Innovation in Rural Distribution: “An Indian Experience”

2010

“Innovations in Rural Distribution: An Indian Experience”

"The future lies with those companies who see the poor as their
customers."
-C. K. Prahalad

The Indian growth story is now spreading itself to India's hinterlands. The rural consumer
market, which grew 25 per cent in 2008, is expected to reach US$ 425 billion in 2010-11
with 720-790 million customers, according to a white paper prepared by CII-Technopak, in
November 2009. The Union Budget for 2010-11 has hiked the allocation under the National
Rural Employment Guarantee Act (NREGA) to US$ 8.71 billion in 2010-11, giving a boost
to the rural economy.
Estimated annual size of the rural market:

FMCG Rs. 65,000 Crore

Durables Rs. 5,000 Crore
Agro-Inputs (including tractors) Rs. 45,000 Crore
2 / 4 Wheelers Rs. 8,000 Crore

 In 2001-02, LIC sold 55% of its policies in rural India.

 Of two million BSNL mobile connections, 50% are in small towns / villages.

 Of the 6.0 lakh villages, 5.22 lakh have a Village Public Telephone (VPT).
 41 million Kisan Credit Cards have been issued (against 22 million credit-plus-debit
cards in urban), with cumulative credit of Rs. 977 billion resulting in tremendous
liquidity.

 Of the 20 million Rediffmail sign-ups, 60% are from small towns. 50% of
transactions from these towns are on Rediff online shopping site.
 42 million rural households (HHs) are availing banking services in comparison to 27
million urban HHs.
 Investment in formal savings instruments is 6.6 million HHs in rural and 6.7 million
HHs in urban.

The market and opportunity related facts given seem to be quite alarming. But most of the
market still remains untapped because distribution channels have remained in the background
in the RURAL areas. Many companies find distribution as a major obstacle. There are
various problems to reach to the customers.

Problems for any marketer to reach rural consumers are:

1) Lack of transport facilities

2) Lack of pucca roads connecting towns to villages

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3) Large distances between villages

4) Lack of proper retail outlets

5) Lack of mass media infra-structure.

Challenges for distribution in rural market:

 Multiple tiers

 Higher costs

 Administrative problem

 Non-availability of details

 Poor viability of retail outlets

 Inadequate bank facilities

 Inadequate credit facilities

The following are very generic suggestions for companies focused on rural market:
Focus: The company/organization must focus on a single service unlike Drishtee or n-logue
or Akshaya.
Training: Training is necessary for all stakeholders with the company (including employees,
customers, vendors, etc.) Why it is important? In rural India you get raw talent. So they must
be aligned to your requirements. Sometimes you may have to start from creating the whole
ecosystem before actually scaling up your operations.
Adjusting to local needs: Rural India consists of varied cultures, variety of traditions, etc.
Your model should have flexibility of adapting to the local needs.
Technology for masses: Use technology wherever is possible.
Word of mouth advertising: In rural India, people love to be your brand ambassadors and
talk about all good things about your product/service if they like it.
End-to-end service delivery: You need to make sure that the consumer gets service-as-a-
whole delivered. For example, Take the case of SKS, they just not only provide capital to
people but also help them in their businesses similar to venture capital companies engaging
with their portfolio companies.
Emotional Attachment: Rural people keep the trust with your product/service and so you
must live up to it. And to create such trust, you need to align with local communities in order

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2010

to follow the trick, "trust is transferable".

Efficient distribution: Rural India is sparsely populated and so it is obvious that the
distribution costs are high. Here, one needs to deploy innovative approaches in order to bring
down the costs. Rural India lacks proper distribution systems. For example, even though
unprecedented growth in mobiles exists in urban India, but rural India remained with
marginal growth. And in order to cross 100 million subscribers mark, each of these Mobile
service providers: Airtel, Reliance, Vodafone, BSNL, Tata Indicom, etc. know very well that
it’s all about how to catch rural peasants. Here, obviously rural distribution channels become
the key.

Rural Distribution:

Distribution in rural markets can be categorised as:

 Physical Distribution

 Transportation

 Communication

 Warehousing

 Channel Distribution

Currently practiced methods of distribution:

Melas

They are held to commemorate important events, celebrate festivals or specific

occasions.

Majority of the Melas held during oct-nov, jan-april which coincides with the kharif
or Rabi crops. Share of manufactured goods in Melas is 42%. Major Melas in the
country: pushkar mela, khumbh mela, sonepur mela.

Van operations

 Stockists from nearby urban markets cover four to five rural markets per day.

 A distance of 60 to 70km is covered per day.

 They operate mostly on a cash basis as per the desired frequency.

 They provide better control over distribution.

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Sub stockist operation

 Gets stock from super stockists appointed in the district.

