Indraprastha Ice and Cold Storage Ltd- CASE ANALYSIS AND RECOMENDATIONS
‘ I N D RA P RA S T H A I C E A N D C O L D S T O RA G E C A S E A N A LY S I S A N D R E C O M M E N D AT I O N S ( C A S E A N A LY S I S )
LT D ’
Prepared by: Alok Sinha (Roll No: ePGP-03-095) Nitin Jaiswal (Roll No: ePGP-03-139) Nitesh Kumar (Roll No: ePGP-03-138) Sharon Selvaraj (Roll No: ePGP-03-167) Sreeramana Gadhamsetty (Roll No: eMEP-10-064) Yeshaswini GR (Roll No: ePGP-03-193)
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Indraprastha Ice and Cold Storage Ltd- CASE ANALYSIS AND RECOMENDATIONS Introduction Sanjay’s company Indraprastha Ice and Cold Storage Ltd (IPCSL) was in the cold storage business serving the fruit and vegetable markets. IPCSL realized that cold storage business in India is becoming a commodity and to remain profitable in marketi. They need to differentiate themselves ii. They should not get into price war. Hence IPCSL commenced on a major technological modernization and expansion. After the upgrade it had - Controlled Atmosphere (CA) and Gas Controlled (GC) cooling units – and a total storage capacity of 11.0 million pounds. The total investment for this modernization was 60 million Rs, with major portion of it coming from loans given by NABARD and nationalized banks. The company began losing money steadily in the next four years. The slew of problems it faced after the upgrade werea. Loss of customer base-as IPCSL’s storage capacity was affected by the ongoing reconstruction work. They also lost the direct export business that had been cultivated with customers in the Middle East. b. Competition-competitors’ aggressive pricing c. Fixed Cost Increase- as better trained and higher paid staff were required to operate modern equipments. d. Debt of Rs. 55 million
Problem Definition Even though the revenue of the IPCSL is increasing it was still below the threshold necessary to cover the financial and operational cost of the company. While the storage space demand for the imported fruit was steady the demand for storage space for domestic fruits declined. In addition to these two problems there was price-cutting in the market as well from competitors. Their competitors resorted to arm-twisting ways with their customers with “complete lot order only” deals. The repayment of the loan and the high interest rates was eating into company profits. A fundamental change in company strategy was essential to turn IPCSL around-the two important questions those need to be answered-
α. Is the Pricing of IPCSL correct to attract customers to make it profitable? β . Should they diversify into buying fruits from growers and selling it to retailers in off-season?
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Indraprastha Ice and Cold Storage Ltd- CASE ANALYSIS AND RECOMENDATIONS Analysis Summary Pricing StrategyIPCSL was determined not to get into price wars- they wanted to differentiate themselves by offering highest quality product and service and for that they wanted to charge a premium- their objective was clear- their price quality strategy was of premium value. DemandIndia’s annual fruit production is around 97 billion pounds, commonly produced varieties are apple, mango, banana, pineapple, chikoo and grape. Fruits like mangoes, bananas and grapes perish faster - ten days from harvest in ordinary cold storage - while in a gas controlled storage, grapes could last for two months, and apples can be stored for much longer up to two months in ordinary storage, four months in gas controlled storage and even six months in controlled atmosphere storage. Most of the apples harvested in India come from Himachal Pradesh (HP) and Jammu and Kashmir (J&K) which annually produce 1.1 billion pounds and 1.9 billion pounds respectively. Local fruit consumption in both these states is estimated at less than 2% of its harvest. All excess production therefore, is transported to Delhi Azadpur Mandi where IPCSL is located. Producers ship their produce in bulk and not all of it is sold the day it reaches the market. Usually only 50% of the fruits are sold the same day while 35-40% is sold within a month thereafter and a small percentage (10-15%) is kept in cold storage to be sold up to six months later. Sometimes, producers deliberately store some of the produce for sale off-season. So even if 10% of this volume is to be stored in cold storages - translates to 300 million pounds of apples- which is a huge demand- this is however possible only if growers understand the economies of off season sale. The below table gives an indication of the demand category wise for IPCSL product offerings- some categories like the foreign fruit storage saw a demand increase of whopping ~7000% CUSTOMERS
Large customers Imported Apple Kiwi and Imp. Grapes & Pears Indian Apple Other fruits Vegetable (IMPORTED) Total
Total Volume in 2001 (Pounds)
Total Volume in 2002 (Pounds)
31064 7248
2,147,864 501,168
2,607,897 1,043,159 2,608
3,725,568 1,490,227 37,255
3,691,976
7,902,082
% Increase
6,814 6,815 43 43 1,328 114
