Smaller size, bigger reach
From customising product packaging to increasing distribution networks for better reach and access, FMCG cos are capitalising on growing rural demands
Recognising the growing significance of rural markets, many FMCG companies are accelerating their presence in rural India to drive volumes. Brands like Parle, Bisleri, Asian Paints, Marico, Dabur India and Amul are extending their rural distribution network and product offerings to target rural consumers.
Most companies are focusing on reach and access, for which they are strengthening their presence. For instance, Marico, which makes Saffola edible oil, is improving its distribution network in rural belts. We are investing in improving direct coverage in the rural areas, which will provide a competitive advantage for Marico, said Saugata Gupta, chief executive officer, Marico.
Instead of taking an all-India approach, Marico has prioritised its rural targets based on infrastructure development, media penetration, GDP growth and governance levels. To tap opportunities in rural markets, Marico has been working on improving its distribution there since the past four years. As a result, our sales coming from there have increased from 25% to 30%, he added. The company is covering its retail outlets directly through its distributors rather than depending on wholesale channels. This strategy opens up the possibility to cross-sell our products and use information technology to boost sales, said Gupta.
While Dabur India is extending its rural distribution network by 20%, the Gujarat Cooperative Milk Marketing Federation Ltd, owner of Amul brand, is increasing the production of small economy packs and sachets to target the rural audience.
With the announcement of increased rural spend in the Union Budget 2013-14, FMCG majors are beefing up rural operations and marketing strategy. The decision to increase allocation to the ministry of rural development by 46% has brought cheer to FMCG companies. This allocation for the next financial year will now stand at R80,194 crore from R55,000 crore, said an industry analyst based in Mumbai.
On the companys rural plans, Dabur CEO Sunil Duggal said, We plan to extend our sub-stockist network too. We plan to introduce rural-centric products in all categories where we are present. We are extending our rural distribution by 20%.
Added Ramesh Chauhan, chairman and MD of Bisleri International, that the company is setting up ten new plants across India as part of its expansion plans. With this move, we will increase our rural penetration to drive volumes, he said.
Like Marico, Tata Global Beverages is planning to increase its rural penetration considerably to reach out to a wider target audience this fiscal, said Harish Bhat, managing director & CEO of Tata Global Beverages.
FMCG major Asian Paints currently has a presence at 35,000 retailers across the country (through direct sales) in both urban and rural markets. We have annual objectives of opening in new towns and increasing dealers every year, said KBS Anand, MD, Asian Paints.
At present, a third of FMCG sales comes from rural areas in India. The governments emphasis on rural development should put more money in rural pockets and this, in turn, will ensure continued rural demand, said an industry analyst based in Mumbai.
The changing face of rural India
The pervasive effects of rapid economic growth over the past two decades have transformed the rural hinterland as well. As the share of farm income, which made up 74% of rural incomes in the 1970s, is projected to drop to 30% in 2020, non-farm incomes have grown at a spectacular pace
While the age old political truism that India resides in its villages may still hold true, there is a growing divergence between how Indian villages have been conventionally perceived and viewed and the current ground reality. Although the instant image the mind conjures up when rural India is mentioned is agriculture, the pervasive effects of rapid economic growth over the past two decades have transformed the rural hinterland as well. As the share of farm income, which made up 74% of rural incomes in the 1970s, is projected to drop to 30% in 2020, non-farm incomes have grown at a spectacular pace. Non-farm incomes encompass all the non-crop agricultural activities, including manufacturing activities, electricity, gases, construction, mining and quarrying trade, transportation and services in rural areas. Over 42% of rural households draw their income from non-farm sources, particularly traditional services (27%). The households engaged in modern services have the highest income increase (200%) in comparison to agriculture.
Non-agricultural income is widespread and of different kinds. As per How India Earns, Spends and Saves, an NCAER study, not counting labour, 25% of rural households can be classified as solely non-agricultural income earners, having a share of 38% in rural income. This is disproportionately higher than their population weight. Piece work labourers, both agricultural and non-agricultural, depending on what kind of work is available, account for 20% of rural income and 36% of rural population. The bloated NSS estimate of agricultural labourers is based on an ambiguous definition. For instance, even if a person works for a few days on the land during the past 365 days, the NSS classifies him as a farmer. For the remaining 364 days, this farmer could be a bricklayer, a carpenter, a welder.
