Problems In Rural Distribution

Rural consumers spend around 13% of their income on fast moving consumer goods.The FMCG industry in India was worth around US$ 16.03 billion in August 2008 and the rural market accounted for 57% share of the total FMCG market in India.

Rural marketing facilitate transfer of goods and service from rural producers to urban consumers at possible time with reasonable prices, and agriculture inputs/ consumer goods from urban to rural.

The rural markets have become a great opportunity for many companies to expand sales. However, many of them back out as they find distribution as a major problem. They try the same tricks in rural markets as they have tried in urban market e.g., extensive retailing and sustained pull generation through mass media advertising. As a result they fail and blame the less developed infrastructure of the rural markets. Creative companies like HLL, have been experimenting to find innovative ways of reaching the rural consumers.

 

                          Problems in rural distribution

(i) Difficulty in reaching rural consumers:

The major problems are:

Lack of adequate transport facilities,

Large distances between villages,

Lack of pucca roads connecting villages to nearest townships,

Lack of proper retail out lets, and

 

The low density of population and inaccessibility makes the problem of servicing these villages individually difficult and often uneconomical. Direct delivery of goods to even the top one per cent of villages costs twice as much as servicing urban markets. Therefore, in the initial stage, it may be better to concentrate only on the larger villages, and towns with large agricultural hinterlands that act as foci for distribution. The semi-wholesalers and retailers servicing smaller villages can obtain stocks from these places or the villagers themselves can buy the necessary items.Studies conducted by the Marketing Research Department of Hindustan Level showed that about 20 per cent of the farmers visit the nearest town at least once a month to sell their produce and purchase their requirements.

 

 

(ii) Multiple Tiers, Higher Costs and Administrative Problems:

In the first place, the rural distribution chain requires a larger number of tiers, compared to the urban one. The long distances to be covered from the product points and the scattered locations of the consuming households cause this situation. At the minimum, the rural distribution chain needs the villagel evel shopkeeper, the mandi-level distributor and the wholesaler/stockiest in the town. And on top of them are the manufacturers’ own warehouses/branch office operations at selected centers in the marketing territory. Such multiple tiers and scattered outfits push up costs and make channel management a major problem. The scope for manufacturers’ direct outlets such as show rooms or depots is quite limited in the rural market unlike in urban areas.

(iii) Non-availability of Dealers:

Many firms find that there are a limited number of suitable dealers. Even if the firm is willing to start from scratch and try out rank newcomers, the choice of candidates is really limited.

(iv) Poor Viability of Retail Outlets:

Retail sales outlets in the rural market suffer from poor viability. A familiar paradox in rural distribution is that the manufacturer incurs additional expenses on distribution; still the retail outlets find that the business is un remunerative. The scattered nature of the market and the multiplicity of tiers in the chain use up the additional funds the manufacturer is prepared to part with.

(v) Inadequate Credit Facilities:

Inadequacy of institutional/bank credit is another constraint. Rural outlets are unable to carry adequate stocks due to lack of credit facilities. They are unable to extend credit to their customers. Thus there is a vicious circle of lack of credit facilities leading to inadequate stocking and loss of business,finally resulting in poor viability of outlets.

 

 Need for an Intelligent Approach

Further if one takes a closer look at the characteristic features of rural market, it will be clear that distribution in fact, is no problem at all. The perceived problem is only a misconception of the old timers who are not aware of the changing scenario in rural areas and the potential of the existing selling outlets. Under the rural road construction programme, the Government plans to link villages with a population of 1,5000 or above withal-weather roads. Progress in this has been somewhat tardy.

Coke

To reach out to rural India, Coke started out by drawing up a hit list of high potential villages from various districts. To ensure full loads, large distributors (Hubs) were appointed, and they were supplied from the company’s depot in large towns and cities.

Full load supplies were offered twice weekly against payment by demand draft. On their part,the hubs appointed smaller distributors (Spokes) in adjoining areas.

The smaller distributors undertook fixed journey plans on a weekly basis and supplied against cash. The distributors also hired rickshaws (cycle operated vans) that travelled to villages daily.

