Karthik Jayaraman, Co-Founder WayCool chats with Gaurav Ranjan, VP Investments Prime Venture Partners.

Listen to the podcast to learn about

01:30 - Push Led Supply Chain to Demand Led Supply Chain

10:00 - Role of Tech in Food Supply Chain

18:00 - Depth in One Category Vs Building Breadth

30:00 - Build in-house, Acquire or Use 3rd Party Service Providers?

35:00 - Solving Credit for Farmers

38:00 - Resource Allocation: Physical CFO & Digital CFO

42:00 - “My Job is to Develop Leaders”

Read the complete transcript below

Gaurav Ranjan 00:50

Good evening, everyone. Today, we have our guest, Karthik Jayaraman, founder and CEO of WayCool, one of the large agri-tech startups from India. Thanks a lot, Karthik, for being here.

Karthik Jayaraman 01:05

Thank you, Gaurav. It’s a pleasure to be here and I wanted to thank you for creating this platform that connects all entrepreneurs into one community.

Gaurav Ranjan 01:10

Yep. We hope entrepreneurs will have some great takeaways from this. So starting with the first question, if you could just quickly explain what WayCool is, what it does, and then we’ll dive in from there.

Karthik Jayaraman 01:25

WayCool is a technology enabled supply chain company that operates in the food and agri space. Our objective is to convert the supply chain from a push or supply-led supply chain to a demand-led supply chain and, therefore, significantly reduce waste and improve responsiveness.

Gaurav Ranjan 01:40

Very interesting. So you pointed out one thing, the demand-led supply chain. You’ve mentioned this in one of your podcasts earlier that the auto industry runs on a demand-led supply chain. So what are the differences between a supply-driven supply chain versus the demand-led supply chain? How do things change in both the scenarios in food, which is primarily supply-driven where you grow crops that’ll be put to the market? What are some of the things that need to be changed or that you had to change while you went about building WayCool?

Karthik Jayaraman 02:10

Push supply chain works based on the principle that people produce and the supply chain conveys it to the user and pushes the product onto the user. Now, if the production is not aligned with what the user wants, there is going to be waste or there is going to be a shortfall of supply. Whereas, in a pull-based supply chain, the demand is predicted or captured or aggregated, and production and supply happens based on this aggregated demand. In a demand-led supply chain, if designed right, we will achieve what’s known as a push out of the efficiency frontier.

In supply chain science, we have this trade-off between efficiency and responsiveness. You can either have very efficient supply chains, which means the inventory is less and the wastage is less, but the responsiveness of the customer will be low. The fill rates may not be very high. Ultimately, you can have very high field rates, but because you’re carrying a lot of inventory and so on. But if you design a demand-led supply chain, you can have both low inventory and wastage and high responsiveness, and that’s really what we are attempting to do.

The food supply chain in India and the auto supply chain migrated us more than 35 years ago. The Japanese taught us this. The food supply chain globally, and largely in India as well, still works on a supply-led supply chain. This causes a lot of volatility and losses in the supply chain, right? Our farmers basically produce what they’ve been producing historically and our consumption is shaped by long-term behaviors. It has become largely inelastic right now. Because the farmers’ production keeps going up and down, whereas consumption remains largely inelastic, you’re seeing high volatility in the supply chain.

Gaurav Ranjan 03:35

That’s interesting. But coming to the agri supply chain, that is a very complex supply chain. You have 10 to 15 intubated from the time the crop is produced and the time it reaches the end consumer, right? And there are multiple areas where one solve from the input side, from the output side, from financing, logistics, and so on and so forth. So when you started WayCool, how did you go about picking the problems to start with? How did you expand into other problem statements and other areas?

Karthik Jayaraman 04:05

Gaurav, that’s an interesting question. I’ll start with why I got into this in the first place and then how the idea of food and supply chain came up, and I’m from the automotive industry. I’m not from this industry. When you turn 40, when your midlife crisis hits you, some people buy Ferrari; others startup. Maybe that’s the trigger, I don’t know, but I was feeling a sense of ennui or boredom with the auto industry and I felt that maybe we should do something more meaningful with the second half of our careers.

The idea of food came from my co-founder, Sanjay. Sanjay and I have known each other socially for a very long time. Sanjay had just come back from college and he said, “Hey, I see a lot of agrarian distress related headlines on the one side and supply volatility related headlines on the other in the food space. I’m interested in this space. Prima facie, it looks like a supply chain problem, which is something that you have capability and interest in. Why don’t we do something together?” That’s really how the idea started. We had actually named the company WayCool because we went in with the hypothesis that cold chains are what will solve the problem. We learned that was not the case. Where the West thinks about cold chains because they store their food and consume it over longer periods of time, India is always a high-speed supply chain. We grow, harvest, transport, and consume every day. And in such situations, cold chains are becoming less meaningful and you have to do it in a different way.

