boats”

• Availability of a good asset-base for smallholders

• Government willingness to double PPPs on Ag value addition by 2018

Challenges

Government of india current account balance defcit might generate trade-offs between recently introduced food security strategy (32Bn USD/year) and investment and subsidies for farm upgrading (5Bn USD/year)

Business Environment

• Interest and investment flow to increase value addition capacity

• Upgrades in water, road, and power infrastructures

• Increased availability of affordable, durable, and SHF tailored technology

“We [Gov and Companies] will have to live with smallholders. Production base is not going to change any tme soon”. Government of Maharshtra

Tomatoes

42,000MT

Technical assistance

Mandi(wholesale)

Support Services: Transport , ICTs, Industrial areas, credit,

investment

PPP

CH

AIN

AN

ALYSIS

Consistent delivery of significant volumes of high-quality and residue free tomatoes. Ease of communication and providing lead points of contact for partners.

To HUL: Delivery of large volumes of sustainably sourced, high-quality tomato paste with lower transportation and transaction costs compared to imports. To farmers: Commitment to purchase up to 100% of produce that meets quality standards at pre-set price, while facilitating access to other services, inputs, information, and training.

To consumers: High-quality, affordable domestically and sustainably sourced Kissan ketchups. To VarunAgro: Commitment to absorb up to 100% of production of sustainably sourced tomato paste at pre-negotiated prices, while providing support in terms of risk-sharing, access to finance, and international exposure.

Solution-based approach improves the economic and agronomic performance of farmers and procuring companies, as well as the compliance to health and safety standards in crop protection.

Bayer Crop Science: Smallholders:

Varun Agro:

Hindustan Unilever:

To farmers: Support innovation that can increase value addition capacity and returns to farmers. To Companies: Commitment to build a conducive agrifood value addition SME sector able to reach 80 billion USD annual sales by 2018, improving companies confidence to invest in SHF

Government of Maharashtra

VALUE PROPOSITIONS

Scarcity of labor during festivity and holidays, conflicting with crop schedule.

Industrial development –conducive ecosystem

Industrial areas competing for labor

India-wide crop failure influencing prices heavily

Consumers demand driver for smallholder inclusion

Unpredictable weather patterns

Heavy rains generating crop failures

Risk: water prioritized to industrial use

Industrial dev. and processing set basis to bring innovation in ag.

Irrigation technology availability, affordability and durability increased adoption rate

Improved energy infrastructure enabling business

Policy change and investment shift from GoM in support of high-value production.

ECONOMIC ENVIRONMENTAL

TECHNOLOGICAL SOCIO-POLITICAL

EXTERNAL INFLUENCERS

“If we want to have inclusion, we have to look at the economics before than the financials”. HUL

“Coordination and understanding with Government is difficult. Procedures and guidance are difficult to follow and generate delays farmers cannot afford”. Bayer

INCLUSION 1/2

Source: Local validation based on FAO, 2003 and India Agricultural Census, 2012.

8.7%

>4 ha

18.3% 2-4 ha

14.0% 1-2 ha

59.0% <1 ha

WHERE IS VARUN AGRO’SSUPPLY BASE CURRENTLY ?

AVERAGE LANDHOLDING IN INDIA IN 2011

Estimated landholding segmentation in Maharashtra in 2010-11

“I trust Varun Agro and UL because Manisha and the Doctor [Vijay] are here sitting with us”. Farmer

1.16 ha

1.31 ha Average

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MORE BETTER

Smallholders • The technological package• Reduced price volatility• Transparency

• Mechanization • Schools in the production areas• Tailored technological package

and assistance.

Women • Women leadership / role model recognized

• Specific meetings andtrainings

• Persistent cultural normslimit women’s decision-making power at the farm level

• Training • Opportunities in value addition.

Labor • Increased yield• Decent quality of labour• Traditional contractual

arrangements• Traditional payment terms

– savings • Contract farming• Varun Agro employment

generation•

• Social enterpreneurshipreinvesting in schooling for laborer children.

INCLUSION 2/2

SUSTAINABILITY

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Past

• Some investment in irrigation

• Unorganized farmers

• Trading only with Mandi (fresh market)

• High level of food waste

• UL sourcing mainly from China

Present

• SAC compliance

• Targeted treatment and fertilization

• Improved planting material

• 100% drip irrigation for tomatoes

• Reduction of resources unit by unit of output

• Sustinability based technological package adoption

• Testing solutions to reduce waste

• UL - Increased volume sourced locally

Future• Reduced food waste

• Increased sustainable supply base

• Soil improvement programs

“Sustainability and smallholderinclusion doen not come for free”. HUL

OPEN QUESTIONS….

• Is the centralized decision-making on “out-of-the-box” procurement supporting or slowing inclusion?

