E000000274.1678.Rural Retail – The next phase in retailing

7/30/2019 E000000274.1678.Rural Retail The next phase in retailing

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Rural Retail The next phase in retailing

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Contents

1. Rural Market in India ________________________________________________ 1

1.1. Key Trends ________________________________________________________1

1.1.1. Rising Purchasing Power ____________________________________________11.1.2. Changing Infrastructural Scenario ____________________________________1

1.1.3. Government Initiatives ______________________________________________ 1

2. Conventional Retail Channels_________________________________________3

2.1. The Distribution Network ___________________________________________3

2.2. Distribution Network: The Challenges_________________________________ 4

3. Meaning of Organized Rural Retail ____________________________________6

4. Key Components and Issues___________________________________________7

4.1 Real Estate _________________________________________________________7

4.2 Planning and Forecasting ____________________________________________7

4.3 Supply Chain Efficiency _____________________________________________7

4.4 Retail Leveraging Technology ________________________________________9

4.5 Human Resource Management _______________________________________9

5. Key Growth Drivers_________________________________________________ 10

5.1 Rising Income and Consumption of the Rural Population _______________10

5.2 Changing Consumption Patterns ____________________________________11

5.3 Increased Availability of Financial Services____________________________12

5.4 Increased Access to Information and Communication Technology ______13

5.5 Significant Improvement in Infrastructure ____________________________14

5.6 Supply Chain Streamlining _________________________________________15

6. Rural Retail: Global Experiences______________________________________16

6.1 A look at Current Rural Retailing Scenario ____________________________ 16

6.1.1 China __________________________________________________________166.1.2 Russia__________________________________________________________17

6.1.3 Central European Countries- Poland _______________________________18

6.1.4 Latin America- Argentina and Brazil _______________________________19

7. Rural Retail in India_________________________________________________ 20

7.1. Insights on the Prominent Organised Rural Retailers ___________________ 24

7.1.1. DSCL-Hariyali Kisaan Bazaar _____________________________________24


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7.1.2. Tata Chemicals Ltd.-Tata Kisan Sansar _____________________________27

7.1.3. Godrej Agrovet Ltd. - Godrej Aadhaar______________________________ 28

7.1.4. ITC- Choupal Sagar ______________________________________________29

7.1.5. Triveni Engineering and Industries Ltd.-____________________________31

7.1.6. Indian Oil Corporation Ltd.- ______________________________________33

8. Challenges _________________________________________________________35

8.1. Poor Infrastructure_________________________________________________ 35

8.2. Seasonality of demand _____________________________________________35

8.3. Heterogeneous population__________________________________________ 35

8.4. Complex buying behaviour _________________________________________35

8.5. Duplicate or spurious products ______________________________________ 36

8.6. Highly price conscious consumers ___________________________________36

9. Implications________________________________________________________37

9.1 Government ______________________________________________________37

9.2 Manufacturers ____________________________________________________38

9.3 Intermediaries_____________________________________________________38

9.4 Farmers __________________________________________________________38

Appendix 1: List of Figures _________________________________________________ 42

Appendix 2: List of Images __________________________________________________ 42

Appendix 3: List of Sources _________________________________________________ 42Appendix 4: List of Boxes ___________________________________________________ 43

Appendix 5: List of Tables __________________________________________________ 43

Appendix 6:List of Abbreviations and Acronyms ________________________________43


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1.Rural Market in India

The rural market in India is undergoing a silent but definite revolution on the back of

enhanced purchasing power of rural consumers, the changing consumption patterns

and increasing overall value of consumption of goods and services. The sheer size of therural market which has witnessed tremendous growth in the recent years as large

sections of rural population transformed into discerning consumers has caught the

imagination and incited business interest of the top conglomerates in the country.

1.1. Key Trends

1.1.1. Rising Purchasing Power

On account of rising purchasing power in rural India, the corporate sector

is discovering the huge potential that can be realized by creating access

and focusing marketing efforts in the rural segment. According to theNational Council for Applied Economic Research (NCAER), there are as

many middle-income and above households in the rural areas as there are

in the urban areas. In fact, there has been a significant increase in the

consuming class, with an annual income of Rs.45,000 to Rs. 215,000, from

13.5 per cent in 1995-96 to 25 per cent in 2006-07. This has been

accompanied by an overall decrease in the segment of population with an

annual income of less than Rs. 22,000 from 54.6 per cent to 25.1 per cent

during the same period (Refer figure-3). A report by Assocham further

states that by 2012, the per capita income of rural population will doubleand the rising per capita income will lead to an increase in their

consumption levels.

1.1.2. Changing Infrastructural Scenario

The focused market attention on the rural markets is aided by the slowly

but surely changing infrastructural scenario in rural India. The budget

proposals are an acknowledgement of the fact that Indias poor

infrastructure needs urgent attention, which in turn is likely to address

many of the ills besieging the countrys vast agricultural sector and the

bottlenecks facing rural marketing in general and organized rural retail inspecific. The plan outlays have progressively escalated from Rs. 140

billion in the VIIth plan to Rs. 300 billion in the VIIIth plan, and Rs. 600

billion in the IXth plan to a mammoth Rs. 900 billion in the Xth plan.

1.1.3. Government Initiatives

The focused approach of the government to bring about overall rural

prosperity is evidenced by initiatives such as the doubling of farm credit


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to Rs. 2250 billion in 2007-08. Budgetary allocations such as a Rs. 1.53

billion allocation for high-yield milch animal scheme, Rs. 110 billion

outlay for irrigation schemes, Rs. 1 billion for New Rainfed Area

Development Programme, approximately Rs. 225 billion fertilizer subsidy

and about Rs. 40 billion for rural electrification and special funds for

coffee, cashew and rubber, weather based crop insurance scheme are

measures in this direction. Regional Rural Banks have been instructed toexpand their branch networks and extend their services to non-resident

Indians as well to expand their scope in general. Incentives to the

agricultural sector which has really been the backbone of the rural

economy is bound to favourably and directly impact growth of the rural

sector.

However, the rural consumers demand

differential marketing effort on account

of his socio-economic profile, referencepoints, ability to discriminate between

alternatives and value assignment

behaviour, which are significantly

different from his urban counterparts.

The infrastructure requirements and the

marketing institutions that characterize

the rural markets are very different from

the urban setting. Therefore, there is an

immense opportunity for the marketer

to create innovative and creativesolutions to tap the rural potential.