The way we learned about this was by walking back down each of these supply chains. Fresh produce supply chain, we used to start on the market in Chennai, the Koyambedu Market, and walk all the way back to Madanapalle, walk as in we drove, of course, but all the way back to Madanapalle and understood how many steps are there, what really happens along this, that’s when we discovered this factor. The challenge is that supply is very fragmented. In the U.S., we have about 20 lac farmers, that’s it, and each farmer has 440 acres of land on average. In India, you have 115 million farmers and each of them has 2.5 acres on average. Obviously, each production unit produces a very small quantity and you need aggregators to consolidate the production and make it into an economically transportable unit. A 40-ton truck, 25-ton truck, or an 8-ton truck is what is used to transport these products, so you needed multiple layers of aggregation.

On the other side, all of the U.S. buys its groceries from just 39,000 stores. India buys its groceries from an estimated 12 million stores, and this won’t change because the kirana store will continue to exist as long as daily wages and weekly wages continue to exist in India, and they’re 80% of the population. So, kirana stores can stock only so much, so your 40-ton truck has to be broken down into smaller units and 10 kg of onion needs to be combined with 10 kg of rice or 10 kg of tomato and delivered to this kirana store. So you have multiple layers of this aggregation. Now, this is the root cause, right? Of course, this adds direct cost to the supply chain, transport and handling, commissions of each of these players, which is not much to be honest, but all of it adds up, and physical loss of the product or damage of the product along the way. But the larger effect is that demand information is not communicated to the producer.

The demand is inelastic, but you find that tomato prices go from 60 rupees to 1 rupee. We don’t consume 60 times more tomato when it drops to 1 rupee, or vice versa. The reason is the farmer produces according to their local inputs, what the seed seller is telling them, what the mandi arrivals are looking like, what the neighbouring farmer is doing, and what their parents will do. All of this is what is shaping their behaviour. If we are able to communicate our demand directly to them, then they will be able to align themselves. But to do that, I have to earn the right to do that, and I earn the right to do that only when I buy from them.

Now, there are a number of models surrounding the agriculturist, right? We have inputs, we have advisory services, financing services, and what we do, market linkage services, but the agriculturist is just out of poverty. They cannot consume unless we put money in their hands, and we put money in their hands by creating demand, that’s the principle with which we decided to become a supply chain player in this first. Now, we have earned the right to work with the farmers and tell them, “Hey, why don’t you align your production according to my long-term forecast? Why don’t you follow this package of practices so that your yield is uniform and, therefore, I can lift whatever you produce?” We’ve now earned the right to do that, but it took us quite a bit and we’re still beginning, to be honest.

Gaurav Ranjan 08:15

That’s very interesting. So, on both sides, the supply is quite fragmented, demand is quite fragmented, and you cater to both of them, not an easy thing to do. Typically, what you’ve seen is people play in one leg of the supply chain, mostly B2B or B2C or C2B, one of these. So how did this thought come, right? Instead of going and procuring from farmers who have very marginal land holding, fragmented produce, fragmented quality, why not procure from one level where things are a little aggregated and then continue the supply chain? Why go to the farmer?

Karthik Jayaraman 08:50

We do that actually. For example, we work with a number of farmer producer organisations. Where you need aggregation partners, we work directly with farmers as well in the more progressive areas, like Tamil Nadu, where it’s possible to work with the farmers who are also well-aligned. But in other areas where we cannot set up our own collection centres, the farmer producer organisations do that. Unless you go all the way there, you can’t orchestrate the supply chain right. The farmer has to hear demand directly from the retailer, technically from the consumer, but retailer is a good enough proxy. Unless the farmer gets that demand, somebody or the other will be distorting the information along the way, that’s why we went all the way there.

Gaurav Ranjan 09:25

Got it. But the other question is the role of infrastructure here, and WayCool has invested a lot in setting up distribution centres and storage centres, right? So, how important is the role of infra, which is roads, railways, storage centres, et cetera? And where are we as a country there in terms of the infra being ready for somebody to build an agri supply chain? That was one. And second, you, of course, have invested a lot, so what is the thought process behind that?

Karthik Jayaraman 09:55

I think, Gaurav, you asked a very important question. While tech can help us aggregate demand, supply, and help in our planning and forecasting, this is a physical business at the end of the day, so the quality of your infrastructure is very, very critical. We operate in Southern and Western India because, when we started out, these parts of the country had the most predictable highway infrastructure and the gram sadak yojana infrastructure. So, in fact, when we were only in Tamil Nadu, I could predict the arrival of my trucks to plus-minus 15 minutes and I was readily wrong, that gave us comfort.

The second set of infrastructure is in terms of collection centres, storage units, processing centres, and distribution centres. Here, I think there’s a need to reimagine. Most of these have historically been centrally-driven, the government as a procurer, the government as a storer, and the government as a liquidator. They create a large scale infrastructure. However, what’s required is distributed infrastructure, compact collection centres with minimal equipment and doing exactly what they need to do, which is basic grading, sorting, and packing. It’s what is needed. In fact, many of our collection centres are flexible. We can move out of one and move into another depending upon the season, so we do a lot of that.

