By Sanjay Dawar
Our earlier article in this three part series highlighted opportunities that are prompting companies to go rural. However,as every coin has two sides the other side of opportunities are challenges. Businesses in India today face a huge dilemma,while it is no revelation that Indian rural markets offer a significant rural opportunity,a cost effective method to tap into these markets has become a significant challenge. There are vast differences between rural and urban markets,including infrastructure,business and social structure,market size and consumer behavior– to name just a few.
Issues such as inadequate infrastructure,low literacy,and high levels of poverty raise serious question marks about the sustainability of the rural opportunity. Most companies point out lack of proper linkages for roads; railways and telecom infrastructure are big hindrances. Some others feel the lack of skilled talent and fragmented demand patterns are the key challenges. Other barriers to profitability and scalability include the lack of granular information on rural markets and consumers,and limited access to financing options. Timely data collection on demographics and consumption patterns is difficult; data analysis is no easier.
Most companies find the size of the necessary upfront investments as the biggest hurdle towards establishing rural operations. For instance,in the case of rural marketings most celebrated story ITC’s e-choupal,each of the 4,100 kiosks (containing a computer with a V-SAT connection) set up under the scheme cost between US$3,000 and US$6,0009 to install and about US$100 for annual maintenance. That translates to an average initial investment of US$20.5 million and a variable cost of US$0.4 million each year. Similar concerns are faced by many other sectors esp. consumer products and industrial goods. Among consumer products the cost of setting up infrastructure for sales and distribution itself is a big question mark and varies from region to region. While breaking even for a distributor in urban landscapes could come within a year,in rural it could be a longer period.
Compounding this issue,companies also find that their trained,seasoned staff is very reluctant to relocate to rural areas. One of the sales head at a known FMCG comments: Most of the young people we interview say they have already done their rural stint and are not keen to spend more time there. We have recently made three offers for the position of rural marketing lead but all three have been turned down. To add to that frontline sales force is also hard to find. Most of the young sales force in rural areas is eventually looking to relocate to the bigger cities thus leading to very high attrition rates and unstable workforces.
A number of companies also believe that inability to create flexible business models as one of the key internal barriers to establishing a successful rural presence. That finding meshes with a recent Accenture research report which concluded that mobile-phone entrepreneurs who have successfully penetrated urban markets are struggling to implement business models that can earn them sustained profits from their rural operations.
Majority of the corporations face major structural roadblocks in setting up efficient rural supply chains,with most citing inadequacies in physical infrastructure,including substandard or non-existent roads,rail and telecom networks. Also half of the businesses face the absence of effective distribution and retail linkagesfacilities which,if businesses have to build them,usually involve heavy capital expenditure.
Sixty thousand villages in India have no form of retail outlet,making it very difficult to reach potential customers there. But,three million retail outlets exist in the remaining villages. The challenge is how to get products to those outlets and replenish them consistently and reliably. These factors thus tend to be major deterrents to doing business in rural markets.
While most of these challenges seem to be operational in nature the biggest strategic challenge faced by companies is towards understanding the rural customer. Translating customer segmentation and analysis into strategies and tactics for reaching them is especially challenging in Indias fragmented and unfamiliar rural markets. More so,a number of categories for businesses are yet to be penetrated in rural markets thus adding the challenge of creating usage and thus demand from the rural customer.
To top that,the usage patterns of rural customers are not easy to understand with each region having its own idiosyncrasies. For example every 100 kms the usage of brands completely changes from region to region. While a belt of villages in southern Andhra Pradesh could only be consuming Brooke Bonds Red Label and driving TATA cars,going down 100 kms another belt would be having a majority consumption of 3 roses and driving Mahindra cars. This is in spite of a common distribution network and mass media reach across the entire region. The reason could vary from distribution set up to word of mouth to simply a complex social referral network and understanding this reason itself tends to be a big challenge.
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. So what can other organizations seeking to achieve high performance learn from these leaders? And how can they think in terms of applying the lessons learned to other rural markets worldwide?
We try to answer these questions and more in the next article in this series focused on understanding the best in class solutions.
– This article is part 2 in a series 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)