ITC – eChoupals

Another innovator in rural distribution — the $3.6 billion, Calcutta-based tobacco-to hotels conglomerate ITC — has also been trying to build a platform that others can use.  ITC is setting up eChoupals across the agricultural belt in India to offer the farmers of India all the information, products and services they need to enhance farm productivity, improve farm-gate price realization and cut transaction costs. Farmers can access latest local and global information on weather, scientific farming practices as well as market prices at the village itself through this web portal – all in Hindi. Choupal also facilitates supply of high quality farm inputs as well as purchase of commodities at their doorstep.

This has been done in a phased approach:

In Phase I, the business goal was to create a physical infrastructure of eChoupals at the village level and create local level ownerships through the identified Sanchalaks. At this stage the business goal was supported by creating a local language portal, which provided the required information to farmers such as local weather, market prices and best practices.

In Phase II, the business goal was to get the farmer registered and transacting by selling directly to ITC Ltd. through the virtual market. This goal was supported by creating a B2B site, which integrated the transactions directly to the back-end ERP and ensured that there was no latency in processing any of the procurement by the processing units.

In Phase III, the business goal was to create a full fledged meta-market.In this phase, the market would facilitate other operators like inputs providers and rural distributors to work effectively through the eChoupal to deliver and procure goods from every participating village.The technology road map to support this phase was to have a secure,consolidated Farmers database with all information pertaining to their holdings and credit worthiness  to be available online. This database, along with identification provided by smart cards would enable support for online transactions through the eChoupal leading to integration with participating financial institutions such as banks, insurance and credit agencies .Transaction costs are also minimized for the farmer by buying output at the farmers’ doorstep, and through transparent pricing and weighing practices. A substantial quantity has already been procured through this channel, resulting in overall savings. The savings are shared between buyer (ITC) and seller (farmer).On the marketing front, ITC is able to maintain and grow the trust of its farmers by enhancing their productivity and wealth. ITC leverages this position of trust among farmers, as well as its distribution capabilities, to market its own consumer good brands and those of partner companies offering products and services that ITC does not. Sales of consumer goods through the e-Choupals have been particularly successful because the cost-savings associated with dealing directly with the manufacturer allow Sanchalaks to offer goods at lower prices than other village-level traders or retailers can afford to do.

 Empowering Women Consumers I-Shakti

Hindustan Lever, whose 2006 revenues were $2.8 billion, has been learning these lessons for nearly a decade. The company’s Project Shakti (its name means “strength”) was born out of this realization, and it has become a case study for business schools and evolved beyond its original goals. “The objectives of Project Shakti are to create income-generating capabilities for underprivileged rural women by providing a small-scale enterprise opportunity, and to improve rural living standards with greater awareness of health and hygiene,” says Dalip Sehgal, executive director of the Shakti initiative.

Hindustan Lever’s drive into rural India was prompted in part by growing competition. When the Indian economy opened up in early 1990s, multinationals such as Procter & Gamble stepped up their activities, forcing Hindustan Lever to seek higher revenues and growth by reaching into villages with 1,000 or fewer residents. Launched in 2001, Project Shakti was an important part of this strategy. It involved working with rural self-help groups (SHGs) to educate rural women, while also making them part of the company’s marketing network. “Women from SHGs become Shakti entrepreneurs — direct-to-home distributors [of Hindustan Lever products] in rural markets,” says Sehgal. “This micro-enterprise offers low risks and high returns. The products distributed include a range of mass-market items especially relevant to rural consumers,” such as soap, toothpaste, shampoo and detergent.

The Shakti website features a video profile of Rojamma, a young woman from the state of Andhra Pradesh in Southern India, as an example of a typical Shakti distributor. A mother of two who was left to fend for herself and two daughters after her husband abandoned the family, Rojamma initially made ends meet by working in her parents’ fields. She then joined the Shakti project and became a distributor of Hindustan Lever products, speaking in village after village to impoverished and often illiterate women about the need to bathe their children and wash their clothes regularly and also selling them soap and detergent. The commission Rojamma earned on her sales helped provide for her family. “Today she is a proud entrepreneur and enjoys not only the money she earns from the project but also the respect of society,” says Sehgal. “The lives of thousands of women have changed because of Shakti.”

A typical Shakti distributor sells products worth Rs 10,000-15,000 (around $250) a month, which provides an income of Rs 700-1,000 (around $25) a month on a sustainable basis. While this may not seem to be a high income, it makes an enormous difference to women who live in remote villages in dire poverty. In many cases, earnings from Shakti help them double their household income. Much of the additional income goes to educating children, and also to purchasing consumer durables such as television sets, which further expands the rural market for such products. Some Shakti distributors — whom the company calls “entrepreneurs” — invest the extra money in buying vehicles such as motor scooters that allow them to go into more villages.