• How to deal with future uncertainty and volatility? Where does risk management trade-offs with sustainability and SHF sourcing.

• How feasible it is to source from currently <1ha farmers?

• Exit strategies not fully clear, but doesn’t seem a core challenge at the moment

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KEY LESSONS• Excellent example of how leadership, partnerships, and positive

relationships can lead to win-win arrangements.

• Roles and value propositions of the various partners are clearly defined, which leads to effective coordination and gives farmers access to the services and inputs they need for upgrading, including credit.

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• The lead companies involved (Unilever and Bayer CropScience) have created the internal structures and incentives necessary to ensure that principles of inclusion and sustainability are realized at the ground level.

• Chain has taken advantage of a supportive policy environment has also helped drive benefits to smallholders.

• The model of working through Varun Agro and in partnership with Bayer CropScience has managed to reach an impressive number of farmers in a short period of time. However, there is an open question about how scalable the model is.

• Positive feedback loops between sustainability and smallholder inclusion have emerged. The increase of yields and the stabilization of prices have been considered key by farmers in determining their willingness

• There is a potential risk relating to availability of on-farm labor. • There is a challenge in convincing farmers to adopt SAC practices before seeing impact on yields • Yield increase in a product with high opportunities, with clear boundaries in roles and

responsibilities, where chain-wide innovation is supported by strong communication among chain actors.

• There are positive feedback loops between sustainable sourcing and inclusion, mainly yield increase.

INPUTS FOR GUIDESBuyer Guide:

1. Build trust and risk sharing into long-term trading relationships with suppliers.

2. Identify opportunities and resolve problems jointly.

3. Seek out driven entrepreneurs with local connections.

4. Interact and communicate frequently with all partners in the supply chain.

5. Look for a combination of soft and technical skills in hiring sustainability staff.

Supplier Guide:

1. Re-think your role in the chain.

2. Build a network of service providers

3. Help to reduce risk for producers.

4. Create proximity to farmers

5. Demonstrate a reduction in transaction costs for buyers.

NGO Guide.

1. Support marginal producers

2. Advocate policies that enable direct linkages.

3. Support government transparency and efficiency.15

KEY LEVERAGE POINTSWhere Unilever and its suppliers can effect positive change for smallholder producer livelihoods

1. Payment terms.

2. Bringing on other partners.

3. Organizing smallholders to access other services.

4. Recruitment and staffing.

Incentive structures and support mechanisms within Unilever

1. Teams dedicated to operationalizing the USLP.

2. Supply development and procurement working together.

3. Alignment of procurement goals with sustainability.

4. High-level support keeps staff motivated.

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PartnersKey Activities Value

PropositionCustomer Relationships

Channels

Customers

Cost Structure

Revenue Structure>

Partners provide:• Inputs and training

to support on-farm upgrading

• Facilitation of finance and business development

Key Resources

BUSINESS MODEL OF VARUN AGRO

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• Plant equipment• Labor • Social capital (with

farmers)• Electricity• Information/knowledge• Access to finance

Consistent volumes of high-quality tomato paste

• Sustainably sourced• Access to farmer base

for easy implementation of improved agricultural practices

• Lead Farmer background—understanding of supply base and production system

• Color• Competitive price

1. HUL2. American and

German juice companies

Relationship with main customer, HUL, based on commitment to absorb/supply up to 100% of tomato paste. Rich, trust-based relationship.

Supporting farmers to upgrade ag practices

Processing tomatoes, guava, and mango into paste

HUL trucks pick up paste at the factory in Nasik to transport to their factory in Punjab, which takes 6-7 days.

PartnersKey Activities Value

PropositionCustomer Relationships

Channels

Customers

Cost Structure

Revenue Structure>

Partners provide:• Seeds (hybrids)• Crop protection• Fertilizer• Knowledge/traini

ng• Financial services

Key Resources

BUSINESS MODEL OF SMALL-SCALE TOMATO FARMERS IN NASIK

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• Tomato (50% land)

• Other vegetables

• Fruit trees• Livestock• Poultry

• Land• Labor (scarce)• Fertilizer• Pesticides• Social capital (groups)• Water• Electricity• Information/knowledge• Access to finance

Consistent, high-quality tomatoes

• Residue free• High solid content• Not damaged• Good size• Good color

Well-organized Single point of

contact for groups of 15-20 farmers facilitates communication, production planning, crate delivery, and training

With contracts: Varun Agro (75-80% of tomatoes)

Without contracts:Mandis (20-25%)To Varun Agro: buyer

provides transportation and packing materials

To mandis: own pickup or rent space on truck/pickup at Rs0.5-1/kg.

Contrast between very transactional, price-based relationships at mandisand long-term trust-based relationships with VarunAgro