 Super stockists typically cover 10-15 sub-stockists in the district.

The sub-stockist covers all the outlets in his rural market like the regular stockist by
extending credit and services.

As mentioned above there are lot of problems and challenges in distribution to the rural
market. Government and business entities are trying to work on these problems so as to
cover the untapped market as much as possible.

Few more suggestions I would like to make are as follows:

Satellite system (the hub-and-spoke system):

A concept known as satellite distribution system is strongly recommended for adoption in

penetrating the rural market. The system work as follows.

The stockists get appointed in major towns and feeder towns. They, by and large,
discharge the following functions:

a) Financing
b) Warehousing, and
c) Sub-distribution

Depending upon the size of the stockist and the product line, the above functions are
performed with varying degrees of competence.

Retailers in and around the feeder town get attached to these stockists. Manufacturers
supplies goods to the stockists either on consignment basis or on cash or credit purchase
basis. The stockists operate their own delivery van to take care of secondary transport and
local delivery jobs. They are fully responsible for financial arrangements.

The main advantage of this system is that market penetration takes place in the interiors of
rural markets without the manufacturer having to expand his direct stock point network.

Syndicated distribution:

Distribution poses major problems for a new company targeting the rural market. It requires
too many levels in the channel and the setting up of distribution channel for rural markets is a
costly proposition. Thus in such situations syndicated distribution approach is a viable and
novel approach to gain entry into rural markets. Under this approach two or more companies
come together to form a syndicated trading organisation, to jointly distribute a collective
group of household products in rural markets by sharing distribution costs.

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Other experiment I would like to implement would be implementing concept of:

Integrated marketing outlets:

In this system the outlets are developed in the rural markets for selling a variety of related
products from the same point. This approach has been used in some areas but not effectively.

Combining ‘in’ and’ out’ operations:

In some sectors, rural marketing outlets combine the two operations of buying and selling.
The co-operative marketing societies particularly, help in the marketing of rural produce-
mostly agricultural products-along with supplying agricultural inputs to the farmers.

Rural Supermarkets:

With so many international brands coming to India like METRO, WAL-MART, it is quite
likely that the supermarket concept will soon or later invade the rural market. The super
market approach will be an extension of the package approach of agricultural inputs
marketing.

The following sector-wise distribution details (of various corporates) describe the
recent attempts/strategies followed in India:

1. Telecom Sector: Recently Airtel and Samsung have tied up with IFFCO to sell
their mobiles and services. IFFCO is (the world's largest) Indian farmers co-operative
of fertilizers. It has about 37,000 member units spanning all-over India. Some of the
other telecom giants & DTH service providers are looking at dying PCOs as a channel
of distribution.

2. Automotive sector: Hero Honda wants to change the rural market dynamics which
is hovering around 10% (of households owing two-wheelers). Its
strategies include selling during festive seasons, tying up with new dealers, providing
finance with local co-operative institutions (guess the number of such institutions, it is
1, 08,779). Meanwhile, Bajaj is launching a Bike, specifically to suit rural Indian
youth needs. It is setting up 20 outlets in affluent but severely underpenetrated, rural
districts. Moreover, it has created specialist dealerships for rural markets, called
'Rural Dealerships'. Bajaj wishes to train the sons and daughters of village VIPs, who
are also the opinion makers and thought leaders of their respective villages. Bajaj’s
non-banking financial arm, Bajaj Auto Financial Ltd (BAFL), is trying to involve the
rural self-help groups (along with specific controls, on this micro-financing, to avoid
the end-buyer not to use the credit amount for other purposes).

3. FMCG sector: Indian part of Unilever, HLL, sells its goods through rural women
who become its sales-representatives. These women are trained by HLL and usually
supported by Microfinance or local self-help groups. ITC has created a supply chain
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2010

infrastructure something called "e-choupal" system. E-choupal is run by an agent,

typically covers about surrounding 10 villages (within 5 KM radius).

4. Financial Services sector: More or less, all the banks are using at agent-based
model as the typical branch-based model does not work here due to cost economics.
Some of these banks including ICICI are looking at tying up with micro-finance
institutions and local self-help groups (or creating them if already does not exist).
Many banks have solutions for Mobile-based services to reach rural consumers
directly into their hand. ICICI has gone further in tying up with large corporate majors
having significance presence rural India and providing loans/banking services to their
distributors/traders and also it is working in tandem with postal department.

5. Soft drinks: Pepsi and Coke have mastered something called "Hub and Spoke"
model. Using this system, initially the goods are transported to hubs (towns) from the
plant and later the stock is transported to spokes (using all types of transport vehicles:
Cycle, Rickshaw, Auto, hand-cart, camel-cart, etc.). They also use annual haat and
village fairs.