It has been observed that Indias rural

markets are growing at double the rate

of urban markets. Moreover, the total

number of rural households is expected

to rise from 135 million in 2001-02 to 153

million in 2009-10. This is likely to result

in rural India becoming the largest

potential market in the world.

Figure 1: Rural and Urban Potential

Figure 2: Rural Population Dispersion Status

Figure 3: Rural Income Dispersal Projection

Source 1: NCAER-2004-05, YES BANK analysis

Focus charts


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2.Conventional Retail Channels

In most developed countries, the retail market is characterized by the dominance of

organized retailing. In US, the share of organized retailing is estimated to be around 80

per cent. Developed European countries have an organized retailing share of 70 per cent

while in Brazil and China it is 40 per cent and 20 per cent respectively. India, on the

other hand lags behind by a huge margin with only 4 per cent of the total sales

controlled by the organized retailing. It is estimated that there is no organized marketing

and distribution in 87 per cent of Indias villages, which is home to 50 per cent of the

rural population. As a result, large firms have often resorted to dependence on make-

shift and dispersed channels and supply chains to meet the safety stock level needed

for catering to the pan-India market.

2.1. The Distribution NetworkIndias distribution network in most parts of the country, especially for non-

perishable products consists of C&F agents (Carrying and Forwarding

agents), stockist/ warehouses, regional distributors, wholesalers, and retail

sellers. It is common to find many companies in unrelated/non conflicting

product lines sharing the network in a territory. The traditional distribution

model has followed a four-tiered structure consisting of regional distributors,

C&F agents, super stockists, stockists and retail outlets, depending on the

size of the market in consideration.

Figure 4: Typical Stakeholders' of Rural Distribution Network

Rural distribution in India has coverage through rural super distributors or

super stockists who are in charge of several stockists, including mobile

stockists who carry products in vans to all villages in their territory and

leverage the circuit costs over a wide range of products and brands.

Typical Stakeholders of Rural Distribution Network


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The rural market in India is also characterized by the presence of a large

number of haats (periodic markets numbering around 42,000) and melas

(exhibitions numbering around 25,000) that account for the retailing of a wide

range of merchandise in the far reaches of the country. This is due to the fact

that a mere 5 and 0.05 per cent of total households headed by petty

shopkeepers and businessmen are in the rural area, catering to the need of

more than 70 per cent of the country's population.

Industry Highlights

Hindustan Unilever Limited: HUL, a consumer product manufacturer

covers an urban population of 1 million retail outlets and a rural market

consisting of 50,000 villages through its supply chain network that consists

of about 80 factories, 150 outsourcing units, 2000 suppliers and 5000distributors.

Marico: Maricos distribution network covers almost every Indian town

with a population of over 20,000. Its parallel rural sales and distribution

network ranks among the top three in the industry and contributes 24 per

cent to the companys top line. The infrastructure comprises 882 direct

distributors, 153 super distributors-catering to 2393 small stockists and

4523 van markets.

Box 1: Industry Highlights

Source 2: Images Retail, May 2007

2.2. Distribution Network: The Challenges

The dispersed population and the lack of cost effective modes for distribution

has induced the firms in India to use multiple tiers in the distribution

network (Refer figure-4). The role of these players in the distribution channel

is extremely important as most of the retail stores can stock only 510 units of

a given stock and often stock competing brands together in a small space. As

a result, it is the distributors and sales agents who need to convince theretailer about stocking their products as well as ensuring that their items are

replenished on time at the retail stores. Given the important role of the

different parties in the distribution channel, their profit margins are also high

(approximately 30 per cent of the retail price and the majority share is

received by the retailer). It is typical for a local distributor to have 510 per

cent margin while a C&F agent may make 24 per cent. Multiple layers in the


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distribution network impact the final price the customer has to pay for the

product.

The taxation structure in India is also complex with products typically being

taxed twice, once by the central government and again by the state

government. The complex interstate tax laws do not enable firms to optimize

the distribution network, as a result of which firms in India are often

required to set up at least one warehouse in each state for compliance. To

mitigate these problems, the Indian government recently adopted the VAT

structure (Value Added Tax) from the 1st of April 2005. So far, 20 of the 28

states have implemented VAT as on date.

Trucking industry, the carrier of most of the business related transportation

within India has been highly fragmented with about 2.7 million commercial

fleets being operated by over half a million fleet operators. The industry hasbeen lacking in average load capacity which at 7 tonnes is way below the

global standards. Although outsourcing of logistics activities to third party

firms is on the increase, there are very few organized third party logistics

providers in India. Those that are operating are mainly in the trucking

industry. Third party logistics (TPL) is still largely under developed with

most business managing distribution and logistics themselves. A recent

survey conducted by a leading Indian business daily found that many of the

TPLs in India lacked the scale and financial support to provide value added

services such as inventory management and order processing. As the

industry evolves and firms strive to become more efficient in the distribution

and transportation, it is clear that such value added services are likely to be

in great demand.


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3.Meaning of Organized Rural Retail

The Census, Reserve Bank of India (RBI) and Insurance Regulatory and Development

Authority (IRDA) (Refer-Box 2) generally distinguish between urban and rural areas

based on three metrics viz., population size, population density and economic activity.

One of the commonly used definition is taken from census which first classifies urban

areas and than classifies all other areas as rural. This method of defining rural areas is

not apt from the point of view of reaching out to the rural market and there is the need

for clearly distinguishing rural areas based upon population size, population density,

purchasing power and infrastructure facilities available. The FMCG (Fast Moving

Consumer Goods) companies, which have been most successful in penetrating the rural

market, generally define all areas below the population of 20,000 as rural. Some

consumer durables companies (such as LG) define rural areas as all areas with a

population below 50,000.

Existing Definitions of Rural

Census: All places having a statutory municipal body that have a minimum population

equal to 50,000, population density of greater than equal to 400 per square k.m. and 75

per cent of the male working population engaged in non-agricultural activity is defined

as a town. All other locations are treated as rural.

RBI: Locations with population upto 10,000 are considered as rural.

IRDA: All locations with a maximum population of 5000, population density of less than

equal to 400 and 75 per cent of the male working population engaged in agricultural

activity are termed as rural.

