A chicken and egg situation
The Indian poultry industry is at such a crossroad. At over INR 900 billion (90,000 Crores) it is the second largest producer of eggs and third largest producer of broiler chicken in the world. It is rapidly growing yet operators, even large ones, find it very hard to make money.
96% of the highly commoditized and fragmented industry’s revenue comes from fresh chicken meat. Its perishable nature, poor cold chain infrastructure, and fluctuation in demand owing to the Hindu custom of vegetarianism on certain days and seasons compound the problem of remunerative price realization. Farm gate prices can rise and fall by 50% or more. Feed constitutes 80% or more of the farmer’s cost.
Processed meat would counter perishability and improve price realization. But consumers overwhelmingly prefer fresh chicken. The industry’s efforts to develop value added offerings have, however, been feeble.
A few large players have developed their own distribution channels, but the bulk of chicken meat is still distributed by local and regional middlemen.
Compound all this with changing consumer habits, and the looming threat of multinationals entering the Indian market, and you have an industry at risk.
Cost leadership or Differentiation
Any industry with these characteristics is beset by price competition, high cost, and wafer thin margins. What can one do? Here, it may be pertinent to draw on John Nash’s Nobel Prize winning work which showed that prices approach marginal cost in price wars. In such circumstances a firm can adopt one of two approaches: cost leadership or differentiation. Classic Porter? Yes, and relevant!
Resilience through cost leadership
Achieving, or attempting to progressively reach the lowest cost in an industry enables a firm to withstand price competition. Not everyone’s cost structure is similar. The ones with the lowest costs can continue to make money, or minimize losses in a virulent price war. Cost leadership gives a firm a degree of immunity and the ability to spring back from bad times. What’s more, it acts as an effective deterrent to price competition.
Asian Paints has followed this approach diligently for more than forty years. As a result, they have remained the largest and most profitable paint company in India for decades. Poultry industry can too. Some players have indeed been following this tenet. It has given rise to Integrators – firms that produce their own feed, layers, eggs, hatchlings, and broiler chicken.
Backward integration has given them advantages of scale and operational efficiencies. But most have not extended their supply chains to points of retail or consumption. Very few companies own their distribution network. The vast majority has done little or no product or service innovation. They continue to sell eggs and fresh meat.
Sustainability through differentiation
It is only a question of time before the world’s largest players – from US and Brazil – start operations in India. They have a bewildering variety of processed chicken meat products for practically all socio-economic segments. Supply will create its own demand and the Indian industry will be caught flat-footed if it doesn’t change quickly.
Differentiation, therefore, is a dire imperative. And it has to be brought about by introducing new products and services. Chicken lends itself easily to ready-to-cook and heat-and-eat products. Service innovation can be in online, telephonic ordering and delivery services of fresh, chilled, frozen, and processed chicken. A few start-ups have started offering such services in several major Indian cities but only a handful among poultry farmers is working at it.
The case of Café Coffee Day
Is it feasible? Has it been done before in India? Yes! Café Coffee Day (CCD) had its origin in coffee plantations. Their business was in farming, trading and export of green beans – an agricultural commodity.
CCD now operates nearly 1500 cafes and enjoys 45% of the retail coffee market. It is the country’s largest food and beverage service business. They are no longer dependent on vagaries of international prices. (That’s another remarkable story. Fit for another post perhaps.)
The poultry industry can too. And if they can, so can you!