Storage units need to be, especially for highly perishable goods, more of transit cold storage units rather than long-term storage units. Some commodities require long-term storage units, such as potatoes. There, again, what’s the technology that you’re using in the storage is important. Cold storage is not just cooling a storage unit, right? Ventilation becomes very important. We have partners from the Netherlands who help us in ventilated cold storage construction, so we bring that technology into India. That reduces the perishability of the product, reduces the sprouting of the product, et cetera, et cetera.

Third is on the distribution side. Distribution centres need to be heavily automated in India, and we have done that both for our dry and wet. The reason it’s important is that urban real estate costs are very high. Your distribution centres should be not very urban, but inside the cities for your logistics cost to come down. And therefore, they need to be compact, and automation helps improve the throughput of the distribution centres and makes them compact. We’ve automated our distribution centres heavily. For example, our wet distribution centres are completely conveyorized and partially robotized. We get everything in pre-barcoded crates. We are able to measure the sent weight and the received weight and what the moisture loss should be versus what it actually is, map the crate onto a customer demand, and the robot arm simply pushes the crate out the outbound area. Now, this makes sure that we are not having a very large aerial footprint, we don’t have too many people running around, and most importantly, we don’t make errors.

If you’re running this manually, somebody will enter 18.5 kgs, 185 kgs, you’ll pay for 185 kgs, and then you’ll be wondering where the inventory went. So, here, that doesn’t happen because machines do the job. The sad part is that this infrastructure, this tech is available in the West, but not at the size at which we want. So we’ve actually had to re-engineer everything. Of course, we own the IPR for all of that. Now, we are patenting and all of that, but we had to re-engineer everything to suit Indian bite sizes, and that’s been a learning.

Gaurav Ranjan 12:50

Very interesting. Talk a little bit more about the role of tech, right? So one is, of course, the automation in the warehouses and distribution centre. The other is, of course, the application level tech, which is the consumer-facing side of things, both on the retailer side, farmer side, your own supply chain route planning tech that you use, right? What is the role of tech, one? And second, is the market ready to adopt tech? And when we, at Prime, had looked at agri-tech about three, four years back, we came to the realisation that there is penetration of tech, but we felt it was still early, like four, five years back, at least from a farmer’s point of view or from different intermediaries in the value chain, right? So, one, what is the role of tech? And what are the readiness of adoption of tech from the different stakeholders in the value chain?

Karthik Jayaraman 13:30

That’s a good question, Gaurav. Because historically, if you see the last 10 to 15 years, the focus of tech has been either demand aggregation, supply aggregation, or discovery between demand and supply orchestrators, but the role of our tech is different in this. Here, the primary role of tech is operational enablement and governance. This is a supply chain that will fail if governance is poor. This is a supply chain which will fail if your demand prediction and supply visibility are not captured properly, so all our effort has been there. We, of course, have a farmer-facing platform, we have a retailer-facing platform, we have a reasonable degree of self-service in the retailer-facing platform, et cetera, but that’s secondary. That’s something that we can solve for later.

Am I able to predict if you are a retailer? You will place an order on me this evening and expect me to deliver it tomorrow morning. I can’t wait for you to place an order because I would have harvested what I should supply to you yesterday morning, yesterday evening, or today morning itself. So I should predict your demand one day before or two days before and I must be fairly accurate in that. Secondly, having predicted your demand, I must have an automated logic by which I can decide which collection centre I can buy or which mill I can buy your material from, and that logic must be optimal from a transport perspective, from a landed cost perspective, and from creating enough demand for that centre to be operationally viable, so that requires some thinking.

The third is, how do I objectivize the pricing at which I will buy? If you make it subjective, then you will run into governance issues. For example, we have a platform called Benchmarkers where we have about 100 gig workers who go to all the mandis and capture the pricing that’s happening every day, and that data is what drives the target price for each of my collection centres. There is logic and an algorithm. So, both the volume that a collection centre has to procure and the pricing at which they should procure is preset by the system, and it took us seven years. We need to build enough data. Today, we service our monthly active basis about 65,000 and our total basis about 125,000 retailers, that gives us enough volume for us to make our algorithms a little more predictable. This is the core.

The third element is the visibility. I’ll communicate my demand, the farmer will respond. Even today, while we have platforms in which they can work, they still work on WhatsApp, to be honest, but that WhatsApp has to be transferred and we have to check whether they’re actually supplying. And through the day, I need to know what my supply is. And at the end of the day, the supply will always be less than the demand. The gap is what I have to source from an alternative source, including the mandi. We still buy about 20% to 30%, and that’s the ratio that we will maintain from the mandi and other sources. So this is as far as the wet supply chain goes.

In the dry supply chain, it’s even more complicated. It’s simpler in one way and more complex in another way. It’s simpler because the product has a longer life. It’s more complex because you have only two harvests, Kharif and Rabi, and sometimes a third harvest. You’ve got to store the material. You have to decide whether you’ll take a position on it or your partner will take a position on it. You have to have a replenishment stocking model. We work only on Fridays of inventory for dry groceries as well, which is fairly tight. So, how do you make sure that you never stock out and you also don’t have excess inventory? So those kinds of calls are where technology plays a role.