Box 2: Existing Definitions of "Rural"


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4.Key Components and Issues

The rural retail market in India is attractive but is fraught with a number of issues. For

tapping this market these issues, would be requiring a long term commitment, cost re-

engineering and sustained innovation. The key issues that have been identified in rural

retail are:

4.1 Real Estate

The initial selection of the retail space is critical to the success of a rural

retailing venture and some of the important selection criteria for choosing a

retail space are the potential for real estate development in the area, air, road

and rail connectivity, overall economic activity in the targeted catchment

area, expected footfalls and sales conversion ratio. These factors along with

the retail format, product mix and shop-in-shop facility planned, willdetermine the location, size and ownership structure of the real estate to be

acquired.

4.2 Planning and Forecasting

Range planning should be accurate so as to ensure that the customers needs

are met by the right width and depth of product and deliveries to the store

are made at the right time. It consists of key decisions of products to source,

number and volume of stock keeping units under each product category and

the time of sale. Proper estimation of the above requires the retailer to

meticulously observe and analyse factors such as customer profile, turnover,

potential, capacity available, seasonality and local preferences. Based on

this, a fairly robust demand forecasting system may have to be undertaken.

4.3 Supply Chain Efficiency

The rural retail supply chain presents many complex issues and needs

focused efforts for solving them efficiently and effectively. The use of store

level, time-phased planning has an enormous impact on minimizing the

effect of these challenges while increasing sales and reducing supply chain

costs. The key issues in achieving supply chain efficiency in rural retail arethe following:

Inclusion of the consumer in the supply chain process

o Consumer demand forecast based on sales history and anticipated

demand (in some cases by collaborating with customers as well as

suppliers)


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o Customised replenishment plan calculation at store level based on

unique consumer demand forecast, ordering rules and parameters

o Replenishment plan calculation at each supply chain partner level

for developing a fully integrated product needs schedule

Product life cycle management

o Decision to list or de-list products taken at a central level by

proper forecasting at the store level and not at the distribution

centre level

o Retail forecast for creating replenishment plan based on each

stores unique position by identifying changes in demand

o Distribution centre level replenishment plan calculated and

shared with suppliers to provide complete visibility of product

phase-ins and phase-outs

Promotional planning

o Promotional sales forecast added to the base forecast of consumer

demand, at the store level

o Replenishment plans for all stores added together to create the

distribution centre's demand plan

Seasonal products planning

o Forecasts of each stores consumer demand for a seasonal product

based on historical sales and market knowledge

o Identification of season end dates to minimize carry-over and

product returns

o Aggregate replenishment plan for all stores created by

distribution centre. The distribution centre and suppliers utilize

the information to create own replenishment plans

Category management

o Future projections of sales, inventory, purchases etc. need to be

converted to retail revenues, cost etc. based on current plans to

compare with budget and take corrective action on real timefeedback

o Projections rolled up from stock keeping unit to category to

department to total store


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4.4 Retail Leveraging Technology

The foundation of modern retailing is precise estimation of each stock

keeping unit of each product in each store. This is possible only by creating

an information system which accurately captures consumer behaviour and

shares it seamlessly with all partners across the chain. It is, therefore,imperative to have the right technology for supporting not only the current

business but also have scale up flexibility to meet fast paced growth plans.

The enabling technology should be easy to manage with a centralised

information system for the operations of the company. The technology

enabler should have common systems and platforms across all units

including suppliers to ensure smoother operations. A good information

technology set-up helps a company to efficiently manage inventory, reduce

working capital requirements and streamline the supply chain and logistics

costs, thus reducing operating costs.

4.5 Human Resource Management

Trained manpower is instrumental in the success of a retail store especially

in the rural areas. Absence of good quality personnel supported by

infrastructure and documented policies and procedures could result in

malpractices and poor customer satisfaction. It is important that a company

venturing into rural retail invest in training its people so as to overcome the

dearth of skilled manpower. Moreover, by employing the locally available

talent it can expect to reduce human resource issues as well as ensure

smooth operations of stores. The employees must be motivated through a

good work environment, encouraging management and well-documented

company ethos, policies and procedures. The key processes that need to be

documented for efficient operations at the store level include cashiering,

inventory management, customer service, query resolution, capital

expenditure and information technology. Above all, the training and

development should be focused to instill confidence in the human resource

and to result in a uniform experience across stores to the customers.


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5.2 Changing Consumption PatternsAn increase in education level and media exposure has led to significant

changes in the consumption pattern of rural India. In rural India the share of

food in total expenditure has fallen throughout the three decades prior to

2004-05 and the overall fall was from 73 per cent to 55 per cent. However,

the shares of milk and milk products, egg, fish andmeat and fruits & nuts have

increased by about 1 percentage point each, the share of vegetables has

increased by 2.5 percentage points while that of beverages, refreshments &

processed food has increased by 2 percentage points since 1972-73 whereas it

has declined for cereals. In rural India expenditure on cereals forms 18 per

cent of total consumption expenditure at present compared to 41 per cent in

1972-73.

Figure 6: Historical Trend Analysis of Food Consumption Pattern in Rural India

Source 4: NSSO, YES BANK analysis

With economic development and diversification of the consumption basket

over time, the choice tends towards a reduction of cereal consumption and

an increase of consumption of other items such as the beverages,


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refreshments and processed food group. The share of miscellaneous

goods and services (here including education, medical care, rent and taxes,

sundry consumables, conveyance and other consumer services including

conveyance) have grown from under 9 per cent to 23 per cent in rural India.

Addressing this quantum growth of 23 per cent through organised rural

retailing offers both a challenge and an opportunity.

5.3 Increased Availability of Financial ServicesThere has been a conscious effort by the banking fraternity to increase their

services to the rural areas owing to RBI guidelines and in search for the

fortune at the bottom of the pyramid. Figure 7 shows a steady increase in the

rural deposits and credits in India.

Figure 7: Growth Trend of Rural Deposits & Credits

Source 5: RBI, YES BANK analysis

The economic awakening of pastoral India is forcing the financial sector to

sit up and take notice. This is evident in the slow but subtle shifts in the

banking sector's credit portfolio. Between 2002 and 2006, the flow of

institutional credit to agriculture has increased from Rs. 695.59 billion to Rs.