Farmers or self employed in agriculture comprise 41% of the rural population and account for 43% of total income (just about what they should have, given their population weight). Even these farmer households, whose main source of income is agriculture, have a non-agricultural income stream. For instance, on aggregate, 29% of all farm households have non-agricultural income streams, led by large farmers. It is also observed that some of this income from other sources is also, in states like Kerala, Uttar Pradesh and Bihar, made up of remittances from rural migrants to urban cities. However, when these migrants return home because of job losses, not only does remittance income disappear, it also results in the economic stress of having more mouths to feed.
Rural consumers are expected to maintain their dominant share in the countrys consumer durables market even by the end of the decade. Rural consumers accounted for around 60% of the total ownership of low-cost items like bicycles, pressure cookers and wristwatches in 1995-96. The share is expected to rise to over three-fourth in 2014-15. Also, the rural share in demand is projected to rise further for automobiles like motorcycles (55%), scooters (40%) and car/jeeps (over 10%) by 2014-15. As in the case of consumer durables, the rural share in FMCG segment is quite high (55%) and is likely to increase to 60%. While the rural share in goods like health beverages is likely to stay the same even in next three years, and will actually decline for packaged biscuits, it is projected to rise in the case of washing cakes and detergents.
While the share of agriculture in total GDP has gone down to roughly 15%, the sector continues to employ over 55% of the total labour force. Efforts to promote labour-intensive small and medium enterprises have been half-hearted to say the least. Business unfriendly laws related to labour and land, as well as unreliability of electricity, have been significant obstacles in the development of labour absorbing industry. One would have expected that in line with the Lewis model, as the modern sector grew, surplus labour from the traditional sector would flow to the more efficient and higher paying modern industrial sector. This in a sense is the crux of the issue. Additionally, instead of actively encouraging the flow of labour from rural to urban centres, government policies seem to be having the opposite effect. Policies such as the Mahatma Gandhi National Rural Employment Guarantee Act (NREGA), which provide 100 days of work, end up having the opposite effect of keeping the surplus labour force in rural areas.
With elections around the corner, Indias politicians are likely to go around the countryside, telling voters what they would like to do for them. Better roads, more electricity, better education, higher farm prices...the list goes on. As the economy grows, as urbanisation increases, as the rural-urban linkages strengthen, there will be a further rise in income from non-farm sources. Intuitively, rural areas in close proximity to urban centres will gain more as the spillover effects in these areas will be higher. Higher growth could open up opportunities for the labour force currently employed in agriculture and thus lead to flow of labour to more productive sectors. But one must also realise the dangers of not altering the status quo. According to the population projections, Indias working population will peak in the coming decades. If this segment of society does not possess the basic skill set and if the transition of labour force away from agriculture does not materialise, then this combination of low and stagnating incomes, unskilled individuals and higher growth in urban areas leading to more inequality would lead to less inclusive development and harm the social fabric of the nation.
Rajesh Shukla is founder-director of NCAER Centre for Macro Consumer Research (NCAER-CMCR)
Country roads driving sales
As sales in rural areas zoom, several companies are even tweaking models for villages and semi-urban areas. With the quadricycle, things can only get more interesting
At a time when demand for cars in urban markets has slowed down, rural and semi-urban India has emerged as a saviour for the industry. These parts of the country have been relatively insulated from the woes faced by the economy, giving auto firms the perfect opportunity for growth when its main markets of the metros are under pressure. Led by major players like Maruti Suzuki, Tata Motors and Mahindra, most car companies are now focusing on rapidly increasing sales points in smaller cities by appointing sub-dealers through a hub and spoke model. What helps, say industry executives, is the low real estate costs compared to metros like Delhi and Mumbai.
The rural market has performed better in recent times. In 2008, when we started focusing on rural markets after the global slowdown, sales were in low single-digits; today the area accounts for 27-30% of monthly volumes. Popular models in such markets are Alto, WagonR, Omni and Eeco, and even more premium cars like the Swift, a Maruti official told FE.
Maruti has opened e-outlets, or smaller workshops and showrooms with two-three service bays as compared to eight to 50 bay service stations in metros. The rural customer gets the confidence that there is someone nearby to take care of his car, and when more people see such vehicles on the road, they get encouraged to buy as well. When we have viable volumes, we will expand with a proper dealership and invest in real estate, the Maruti official added.