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Indraprastha Ice and Cold Storage Ltd- CASE ANALYSIS AND RECOMENDATIONS Medium Imported Apple Kiwi and Imp. Grapes & Pears
6,213 1,450
429,573 100,232
Indian Apple Other fruits Vegetable (IMPORTED)
521,579 208,632 522
745,113 298,045 7,450
Total Small Imported Apple Kiwi and Imp. Grapes & Pears
738,396
1,580,413
3,106 725
214,786 50,117
Indian Apple Other fruits Vegetable (IMPORTED)
260,790 104,316 260
372,556 149,022 3,726
Total
369,197
790,207
6,814 6,813 43 43 1,327 114 6,815 6,813 43 43 1,333 114
So demand is huge both for the domestic fruits (market needs to be developed though) and foreign fruits (market is already there). Costs
Fixed Cost Quantity(mi llion pounds) 0 to 5.5 5.5 to 11
Fixed Cost(million RS) 6 12
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Indraprastha Ice and Cold Storage Ltd- CASE ANALYSIS AND RECOMENDATIONS So at full or half utilization the fixed cost is minimum and translates to 1.1 Rs per pound or Rs 48 per box of 44 pounds per anum which is Rs 4/- per month. Variable Cost Rs 7.5 per box Total Cost Rs 11.5 per box
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Indraprastha Ice and Cold Storage Ltd- CASE ANALYSIS AND RECOMENDATIONS
Analyzing Competition Following table gives the direct competitors of IPCSL in NSM Capacity in millions of pounds
Number of Storage Facilities
4.4 – 7.5 million pounds 7.6 – 10.0 million pounds 10.1 – 18 million pounds
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None of the competitors however operated gas controlled technology or controlled atmosphere technology. Some had introduced a 24-hour, 24/7 cold storage service to cater to traders. However none come close to IPCSL in quality. Clearly IPCSL had a big advantage over its competitors in terms of quality of the offering.
Diversification Even the product offer price of Rs 20/- is not affordable to IPCSL in long run- as their cost per kg is Rs 51/- so reducing the price further is not an option. It is imperative that if they have to achieve the desired sales then they need to first integrate- backward or forward. The below table corroborates the backward (buying from growers) and forward integration (supply to retail) strategies as profit margin are huge in both spaces. Description Cost break down Expenses incurred by the grower Net price received by the grower Wholesaler‟s purchase price Expenses of wholesale trader
Market charge @1% Handling and carriage Wholesale trader's margin Sub-wholesaler's purchase price Sub-wholesaler's margin Retailer's purchase price Retailer's expense Carriage and handling Produce waste Retailer's Margin Consumer's purchase price
Rs. Per box of 44 Pounds Total 175* 280 455 6 4.5 1.5 90 551 100 651 65 5 60 224 940
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Indraprastha Ice and Cold Storage Ltd- CASE ANALYSIS AND RECOMENDATIONS
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Indraprastha Ice and Cold Storage Ltd- CASE ANALYSIS AND RECOMENDATIONS Relationship With IPCSL owners family was into cold storage business for long and also earlier they were mainly into vegetable cold storage businessthey are always close to growers- they have natural advantage for backward integration. Value proposition of IPCSL Name of grade
Diameter of Fruit at base.
Extra large (special) Large (fancy) Medium (selected) Small (commercial) Extra small (janta or mass market)
3.0 inch
Average
Wholesale Rate in season (Rs)
Storage Cost for max of 4 months@Rs 20
Wholesale rate in off season (Rs)
730
80
930
Profit (min) to customer availing IPCSL facility 120
2.7 inch 2.5 inch
630 530
80 80
780 630
2.2 inch
480
80
2.0 inch
380
80
550
Retail price in season (Rs)
Retail price in off season (Rs)
Profit if diversify into retail
Number of apples in each box (Rs)
1,340
1,730
920
80
70 20
1,090 890
1,430 1,180
720 570
100 125
580
20
790
1,080
520
150
480
20
590
880
420
175
680
940
1,260
As clear from above table that on an average any customer can get at least an additional profit of Rs 50 per box using IPCSL facility with no additional cost of thereof. This value needs to be communicated to customers- some promotional schemes may be adopted- like payment for the storage cost only after the sale in off season etc. At a later point in time they should diversify into retailing of fruits.
Recommendation Pricing Recommendation a. Should not worry about price cuts by competitors- should not lower their price as they are providing a quality offering. They have a robust growth in foreign fruit segment. To incentivize the domestic fruit –promotional pricing can be offered- like taking the payment only after sale for fruits in off season. The 8
Indraprastha Ice and Cold Storage Ltd- CASE ANALYSIS AND RECOMENDATIONS value proposition as discussed above should be communicated to customers. b. Should not be offering the product below cost price. Should maintain a healthy margin. Diversification a. Buy from growers and sell in off-season to retailers( backward and forward integration) b. Venture into retailing of fruits and vegetables through their own outlets in 5 years for further growth.
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