CASE 2

Karuturi Global Ltd.: Rosy Roti

This case study is based on our video interview of Shri Sai Ramakrishna Karuturi, Founder, Managing Director, Karuturi Global Ltd.

SYNOPSIS

Sai Ramakrishna Karuturi, Founder and Managing Director, Karuturi Global Limited, wanted to be different. When he ventured into floriculture, the business was still in its infancy in India. There were no organized players and business was tough, considering the highly perishable nature of flowers and inadequate storage facilities. The business was also very different from his father’s electrical cable business. However, his decision yielded excellent results; Karuturi Global Ltd is today the largest exporter of cut roses in the world.

In its pursuit of new avenues in floriculture, Karuturi reached Ethiopia. Karuturi Global acquired 3,11,700 ha of land on long lease in Ethiopia. It intends to become a truly multinational Indian agricultural products company.

GLOBAL CUT FLOWER INDUSTRY

The global retail cut flower industry size is approximately $43 billion and cut roses constitute some 30 percent of the same. The demand in Europe is not only occasion driven, such as for birthdays, anniversaries, etc., but there is also a yearly consumption making it almost recession proof.

The European wholesale cut rose industry size is approximately $1.4 billion. Its historic growth rate has been within four to five percent annually. The major producing countries are Kenya, Ethiopia, Equador, Columbia, Netherlands and Israel. The major consumers are the UK, Switzerland, Italy, Germany, France and Netherlands. Karuturi Global Limited has a 9 percent market share in the European cut rose industry.

Besides the US, Japan and UK are key consuming markets. Western Europe is the largest market with more than 50 percent consumption. This is because European culture requires large supply of flowers for gifts, occasions and everyday life. The international trade of cut flowers is $6.1 billion. Although countries in Europe have more than 60 percent share of the world’s exports, they are largely intra-European with only about 16 percent exported to other countries. Netherlands is the largest exporting country of cut-flowers with 54 percent share. However it has been experiencing a decline in revenue and market share because of increasing exports from countries like Ethiopia, Columbia, Equador, Kenya and Israel. Germany, UK, US and France account for about 70 percent of the imports. Japan is the main importer with a four percent share in Asia; Netherlands both imports and re-exports flowers. The auction market is the most preferred route because of price competitiveness.

Columbia and Equador are major suppliers to the North American market. Netherlands is the key supplier in Europe and this country can be used an indicator for the best cut flower species since majority of the global trade takes place here. Taiwan, New Zealand and Equador supply to Japan.

 

As of 2008, the per capita flower consumption has been high for countries, such as the Netherlands ($73 million), UK ($63 million), Denmark ($62 million), Australia ($54 million) and Belgium ($53 million).

 

KARUTURI GLOBAL LIMITED: AN INTRODUCTION

Incorporated in 1994, Karuturi Global is currently the largest producer of cut roses in the world, with an area of over 292 hectares under the Greenhouse cultivation and annual production capacity of around 555 million stems.

An integrated production model encompassing in-house plantation, cultivation and distribution capabilities coupled with a series of green initiatives make it one of the lowest cost producer of cut roses in the world. Almost its entire produce is exported to high-value markets, such has Holland, Germany, United Kingdom, Italy, Singapore, Hong Kong, Taiwan, Bahrain, Muscat, Dubai, Australia, Japan, New Zealand, Brunei and North America, with a small portion sold in India.

Having established its strong presence in floriculture, it now aims to broaden its portfolio into a larger agricultural produce basket. The acquisition of large tracts of land in Ethiopia has set the stage for it to become a complete agriculture production company. Its goal now is to make a significant contribution to alleviate the global food crisis, especially in Africa.

Equipped with a robust and de-risked business model, Karuturi Global’s other fast growing business realms are food processing, floriculture retail including a flower auction portal and information technology.