Indeed, with help from Shakti distributors, Hindustan Lever has been able to reach rural consumers in thousands of remote Indian villages. According to media reports, Shakti distributors now account for 15% of the company’s sales in rural India. Meanwhile, the potential for growth is enormous, since studies have shown that just 15% of Indian consumers use products such as shampoo. According to Wharton’s Raju, there are behavioural reasons why rural consumers represent a sound bet for companies that are willing to invest in reaching them. “Affluent consumers demonstrate that they have ‘arrived’ by buying bigger houses or cars. People at lower income levels do so by buying premium brands. This means brand loyalty is very high among less affluent consumers. That is why the rural market is critical for companies. The first-mover advantage is significant.”

The Shakti model was piloted in 50 villages of the Nalgonda district in Andhra Pradesh. It has now spread to more than a dozen states, creating 26,000 women distributors covering 80,000 villages. By 2010, the goal is to recruit 100,000 Shakti distributors covering 500,000 of India’s more than 600,000 villages. “This initiative has been extremely successful,” says Ajay Gupta, CEO of www.ruralnaukri.com, a job site for the rural market.

In addition to the distribution network, the Shakti project includes Shakti Vani (or voice), a social awareness program, and iShakti, a community portal. “Desktop computers are set up in the homes of Shakti entrepreneurs,” says a Hindustan Lever spokesperson. “These computers are equipped with software developed by Unilever through which users can access content in categories including education, employment, agriculture, health and entertainment. They can also ask questions on any of these subjects and have them answered by experts.”

iShakti is in its early days; it was launched in November 2004. The Vani project, however, is operational in more than 20,000 villages in states like Madhya Pradesh, Karnataka, Chattisgarh and Andhra Pradesh. Hindustan Lever has also tied up with partners such as Tata Consultancy Services, India’s largest software firm, which is actively involved with the iShakti portal, and ICICI, a financial services institution that is involved with providing micro-credit loans. With the network now in place, other companies want to hop on to the Shakti bandwagon. One service that is likely to be added soon is insurance.

Hub and spoke model Ex:

Medicated soap which is 100 per cent handmade is exempt from tax and consumers especially in rural market is attracted by the medical qualities of the soap as natural products appeals to an average Indian.

Medimix in this category is very popular due to all the above qualities and within the reach of a rural customer. There is no compromise on the packaging or appearance or the perfume or colour of the soap.

Their strategy was first target small hotels all over India. A firm decision was taken that Medimix would aggressively market to over 3,000 small hotels all over India, even in small towns. The outcome is even foreign tourists were impressed by the medicated quality of Medimix.

Through the hub model, Medimix is offered in the villages and explaining the local influencer about Medimix as an ayurvedic product. When he is convinced, his customers got convinced. In fact penetration of medimix in south is about 80% which is much higher than Hindustan unilever’s “Haman”.

Distribution network of coca cola is effective in reaching the rural market. It has a ‘hub and spoke’ distribution system which helps in gaining access to the small places. Increasing the reach by providing inexpensive ice-boxes to small retailers and distributors in rural areas as it can be a substitute for electricity which is not available 24 hrs in rural areas.

Improvements & Future Scope :

Increasing urbanisation in reference to lifestyle, habits, etc. has given opportunity to the companies to enter into the rural market with a purpose to maximise the market reach and to realise the untapped potential.

Making small size packets or sachets and popularizing the brand with the help of opinion leaders facilitate in serving the rural market. As people can afford these packets of small sizes having lesser price. This requires sales force to be trained to win the confidence of opinkion leaders. This strategy is already in use by a number of FMCG companies like HUL, Marico etc.

Rural consumers can be reached through innovative media. Apart from radio and television which are the conventional media others like horse cart, bullock cart and wall writing can effectively convey the message.

 

Some of the strategies to tap the opportunities in the rural market are:

• Build fair price shops i.e. having tie ups with public distribution system.
• Develop rural shopping malls that act as a two way supply chain. While selling goods to the farmers and also buy their farm produce.
• Use mixture of retailers and wholesalers to reach every nook and cranny of rural market.
• Grow ‘rural malls’ and ‘self help groups’ to push product into core rural market.