Sprouting Reads #4: Zack Fuss on Breaking Down the Food Ecosystem. Plus! A new eco-modern rap song.

Where will the bulk of profits reside in the next curve of evolution in the food and agribusiness value chain? Plus! A new viral rap song about lands and landless laborers who toil the land.

Dear Readers,

My name is Venky, and I write Agribusiness Matters every week to talk about agriculture in the nick of transformation.

Welcome to the fourth edition of Sprouting Reads. You can check out the previous editions here.

Sprouting Reads #1: Amitabh Kant's Agritech Oped, Jain Irrigation's Recast Plan & India's Edible Oil Problem.

Sprouting Reads #2: TCA Ranganathan's Opinion on Farms and Cities

Sprouting Reads #3: Jagadeesh Sunkad on Farmers' Share of Consumers' Price

About Sprouting Reads

If you've ever grown food in your kitchen garden like me, sooner than later, you would realize the importance of letting seeds germinate. As much as I would like to include sprouting as an essential process for the raw foods that my body loves to experiment with, I am keen to see how this mindful practice could be adapted for the food that my mind consumes. 

You see, comprehension is as much biological as digestion is.

And so, once in a while, I want to look at one or two articles closely and chew over them. I may or may not have a long-form narrative take on it, but I want to meditate slowly on them so that those among you who are deeply thinking about agriculture could ruminate on them as slowly as wise cows do. Who knows? Perhaps, you may end up seeing them differently.

Zack Fuss - Breaking Down the Food Ecosystem

Shane Thomas (Of Upstream Ag Insights fame) alerted me to this fantastic Zack Fuss podcast interview and it reaffirmed why I love Clayton Christensen so much.

Hands down, Clayton Christensen (1952-2020), is one of my favorite management thinkers who approached business thinking with a deep awareness of the power of technology. While his theory of disruptive innovation is known in all its glory and banality (especially by those who use the term disruption loosely without understanding what Clayton really said), there are very few who know his other brilliant contribution: Law of Conservation of Attractive Profits.

The reason behind its low-key nature will become obvious if you ask me to spell out the law in its entirety.

"When attractive profits disappear at one stage in the value chain because a product becomes modular and commoditized, the opportunity to earn attractive profits with proprietary products will usually emerge at an adjacent stage. That is, the location in the value chain where attractive profits can be earned shifts in a predictable way over time."

Say what?

Allow me to make things easier for you. Let me unpack it using Lego Blocks.

Broadly speaking, every industry value chain has two types of value chain lego blocks: Integrated blocks and Modular blocks. Integrated blocks operate in a tight interdependent fashion and every nut and bolt of it - from design to manufacturing to distribution - is fully owned inside.

I want you to pay attention to this operating word.

Inside.

Modular blocks, on the other hand, operate in tight-knit coordination with partners outside.

Yes, you heard me right: Outside

They are relatively independent blocks and are governed by mutually agreed quality standards.

Let us understand this better with an example. How about the restaurant industry? 

If I am a large and popular restaurant chain, my value chain would look like the image given below. When I franchise my restaurant outlets, I provide a modularized dining experience to my customers. And in order to facilitate that, I will own the core blocks. I will have the final word in it. From Chefs to the right kind of ambiance to the menu items that would continuously evolve as per customer tastes.

Now, when digital disruption happens, commoditization (what you offer becomes a utility-driven commodity) kicks in, and the value chain blocks which were once integrated become modular.

In response to this shift, a new set of integrated blocks take over to capture the declining profit in the previous arrangement. Net net, profits have been conserved. They have evolved from one business model to the other.

If you are with me so far, the net impact of digital disruption in the restaurant industry can be summed up this way

What started off with Yelps of the world (which began digitizing menus and hotel reviews) has now come a long way. Today, with an app, I can have my unique dining experience that has been powered by a dark/cloud kitchen, along with my preferred food selections. Every other component in the value chain, from Chefs to Food Production has now been commoditized and modularized.

Using this framework, I can map digital disruption happening in many other industries as well.

Here's a quick glance at the disruptive shift happening across hotels, taxis, and men's grooming industries (with the advent of subscription services like Dollar Shaving Club). I am not going into too many specifics here. If you have any comments, or if you have a different perspective about disruption in these industries, I am all ears.

Hotels and Taxi Booking examples have been adapted from the popular Stratechery blog.

If you want to understand how digital disruption could play out in the case of e-commerce in agri-inputs, look no further.

Law of Conservation of Attractive Profits predicts that incumbents who once integrated backward, competing through exclusive supplier relationships, will now be taken over by aggregators who aggregate modularized suppliers to integrate forward with customers at scale.

It was this point that I explored earlier in my evolution-of-Indian-agtech article, outlining the first wave of aggregators(2010-2020) and the second wave of integrators (2021- Present) in an Indian agtech context.

In this interview, Zack Fuss uses the Law of Conservation of Attractive Profits to explain why McDonalds is into lead-gen business. He further delves deeper into why restaurants have historically been considered a “bad” business.