• It is the world’s largest cut rose producer.
• The production units are located in Kenya (154 ha), Ethiopia (100 ha) and India (10 ha).
• The market share is nine percent in the European cut rose market.
• It has a huge land bank of 3,11,700 ha acquired in Ethiopia for production of agricultural crops, which include maize, rice, sugar and palm oil
• There has also been implementation on 90,000 ha: Cereal Crop (70,000 ha) and Oil Palm (20000 ha).
• The output tries to meet the food demand in countries of Africa as well as ensure food security in Africa.
• The revenue so far has been $115 million and is expected to reach $1 billion in five to seven years.
• Karuturi has around 10,000 working partners which is expected to be 50,000 in the near future.

KARTURI’S ROSE PRODUCTION

Karuturi Global offers a complete basket of product offerings: Sweetheart (small buds). Intermediates (medium buds) and Hybrid Tees (large buds), produced in Ethiopia, Kenya and India. The wide array of roses from its bouquet and a significant output of about 500 million stems per annum foster its production and export statistics. It has adopted an integrated rose production model encompassing inhouse plantation, cultivation, and distribution capabilities.

 

It offers different varieties of roses in different price ranges. Red roses account for about 40 percent of its total sales.

KARUTURI’S INNOVATIVE STRATEGIES

Karuturi Global has adopted a series of innovative methods to optimize production processes, reduce costs and maximize profits. For example, its initiative to build indigenous greenhouses has resulted in three-fold increase in the rose produce. Strategies, such as procuring flowers and planting materials through indigenous sources and meeting the power requirements through in-house biomass-based power generation, have resulted in substantial savings. Rainwater harvesting has ensured adequate water supply. Several of these steps have also helped in environment conservation.

Its team is equipped with an in-depth knowledge on greenhouse management, drip irrigation, material sourcing, agronomy, pest management and post-harvest marketing and logistics management. Consequently, Karuturi Global has become one of the cheapest producers of roses in the world.

 

Application and Key Markets: Cut roses is an important agri-produce finding uses across various sectors of the economy. While dry/cut roses are used for decorations and adornments, its extracts are used in perfumes and natural dyes. Food and beverages, hotels and healthcare/skincare products also use this product.

KARUTURI: HOW IT ALL BEGAN

After earning a degree in Mechanical Engineering from Bangalore University, Karuturi went to the US to do an MBA at Case Western Reserve University Cleveland, Ohio where he made it to the Dean’s honours list., Karuturi joined his father’s business in Bangalore for a few years. ‘I was influenced by the management guru, Michael Porter’s, model of sustainable competitive advantage,’ says Karuturi about his journey. ‘I identified high value horticulture as an area with immense potential.’ That’s when he started Karuturi Floritech, a 100 percent export oriented unit (EOU) for floriculture in 1994. He initially bought a farm (from the money he had saved doing odd jobs in the US) in Doddaballapur, near Bangalore to cultivate roses.

His masterstroke was when he decided to make his own greenhouses in Bangalore and grow his own premium rose varieties, after importing the grafts. ‘One of the suppliers asked if we wanted our rootstock as Rosaindica or Rosa Multiflora. When asked what and when Rosaindica was, the supplier said Indica means India and that the original strain was from India. We went into the hinterlands of Tamil Nadu, Karnataka and Maharashtra to discover a hugely fragmented but highly skilled rose nursery business. We incorporated specific cut rose genes into the India rose plants and produced them for ₹3 as opposed to ₹100 for imported plants.

Cut roses are governed by IP (Intellectual Property) requiring payment of royalties and after many a battle Karuturi has the best deal in the industry on onetime royalties at €2.50 to €3/m2 vs. €5/m2 which is the industry standard. This resulted in Karuturi getting rosebushes for less than ₹10 per plant. His decision to locally build greenhouses greatly reduced his additional investments, which he would otherwise have to make if he were to import the same.