1493.43 billion (Refer figure-8). This is not only an indicator of greater

financial inclusion but also that agriculture is no longer a taboo to large

sections of the banking industry. In effect, agriculture in India is maturing

into a viable economic activity and in several instances; governmentstipulation is no longer required for extension of credit. The greater access of

rural areas to formal financial services can also be judged by the fact that the

average size of population being served by a rural branch has meteorically

jumped from 13,462 in 1991 to 16,650 in 2005. Moreover, the rural middle

and upper middle class prefers approaching a rural bank branch or an

NBFC (Non-Banking Financial Company) for fulfilling his financing


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requirements rather than approaching a moneylender. This is because the

public sector banks and NBFCs offer them easier financing options to meet

their credit needs.

* Only up to 31 December 2006

Figure 8: Flow of Institutional Credit to Agriculture

Source 6: Ministry of Finance, YES BANK analysis

5.4 Increased Access to Information and CommunicationTechnologyThe mass media coverage in the rural areas has shown a continual increase

with press media penetration increasing from 14 per cent in 2002 to 19 per

cent in 2006 and cable and satellite (C&S) households increasing from 9.5 per

cent to 20 per cent during the same period (Refer Figure-9). Moreover, therural rich and the upwardly mobile rural population having significant

purchasing power have mass media coverage almost akin to the urban

masses.

Figure 9: Access to Press, TV and Mobile Services

Source 7: Industry sources, YES BANK analysis


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The penetration of mobile telephony, although not comparable to urban

centres, has brought about quite a few changes in rural India. The mobile

telephony service acts as a bridge between the digital divide in the villages.

The power of communication provides new opportunities of doing business

and impetus to the growth of the service sector in the rural areas. A new class

of brokers is likely to emerge to provide access to information which is the

key to providing choices in an access-starved market. The low-entry barriers

will ensure competition and growth of a sector that is at present

characterized by the intermediaries thriving on the lack of information and

competition to earn high margins. If the growth of availability of information

is matched by relevant services and products at reasonable prices, an

unprecedented economic boom can be foreseen in the near future.

5.5 Significant Improvement in Infrastructure

The new road connectivity and up gradation of existing road network haveshown continual increase from 2005-06 to 2006-07 and expected to continue

in 2007-08. Also rural electrification has been achieved in more than 80 per

cent of the villages. The Government of India has a clear mandate towards

rapid development of rural infrastructure to unleash the rural potential. The

Government of India has conceived a time-bound plan under Bharat Nirman,

which is a flagship programme for the country with a commitment of over

Rs. 1740 billion to upgrade rural infrastructure. It has a holistic approach

towards development of roads, telecom connectivity, rural housing,

electrification and water supply. The different schemes for carrying out the

Bharat Nirman programme are Pradhan Mantri Gram Sadak

Yojana(PMGSY), Rajiv Gandhi Gramin Vidyutikaran Yojana, Indira Awaas

Yojana and Rural Infrastructure Development Fund(RIDF).

As part of the programme, Government of India intends that by end of

financial year 2008 2009, every village of over 1000 population, or over 500

in hilly and tribal areas, has an all-weather road.

To achieve the targets of Bharat Nirman, 1,46,185 k.m of road length is

proposed to be constructed by 2009. This is expected to benefit 66,802unconnected eligible habitations in the country. It will also provide telephone

connection to 66,822 villages.

Source: Industry sources


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Figure 10: New Connectivity and Upgradation of Roads under PMGSY

Figure 11: Project-wise Number and Amount Sanctioned for Roads under RIDF

Source 8: Ministry of Rural Development, YES BANK analysis

5.6 Supply Chain StreamliningThe existing supply chain in India is archaic and not in a position to cater to

the needs of modern retailing, either rural or urban. The new and existing

players entering the system are thus investing to get the back-end operations

established which is essential for the efficient roll out of their retail network.

The Bharti-Wal-Mart JV is focusing entirely on the supply chain and is

willing to invest the next three to four years in setting up the network.Similarly, Reliance Retails plan of Rural Hubs, a procuring cum processing

hub besides a one stop shop for farmers, is also an initiative towards supply

chain streamlining. A number of other such initiatives, by corporates such as

Pantaloons (Future Group), DSCL, ITC, Subhiksha and the likes, will be seen

in the near future as the private sector try to bring about efficiency and best

practices into their supply chains.


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6.Rural Retail: Global Experiences

This report concentrates on three main regions in the developing world- Asia, Central

Europe and Latin America for analyzing the global retail scenario. The countries

representing the region are China, Russia, Poland, Brazil and Argentina which also

include the three major economies from the BRIC countries. All these countries have

been showing robust economic growth with investor friendly environment. They are

also pushing for a private-led equitable growth for balancing the rate of growth between

the urban and rural areas.

According to the latest estimates of United Nations, almost half of the world population

continues to live in rural areas in 2007. Argentina, Brazil and Russia have predominantly

urban populations, whereas in China, India and Poland, the majority of the populationsstill live in rural areas or smaller regional towns. The urban-rural divide is continually

assuming significance considering the tremendous potential in the rural areas and the

need for a focused effort to tap the rural consumption spree.

6.1 A look at Current Rural Retailing Scenario

6.1.1 China

The Chinese Government has embarked on an ambitious national rural

retail network in February 2005 for transforming the rural retail sector

within a time frame of five years. This programme is expected to cover 70

per cent of all villages and is likely to open huge opportunities for the

organized retail players. The underlying promise of a distribution

infrastructure improvement, preferential treatment and support from

local governments is likely to pave the way for the private retail operators

to access the hitherto unexplored rural market.

The rural population amounts to more than 70 per cent of the country's

population but has a disproportionate consumption capacity. Moreover,

there are, approximately two country markets only for every sixtythousand peasants. These rudimentary open-air fairs are filled with fake

commodities and illegal dealings due to lack of quality surveillance

equipment and regulations. Registration fee, commissions and taxes

increase the transaction cost and discourage peasants from entry. The

proposed national rural retail network finds a way around these existing

rural retail structures and is cost effective besides ensuring faster


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implementation. The programme aims at enticing willing retail operators

to take over or co-operate with existing rural stores and country fairs by

means of franchising or voluntary retail operation. This programme aims

to ensure a smoother transition to organized retailing with participation

of the existing channel members and provide urban retailing convenience

in rural areas. On successful completion, this programme expects to see

around 250,000 supermarkets and convenience stores chain in the major

towns and villages by the end of 2008.

