Understanding Indian Rural Markets: The Solution

The fact that Indian rural opportunity is one of the largest in the world is agreed upon by most companies.

Published:May 2, 2013 4:10 pm

By Sanjay Dawar

The fact that the Indian rural opportunity is one of the largest in the world is agreed upon by most companies. However tapping this opportunity and converting it into a profitable endeavor is a challenge that most companies have not been able to overcome. Yet,a growing number of companies,large and small,are steadily transforming their rural operations into viable profit centers. They have been successful in selling to unsophisticated buyers in geographically dispersed locations using appropriate “reach strategies.”

Let us have a look at how these companies have been able to negotiate the rural challenge and what are the key factors that they have chosen to work on first.

Essentially,the rural market leaders have mastered product development and pricing,arrived at an optimal channel mix,and set up local partner networks that work well and generate revenue. They have been able to accelerate the adoption of their products and ensure consistent availability by investing in comprehensive market development and by making their supply chains as efficient as possible. And,they have effectively utilized technology and social networks to achieve the scale necessary to reach diverse consumer segments across rural India. And,in some cases,they are taking lessons learned in India and applying successfully in other emerging markets.

However when seen from an end to end holistic perspective there are four key capabilities that need to stand out for organizations to truly make an impact to the rural space.

Create,Shape and Develop markets

Creation and development of markets in the hinterland involves building consumer understanding,product customization,relevant pricing,value engineering,and innovative modes of advertising and promotion—all designed to increase consumption and open up new markets. Among these creating new categories could be most essential where businesses may need to develop new products tailored to the unique needs and circumstances of rural consumers. An example: BP Energy India saw an opportunity to offer a cleaner fuel alternative for the traditional charcoal- and wood-fired stoves used in the countryside—a move that the company believed could convert 3.6 billion potential consumers to more environment-friendly energy solutions. The company bought patented technology from the Indian Institute of Science (IISc) that used fuel pellets made from agri-waste to run smokeless stoves; it had successfully sold the pellets to nearly 300,000 households by early 2010.

Setting the right price point is another essential mechanism to tap the rural market. The rural market leaders usually address their customers’ price perceptions in two ways: by offering low-priced products in the first place,with a range of even cheaper variants; and by selling products as discrete units rather than in multiunit packs. Many FMCG companies,selling products ranging from biscuits to shampoos,have introduced smaller pack sizes to increase category penetration.

Adapt and optimize supply chains

Investments in better transportation,warehousing,infrastructure and storage can boost returns over the long term for all participants in the supply chain. Important supply chain activities need to be taken up first such as Optimizing sourcing processes and reaching the customer.

Sourcing processes can be optimized through a number of initiatives. Replacing middlemen with direct manufacturer-to-producer linkages is a successful strategy adopted by ITC’s e-choupal program. Another successful mechanism has been process outsourcing such as contract farming. A relatively new phenomenon the practice uses forward contracts between buyers and producers to reduce the risks involved in agricultural activity,guaranteeing timely raw materials at a fair price. Wheat farmers are using contract farming through an association among Hindustan Unilever,Rallis and ICICI Bank.

Reaching the customer is the other big challenge that companies have been negotiating through innovative solutions. Leveraging feeder towns has been one of the most successful models esp. for the FMCG and consumer products companies. The hub-and-spoke distribution model is another option for reaching customers in remote areas. Coca-Cola uses this model; its products are transported from bottling plants to the hubs or large distributors and from the hubs to the spokes or smaller distributors in semi-urban areas. These small retailers then distribute products to village retailers.

Infrastructure-sharing among non-competing companies is another successful attempt of companies that are new entrants and look to quickly scale up and expect quicker returns by collaborating with companies having a well-entrenched reach. For instance,Samsung has partnered with the Indian Farmers Fertilizer Cooperative (IFFCO) to market its handsets using IFFCO’s broad presence in rural areas.

Create Value through innovative use of technology

The ability to create and nurture new markets and adapt and optimize supply chains are essential hallmarks to serve the rural markets. But high performance businesses go beyond this: they employ technological platforms and solutions innovatively to co-create value by actively involving local resources. By utilizing technological platforms to gather authentic data on the customer base—companies actively find ways to improve their reach and scale as well as share the benefits. High performance businesses also employ innovative approaches to overcome talent deficits. They utilize state-of-the- art technologies to nurture local human resource,thereby reducing their dependency on urban talent pools and parallely unlock income opportunities in hinterlands.

Build social networks with local participation

Since rural consumers are unfamiliar with many commercial products,they often look to trusted sources such as friends and family for advice in making purchase decisions. Many companies have developed innovative communication pathways,often borrowing from social marketing models to use word-of-mouth advocacy. Effective social networks build partnerships among NGOs,self-help groups (SHGs),microfinance institutions (MFIs) and local rural populations. These relationships have a business and social use. For example,MFI-SHG combinations in India have access to 50 million consumers over whom they also exert influence. This makes the MFI-SHG network a powerful distribution and retail channel that combines reach,proximity to the consumer,and access to finance.

To succeed in rural markets,it is important for companies to engage local communities as partners as well. It has to be a collaborative model with long-term horizons. Rural market leaders such as HUL,ITC and Hero Honda have moved beyond traditional vendor roles to partner with local communities; today,they regularly work to develop skills and to generate employment locally.

Thus,a large number of businesses have now begun to scratch the surface of the potential for profitable growth in rural India and in the process understood the rural customer better. In the end,the high-performance businesses will be those that deliberately learn from their experiences in India and quickly apply those experiences elsewhere,not only in other emerging markets but in highly mature markets as well.

– This is the final part in a series of articles on understanding Indian rural markets.

(The author is Managing Director,Accenture Management Consulting. Views expressed in this article are author’s own and do not represent those of The Financial Express)

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