"Quick Look" at ITC Ltd's e-Choupals:
Backward Integration as a Forward-Looking Strategy for India's Rural Markets


The Problem
The Agri Business Division of ITC Limited is facing many challenges as it seeks to expand markets for its goods, both locally and internationally. A large portion of India's 150 million hectares of agricultural land is distributed in small holdings of only one or two hectares each. Procurement from such a fragmented farmer base compounds the problem of control over quality that is natural in agricultural produce. Infrastructure bottlenecks and a large dependence on middlemen add avoidable costs to the products. Additionally, despite India's strong agricultural research and development base, harvest yields fail to reach their full potential because of difficulties in disseminating best practice information. A different approach was needed to ensure that Indian agriculture in general, and ITC in particular, remained internationally competitive in today's rapidly globalizing world.

Like many other marketers of products in rural India, ITC also found it difficult to sell goods at costs affordable to the poor. Again a different approach was needed to build a competitive, modern marketing and distribution infrastructure tailored to the rural market - a market otherwise serviced by the unorganized and inefficient informal sector.


Company Profile
With over US$ 2 billion sales, ITC Limited is one of India's leading companies. Traditionally a tobacco and cigarette producer, it has grown into a conglomerate dealing in hotels, packaging, agribusiness, information technology, and fast moving consumer goods (FMCGs). Its diversification into consumer goods includes recent entry into the garment, prepared food, greeting card, gift and matchbox industries.

The US$ 155 millionInternational Business Division (IBD) of ITC's Agri Business segment was created to market India's agricultural produce internationally. This division also sources agricultural raw material for its domestic FMCG business (e.g. branded wheat flour, rice etc). Aiming to integrate more closely with its rural suppliers, while also developing new markets for its own and third-party goods, ITC began deploying its e-Choupal network in early 2000 through its International Business Division.


The Business Model
In a country where 200 million people are engaged in farming or related activities, ITC is developing its internationally competitive agricultural business by empowering, not eliminating, the independent small farmer.

Its business model centers around the deployment of a network of Internet-connected kiosks, known as e-Choupals, throughout agricultural areas in India. An e-Choupal is a high-tech version of the traditional "choupal," or "village gathering place" in Hindi, where farmers are provided with the latest weather reports, local and international produce prices, and farming best practices. Costing US$ 3,000 - 6,000 each to set up, they also serve as procurement and purchase points, allowing farmers not only to sell their produce to ITC, but also to buy agricultural inputs and consumer goods for daily household use.

Each e-Choupal is managed by an ITC-appointed "Sanchalak", a respected farmer of the community who takes a public oath of office upon accepting the position. While ITC covers equipment, the day-to-day operating costs, which consist primarily of electricity and Internet connection charges, are covered by the e-Choupal Sanchalak. These costs vary depending on usage, but average about US$ 60 and US$ 160 per year respectively. Miscellaneous travel and equipment maintenance costs add another US$ 20 in yearly fixed costs. ITC, for its part, spends an average of US$ 100 annually on each kiosk, which goes toward training and infrastructure management. Such activities include maintaining a helpdesk, addressing equipment and software complaints, and repairing or replacing broken equipment.

The premise of ITC's expanded business model is backward integration, a form of virtual vertical integration that involves the direct purchase of produce from farmers, thereby reducing ITC's dependence on middlemen. In many sectors of India's unorganized economy, middlemen involved in procurement typically make large profits by blocking market and price information. Up until now they have been indispensable even so, because they compensate for infrastructure gaps along the supply chain. The e-Choupal network, by deploying IT innovatively, reorganizes the roles of these intermediaries by leveraging their strengths in physical transmission of goods, yet disintermediating them in the flow of information along the chain. In the process several non-value-adding activities in the traditional farm to factory leg of the value chain, such as redundant transportation, bagging, handling and labor, are eliminated.

This reorganization of the role of middlemen results in lower procurement costs for ITC, despite having to pay higher prices to the farmers. Transaction costs are also minimized for the farmer by buying output at the farmers' doorstep, and through transparent pricing and weighing practices. A substantial quantity (120,000 MT of various commodities) has already been procured through this channel, resulting in overall savings over a million US dollars. The savings are shared between buyer (ITC) and seller (farmer). According to company officials, the average soya farmer saves US$ 5 per ton of beans when he sells through the e-Choupal network. ITC, for its part, saves US$ 4 per ton, even after paying transportation costs.