6.1.2 Russia

Russia has around 27 per cent of the total population residing in the rural

areas. Big cities like Moscow, St. Petersburg, Novosibirsk, Volgograd,

Kazan, etc. are reaching saturation point and an emerging need for

expansion of retail into the lesser accessed regions is evolving. However,

the sheer size of Russia with twelve time zones and the geographicalposition of cities with more than one million population, significantly

constrains logistic efficiency. The logistic services are not highly

developed in the country and frequent delay in deliveries is a challenging

problem for the retailers. The existing retailers face stiff competition at the

regional level where remoteness of the territories has a strong impact.

Until few years ago the retailers were highly dependent on the suppliers

but now the retailers are gaining bargaining power and have started

demanding stringent delivery schedules, lower prices, easier credit terms,

standardized packaging and labeling.

For many of the largest retail players, Moscow has traditionally been an

obvious entry point into Russia. It still accounts for around 25 per cent of

the retail trade in Russia. However, a new trend is emerging wherein the

retail players are announcing entry strategy through store openings in

regional cities like Samara (e.g. Castorama), Saint Petersburg (e.g. Media

Marketing-belonging to METRO group), etc. Three important

developments that have been responsible for the above trends are:

Rising income levels of population in the regional areas Stiff competition in Moscow and the other cities with a population of

more than one million

Scarcity of quality retail space in the bigger cities for both new and

old players


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Regional chains are being developed by retailers mainly through the

franchising route while the scale up is being accomplished through the

inorganic route of acquisition of existing retail stores in the regional areas.

6.1.3 Central European Countries- Poland

The major trends in retailing are to a certain extent similar to all the

Central European countries and are:

The market share of small businesses, groceries and local markets is

constantly declining in favour of the homogenised supermarkets,

hypermarkets and discount stores

Retail sale is likely to continue growing at a substantial rate despite

last years slump in some countries. The growth is expected to be the

fastest in Romania, Bulgaria and Slovakia

Discount stores are rapidly gaining market share while supermarketsand hypermarkets are losing their position

As the retail market in major cities is nearing saturation, retail chains

are exploring opportunities further afield in more rural areas,

bolstering sales and changing consumer habits

The number of shoppers who choose the best quality products instead

of the least expensive is increasing. More and more customers are

beginning to appreciate the quality of services provided as well as

ease and comfort of shopping instead of simply the value for money

factor

In Poland as the urban metropolitan areas are increasingly becoming

saturated the retailers have started looking at smaller formats to expand

into the rural areas. The country has a very low population density and

only 4 per cent of the population living in the capital city while around 37

per cent population in the rural areas. Thus, the small towns and rural

areas have a tremendous potential for the discount stores and

supermarkets. This is attracting large players like Aldi who are set to

enter the Polish market.

The key to the rural market has been through supermarkets and discount

stores which are efficient in meeting local needs offering a broad array of

customized products. Thus, there has been a rapid expansion of

supermarkets like Carrefour and Tesco. Discount stores have also been

hugely successful in smaller towns and rural areas (having a population

of less than 10,000) and are expected to grow rapidly. The discount stores


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are expected to achieve a peak in 10 years but it may drag out for 20-30

years until incomes have increased significantly.

6.1.4 Latin America- Argentina and Brazil

Latin America is slowly recovering from the economic crisis from 1998.

Over the past three years, Brazil is showing a strong comeback and has

climbed to 27th rank in the ATKearney Global Retail Development Index

(GRDI). With a population of 185 million, Brazils retail market is worth

Rs. 10392.50 billion (US$250 billion). Argentina has also a similar case

with consumer spending decreasing after the economic crisis of 1998 but

showing a comeback. However, some segmentsincluding restaurants

and certain retail franchiseshave managed continuous growth. The

share of organized retail is sizable with a share of more than 40 per cent

though it does not figure on the top 30 countries in the GRDI. Small

markets and family-owned retail outlets have gradually been replaced bylarger chain stores.

The developments mentioned above pertain mainly to the urban areas

and rural retail scenario in the Latin American countries like Brazil and

Argentina do not present so high a potential as in the other countries

discussed above. This is because majority of the population live in the

urban areas. Brazil has a rural population of only about 16 per cent while

Argentina is lesser at around 10 per cent of the total population.

Conversion Rate: 1US$ = Rs.41.57, as on 17th August 2007, Source: Economic Times


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7.Rural Retail in India

The Indian retail industry is gearing up for massive structural changes on both the

urban and the rural front with global players like Wal-Mart and Tesco competing for a

share of the Indian retail market and domestic companies lining up huge investments

for setting up rural retail chains. At an estimated market size of greater than Rs. 1400

billion (approximately US$34 billion, includes only FMCG, durables, agricultural inputs

including tractors and 2-4 wheelers) and more than 60 per cent of the countrys 1.12

billion population, the rural retail market is too precious to be missed by corporate

India. Moreover, for ensuring a sustained double-digit growth of the economy, the rural

economy must be given a new impetus and as such the rural retail initiatives by the

corporate sector are both timely and apt.

Rural Market Size Estimation*

0

500

1000

1500

2000

2500

2000 2005E 2010F 2015FYear

Rs.

Billion

Rs. Billion

* Includes FMCG, Durables, Agricultural inputs

Figure 12: Rural Market Size Estimation

Source 9: Industry estimates, YES BANK analysis

At present almost all the companies venturing into the rural market have a significant

agribusiness interest. Most of these stores started out as shops selling agricultural inputs

but have now become destination stores offering FMCG, consumer goods, automobiles

and electronics, thus providing the last mile accessibility to the rural consumers. The

rationale for approaching the rural consumers with an organized retail format has been

mainly to offer the consumer choice of authentic products in a streamlined and a user

friendly package. The traditional methods of approaching the rural consumer have been

through each prospective seller of goods and services reaching out to the individual


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with more often than not, similar products which created heightened conundrum in the

consumers mind. For the promoting agency too, this has often meant wastage and

duplication of resources that could have been used more effectively elsewhere.

Most of the players started their rural foray in 2002-04. Initial successes have led to

ambitious expansion plans being drawn up by these players for the coming years. The

key success factors in organised rural retailing are:

Customized offerings suiting the rural mindset

Attaining scale of operations coupled with a strong backend infrastructure

Developing and implementing streamlined technological solutions for effective

store management

Uniformity in product quality, services and formats to instill trust and goodwill

among the consumers

At present the rural retail industry is still in its formative stages and is expected to take a

few years from now for the above objectives to be achieved.