For South Korean car maker Hyundai, the second-largest player at home, the rural markets are a key part of its car sales strategy. It is focusing on markets beyond the top cities to increase sales by increasing the number of outlets. These new outlets are built in tier-3 cities to achieve maximum penetration. The most popular Hyundai models in these markets are the Santro, Eon, i10 and i20 compact cars.
In the past two years there has been a noticeable upward sales trend. The rural markets are growing on account of growing income and change in lifestyle. In 2011, around 15% of sales came from rural and semi-urban markets. In 2012, it grew to 16.9% and we expect it will increase to over 20% by 2014, said Rakesh Srivastava, senior VP for sales and marketing, Hyundai Motor India. Hyundai has 270 rural sales outlets (RSO) and customises sales promotion offers for farmers, traders and panchayat members through various finance companies and gramin banks to create better affordability for its products. It plans to increase these RSOs to 350 outlets by the end of 2013.
With the new realisation of the potential of the semi-urban and rural markets coming post-2008, some auto companies have also started developing new products specifically for these markets. Industry executives say it is now well understood that the needs of these markets are different from the metros because of multiple reasonsthe lower average affordability, worse road conditions and shorter daily travel distances that do not require high speed vehicles.
Players like Tata Motors and Mahindra have already started catering to this segment of customers through passenger variants of their LCVsTatas made the Ace Magic Iris, while Mahindra sells a people-carrier version of the Maxximo. Maruti is also said to be developing its own LCV model with these markets top on its mind.
But now a new segment is also emerging with the government giving its nod for quadricycles in May this year. Quadricycles are four-wheeled vehicles with far less power than cars and are lighter as well, so while they are cheaper to buy and run, they have speeds limited of around 70 kmph and are ideal for short distances. To be kept off highways, these vehicles are believed to be ideal for smaller cities and villages of the country and will be provide a safer alternative to the three-wheeler. At present, Bajaj Auto has a product ready to sell, but others like Piaggio, Tata, Mahindra and Eicher are all said to be interested in quadricycles.
Dialing the hinterland
With urban Indias teledensity nearing saturation, telecom operators are focusing on increasing footprint in rural areas, through both voice and data penetration
Rural India has a teledensity of 39.85%, while teledensity in urban India is nearing 162.8%. Teledensity is the number of telephone connections per 100 people in a specified geographic area. With urban Indias teledensity nearing saturation, the highly competitive telecom operators are now focusing on increasing their footprint in rural areas, not only through voice, but data penetration as well.
Latest Telecom Regulatory Authority of India data says there are 338.54 million rural subsc-ribers, which is 37% of total wireless subscribers in the country.
Indias largest telecom carrier Bharti Airtel has 82.1 million rural subscribers, close on the heels of Vodafone Indias 82.2 million, according to data from Cellular Operators Association of India, the industry body representing GSM operators. Aditya Birla Groups Idea Cellular has about 65.8 million subscribers as on March 31 in rural areas.
While the urban subscriber base for voice has plateaued out, rural India holds a lot of potential, a Vodafone spokesperson said. Besides opening 5,500 mini stores or laal dukaans, the company is addressing rural customers in village fairs (even the Kumbh Mela) to help potential customers understand customer-friendly low balance services (peer-to-peer balance transfer, chhota credit, etc).
Today, two out of every three new Idea Cellular users come from rural parts of the country. Idea has always remained focused on growth from rural India and started setting up the network to grow mobile telephony in untapped markets right from the start of our operations, the companys spokesperson said.
Telecom companies have now begun to bet on data services in rural areas as well. For example, Idea is offering low-cost 3G devices in educational, agricultural and commercial heartlands of the country to upgrade existing 2G users to 3G and get them to experience data. In these markets, where PC penetration is low, mobile broadband is the only access to Internet and social networking, the Idea spokesperson said.
Last week, Vodafone slashed its 2G data prices by 80%, followed by a similar cut by Bharti Airtel and Idea Cellular. Idea Cellular has continuously focused on growing data penetration in smaller markets. Availability of data at such affordable rates will usher in a new wave of mobile data growth in the country, said Ambrish Jain, deputy MD, Idea.