On the marketing front, ITC is able to maintain and grow the trust of its farmers by enhancing their productivity and wealth. ITC leverages this position of trust among farmers, as well as its distribution capabilities, to market its own consumer good brands and those of partner companies offering products and services that ITC does not. Sales of consumer goods through the e-Choupals have been particularly successful because the cost-savings associated with dealing directly with the manufacturer allow Sanchalaks to offer goods at lower prices than other village-level traders or retailers can afford to do.

Through his close relationship with other farmers, the e-Choupal Sanchalak is also able to gain market information not otherwise available to a big company, such as preferences or specific needs, thus giving ITC the ability to customize products to provide increased convenience at a lower cost. Brand marketing by a trusted name (e-Choupal) in a market without brand leaders leads to improved market penetration and reduced cost of advertising new products.

The largest corporate Internet initiative in rural India, the e-Choupal network covers an area that is as diverse socio-economically as it is geographically. Four distinct crops in as many states have already been initially targeted under the initiative: soybeans, coffee, shrimp and wheat. These groups show significant differences both because of the dynamics of the commodity they are dealing in as well as because of the socio-economic strata they belong to. Soya farmers, for instance, tend to hail from poorer segments of society, and typically have a weaker bargaining position in most matters. The high risk / high return character of aqua farming, on the other hand, attracts an altogether different profile of farmers: more well-to-do and more demanding. Traditionally pampered by the government, wheat farmers are also demanding in their expectations. Coffee growers are generally well-informed and market-savvy, characteristics attributed to the volatility of the coffee market.

The first and largest e-Choupal network, Soyachoupal, was launched in June 2000 in the state of Madhya Pradesh. It has since grown to include 976 kiosks that provide services to 600,000 soybean farmers in 7,000 villages. Plantersnet , launched in the state of Karnataka in December 2000, includes 75 kiosks covering 6,000 coffee farmers in 125 villages. The Aquachoupal network, launched in February 2001 in the state of Andhra Pradesh, includes 55 kiosks reaching 10,000 shrimp farmers in over 300 villages. The most recent addition, e-Choupal, was inaugurated in November 2001 in the state of Uttar Pradesh. 180 kiosks now reach 375,000 wheat farmers in over 1,500 villages.

The total network already includes 1,286 kiosks, reaching almost a million farmers across some 9,000 villages. Enthusiasm from farmers is helping ITC to rapidly scale up its network. Current plans include diversification into a wider variety of crops in 11 other states across India. Expanding at a rate of 3 to 4 kiosks a day, the company expects to have 20,000 choupals covering 100,000 villages, or one sixth of rural India, within 10 years. With this infrastructure, ITC is targeting US$ 400 million in international exports by the year 2005.


Products & Services
e-Choupals help farmers realize larger harvests by providing them with the latest weather reports and farming best practices. The information is retrieved from the Internet or caches on hard disks, and is made available in the relevant local languages: Soyachoupal and e-Choupal in Hindi, Plantersnet in English and Kannada, and Aquachoupal in Telugu. Static content is installed on hard disk while setting up the choupals or is made available on CDs. The e-Choupals also offer other critical services like soil, water and PCR testing, which further help to enhance yields.

Farmers improve their bargaining position as well, enabled by live data on local and international market prices of relevant agricommodities. Historical and up-to-date information on supply and demand, in addition to expert opinion on future price movements, also helps empower the farmers.

The e-Choupal network offers farmers two options for selling their goods to ITC. They can either sell their produce at their doorstep through one of the e-Choupals in the ITC network, or they can bring their produce directly to an ITC processing or storage hub and get reimbursed for transport costs.

Both the e-Choupals and ITC storage hubs function as one-stop shops for agricultural inputs, household items, and other fast moving consumer goods from ITC and ITC partners. Examples include solar lanterns, cooking oil, herbicide, pesticides, seeds, fertilizers, tractors and even life insurance. The larger hubs also stock up certain products that are traditionally bought in bulk by the farmers when they cash out their produce after harvests. Combined with seasonal and bulk discounts, innovative value exchange mechanisms, and the competitive advantage of being able to sell goods at the produce receiving point, these hubs are able to lock in higher sales. The IT backbone also helps in faster transmission of demand forecasts, making it easier to manage larger inventories efficiently at all levels of the network.

Sanchalaks receive a commission on all transactions, buying or selling, that occur through the e-Choupal. These range from a low of 0.5% on some commodities to a high of 20% on life insurance policies. These commissions are paid regardless of whether it is ITC or a third party that buys or sells the goods. No additional fees are charged to the farmers for Internet access or for any transactions.