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The Agriculturally Advanced Northern and Southern States areExpected to Lead the Growth in Organized Rural Retail

Figure 13: Percentage of Surfaced Road to TotalRoad Length

Figure 14: Projection of Urbanisation for the

Different Regions

Figure 16: Percentage of Villages with Electricity

Source 11: YES BANK analysis

The growth of organized rural retailing in India has seen major action mainly in the

Indo-Gangetic plains consisting of the states of Uttar Pradesh, Punjab and Haryanaowing mainly to the advanced state of agriculture in these states. In the coming years the

relatively wealthier southern states are expected to be the fore runners in the growth of

the rural retail industry. The eastern region has mainly been left out of the advent of the

organized rural retailing but holds immense potential if appropriate market

development efforts are made by the corporates.

Regions with high penetration

Regions with low penetration but high

potential

Regions with low penetration but highpotential requiring market development

Figure 15: Rural Retail Potential MapSource 10: Population projections for India &states, 2001-2006; Census India, 2001;Ministry of Human Resource &Development; Department of Road Transport& Highways, YES BANK analysis


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Rural Retail: An analysis of the States in India

Figure 17: An analysis of the States in India

Monthly Per Capita Consumption Expenditure (MPCE) (Rural) in Rs.

Opportunity Matrix for Rural Retail in India based on MPCE andAgricultural Activity

Figure 18: Opportunity Matrix for Rural Retail in IndiaSource 12: NSSO, YES BANK analysis

Penetration

Potential

Low

Punjab, UttarPradesh,Haryana

Rajasthan, Gujarat,Maharashtra, AndhraPradesh, Tamil Nadu,Kerala, West Bengal

Bihar, Orissa, MadhyaPradesh, Chhattisgarh,Jharkhand

Not economically viable

Below 450

450-550

550-650

650-800

800 and above

High

High


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Some of the prominent players in the rural retail sector in India are:1. DCM Shriram Consolidated Ltd.2. Tata Chemicals Ltd.3. Godrej Agrovet Ltd.4. ITC Ltd.

5.

Triveni Engineers and Industries Ltd.6. Indian Oil Corporation Ltd.

Murugappa Group: The latest entrant into rural retail

The Chennai-based, Murugappa Group, in April, 2007, launched its agricultural retail

venture with the opening of its first agricultural retail stores branded Mana Gromor,

at Sattanpali in Guntur District of Andhra Pradesh. The Group has decided to initially

set up 100 Mana Gromor stores. These stores, costing about Rs. 25 lakhs each, will

come up in Andhra Pradesh, Tamil Nadu, Karnataka and Maharashtra. These outlets

are designed to service the requirements of about 5,000 farmers living in 50 villagessurrounding the shop.

Apart from various agricultural inputs the stores will also provide hassle free credit to

farmers and also impart education and training to farmers on soil condition, water

management, crop timing and optimum use of inputs. Each store will be equipped

with a testing laboratory to analyse soil samples, etc. collected by its trained personnel

from the fields.

Box 3: Murugappa Group

Source 13: Images Retail, May 2007

7.1. Insights on the Prominent Organised Rural Retailers

7.1.1. DSCL-Hariyali Kisaan Bazaar

DSCL is a DCM group company with primary business interest in

agribusiness, chemicals and plastic. Hariyali Kisaan Bazaar (HKB) is the

rural retail initiative of DSCL and to achieve faster growth the company

has decided to convert HKB into a subsidiary company. HKB is expected

to expand its network to around 200-250 stores in the next 12-15 months.

HKB apparently started as a marketing arm to leverage DSCLs strong

brand equity (especially its Shriram brand in Uttar Paradesh) and to reach

out to the rural masses. The HKB chain, seeks to empower the farmer by

# YES BANK analysis


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setting up centres, which bridge the last mile gap by providing all

encompassing solutions to the farmers under one roof.

DSCL started the first HKB store at Delpandarva in Uttar Paradesh (UP)

where it had a strong brand image and then rolled out other stores in

different parts of UP. Thereafter, it seems to be following a focused

approach of expansion into the high potential regions of the Indo-

Gangetic plains consisting of the states of Punjab and Haryana. At

present HKB has established its presence in the northern and central parts

of India and has intensified its efforts to penetrate into the southern states

which are high potential states with low penetration of organized rural

retail.

The HKB stores are characterized by being located away from town

centres and have, on an average, an area of about two acres. These storesalso include fuel pump facilities. Each HKB centre operates in a

catchment of about twenty k.m. and caters to agricultural land of about

50000-70000 acres. A typical store provides the following services:

A complete range of good quality, multi-brand agricultural inputs

like fertilizers, seeds, pesticides, farm implements and tools,

veterinary products, animal feed, irrigation items and other key

inputs like diesel, petrol at fair prices

Access to modern retail banking & farm credit through simplified and

transparent processes as also other financial services like insurance

A wide range of FMCG, consumer durables and apparels.

Agricultural consultancy services through a team of qualified

Agronomists

Farm produce buyback opportunities, access to new markets and

output related services

Image 1: Hariyali Kisaan Bazaar


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DSCL is planning to explore the potential of sourcing fresh fruits and

vegetables as well as grains like wheat and rice from farmers and supply

the same to various retail chains across the country. It will leverage the

existing network of HKB stores and act as the interface between the

farmers and the retail chains. DSCL will place contract farming orders

with farmers and is likely to invest heavily on creating back-end

infrastructure as it will be required to set up an extensive network of cold

chain, refrigeration, transportation and distribution centres. Currently,

DSCL is running pilot projects of sourcing for Big Bazaar and RPG-Spencers.