And the value that we have is that we have one single integrated platform. I think I am told it’s about 59 apps now, but they all talk to each other as one platform, from a retailer self-service app to a salesperson app, for example, for those who don’t do self-service, to a demand forecasting app, to the Benchmarkers application, to our CC operation is run by an app called FarmConnect, and the farmer engagement app is also ready to use. Similarly, all the warehouse automation through our Rapid platform, all of this is integrated into one, and that’s what enables us to do this and that’s what took seven years for us to build as well. Literally, the last piece of the puzzle fell into place sometime in March of this year.

Gaurav Ranjan 17:20

Oh wow. So what looks like an overnight application took seven years to build, interesting there. One question there. WayCool has multiple product lines, business lines. You have your own products, you export, you do farm-to-market connect, et cetera, right? And typically, it is said that for early stage startups it is always good to focus on a couple of things and just do that well, right? In your case, you have been doing multiple things, supply chain planning, setting up physical infrastructure of distribution centres, aggregating farmers, onboarding retailers, doing exports, getting imports, right? How did all this happen? How did you go about doing this? How did you build this over the last seven years? What is the approach basically, whether it is agri or otherwise? How should one think about operating in a complex supply chain?

Karthik Jayaraman 18:05

So the argument is right about doing one thing at a time. The initial question we had was width versus depth. Do you build a deep supply chain in one category, or do you build width? So we’ve picked a few battles that we fight. First, we said, “We’ll focus on the south. It’s easier for us, we know the geography, and generally we are comfortable with the tech adoption, as well as the infrastructure, so we’ll focus on the south.” The second, we said, “We’ll take only fresh produce because it’s the toughest part of the supply. And if I can crack fresh produce, I can crack everything else,” and that was a learning ground.

And the third was we actually started life as a retailer because nobody would buy from us. Why would a retailer buy fresh produce from somebody fresh out of college and an automotive engineer? So they said, “You’ll figure out your life for six months and then come, and then we’ll buy from you.” So we said, “What is the best way? Let us set up our own retail chain.”

So we started with mobile retail units and then we set up retail outlets, then we sold that business through franchising. We still support their outlets, but we don’t own those outlets anymore, but that gave us the initial traction. We generated about 10 tons per day of fresh produce of demand. Only when you generate 10 tons you can buy 1 ton of our tomato, and then you earn the right to go and talk to a farmer. The farmers’ harvest is about 600 kg per harvest, right?

So, once this demand was created, we were able to start engaging, going deeper in the supply chain, and start buying. Then we ran into another interesting situation where the farmers said, “You pick up whatever I produce,” and the grades are multiple, right? They have a premium grade, they have a grade 2, grade 3, et cetera, and not everything can be retailed. So, we started servicing our neighbourhood hotels and restaurants. They don’t mind size differences as long as the quality is consistent. One thing led to another. And when chefs move and when purchase managers move, they carry you along with them if you’ve done a good job. So we started increasingly servicing larger and larger HoReCa(Hotel/Restaurant/Cafe) chains, then some of them went into modern retail and we also serviced modern retail, and that’s how the base of customers grew.

This helped us because the scaling was faster with HoReCa and modern retail, but then you’ll have to financially pump working capital into that business. This is not a good way to scale a business exponentially if you’re pumping working capital into it. So that’s when we said, “Let’s diversify into smaller retailers. There, we can be tighter on credit terms or not even offer credit.” We don’t offer credit, for example, for fresh produce, or come up with other solutions, like digital lending platforms, which can give them credit instead of us, and so on.

And also, the customer is manageable. If it’s a small customer, if you do a good job, they’ll stay loyal to you and you are more dearest. Your client concentration is very low, so we started servicing small retailers. So this is how the fresh business is going.

Most of our cultivation belts are mixed belts. Horticulture and agri happen at the same location, so we said, “We’ve cracked the toughest part of the supply chain. Why don’t we apply our learnings to something that’s more manageable, which is grains and staples and so on?” So, by now, since the playbook was established, we said, “Let’s start directly with the small retailer. The number of small retailers selling grains and staples are much higher than the ones selling fresh produce, and let us replicate this.”

The commonality comes more from the technology and design principles rather than the physical infrastructure. I still have separate warehouses. We are seeing synergies, however, in the customer. We are seeing a 30% overlap between a fresh customer and our grains customer and our dairy customer.

But otherwise, the design principles and supply chain management is what holds this together and, of course, the farmer bases overlap and we are able to buy year-round on the same farmer. The farmer prefers to grow vegetables and then pulses during the dry season. It fixes nitrogen in their soil and they also make sure they have income through the year. So, they’re all synergies that way.

So, in grains and staples, we started with this first. Here, we had another very interesting lesson. We only used to supply grains and whatever pack the mill gave us. So, initially, we were buying from mills, then we were able to supply to the mill, and then they used the mill for us and supply. But whatever pack they gave us, we were supplying. That’s when we learned that one day that we ran out of orange colored bags, the millers and everything in green colour bags, all the retailers started returning the rice. And when we asked them, they said, “No, no, no, that orange colored bag is what my customer is asking.” That’s when we realised that the customer does not see this as a commodity, but was using the orange colour as a proxy for the brand.

