Posts Tagged ‘Rural’
Wholesellers are none but middlemen who buy products from distributors (wholesale/retail) and sell them to retailers. In most cases, the retailers come to the wholesellers to buy products to replenish their stock. However, wholesellers may also sell to end consumers, but such sales are minimal.
In the Indian FMCG market, we have broadly two types of wholesellers:
1. Modern Wholesale stores such as Metro, Wal-Mart BestPrice, etc.
2. The neighbourhood wholesellers around the streets in India
Wholesale distributors buy in bulk (high volumes) bargaining low prices from manufacturers. Wholesellers in turn buy products in demand (what retailers ask for?) at low prices from wholesale distributors. Because of this reason that wholesale distributors are bulk buyers, it is generally seen that wholesale is cheaper than retail. But, it also depends on how many middlemen it passes through, as each middleman adds his margin to the selling price.
What’s in it for the retailer?
Few reasons why retailers buy from the wholesellers:
- No direct distribution of a brand to their stores
- Low margins by distributors
- Direct distributors dictating terms
- Better deals at wholesale
- To be aware of the high selling products and brands
Retailers also face some disadvantages in buying from wholesellers:
- Buying goods on immediate cash
- Transportation costs of the goods
- Wholesellers may not take back the unsold inventory/stock
What’s in it for the manufacturer?
The wholesale channel helps the manufacturers achieve sales from markets where they are not directly able to handle retail sales and their shipments. In a country like India, where 95% of the retail environment is unorganized, and spanning across millions of small stores, it is impossible to reach all the stores directly through your distributors.
Most companies will have strong direct distribution in cities like Mumbai, but as you go deep into India, the dependence on wholesale indirect channels increases. Most top selling brands and categories have a good amount of wholesale component. For example, a brand which is selling in Pan-India (across the regions in India) may have a wholesale component ranging from 20% to as high as 50-70% depending on the category/brand’s dependence on Rural India. It is obvious that most of the sales in Rural India happen through wholesellers. In Rural India, you will have strong wholesellers for every group of villages or in the nearby town, where retailers go and replenish their stocks.
Manufacturers would always like to have a higher contribution of retail sales to their overall shipments, as this helps them directly to control the nuts and bolts in the operations such as trade promotions and schemes, in-store visibility, relationship with retailers, pushing and increasing their assortment within the stores, maximising profitability, increased visibility of their sales, etc. The top FMCG companies are driving their direct distribution in Rural India as they mine the Gold at the Bottom of the Pyramid.
The retail sector in India, both organised and unorganised, is set to grow at a rapid pace over the next few years. Retail India is currently ranked as the fifth larest globally, contributing to over 5% of the country’s GDP. India has also been ranked as one of the most attractive investment destinations in retail among 30 emerging markets in A T Kearney’s annual Global Retail Development Index (GRDI) for the past four years. FDI inflows to single brand retail trading stood at $ 195 million.
According to BMI India Retail Report, the total retail sales is expected to grow from $353 billion in 2010 to $543 billion by 2014, with organised retail accounting for 5% of the sales. According to McKinsey, organised retailing itself is set to rapidly increase from 5% to 14%-18% by 2015. While the nod to multi-brand retailing anticipated by mid-2011, and with top retailers entering the space and diversifying, organised retail is expected to have a good robust growth in the coming few years.
But the above projections and growth is dependent upon consistent growth in infrastructure, particularly a more reliable and efficient supply chain and logistics mechanism. The rapid growth of organised retail and the need to reach out to untapped rural markets necessitate massive improvements in infrastructure and the logistics network. The National Highways form a meagre 2% of the total roads in the country, but take over 40% of the load. Almost, 80% of the roads are not suitable for commercial vehicular movement. The average speed of such vehicles in India is only 20 km/hr, compared with 60 km/hr in the developed countries. The inadequacy and the ineffeciency of the logistics network is evident.
Due to these inefficencies in logistics, the cost of logistics as a percentage of the cost of goods sold (COGS) is the highest. There is a lot of promise for retail industry in India, but there are some challenges to overcome. The growth of this sector depends on how we overcome these challenges.
The last few years were a golden period for the FMCG industry. The economy was growing at a faster rate, imput prices were low, and inflation was low. This year the food inflation is very high around 12%, and the raw material cost has increased upto 15 to 20 percent compared to last year. The operating margins which are typically about 20 percent in the last few years have seen a drop to almost 16 percent.
High food inflation has an adverse affect on the FMCG industry. People will spend less money on discretionary items which will hit he FMCG industry. They say the fate of HUL is dependent on the monsoons. A good monsoon will not give any inflation worries and also increases the consumption power creating demand for hair oil, biscuits, soaps, shampoos, laundry, and toilet soaps.