Apart from broadband facilities being driven by the government, we need to work on bringing broadband Internet to rural India. People in rural India need it more than the urban centres, Marten Pieters, CMD, Vodafone India, had said earlier this year.
To promote and drive data adoption, Vodafone has been hand-holding customers, especially in rural areas, by engaging and educating them on the benefits of the Internet and how it can positively influence lives. Our recent initiative of mobile Internet vans in small towns across key states is an important step in this direction, added Pieters.
Telecom companies are also considering active infrastructure sharing for making viable business models, particularly for rural and remote areas. With the high cost of expanding network coverage, especially in rural areas, many operators are entering into intra-circle roaming (ICR) agreements that allow subscribers of one operator to latch on to the network of the other operator to make regular calls without roaming, said a Reliance Communications spokesperson.
To boost rural telecom adoption, telecom service providers are coming up with various value-added services for rural segments, such as agriculture information. Mobile-based payments and banking would also be major drivers in the future, considering the higher un-banked population in rural geographies, said Jaideep Ghosh, partner, KPMG India.
Logging into aspirations
Sam Walton, founder of Wal-Mart, had once famously said, There's a lot more business in small town America than I ever dreamed of. Replace America with India and the same would hold true for the countrys leading e-retailers. Increasing incomes, rising spends on non-food products and faster average consumer spends in non-metro areas have made such areas a key market for e-retailers, even though challenges to have an effective supply chain remain.
Non-metro markets now contribute nearly half of the overall sales and traffic for most e-retailers. About 50-55% of all sales on Myntra.com come from non-metros and smaller markets and this percentage is growing gradually, said Ashutosh Lawania, co-founder, Myntra.
Its a similar story for Yebhi.com, where 50% of the traffic on the website is coming from tier II and III cities and rural markets. Yebhi.com has a good mix of online shoppers from all parts of the country, said Nikhil Rungta, its chief business officer.
The country's largest e-retailer Flipkart also said traffic from smaller towns and villages is steadily increasing. In recent times, we have seen a considerable increase in the number of customers from non-metros, said Ravi Vora, senior vice-president (marketing) at Flipkart. Today, almost 50% of our traffic is generated from tier II/III markets and we think this will only grow.
However, going into a fairly immature non-metro market has its challenges, like managing the supply chain. Said Lawania of Myntra, E-commerce firms are solely dependent on third party logistic partners to ensure last mile delivery, where ensuring consistent customer experience is beyond their control.
Flipkarts Vora also pointed out at similar problems. Smooth delivery is a problem in these areas as transportation/courier systems dont work very well. Added Rungta of Yebhi that locating address and lack of 3G network in remote locations is a big challenge.
But solutions are not far. Yebhi.com, for example, has developed an in-house logistics network, Yebhi Champs.
Most e-retailers also offer exchange policies to overcome the apprehensions of first-time buyers, besides offering easy payment mechanisms like cash-on-delivery. Flipkart also offers card-on-delivery.
Despite the challenges, e-retailers are extremely bullish about the non-metro markets. Results of the NSSO Consumer Expenditure Survey 2011-12 show exactly why. As per the survey, growth from 2009-10 to 2011-12 in average per capita monthly expenditure for rural areas was 35.7% while for urban areas it was 32%.
The advantages of availability and convenience, coupled with purchasing power, is fuelling the online shopping industry in India, said Vora. Myntras Lawania is similarly bullish about the potential of the non-metro markets. We are already witnessing strong acceptance of the online platform with many first-time shoppers transacting online, he said. Yebhis Rungta also points to the aspirational shoppers in the non-metro markets, which makes them a potentially big money spinner for e-retailers. Non-metro markets hold a key to smart e-commerce business as there is aspiration but lack of access, Rungta says, adding, With e-tailing they can get any product they want. From mobile phones to branded jeans, we sell everything there.
E-retailers are now in the process of increasing marketing activities with a special focus on non-metro markets. Myntra has launched a focused campaign spread across the top five non-metro cities. The campaign is aimed at showcasing the benefits of online shopping and encourages first-time shoppers to transact online, said Lawania. Yebhi is using geo-targeting or offering specific offers to people in smaller cities, besides plans to take virtual walls to smaller towns in the coming months.