Key features of Hariyali Kisaan Bazaar

Store management is superior with proper layout, visual

merchandising and attractive in-store promotional display

The stores besides having quality agricultural inputs also provide fora wide range of FMCG, consumer durables, electronics, apparels, etc.

and thus cater to the needs of the entire rural community

The location of the stores at a distance from the town centres makes it

easily accessible for the consumers from the surrounding villages

Urban Health Care to Rural Population

Fortis HealthWorld (FHWL), the one stop healthcare retail chain has

announced its plans to reach rural India through its tie up with

Hariyali Kisaan Bazaar. By setting up FHWL health stores in

conjunction with Hariyali Kisaan Bazaar, Fortis HealthWorld seeks to

empower rural India, mainly the farming community by providing

services to meet all healthcare needs under one roof. With the

intension of reaching out to the remotest corner of rural India and

providing the best of products and services for all healthcare needs to

the farmers and their family Fortis HealthWorld will have the

following key features at the stores:

OPD facility (Doctors consultation)

Telemedicine Routine pathology tests collection centre (SRL Ranbaxy).

Prescription, OTC, Alternate medicines (Ayurveda &

Homeopathy) and also veterinary medicines.

Wide range of fast moving health good and support systems.

Box 4: Urban Healthcare to Rural Population


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7.1.2. Tata Chemicals Ltd.-Tata Kisan Sansar

The fertilizer business of Tata Chemicals Ltd. (TCL) is mainly

concentrated in the Indo-Gangetic plains having the most fertile soils and

being the main grain cropped area in the country. Tata Kisan Kendras

(TKK) were initially setup as one stop agricultural input shops for fulfilling

the Indian farmers requirements, from seed sowing to post-harvest

activities in the year 1998. The TKKs enabled farmers to purchase

required products and also get expert information. Four years later the

company conducted a strategic review of the TKKs and decided to evolve

its focus and give it a greater thrust as a distribution tool. Finally after an

extensive branding exercise, the TKKs evolved into Tata Kisan Sansar

(TKS)-a one stop farmer solution shop.

The TKS was set up with the objective of helping farmers to create value

by improving farm productivity through better agronomic practices,facilitating farm credit and providing quality agricultural inputs from a

single source leading to improved farm income. This in turn helped TCL

in establishing a reputation as an approachable and reliable business

partner for the farmer that offered end to end farm management

solutions.

The TKS network operates on a hub and spoke model wherein the

company owned Tata Krishi Vikas Kendras (TKVK) act as the hub with

the franchisee TKS as the spoke. The TKVK serves as a resource centre for

both the TKS (franchisee) and the farmer. Each TKVK contains the entire

infrastructure necessary to work as a comprehensive resource centre to

fulfill the needs of the TKS network. Every TKVK is equipped with an

administrative office, a training hall, a crop clinic, a soil-testing

laboratory, a research and development farm, a storage godown, an

exhibition hall and a TKS retail outlet, all under one roof. Each TKVK has

a command area of around sixty k.m. and covers forty TKS. The

franchisee TKS typically operates as a branded retail outlet of TCL,

providing agricultural inputs, farm equipments, farm advisory services,

farmer credit financing and produce buyback arrangements. Each TKSspans a radius of about eight k.m. and covers about sixty villages.


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Image 2: Tata Krishi Vikas Kendra (TKVK)

The TKS network seems to be expanding with the strategy of exploring

the potential of the states of Punjab, Haryana, Uttar Pradesh, Bihar and

West Bengal that have a majority share in TCLs fertilizer business.Moreover, each TKS seeks to service one mandi and further expansions

are carried out in locations where there are gaps in servicing a mandi

through TKS.

Key features of Tata Kisan Sansar

Formation of strong relationships and brand awareness among the

farming community

Scope of revamping the TKS stores to a slightly larger format to

provide products and services to the entire rural community

Image 3: Tata Kisan Sansar

7.1.3. Godrej Agrovet Ltd. - Godrej Aadhaar

Godrej Aadhaar (GA) is the rural services cum retailing venture of Godrej

Agrovet Ltd. (GAL) and belongs to the Godrej group. GAL is a key player


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in the Indian agricultural sector with a large presence in cattle, poultry

and aqua feeds, agricultural inputs and oil palm development.

The GA initiative seems to have evolved out of an objective of GAL to

become a complete agricultural solution provider to the farmers and to

reach out to the farming community directly by reducing the

participation of intermediaries in the channel. The GA stores, in order to

achieve this objective, provide quality agricultural inputs, professional

crop advisory services, transfer of information (weather, price, and

demand-supply), crop finance and output buyback services. Overtime the

concept has metamorphosed to become a multi-category retail outlet

providing not only complete agricultural solutions but a wide range of

products and services suited to meet the daily needs of the rural

populace.

GA, in order to expand into the semi-urban and rural market, have

decided to move out of the standalone store format to a hub and spoke

model wherein the hub would cover about 10,000 sq ft and the spoke

around 3,000 sq ft. Besides, providing agricultural inputs and a wide

array of consumer products, these outlets will include a host of services

such as banking, insurance, pharmacy, postal services and petrol pumps

to make GA a destination point for all conveniences in rural areas.

Key features of Godrej Aadhaar

Unique capability led empowerment process of the Indian farmer to

sustain an improved productivity cycle. Demonstration of the

improved productivity benefits of the Aadhaar programs, cycle after

cycle, results in an enduring relationship with the farmer, while

enhancing their capability to sustain thereon

The new format Aadhaars promise a very conducive urban retail

atmosphere and a women-friendly interface, thus halting shopping

migration of consumers to nearby big towns

7.1.4. ITC- Choupal Sagar

The Choupal Sagar is the rural retail initiative of ITCs International

Business Division (ITC-IBD). ITC-IBD is involved in the trading of a wide

range of agricultural commodities and aqua foods. It is one of Indias

largest exporters of agricultural commodities and has one of the finest

supply chain models in India, achieved through its e-Choupal initiative.


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The Choupal Sagar initiative is a procurement driven effort of ITC-IBD to

establish the hub-and-spoke Choupal network at two tiers in the villages

which are as follows:

First tier is the e-Choupal (spoke) at the village level which is located

within five k.m distance of all target farmers.

Second tier is the Choupal Sagar (hub) at the cluster level which is

located within thirty k.m distance of the e-choupals(a single Choupal

Sagar hub caters to around forty e-Choupal spokes)

The e-Choupal acts as the procurement centre for ITC-IBD wherein a

farmer finalize his contract with a Sanchalak (representative of ITC-IBD in

the e-Choupal) for selling his agricultural produce. After finalizing the

contract a farmer carry their produce to the Choupal Sagar hubs, depositsthe produce at the warehouse and collects payments. The Choupal Sagar,

which combines a procurement yard and a warehouse with a multi-

category hypermarket, is designed to leverage the traffic of the cash rich

farmers who come to deposit their produce at the warehouse.