The worst thing you can do is to discount a commodity. We will never ever get into discounting of commodities. Instead, you should de-commoditize a commodity. And branding, having a promise of consistency behind that brand was the way to de-commoditize a commodity, and that’s when we launched Madhuram, which is our first brand in this space. Today, Madhuram is a 250 Cr brand in just 18 months. It’s a massive brand. Next, we launch Kitchenji, which is more of our smaller SKU sizes, which does rice, pulses, whole spices, et cetera, et cetera.

And then we ran into this very interesting and very strong founding team running a company called Benani Foods. They were selling idli, dosa batter under the brand Freshey’s. When you mill your own pulses and rice, you have a byproduct, which is the chipped rice and chipped pulses. You cannot sell them in a retail pack because the consumer looks at it and says, “I will not buy this,” but the product is as good as any other product. So we said, “Hey, what if I combine my sourcing capability and your formulation capability and convert some of these into batter?” So what would have begun as a waste byproduct becomes a valuable product.

Similarly, in the south, you have a variety of papad called appalam, which is made out of urad. What if I convert this to appalam and sell it? Then it suddenly becomes a value-added 45% gross margin product, and that’s very interesting for us. So that’s when we invested into Benani Foods and we acquired the brand Fresheys.

Then the batter goes in a cold supply chain, right? So it goes in cold boxes and it’s delivered every day, and it’s placed in the refrigerator of the retailer. So we said, “What else goes into the refrigerator of a retailer?” Dairy products go into the refrigerator and all our farmers have dairy, so we said, “This is another way by which we build a stronger relationship with the farmers. Why don’t we lift the farmers’ milk, process it, and deliver dairy products?”

So, one of the things of coming from the manufacturing industry is we are not scared of factories, so we went and leased a dairy. We started buying milk, pasteurising it, converting it, and we were starting with liquid milk initially. We quickly moved to value-added products, such as dahi and paneer, and they just took off like a rocket. This is the way we got into the brand’s portfolio.

It is a bit organic. We moved this way organically. And soon, why did we get into imports and exports, right? It is another interesting story. When we started servicing modern retail, we realised that a lot of products that they bought from us were those four and six packs of apples, and Bangalore is especially leading in that, and those apples actually travel through very long supply chains. There’ll be traders who are supplying this to packers. The traders will be buying from traders in Chennai who will be buying it from importers in Chennai, and the importers will buy from exporters in Italy or Turkey, or some other country, and they will buy from pack houses, and they will buy it from farmers. We said, “What if we extend our theory to the global supply chain?” And therefore, we said, “We initially used to buy from traders, then we bought from importers, then we started visiting Fruit Logistica and building our relationship with exporters.

Initially, nobody took us seriously. And as our number of containers started picking up, people started working with us quite seriously.” Today, at peak, we import over 90 containers a month, and this is not going to go away because Indian apples are available only for four months of the year. The remaining eight months, the country depends on imported apples. That’s how import started. So, while to the outside it looks like a different business, frankly, it’s an extension of the same supply chain logic. In fact, we have clusters of farmers in Turkey who are following the same agri extension practices that we’re following in India. They have picked it up from us and they said, “Hey, I will set up an equivalent of your outgrow extension program in Turkey and we will follow it.” So, it gets replicated there.

Exports, because UAE has a very large Southern Indian expat population and UAE has a food security problem, and in the long-term, they need a reliable partner to supply them food year-round. 24 varieties of fruits and vegetables, India is almost the lead or exclusive supplier to them. So we said, “Hey, we don’t want to be a trader going into the UAE. There is a supply chain problem here. We’ve learned something. Maybe we can extend the supply chain forward and supply back to the UAE, starting with contract farming to storage, to processing, to delivery. Can we build it out? And because the diaspora is the same population, the buying behaviour is the same.

And if we do it in the UAE, we can extend it to other geographies in the GCC.” This is also in line with India and UAE strategic partnership of India-UAE Food Security Corridor and so on, and this will become a prototype for what will happen worldwide in the next 20 to 30 years.

Protectionism in the food supply chain will get vaporised as climate change comes and impacts us. It will have to be necessarily global. So, for me, all of this is a learning to what we will do 20 years later, that’s how we have evolved the business.

Now, the next logical question is, how the hell do you manage so many pieces? The answer is I don’t, okay? I’m only an investor into several companies that exist within WayCool. There are specialists who manage each of these. We have a dedicated team for fresh produce, a dedicated team called CPG, consumer packaged goods, for my branded grocery products and dairy products. We have a dedicated supply chain team that operates as a service provider for both of these entities. And Censa, our tech subsidiary, manages the technology for all of this.

We have a few other verticals. Where we needed to host manufacturing skills, we created a contract manufacturing business unit. So they not only service WayCool’s requirements, they are also pretty much servicing any other modern retailer or even brands in repacking and product manufacturing for them. Why are we doing it this way? Each of these requires focus, it requires a specialised skill, and each of this is potentially an independently governable and monetizable asset as we go forward.