High input costs
High input costs are another worry for existing woes. The cost of milk powder and sugar has gone up by 35 percent and 19 percent YOY and Nestle India is really struggling on its margins. The wheat used in ITC’s biscuits is up 10-15 percent thi year, the Copra used by Marico cost 10 percent more, the coconut and palm kernel oil used by Godrej Consumer has risen by 15-20 percent, and the menthol used by Emami has gone up by 20 percent. The heavy rains in Kerala might have caused the cost of Copra to increase and it doesn’t seem to be temporal. So, maintaining the margins this year is a tough task. Some of the FMCG players say that they will not increase the price of Low Unit Packs (LUPs) but may increase the prices of higher priced stock-keeping units (SKUs). The packaging cost which is very important in the FMCG sector has shot up by around 10 percent this year. They are expected to stay that way caused by the strong crude prices at $80 per barrel.
Rural Market is the way
Urban Markets are showing lower growth as compared to the rural hinterland. It is estimated that the big daddy Hindustan Unilever (HUL) gets almost 50 percent of their revenue from rural India , and Dabur gets almost 55 percent, and Marico gets 25 percent of their revenue from rural India. The Urban Markets are saturated with more and more competitors and less margins for the companies. For example, Toothpaste has a rural penetration of 40 percent as against 72 percent in the Urban areas. The underpenetrated categories such as toothpaste can be taken advantage of by companies like Colgate and HUL. Colgate started an initiative to educate people about the advantages of toothpaste and influence conversions from toothpowder and others. The volume growth in such categories will be fast.Shampoos showed a growth of 8.9 percent (Jan to May’10) compared with an urban volume growth of 2.5 percent.
The government schemes which have been launched over the past few years had helped in increasing the disposable income, in turn the purchasing power of rural India. Schemes such as Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) which aim to put around Rs. 40,000 crores in the hands of the rural poor, leaves a large population with higher disposable incomes. This leads to some basic changes in the consumption patterns of greater consumption of personal care and above basic food requirements.
SOCIO ECONOMIC CLASSIFICATION (SEC) – NRS 2005
- The Market Research Society of India categorises socio-economic groups based on both occupation and education of the chief wage earner of the household.
- These eight classes are A1, A2, B1, B2, C, D, E1, and E2. A1 is the uppermost socio-economic class and E2, the lowest.
HOUSEHOLD DISTRIBUTION BY EDUCATION ALL INDIA-RURAL & URBAN
- 72 % of those who have not finished school live in rural areas.
- 61% of those who are graduates/post graduates live in urban areas.
URBAN – RURAL DIVIDE HOUSEHOLDS BY INCOME
- 78% of those in the highest income bracket live in urban areas
- 67% of the poorest live in rural areas.
Similarly, the SEC Classification of Rural India is R1, R2, R3, and R4. This again is primarily based on the chief wage earner’s occupation and the type of house like Pucca, Semi-Pucca, and Kutcha house.
As people don’t disclose their exact incomes due to various reasons, this classification is doubted by some experts. So, Market Research Users Council has devised another system called New Consumer Classification System which is based on Household Potential Index (HPI) which takes into consideration many parameters like durables owned in the house etc… Also, there are other measures like Living Standard Measure (LSM) which Unilever believes and uses for its internal use.
India’s pharmaceutical industry has been growing at record levels in recent years but now has unprecedented opportunities to expand in a number of fields. India’s leading drug manufacturers are becoming global players, utilizing both organic growth, through the gradual development of their business, and mergers and acquisitions (M&A) as they seek to boost their presence in existing markets and open up new ones.
In addition, India’s long-established position as a preferred manufacturing location for multinational drug manufacturers is quickly spreading into other areas of outsourcing activities. Soaring costs of R&D and administration are persuading drug manufacturers to move more and more of their discovery research and clinical trials activities to the subcontinent or to establish administrative centers there, capitalizing on India’s high levels of scientific expertise as well as low wages.
Healthcare grew from 4 percent of average household income in 1995 to 7 percent in 2005, and is expected to grow to 13 percent by 2025. In terms of scale, the Indian Pharmaceutical market is ranked 14th in the world. By 2015, it will rank among the top 10 in the world, overtaking Brazil, Mexico, Turkey, and South Korea. According to the McKinsey Report, if the underlying growth drivers grow more rapidly then the market may reach to a size of US$24 billion, and if the growth is slower then the market may be limited to US$16 billion.
The main opportunities for the Indian Pharmaceutical Industry are in the areas of:
- Generics & Bio-Generics
- Bio technology
- Outsourcing, Contract Research and Contract Manufacturing
- Rural Markets
- Health Insurance
Generics & Bio-Generics:
Indian drug manufacturers currently export their products to more than 65 countries worldwide.Their largest customer is the U.S., the world’s biggest pharmaceutical market. The use of generic drugs is growing quickly in the U.S. Low production costs give India an edge over other generics-producing nations, especially China and Israel.