In 1996, Karuturi floated a public offer for 30 lakh shares at ₹10 per share to attract funds for new projects. The company was listed at the BSE and the Bangalore Stock Exchange at the same time. Karuturi to remain in India, diversify, remain true to core competency and expand globally borrowed ₹3 crore from IDBI bank to augment the company’s finances, but returned ₹2 crore as he could save on project cost.

In 1999, the global flower industry crashed and many floriculture companies suffered. Thanks to Karuturi’s low-cost strategies, his company weathered the tough times. In 2000, Karuturi created history when he chartered a Boeing757 to Bangalore to export his roses to Europe.

It was 22 tons of roses for Valentine’s Day in 1998 that earned him his first million. There was an order to supply roses to Europe, and the Air France flight that was to ship it got cancelled. There was no flight to the destination after that. ‘The buyers were not ready to wait; they would have switched to another supplier. I was the president of the flower association and bought up the entire stock that was lying there on the tarmac at a throwaway price as the sellers were desperate to get rid of it. I drove a truck all the way to Chennai and finally after some haggling, got all the stuff in a Lufthansa flight. That consignment alone netted me my first million,’ says Karuturi reminiscing in his Embassy Center office in Bangalore. By 2003, the company was the country’s biggest producer of roses through efficient farming techniques.

Producing in India was getting costlier and the customs regulations did not make matters any easier. So in 2003, he took a call: ‘To be, or not to be in India,’ as he puts it. Finally he decided to kick start the next acres of farms in Ethiopia, a country which has been wooing investors and giving out lands at much cheaper rates. The wholly owned subsidiary, Ethiopian Meadows Plc, is now the epicenter of the group’s activities in Ethiopia.

Ethiopia—The Game Changing Moment: The decision to enter Ethiopia was inspired by an Edward de Bono seminar he attended. There he learned the importance of lateral thinking. It made him look beyond India for production and prospects. It was a paradigm shift in his outlook. Karuturi says he was looking at a significant diversification from the core electrical contracting business and the prevalent horticulture practices in the North-South hemisphere appealed to him.

In 2004, he took another risk. ‘I felt that I could not compete in the global flower market unless I ventured into Africa,’ said Karuturi. He started with a 10-hectare farm in Ethiopia and expanded to Naivasha, Kenya.’ He got his largest order from Tesco in 2006. ‘All the partnerships we have had with the retail chains have endured...’ says Karuturi.

Acquisition of Sher Agencies in Kenya: In 2007, he made the strategic leap from just another producer to the world’s largest producer of roses when he acquired Dutch firm Sher Agencies in Kenya for $69 million. This acquisition boosted the revenue of the company from ₹1 billion to ₹4 billion. The capacity now grew from 150 million to 650 million rose stems with this deal.

The Sher Agencies acquisition bestowed upon Karuturi Global the identity of being the first fully integrated Indian company of global stature in the floriculture industry. It gave Karuturi Global the following advantages. An additional 188 hectares of land under rose cultivation in the rich Naivasha region of Kenya. Around 135 hectares is under greenhouse cultivation and 42 hectares in open cultivation. In addition to this, the production of Sweethearts helped enhance their portfolio, ensure economies of scale and gain global recognition and transformation into a multinational company. The company has gained one-stop shop status for all varieties of roses and improved operational efficiency. Post- acquisition, Sher Agencies has been rechristened Sher Karuturi Ltd.

The Naivasha region is the home for about 70 percent of the floriculture farms in Kenya. Situated slightly to the south of the Equator, Naivasha is an ideal location for rose cultivation. Equal days and nights (each of almost 12-hours duration) and annual temperatures ranging between 8°C to 23°C increase the incidence of light intensity on the plants. This imparts thick texture to the leaves and consequently, better vitality to improve vase life of the roses.

This facility in Kenya is home to over 40 species of roses. In addition to the conventional methods of farming, the other method adopted is hydroponics. Here the plants are grown in black polythene bags filled with coco peat. This method enhances the per unit area productivity while reducing water consumption. Its farm is equipped with a fertigation unit and drip irrigation system, and is sprayed with environment friendly fungicides. The average daily output of about 1.5 million stems from Kenya is exported to Europe.