And lastly, I don’t have the competency to run all of these focused areas, so I said, “Let me bring the experts. I will provide them access, finance, and synergies. I’ll drive synergies. I will provide them the guardrails.” We have three functions, safeguarding, shaping, and services, that is what we will do in the corporate team and each of these businesses will run independently. That’s how this perceived complexity is managed in reality.

Gaurav Ranjan 28:25

Got it. I have tons of follow-up questions, but in the interest of time, I’ll just pick on one, which is: as you went about building these different business units, of course, you hired subject matter experts from the industry who went about building it, but how do you build synergies between these individual business units? Right? Because there’s some underlying there, there’s some shared resource, there’s some interdependency between them, right? So how do you build synergy as you grow and as you get in these teams from outside?

Karthik Jayaraman 28:50

I think the few things that we have to do here, and this is still work in progress, to be honest. One is incentive alignment, make sure that everybody gains from working together, and there are natural incentives that come up, right? If my own contract manufacturing team is producing for somebody else, the margins are captured within and, therefore, you make more money as such. So those are the natural incentives, plus individual incentives.

The second is clear service level agreements between the teams and making sure that the incremental opportunity mapping is done well. We just ran a study with a team, both internal and external consultancy team, which showed how much of my fresh produce stores can actually buy grains and staples, and how much of my grains and staples customers actually buy fresh produce.

And now, there are teams being formed to just drive that cross-functional benefit. And the teams are pretty smart, right? They will figure out saying, “Hey, this is actually the same truck that’s being used to carry more material. I save money and I get more AOE. It is even better for me.” So they are actually moving quite fast in aligning all of this.

I have, of course, a monthly offsite with my senior leadership team, but we have multiple chat groups across the company that are designed just to drive these synergies and multiple projects that are used to drive these synergies. For example, we have a program called LEAP where we bring out our young leaders who’ve been in the company for two or three years and we put them on such projects, so that becomes a good grooming ground for them and it also drives these synergy projects.

Gaurav Ranjan 30:20

A related question to that is, while you expand into different business units, different functions within the organisation? How do you decide and prioritise between building things in-house, buying something else, the way you did with Benani Foods, or relying on using third-party provider services? Should I build it in-house, own it? Should I invest in somebody, or should I just use third-party providers, just get things done?

Karthik Jayaraman 30:50

Look, I think there are a few things that we don’t do ourselves where it is clearly non-core and we’ll be terrible at it if we did it ourselves. For example, we don’t own trucks or operate trucks. There are specialists, providers that do that job, so those are pretty obvious. We don’t own land and buildings. There are specialists, warehousing partners that we work with and the IPR over there is already solved for. The governance that is required over there is different from the skills that we have, so there is no point in doing it ourselves. Where there is IPR creation involved and ownership of IPR exists, that I will own. Where the process is mission critical, for example, in dairy, where it is sensitive to quality, then I will own that process. The rest purely depend on unit economics and how unit economics evolve over time.

For example, it makes very little sense for me to get into sugar in the backward supply chain. It is well-established, well-regulated. There’s very little leverage I can generate and it’s an entirely new business. You can’t be in sugar without being in alcohol, without being in bagasse, paper, and all of that. It’s not our cup of tea. So, we only operate the forward supply chain in that. Edible oil is another case. I can’t add any value in edible oil because it’s all imported. And frankly, branding and sales is what happens over there and there is a lot of branding spent for a product that is relatively lower margin, and I’m not in the business of ATL and I’m not an FMCG company. There, we said, “We will not get into edible oil. And therefore, we don’t do that.”

But supply chains like pulses make a lot of sense for us to get in. Why? It is a rotation crop for my farmer. And if we encourage the farmer to rotate into pulses, nitrogen fixation happens in the soil. Their soil becomes stronger and they make better economics. Secondly, pulses are procured. It is non-trivial to manage pulses. The grading and sorting of pulses is non-trivial. You had to store the pulses, mill it, pack it. There are a number of forward steps also. So the margin potential is high only if you do all these steps. Therefore, it made sense. And thirdly, the government is very clear that they want to make India self-sufficient in pulses. We import a lot of pulses. So the tailwinds are stronger for us to get deeper into that category, so we’ve chosen to go deeper into that.

The next question is, what is it in terms of make versus buy? See, we do multiple models already. We take minority holding, we take significant holding, et cetera, and we do outright purchases of companies that do this. For us, in all these cases, we bring complementary capabilities. It doesn’t make sense for me to invest into somebody who’s doing exactly what I’m doing just to bulk up. I can just compete with that person and take my market share. But if you take SVAgri as a company into which we have invested, we are an investor in SVAgri, we’re an investor now in Allfresh, phenomenal founders, very deep skillset. They have massive technical capabilities.

For example, SVAgri grows its own seed tubers using aeroponics, distribute these seed tubers to farmers, they bring the potato back, they build those ventilated cold storage that I was talking about, they even have an engineering division that builds all the processing lines for your extruded snacks, and so on. It’s perfectly vertically integrated.