Increasing costs of R&D, coupled with low productivity and poor bottom lines, have forced major pharmaceutical companies worldwide to outsource part of their research and manufacturing activities to low-cost countries, thereby saving costs and time in the process.
India holds the lion’s share of the world’s contract research business as activity in the pharmaceutical market continues to explode in this region. Over 15 prominent contract research organisations (CROs) are now operating in India attracted by her ability to offer efficient R&D on a low-cost basis. Thirty five per cent of business is in the field of new drug discovery and the rest 65 per cent of business is in the clinical trials arena. India offers a huge cost advantage in the clinical trials domain compared to Western countries. The cost of hiring a chemist in India is one-fifth of the cost of hiring a chemist in the West.
Increasing Penetration of Health Insurance:
In stark contrast to the US, where insurers pay more than 80% of the individual’s healthcare cost, Indian insurers contribute a very small proportion. At present only 3% of the healthcare cost of an Indian patient is paid by insurers; 80% of costs are borne by the individual. However, the insurance sector shows significant improvement with increasing sales of health insurance premiums. This rise in healthcare insurance coverage is attributable to the Insurance Regulatory and Development Authority (IRDA) bill, which has lifted entry restrictions for private players and allowed foreign players to enter the market. Additionally, the increase in consumers’ disposable income further boosts India’s insurance sector.
Rural and Tier-2 markets:
Currently, Tier-1 markets account for nearly 60 percent of the market, and Tier-2 markets account for nearly 40 percent. The significant share of Tier-2 markets can be credited to a large extent to the strong wholesale distribution system. Nearly, 45 percent of the growth will take place in Tier-2 markets. According to the McKinsey Report, by 2015, the share of Tier-2 markets will grow to 44 percent implying a market size of US$8.8 billion.
India is one of the most challenging markets in the world which fooled big marketers and companies across the world. We have over 1500 Gods segmented into 350 broad categories, and we have a God for every single day of the week. There are 9.5 lakh pan shops, 638,667 number of villages, 612 districts, and 28 states in India. This is the country where you see a pan shop and Haagen Daz together, and a bullock cart and a Mercedes in the traffic jams. Indian market is very challenging and it really fascinates me as a marketer.A very large part of Indian population still lives in villages defining the Rural India.
Rural India is very important for many companies and there is tremendous increase in investments and strategies surrounding the rural markets. Rural India Market buys:
- 45% of all soft drinks
- 50% of motorcycles, TVs, cigarettes, washing soap, fans, blades, and a lot others.
Rural Market Opportunities
Few of the companies that are going bullish in the rural markets:
- HUL with its Project Shakti has already has a reach of 1.7 lakh villages, and aspires to reach 5 lakh villages by 2020.
- Indian Tobacco Company (ITC) has a lot of penetration in the rural markets and the eChoupals are a big hit in the rural market.
- Airtel is planning to reach around 2 lakh villages.
- Marico with its most famous brand Parachute has a reach of 1 lakh villages.
- Pepsi and Coke, the Cola giants, have a reach of 70,000 villages.
- Dabur, known for its Lal Dant Manjan and Hajmola, has a reach of 60,000 villages.
- Colgate with its Operation Jagruthi has a reach of over 60,000 villages.
- Mahindra & Mahindra sells most of its SUVs in the rural market.
Mahindra Shubhlabh is India’s largest exporter of fresh produce. Mahindra Shubhlabh engages with farmers in the production of export quality grapes, pomegranates, and apples aimed at delivering to domestic and international markets. It has a huge R&D facility in Pune to research on various modern seeds and saplings.
- Nokia 1100 with its torch is a very big hit in the rural market. It is a perfect example of understanding the needs of the consumer. Nokia realized the need for a torch in the mobile for the rural people as they walk in the dark streets and fields of the village. Nokia is set to release some low cost phones to tap more from the tier-3 and tier-4 markets.
There are other companies like Godrej, ParleG, Asian Paints, Yes Bank, Royal Enfield, ITC and Revlon.
Delivering to the rural markets is a real challenge to many companies. In fact, the whole dynamics of these markets are so different that you need to look at a different product mix containing the 4A’s instead of the traditional 4P’s of marketing:
Acceptability – Build what the consumer wants
Affordability - Make an affordable product
Availability - Distribution plays a key role in the rural markets
Awareness - Don’t promote the brand, demonstrate the product.
Top Media in Rural Markets
Dainik group is the leading newspaper in the rural markets. In the realm of television, we have the following in the descending order of penetration in the rural markets.
- Doordarshan has a reach of 97% of the rural markets in India.
- Zee Cinema which carries with the image of movies being the favourites of rural people.