“And I think we can say with confidence that in certain markets and at a certain basket side, both the restaurants themselves and the aggregators, the delivery providers can both make money. And in urban areas specifically, if you have enough route density or drops per trip, take rates can be lowered. So a scale economic share type dynamic between the restaurant and the aggregator where everyone is participating in a larger profitable, delivery can hypothetically be done at a very positive contribution margin.” - Zack Fuss

What really caught my attention was how he explains the emergence of dark/cloud kitchens using this framework and elaborates on the industrialization of the traditional grocery business.

“For grocery stores, like restaurants are also located in highly trafficked areas with strong access points and require a fairly big footprint. Probably, I don't know, 70 to 100,000 square feet. So they face pretty significant real estate costs. Buy online, pick up in-store is having its moment throughout the consumer. But the reality is having human labor walk the shelves of a conventional grocery store to pick and pack your order comes at a very high cost. What's going to have to happen over time is more of the traditional grocery store is going to become industrialized. It's going to become more like a fulfillment center. So today maybe you walk into a grocery store, 80% of it is walked by shoppers. In the future, it becomes 60%, 40%, 20%. And the center of store items probably come completely commoditized and fulfilled through something like order ahead. And what I would postulate is as we observe this evolution of the store footprint, we get more dark stores or de facto warehouses and less desirable real estate. And much like Amazon uses its fast fulfillment centers to fulfill its online orders, a grocery store is going to operate in the same way.” - Zack Fuss

Essentially, what he is saying is this

The ramifications of this next curve of evolution are extremely interesting. As Zack further elaborates,

“The reality is that a legacy grocery store requires the consumer themselves to pick and pack the items. Now when you shift that labor cost onto your own people, it requires an incremental wage cost. The idea of a dark store is that you shift location somewhere where you have fewer costs that can fund the cost of delivery, the cost of fulfillment”

If you look at how online grocery businesses are evolving in India, they are exactly moving in this direction.

Take the case of Daily Basket, an online grocery startup that is making waves in Coimbatore, a vibrant Tier-2 city with indefatigable entrepreneurial energies in the south of India (where I am currently temporarily working out of and writing this newsletter) thanks to an unwanted controversy that was created by its Goliathan competitor, Big Basket.

On their website, here is how Daily Basket describes its plan of operations in the near future.

“Our plan is to set up a string of mini supermarkets throughout Coimbatore and make them act as delivery hubs for our online delivery business. Currently, we operate one warehouse and about to open a mini-store..”

Although you can argue that this is unlike the dark store/fulfillment model, I can bet that over time, as online consumer behavior evolves in Tier-2 cities’ markets like Coimbatore, they would centralize their operations and convert them into dark warehouses for order fulfillment.

While most grocer players in India are partnering with online players for lead gen ordering and logistics, this next curve of evolution is deeply fascinating for an important reason: It has huge implications in the way we design and operate food traceability systems.

Food Traceability is an important domain in my areas of inquiry and when I look at this evolution of food retail, one of the key repercussions I foresee this to have is in the domain of food traceability systems.

Pay attention to this statement from Zack Fuss:

The idea of a dark store is that you shift location somewhere where you have less costs that can fund the cost of delivery, the cost of fulfillment”

Essentially, if you are able to read between the lines, this evolution is going to significantly impact consumer expectations about the genealogy of foods and would dramatically transform how the suppliers would deliver in their respective food supply chains.

Pay attention to the first point I mentioned in 13 Things They Don’t Tell You About Food and Agribusiness {only for subscribers}

Food brands and agritech firms (Who doesn’t love to call themselves an agritech firm these days?) worldwide are not investing on Traceability for noble and altruistic reasons. C-Suite understand today that traceability can be used as a competitive weapon, as a mechanism of changing the political dynamics of the value chain they currently exist in.

There are more fascinating nuggets in this interview from Zack Fuss on Dominos, the evolution of retail and so much more. I think this podcast interview is worth its long run.

Eco-Modern Rap Song on Land and Landless Labourers

As a musician, I realize that I have never talked about my love of music in these spaces. And so, for a change, I want to include a song that deeply moved me.

How do you tell the story of your roots?

For Arivarasu Kalainesan, more commonly known as Rapper Arivu, it is the story of his grandmother Valliammal and his ancestors who once migrated during the British Colonial times (19th century) to Sri Lanka. It was their bloodied efforts with humungous human costs that resulted in the establishment of tea, coffee, and coconut plantations.

When they had to return back to their home country after working there for two generations, they returned home to the sad realization that all they knew is to pluck tea leaves. And so they migrated towards the hill regions in Tamizhnadu - Ooty, Koodaluar, Kodaikanal- and toiled their way to earn a livelihood.

"Enjoy Enjaami" is a watershed moment in Tamizh independent music. (Strong Warning: Try not to click on this addictive song)

As a musician who runs a non-profit on finding your roots, besides working on agriculture, I am thrilled on all fronts.

It tells the painful story of one's roots, the struggles of landless laborers whose plantations burst out in abundance while keeping their throats starved (My rudimentary translation barely does justice to words like these "??????? ????????????..??? ?????? ???????...")

It is a painful-and-celebratory marriage of dirge folk music (oppari) and rap. It is a song that deserves a genre of its own: eco modern rap

That’s all for today!

Enjoy your weekend!