6. Pharma sector: Nicholas Piramal has focused on general practitioners, to cater to

rural markets to increase its penetration with a field-force of 800 people. Most of the
Pharma companies are looking at post-office as their distribution platform. Some of
these companies conduct health-care workshops in severely underpenetrated, rural
districts. Moreover, it has created specialist dealerships for rural markets, called
'Rural Dealerships'. Bajaj wishes to train the sons and daughters of village VIPs, who
are also the opinion makers and thought leaders of their respective villages. Bajaj’s
non-banking financial arm, Bajaj Auto Financial Ltd (BAFL), is trying to involve the
rural self-help groups (along with specific controls, on this micro-financing, to avoid
the end-buyer not to use the credit amount for other purposes).

Examples of the innovations in Indian Market:

The following figures depict product movement routes through the interiors.

 47000 haats held throughout the country.

 Weekly markets.
 Each haat caters to the needs of a min of 10 and maximum of 50 villages from where
averages of 4000 persons come to buy a range of daily necessities and services.
 Urban goods are also sold like packaged foods, toiletries, cosmetics and certain low
value durables like utensils.
 During the day, agri produce is sold during the first half of the day and in the 2nd half
urban consumer goods are purchased.
 Government auctions the haats. The contractor who wins the auction administers
them. He collects taxes from traders and allots stalls and areas for trading.

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Distribution system of NIRMA:

 The structure followed by nirma consists of minimum channel partners. Direct

distributors receive supplies from depot.

 Market cover is mainly through the wholesalers’ network and hence few distributors
are required to handle bulk dispatches.
 In some areas big wholesaler plays a role of a sub distributor, supplying to the retailer
and wholesalers in his area.
 Distributors are appointed and are the only channel partner recognized by the
company.
 The distributor’s area is one or more districts, depending on market potential.
 The depot is company owned. The company supplies goods on a ready basis.

‘SHAKTI-EMPOWERING WOMEN IN RURAL INDIA’

Objective of HLL’s Project Shakti:

 To create income-generating capabilities for underprivileged rural women, by
providing a sustainable micro enterprise opportunity.
 To improve rural living standards through health and hygiene awareness.
 To create income-generating capability among underprivileged rural women by
providing a sustainable micro-enterprise opportunity to them.

Rural Penetration of NOKIA

 The company is working on several innovative business models to reach rural

areas in an effective manner.
 The key focus will be to cover villages with a population of 3000 and above.
 Nokia started distributing its phones trough a partenership with HCL(Hindustan
Companies Ltd.), which had already built an extensive network for its own
products
 Tie ups with key operators to deploy mobile vans in rural villages.
 These co branded vans are to educate consumers on the impact of mobility on
their lives, new bundled offers and product features/experiences.
 The pilot program of Nokia Life Tools in India was launched in December 2008
 With services in Agriculture
 Learn English
 General Knowledge
 Astrology

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RURAL DISTRIBUTION STRAGEIS OF MARICO

 Marico’s distribution width and penetration is acknowledged as one of the best in

the industry.
 Marico’s distribution network covers almost every Indian town with apopulation
of over 20000.
 Marico’s parallel rural sales and distribution network ranks among the top three in
the industry and contributes 24% to the company’s topline.
 Distribution network: 882 direct distributors, 153 super distributors, 2393 small
stockists and 4523 van markets.
A dedicated team of Territory Sales Executive and Pilot Sales Representatives
distribute this vibrant network.

Rural Market is the major target of FAKE products

Channels of distribution of fake products:

Channel 1:

Manufacture to wholesaler/retailer in big city or small town, or directly to customer.

Channels 2:

Wholesaler in big city to wholesaler in small town.

Channels 3:

Wholesalers in small town.

Channels of distribution for Fake Products

Fakes reach consumers through the following channels:

 Small kirana shops located within the village (mainly look-alikes)

 Big shops generally located on the main roads (mainly duplicates)

 Door to door visits by salesman who pose as company representatives

 Salesmen in local trains

 Mobile traders

 Haats

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2010

CONCLUSION

The geographic dimension of rural markets has been an overwhelming problem that for
decades many organisations did not operate in these areas only because of the lack of
access to these markets

But with the improvement in the status of roads and connectivity to villages the situation
has improved but geographical aspect of the external environment still remains a barrier
which needs to be overcome. Therefore proper distribution channel needs to be set up in
order to tap the untouched part of the market.

REFERENCES:

www.devex.com

http://ruralindia.blogspot.com

www.docstoc.com

www.coolavenues.com

Books Referred:

“The rural marketing” by Pradeep Kashyap, Siddharth Raut.

“Marketing of Agricultural Products” by Richard L. Kohls and Joseph N. Uhl.

“Rural Marketing” by Ramkishen Y.