- B4u movies
- Discovery Hindi
One of the key trends in the rural markets is people changing very quickly from cable to satellite TV. This is because of the hassle-free dish connection of the satellite TV. Most of the dish TV companies like Tata Sky, BIG TV, and Airtel are selling good in the rural markets too. Similarly, Revlon has come up with a lipstick for the rural markets and it is doing very good as against Lakme. This shows that there is huge potential in these markets and it is interesting to see how these trends will transform the lives of the rural people and in turn impact the Indian markets.
Clinic Plus is the second most sold brand of shampoo in the rural markets after Cavin Kare’s Chik shampoo. The following Clinic Plus advertisement is designed for the Indian Rural Markets. There is an animated character called Chulbuli. The advertisement is partly based on the small girl of the original urban advertisement. We see both the advertisements below
The actual advertisement for the Urban markets having the girl is:
The rural consumer behaviour exhibits certain behaviour unique to rural settings and this makes it important for marketers to understand rural consumers through appropriate research. Rural consumers, for example, tend to lead a more relaxed lifestyle compared to the urban counterparts and exhibit little urgency. Consumers in rural markets tend to have greater trust in products and services endorsed by the government and its agencies. They tend to be more brand loyal, as habits once formed are difficult to change and they tend to feel a pride in getting a good deal rather than paying premium prices for products and services.
The cultural values and norms have a strong influence in determining buying and consumption behaviour in the rural areas. There are restrictions on the type of food and the type of intoxicants that can be consumed in the villages. Similarly, women occupy a more traditional place in rural areas and therefore western apparel may not be accepted in the rural markets. However, the rural youth are open to any new ideas, and influenced by the urban consumption patterns.
Rural communities tend to be closer than urban societies and reference groups have a greater importance. Relatives and people from the same caste are important reference groups. Joint families still exists in villages although the trend is towards the nuclear families. In rural areas, the consumption is driven to a large degree by the occupation and income of the consumers. Low income levels and inadequacy of credit facilities also affect the consumption patterns. Another important factor that affects demand patterns in rural areas is the instability of the income of the farmers, which is linked to the seasonality of agricultural production as well as to the unpredictability of the harvest. Similarly, the landless labourers and daily wage earners get their remuneration on a day-to-day basis and therefore they purchase in smaller quantities of products at a time, mostly on a daily basis.
As compared to the urban counterparts, the rural consumers have different interpretations of colors, symbols, and social activities. As the exposure to mass media and information technology is increasing, rural consumers are being more informed about products and services and their dependence on traditional reference groups is waning.
Hindustan Lever Limited (HLL) is the largest detergent manufacturer in India. HLL is one of the few companies that targeted and delivered to the bottom-of-the-pyramid (BOP) markets very effectively. One of the key strengths of HLL is their distribution and marketing penetration in the BOP markets. HLL products are manufactured at around 100 locations around India and distributed via depots to almost 7500 distribution centers. HLL has the reach to all villages with atleast 2000 people.
Pricing for the BOP markets
HLL is known as the company that comes up with innovative products for which the poor are willing to pay for. In fact they base their product on peoples’ willingness to pay for the product. For example, let us consider the case of Lifebuoy. HLL does some initial market research and comes up with the requirement that the Indian rural population need germ kill soap. Now, HLL experts immediately don’t go to the laboratory and come up with the most sophisticated germ kill soap. Rather, they have a bottom-up approach which works well for the mass markets. HLL does market research to understand how much are people willing to pay for a benefit like germ killer. Considering the price to be the retail price, it evaluates its target margins it gives a challenge cost. Then it comes up with a business model which delivers that challenge cost.
Marketing and Communications Strategies
Everything seems good on paper, but how does HLL manage its competitors. The key strengths of HLL is its distribution channels available to deliver Lifebuoy at the price the market dictated. The sales and marketing strategies of HLL are based upon microfinance institutions, micro-credit lending, and rural entrepreneurship. One such project is the Project Shakti which started in Andhra Pradesh and expanded to 12 states in India.
HLL tied up with the Self-Help Groups (SHGs) and offered them products which are relevant to the rural population. A member of an SHG is selected as a Shakti entrepreneur, also called ‘Shakti Amma’ will receive stocks from HLL rural distributor. With some training from HLL, the Shakti entrepreneur sold those goods directly to the local village population. HLL witnessed 15% increase in sales from the villages of AP, which accounted for 50% of total sales of HLL products in AP.
An important reason for the success of this integrated marketing strategy for rural India is the consistencies of goals between HLL, the government units, and the NGOs. As Lifebuoy is targeted for socially desirable improved health goal, the other parties are happy to cooperate with HLL. This kind of integrated positioning, targeting, sales, marketing, and distribution strategy has given HLL a real edge over its competitors.