Sunstar Overseas Limited

Sunstar’s choices about their products, markets, and procurement methods have served them well in some respects, but created challenges in others:

• Capital Requirements: The advance purchasing agreements tie up huge sums of money that otherwise might be available for working capital. Income from sales can take more than 60 days. A few years ago, struggling to find enough working capital for facilities improvements and expansion, Sunstar began exploring going public, which would have ended local ownership of the company. Nervous that they wouldn’t find enough investors to support their work, the Aggarwals decided to keep the company family owned, but such a change in corporate structure remains a potential solution to the need for more capital.
  
  
• Price Vulnerability: By focusing on organic basmati, Sunstar grew 25% in its first three years. But then, in 2007, the market price for basmati fell dramatically. The company couldn’t sell half the harvest, and the surplus made plans to add more farmers impossible. “We are still upbeat,” says Ajay, “as prices should go up this year and we should be able to offload this stock.” Even if prices do rebound, organic basmati remains a niche market that Sunstar has effectively captured. As such, Ajay does not seek to expand the company’s organic basmati production further.
  
  
• Domestic Fair Trade Market: The fair trade system works by passing along the additional costs to consumers who are willing to foot the bill for better social and environmental practices. For Ajay, it’s an imperfect system. “Apart from the consumer, other actors, including traders in the fair trade value chain, are not required to contribute ‘their share’ of the profits in the process.” India currently lacks a consumer base interested in an organized practice like fair trade, due at least in part to informal trading between farmers and consumers in smaller towns and markets. As a result, Ajay doesn’t see a strong domestic market for fair trade rice in the near future.
  
  
• Competition: Sunstar’s special niches now face competition from abroad. Market demand for Indian organic basmati continues to grow in Europe, but so do the number of exporters. In the United States, which Sunstar has targeted for increased sales, it has run into competition from a Texas-based firm, RiceTec, which grows a new type of basmati, called Kasmati, adapted to grow in American environmental conditions.
  
  
• Intellectual Property: RiceTec got a boost when the United States granted the company a U.S. patent for Kasmati. Livid, the Indian government challenged the patent and threatened to take the issue to the World Trade Organization. The United States responded by revoking portions of the patent and RiceTec agreed to give up part of their claims. But many basmati producers feel the issue is far from settled. Indian scientists are now mapping the DNA of basmati rice, and together the Indian and Pakistani governments are seeking to protect basmati with “geographical identification” status. This would recognize the regional genesis and authenticity of the product, and prevent producers in other areas, like RiceTec, from using the same name—a status that French champagne enjoys, for example.
  

Sunstar’s success could be replicated by any firm smart enough to identify a clear market opportunity, to create a strong product with excellent quality control, and to carefully cultivate relationships with farmers. But as the 2007 price drop evidenced, the model has its weaknesses. The long-term success of a company like Sunstar depends on diversifying its products and market, both of which it is now trying to do.

But perhaps the real key to replication is group certification, whether organic or fair trade—or both, as in the case of Sunstar. It’s an alternative to the cumbersome certification of individual farmers that they never will be able to afford themselves. It also builds the capacity of these farmers through training in agricultural methods, inventory tracking, group decision making, and leadership development. Involvement in the fair trade movement, in particular, has helped build trust between the company and the Khaddar farmers. Sunstar therefore stands as a model for how the social bottom line can boost the economic bottom line.