Distribution Network

Customer Management: Karuturi Global’s clientele is fairly extensive and this greatly reduces the risk of dependence on few customers. They have a strong understanding of seasonal trends and demand shifts in the market. Precise comprehension of the buyer’s needs and strict adherence to quality norms and shipping timelines have resulted in regular and recurring orders. The increasing number of satisfied customers is one of the prime drivers of the company’s growth.

Value Chain:

This can be best understood through Figure 2.3

Supply Chain: The distribution chain is rather long, including auction houses, wholesalers, agents, retailers and local florists.

Auction: Nearly 55 percent of its overall output is sold through auctions. The convenience of having multiple buyers at single location offering reasonable prices and securing payment are some of the key advantages of auction. To expand its presence, it has also acquired a flower auction house in Australia

Direct Channels through Wholesalers and Retailers: The remaining 45 percent of its output is sold through direct channels. Deals undertaken through the network of wholesalers and retailers help it save the handling costs related to auctioning. The direct channels also provide helpful insights pertaining to quality standards, packaging and presentation, transportation and handling. It has been observed the European retail chains prefer to purchase large volumes directly from it.

Global Operations in Ethiopia

In its pursuit of new avenues in floriculture, Karuturi reached Ethiopia. Favourable government policies and environmental conditions, flood-safe geographic location and abundant availability of low-cost labour, coupled with its proximity to the global markets made this African country an ideal location. It forayed into Ethiopia in 2004 through its 100 percent subsidiary, Ethiopian Meadows Plc.

Karuturi Global acquired 3,11,700 ha of land on long lease in Ethiopia. 11,700 ha inBako province and 300,000 ha in Gambella province. Karuturi has taken possession and is developing 100,000 ha in Gambella.

 

KARUTURI GLOBAL’S MARKETING STRATEGY

Target Markets in Africa

• Karuturi Global aims to sell its produce mainly in Africa.
• With a Ethiopian domestic market of around 85 million people there is ample scope for local sales.
• COMESA The common market for Eastern and Southern Aftrica is shown by the shaded portion in the above map.
• This is a prefential trading area with nineteen member states stretching from Libya to Zimbabwe.
• These nineteen member states of COMESA spend $19 billion on food imports.
• The Comesa countries are the primary market for Karuturi Global Ltd.
• Karuturi Global aims to satisfy this demand for food imports.
• There are Bilateral treaties of Ethiopia with most developing and developed naitons, through which goods and products made in Ethiopia have duty free access.

 

• Company took up major replanting in 2011-12, which resulted in decrease in production
• Euro crisis and snowfall in winter season affected the sales relization

Project Execution Strategy

• Phased Development
• Mix of Long Term and Short Term Crops
  • Cereals are short term crop while Sugarcane is long term
• Using Farm Expertise from South America
  • Currently A team of 4 Senior Farm managers from Uruguay are on the farm for developing and farming 5000 Ha.
  • Farmers national Company (FNC), USA in collaboration with Agland Investments, USA have taken up 5000 Ha. on a joint development model
• JV being explored with other farm developers from Australia, USA, India, and South America on Revenue share basis. Currently a team of Indian Farmers is doing a small area.

International Competition

The four agricultural companies dominate the world agricultural market. Karuturi aims to be a leading player in cereals, such as rice and maize, and other crops like palm oil, sugarcane, soyabean, etc.

CORPORATE SOCIAL RESPONSIBILITY

The following initiatives have been taken by Karuturi Global Ltd in Ethipia and Kenya in Africa.