Management
Management of the e-Choupal network is overseen by the International Business Division of ITC Limited. Sanchalaks, the trusted local farmers who run the individual choupals, are not official employees of ITC but serve as both ITC brokers and consumer goods salesmen.

Helping to minimize potential conflicts in the supply chain, the position of choupal "Sanyojak" was created for the traditional middlemen. ITC leverages their knowledge of the terrain and long-standing relationships with villagers to help manage the logistics of the e-Choupal network effectively. Sanyojaks assist ITC teams in setting up new e-Choupals by conducting village surveys and helping identify the best Sanchalaks. They also help facilitate transactions by maintaining records, collecting price data from local mandis, and managing the physical flow of goods. In this manner, they still serve to compensate for infrastructure gaps along the supply chain, but no longer obstruct the flow of information and market signals. The Sanyojaks are paid commissions based on the services they render, and typically make more money as part of the e-Choupal network than they did independently.


Challenges
Outdated telephone exchanges, sporadic electricity, and widespread illiteracy are formidable challenges to any effort to deploy a modern Internet network in rural India. ITC has responded to these challenges in a number of innovative ways.

Where connectivity is a problem, telephone exchanges have been upgraded using RNS (RAX Network Synchronisation) kits. In other cases, wireless VSAT links have been installed, bypassing the exchanges altogether. Even with these improvements, bandwidth often remains limited. e-Choupals compensate for this by caching static content locally. The company also uses a specially-designed template for managing data combined with new imaging techniques in order to speed up downloads and optimize bandwidth use. To overcome sporadic electricity, several of the kiosk computers use back-up batteries recharged with solar panels.

Familiarizing first-time users in remote areas of rural India with the Internet also presented a challenge. When the e-Choupal concept was first proposed, there was some initial hesitation by the farmers, but no direct resistance. Surprisingly, they learned quickly - the basic training planned for two days was accomplished in just four hours by the very first lot of Sanchalaks. A video showing farmers using the kiosks has helped speed acceptance and adoption of the technology among other farmers. Illiteracy is overcome through the e-Choupal Sanchalak, who retrieves the relevant information on behalf of the farmers who cannot read.

ITC has also had to surmount regulatory barriers. The Agricultural Produce Marketing Committee Act (APMC Act) prohibits purchase of specified commodities (including several that ITC deals in) from any source other than government-designated mandis. ITC has overcome this challenge by convincing the political and bureaucratic leadership of various state governments that the "spirit" of the act (to benefit the farmers) is better served through e-Choupals. As a result, some states have amended the act, while others have allowed specific exemptions for such new business models.

ITC's e-Choupals face no significant competition from a business perspective. While other industry players have attempted to replicate the e-Choupal business model, ITC retains a strong competitive advantage due to its first-mover status, broad multi-sector experience, extensive partnerships and large financial resources. Intending to expand e-Choupal's social benefits to resource-poor farmers and the nation in general, ITC has actually encouraged competition by proactively sharing the network's experiences and lessons learned.


Key Lessons
By cutting costs and increasing revenues both to ITC and to farmers, the e-Choupal network demonstrates the possibility of convergence between shareholder value creation and social good. This "win-win" business model helps ensure its sustainability, while also making it highly scalable.

Increased profits to farmers and to ITC are realized through enhanced yields and improved procurement, marketing and distribution. Due to multiple variables that impact productivity, a longer term assessment is needed to determine the extent to which productivity is increased. In the short term, however, there has been a visible increase in many of the project areas, and feedback from farmers has been positive.

ITC has been able to leverage its e-Choupal infrastructure into a distribution channel for a variety of goods and services. Sales of consumer goods that began on a trial basis in 2000 and 2001 are currently being scaled up. Savings in the core activity of commodity sourcing make the channel almost cost-free for the distribution business, resulting in superior value to rural consumers and sustainable profits to ITC.

e-Choupal's value as a distribution channel appears set to increase rapidly as the network grows. With more kiosks and more farmers being added to the network every day, ITC is well-positioned to leverage its distribution channels to more partners, thereby providing even more benefits and services to underserved areas. Applications such as crop diagnostics, small business loans and insurance, telemedicine, education, tourism and entertainment, all enhanced by the e-Choupal branding, can all be phased in as demand increases for such services.

In addition to being sustainable and scalable, ITC's e-Choupal model promises to be widely replicable, not least because the company is proactively sharing its experience with other interested companies. There is no one-size fits all model for the e-Choupal network. The belief is that, in managing e-Choupal networks in areas that are diverse socio-economically and agriculturally, ITC will gain the expertise needed to replicate the model not only throughout India, but in other developing countries as well.