Value we can offer to them is capital and access. Our distribution and our supply chain adds value to them and we’re able to provide capital to them. And the advantage is that, if you’re a product specialist, these products go through a lot of volatility where if there is a down cycle, then our balance sheet strength is there to support. But SVAgri operates completely independently with us. My own customers and my businesses benefit because the margin depth improves. When I’m buying from SVAgri my requirement of potatoes obviously, both companies make adequate margins.

The same thing in apples. Apples grow in Himachal and J&K. I don’t have a presence in Northern India. For me to develop it organically, it would be non-trivial. And therefore, we have a long relationship with Allfresh. And Naresh Jawa has taught me everything about apples that I have learned, so I said, “Naresh, what if we become a partner with you and you can support us for domestic apples?” So, today, he supplies all our domestic apple requirements and domestic citrus requirements. Again, these are non-trivial. Controlled atmosphere, storage is a technology, citrus fruit coating is a technology, and Allfresh has built the IPR in those areas. So, we gain a lot because we build depth in the supply chain, they gain because we are able to provide access in the southern markets for them, so that’s the way we take calls.

Gaurav Ranjan 35:10

Got it. Now, on the buyer side, do you cater to modern trade, general trade, institution buyers, all of them?

Karthik Jayaraman 35:20

We service most of them, but our focus base is retailers. The small retailers make up 90% of our numbers base in terms of customers and about 65% of our volume. The rest of the customers, we continue to serve them for sure, but on terms that work mutually. The challenge we face with HoReCa is longevity of HoReCa customers because, as you know, that industry itself is going through considerable churn. And consequent to that, collecting your money on time, pricing becomes a point of dispute, so we service a limited base with whom we are comfortable.

Modern retail is a good client base. Again, there will be some churn in that space because of the quick growth and subsequent retreat, or apparent retreat of e-commerce in that space. So we service most players. Our volumes are dependent on what volumes they do, so we don’t control the volumes that they do. And we provide specialised services. For example, machine packing of vegetables, machine packing of grain staples, et cetera, are the services that we provide to these players as well. So we are agnostic as a player, but we don’t deliberately go after a segment. Our split reflects what the market is, that’s all.

Gaurav Ranjan 36:30

Great. Switching gears, we haven’t covered the FinTech and financial services in this, right? But we have an internal joke that, in India, all startups are lending startups or all startups are FinTech startups, or they eventually become FinTech startups. So, in the agri value chain, you need credit to lubricate the value chain, right? So, what are your views on that?

Karthik Jayaraman 36:45

Credit is required. Credit is not available easily. We aren’t a lender, but we enable lenders to reach our farmers, as well as our customers, quite extensively. A large number of our farmers have lending lines through our platform and they’re able to work with that. So the farmer gets paid immediately from these lines and we pay the lender after about 30 days or so, that gives us some working capital.

Obviously, we can do it only at an aggregated level. So, typically, it’s the farmer producer organisations that take the benefit of these lends and work with us. On the customer side, again, we work with a number of digital lending platforms and offer credit through our application to the customers who seek that credit. This industry has to be built through partnerships. Everything can’t be done by us, and so this is the way we are orchestrating the supply chain.

Gaurav Ranjan 37:30

Got it. That brings me to the last part of the podcast. There’s two questions before we wrap up. One is, in a business where you have different business lines, you have the tech platform, you have the back logistics, the servers, you have export/import, you have your own brands, et cetera, how do you do resource allocation from just the capital to the manpower, to the leadership, and your own bandwidth? How do you prioritise amongst the different business lines, just the resource allocation bit?

Karthik Jayaraman 38:05

So, here, having some grey hair helps. I think established companies, which are conglomerates, have figured out how to do this well and it’s basically portfolio allocation that we do. We have a five-year plan for the company, which is a bidirectional plan. There’s a top-down plan, aligning with which each business unit makes its plans, and that has broken down into an annual business plan. We largely meet our plans as a business. And the ABP has a budget associated with it, and that budget determines how much resources will be provided to each business.

In each of the businesses, we have a physical CFO as well as a digital CFO.

So the digital CFO basically controls the budget as per every GL Code, and the business and their CFO and CEO are free to operate within that portfolio. They have the freedom to switch between GL Codes in terms of money, allocation, et cetera. But if they’re going to exceed their overall budget, they have to take a loan from the parent. So, the money is provided every quarter to them in terms of any cash consumption or burn that they’re undergoing.

But if it goes beyond that, either for cash consumption or for working capital, they are to borrow from us and we charge an interest to them, and that also has limitations. You can’t borrow beyond a certain level. We suggest that they repay before they take more, and that grid is what maintains control in the operation.

In the beginning of the year, we have our annual business plan meeting. We have what we call a 3+9, a 6+6, and a 9+3 where they do a look back and a look ahead and reset these based on how each business has performed as well. So those are the ways by which there is some dynamism built into this planning, and there is a central finance team that does those allocation. They’re almost like an investment team. They decide whether they’re putting fresh equity into each of these businesses or lending to each of these businesses.