• Distributed woolen blankets to poor and elderly people
• Contributed towards drinking water supply for Holetta town
• Free food every Sunday to the destitute
• Drinking water supply to Sadamo Village

Social Welfare initiative in Kenya

• Healthcare services to locals (other than own employees also)
• Food to drought victims
• Sponsored a village mortuary and the regional WWF
• Provided infrastructure to the local police

Ban the Can: A social initiative by Karuturi

• BAN the CAN, an initiative of Karuturi to provide water on tap to people around all it’s projects
• Contribution of $ 75,000 towards drinking water supply for Holetta town
• Drinking Water supply to Village Sadamo
• Bore wells drilled for Tulusia and Bachara village, Oromia Region.
• 4 Bore wells drilled in Illiya Village for free drinking water
• Karuturi aspires to mitigate the water needs of the local population in a radius of 1 Km every year at all it’s locations.

Building an Eco-system of Trust and Economic Prosperity

• Karuturi today is well accepted in the Sub-African Countries as a change agent for growth and prosperity
• Deep Local relationships—95% of the staff are locals and trust the Indian company
• Local government realizing the contribution of Karuturi Group in the uplifting of the country’s socio-economic status.

The Road Ahead for the Ethiopia Project:

The following steps have been taken to make the Ethiopia Project successful.

1. Procurement of resources including finance, people and equipments.
2. Project Conceptualization, Planning and Mobilization
3. Project implementation: contour mapping, land leveling, land tilling irrigation and rain age, infrastructure build-up and crop harvesting.
4. Expand Agro-based product basket to include Sugar, Wheat, Soya Etc.
5. Initiating employment generation and contribution to the Ethiopian Economy
6. Emerge as a dominant global, low cost and quality agri-producer

CASE UPDATE

Karuturi Gaining Momentum

With its maiden harvest, Karuturi has climbed the ladder of success in executing its visionary agro-project. Its second successful cropping on 12500 acres is due to be harvested in November 2013.

Karuturi has made multimillion dollar investments in equipments and machinery from the world’s top suppliers like John Deere, CASE, Great Plains from USA; Volvo and Doosan from China and BEML from India.

Karuturi is planning to plant around 25,000 – 55,000 acres next year increasing it further to 75,000 acres during the following year and reaching 1,65,000 acres under production by 2017. Our current yield is expected to increase to 5 MT per hectare with ongoing research and improved techniques. Apart from corn, other crops which will form a part of our agro portfolio will be sugarcane, oil seeds and paddy.

A hydroelectric dam located 40 km upstream from Karuturi’s Gambella project has been commenced by the Ethiopian government at an investment of over $1.5 billion. This will harness the potential of the Baro river for yearly irrigation while taming it and eliminating flood risk to the project.

Karuturi Global is also in the process of building hi-tech silos that can store excess grain while keeping freshness longer. Its biggest advantage is economical transportation is the river Baro, which is navigable nine months in a year and has made Gambella a river port since 1907. It is looking at building large barges that can cost effectively transport its produce to other African countries especially South Sudan.

QUESTIONS FOR DISCUSSION

1. What unique strategies did Shri Sai Ramakrishna Karuturi adopt to make Karuturi Global Ltd. the largest exporter of cut roses in the world in such a short span of time?
2. Why did Karuturi Global expand its Rose Business in Africa and not in India?
3. How did Shri Sai Ramakrishna Karuturi sell the concept of Large Scale Agriculture to the Ethiopian President and the Ethiopian Government.?
4. Why was the decision to enter Ethiopia /Africa in the Agriculture sector in a big way a game changer/high stakes gamble for Karuturi Global?
5. What is uniquely Indian about Karuturi Global’s C.S.R. strategy.?
6. What differentiates Karuturi Global Ltd from its international competitors in the Cut Rose Industry.?
7. How did the established Agricultural multinationals /cartels try to sabotage Karuturi’s Ethiopian safari?
8. In his foray into mass scale Agriculture in Ethiopia, do you think Shri Sai Ramakrishna Karuturi has bitten more than he can chew?
9. What is Shri Sai Ramakrishna Karuturi’s Success mantra?