So, most conglomerates operate this way and this is what we’ve set up. It’s possible because of the application layer. The application layer is also seamlessly integrated to SAP S/4HANA and we do all our configuration in-house now of S/4HANA, so we are able to quickly build all of these solutions.

Gaurav Ranjan 40:10

Got it. And how do you allocate your time? And a related question to that would be, when you started off, of course, a lot of things you were doing yourself. You mentioned travelling from Chennai market back to the farmer, right? So, at what point do you let go of control and be a lot more hands off than getting into day-to-day operations?

Karthik Jayaraman 40:30

Look, the default mode has to be hands off, but you will have to deep dive once in a while. I have live dashboards of pretty much everything that happens in the company on my phone now. So when you start seeing a few red flags, you go into a deep dive and help out the businesses. We are only a thought partner for the business and the provider of access and resources.

So some businesses may be struggling, for example, on planning, then we bring in a planning expert through our networks to help that business out, and that helps solve that problem. Sometimes, we go and step in as I go and step in myself. For example, shop floor operations improvement programs are my passion and I have some skill still left in that area. So I go in for all the big Kaizen events that happen for continual improvement, et cetera. I go myself. So, it has to be T-shaped. You will have to deep dive on occasion and stay off their backs when things are going fine, and the temperature check happens through a number of dashboards. So we keep producing, I think, a couple of dashboards every single day, it gets generated, and those help us in understanding where the businesses are.

The second is where our time goes. Of course, investor relationships is an area where our time is spent considerably. Second is strategy. I have to think of this business in three horizons. The respective BUs will probably think of it in two horizons and the respective CXOs of the businesses will think of it in one horizon. So I have to think about what will happen in 10 years, the next five years, et cetera. So that is one area where I spend my time on quite a bit, and I learn a lot from talking to the outside world and what’s happening.

The third is on people. My job is to develop leaders. It’s the leaders that build the business. So how do we create opportunities for leaders to come up? How do we do a temperature check and give feedback where it is relevant? What are the institutional mechanisms that we create that enable leaders to come up? These are not typically done in the startup world and it results in high-attrition and very angular leaders, that doesn’t help. So, this is an area where I spend a lot of time because this is not something that we are looking for a rapid exit or anything on, right? We’re building an institution which should outlast us, so my time must go into leadership development and I spend some time in that as well.

Gaurav Ranjan 42:45

Got it. Very interesting. I feel I could do a whole podcast just on org building and leadership design with you, but that will be for another time. One final question. Any message for upcoming entrepreneurs, people with experience like yourself, or people starting fresh out of college or fresh out of their jobs?

Karthik Jayaraman 43:00

Sure. My learnings are as follows. I’ve been through a fairly tumultuous cycle of various… and the ecosystem has been through a tumultuous cycle and I have been a watcher of that ecosystem. My learning has been that the fundamental principles of how a business is built remain what they were. Technology has been a good enabler in acceleration, but the fundamental principles remain. There is a sustainable rate of growth. The metrics to look for are always ROIC and free cash flow. We keep distracting ourselves with intermediary metrics based on the flavour of the season. When the model is one of irrational exuberance, we start focusing on GMV and revenues. When the model is one of irrational apprehensiveness as it is now, we start worrying about profitability and we take knee-jerk actions. This should stop.

India is the long-term hedge and the long-term market for anyone. We will be one-fourth of the world, come what may. This is where we were. We were interrupted for a couple of 100 years. Now, we will come back to where we were. Let us believe in the India story and build an institution that is shaped by India and will shape India. Let’s not build valuation models. Build an institution, not a valuation. And to build an institution focusing on the right metrics, such as ROIC and free cash flow, becomes important, it won’t be achieved on day one, but you should have a goal of saying, “Year 10, I will have this free cash flow and continue to work towards that.” It helps us take the right decisions, and most of us make mistakes because we are focused on the short-term.

The second is, like you said, we apparently look like a complex company, but every one of us is relentlessly focused on the supply chain. In reality, we’re a very simple company. That is the only area of focus and that’s why we limited our presence to only the south, and so on as well, so that we can stay focused, so that focus is important. It’s important to figure out where, which area of focus will create value in the long-term, and that’s what we have been working on. That’s the second input that I will give. And the third is these elements which are very common in traditional companies get missed when we are working in the startup world, such as leadership development, such as putting governance and controls in place, et cetera. I think these are important. In the steady state, this will be more valuable for us. They may be less relevant in the short-term, but they are more valuable in the steady state. I would suggest we focus on these areas when we are building an institution. So these are my learnings which I’m merely transmitting through this platform.

Gaurav Ranjan 45:30

Very well put all the three points that you mentioned: The core of the way you build doesn’t change whether you’re building an agri-tech, or an edtech, or healthcare? Focus on economics does make a lot of sense and then org design, et cetera, is what builds great businesses. Thanks a lot Karthik. It was a pleasure chatting with you.

Karthik Jayaraman 45:50

Most welcome. Thank you Gaurav.

 

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