Image 4: ITC-Choupal Sagar

The expansion of the Choupal Sagar network seems to be following the

procurement objective of ITC-IBD. The existing stores at Madhya

Pradesh, Uttar Pradesh and Maharashtra have the objective of

procurement of soyabean and wheat. The future stores are expected to

come up in states like Rajasthan (for soyabean and wheat), Karnataka (for

coffee) and Andhra Pradesh (for aqua products).


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Key features of Choupal Sagar

The stores cater to the needs of the entire rural population with a

wide range and depth of merchandise

Uniformity in layout and design across all the existing stores

The store management is superior with excellent visual

merchandising and promotional display

A qualified team of seven Agronomists are actively involved in

agricultural advisory and supervision of field trials

7.1.5. Triveni Engineering and Industries Ltd.-Triveni Khushali Bazaar

Triveni Khushali Bazaar is an initiative under Triveni Retail Ventures Ltd.

which is a subsidiary of Triveni Engineering & Industries Ltd (TEIL).

TEIL is one of Indias leading companies in the business of sugar

manufacturing and engineered-to-order mechanical equipments. TEILsassociation with the sugar industry dates back to the pre-independence

era. At present, with four plants in the state of Uttar Pradesh, it is the

largest sugar producer in the country.

Triveni Khushali Bazaar (TKB) started as an effort to further Trivenis

agribusiness interest with a better and improved reach to its primary

stakeholders-the farmers. TEIL has a command area of over one lakh ha

under sugarcane cultivation that covers more than 1.46 lakh farmers and

procures over Rs. 3 billion worth of sugarcane per annum from these

farmers. However, presently there has been a conscious effort by the

management to clearly differentiate between the agribusiness and the

retail initiative. TKB is positioning itself as a lifestyle solution provider

for the rural masses in the semi-urban and rural areas besides also

providing for the needs of the farming community by banking on the

TEIL brand.

TKB operates through company owned large and small format stores.

The larger storesare located near to the sugar mills (the TKB at Deoband,

Uttar Pradesh is located next to the sugar mill) or rural and semi-urbancommercial centres. The smaller stores on the other hand are located near

to the villages. TKB is following a strategy in which it is expanding its

store network in a concentric pattern in the states of Uttar Pradesh and

Uttarakhand. In the near future, it may move on to other states such as

Haryana and Punjab.


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Image 5: Triveni Khushali Bazaar

The larger TKB stores are designed like dome shaped structures

operating on a low capital cost (leased) model. The stores cater to the

entire basket of goods required by the rural populace besides the farming

community with products such as agricultural inputs, farming

implements (for sale and rental), cement, diesel, consumer goods and

services such as facilitating institutional credit, insurance and agricultural

consultancy. TKB has established tie-up with a number of leading

companies likeHPCL, Apollo, IFFCO, Chambal, Atlas, Godrej, HUL, etc.

to sell their products through these stores. It has also signed a MoU withSBI to provide unlimited, unsecured financing to farmers.

Key features of Triveni Khushali Bazaar

Easy accessibility and brand visibility as the larger storesare located

adjacent to main roads near large mandis or towns. The smaller stores

are located near to villages

The stores carry a broad range of products which can cater to the

needs of the entire rural population and not just the farming

community

Provision of quality agricultural inputs in the Terai region of Uttar

Pradesh which have problems of shortages during peak season

Unique provision of easy credit to the farmers on the basis of crop

hypothecation without a lien on land

Employing a team of qualified agronomists to offer consultancy

services to the farmers


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Tapping employees of TEIL and the sugar mills as customers

7.1.6. Indian Oil Corporation Ltd.-Kisan Seva Kendras

The government owned Indian Oil Corporation Ltd. (IOCL) is the largest

company in India in terms of sales. As the flagship national oil company

IOCL, together with its IBP Division, distributes petroleum products to

millions of people everyday through a countrywide network of 32,550

sales points. It also operates the largest and the widest network of petrol

and diesel stations in the country, numbering 16,455.

The Kisan Seva Kendras (KSK) is the recent rural retail initiative of IOCL

to strengthen its presence and explore the potential of the rural market

with fuel and non-fuel retail. The KSKs seeks to achieve a first mover

advantage in the rural areas that have a low penetration of organised

retail and thereby build and retain a loyal customer base. In view of theincreased margin pressure on fuel retail, it is a prudent initiative by IOCL

to diversify into non-fuel retailing by leveraging its extensive network in

the rural areas.

Image 6: Indian Oil Kisan Sewa Kendra

The KSKs are low cost (a typical outlet costs around Rs. four to five lakhs)retail outlets and are operated on a dealership basis by IOCL. The

kendras are set up on the dealers land who gets the revenues from the

non-fuel sales besides earning a margin on the sale of diesel (60 paise per

litre of diesel) which is similar to that earned by the petrol pump

operators. At present IOCL is not charging a share in the revenues from

non-fuel sales (IOCL takes a one time security deposit from the KSK


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dealers) but it is likely to happen on a later date when non-fuel sales will

pick up in the rural areas. The management of the KSK rests with the

dealer and IOCL have formed tie-ups with various companies like

National Seeds Corporation, Indo-Gulf Fertilizers, Dabur, Godrej, TATA,

Airtel, Bank of Baroda, Dena Bank and Oriental Bank of Commerce for

the products and services at the KSK.

The KSKs seem to be following an expansion strategy based on the

potential of fuel sales in an area and the minimum fuel sales required to

set up a KSK is thirty kilo litre (kl) per month. The average fuel sale in the

KSKs is fifty kl per month which is a healthy figure when compared to

the all-India average throughput of 70 kl per month per outlet.

Key features of Kisan Seva Kendra

Extensive network that have reach across the length and breadth ofthe country

Low cost and de-risk model of the KSKs as the management of the

kendras rests on the dealers

The IOCL brand has a top of the mind recall in the entire country


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8.Challenges

The key challenges encountered in retailing in rural areas are:

8.1. Poor InfrastructurePoor physical and institutional infrastructure is the main reason that is

holding back the private sector in exploiting the potential of the rural market.

Although at present the situation is slowly improving, it may take some

years before the issues are satisfactorily resolved. Thus, the corporates

venturing into the sector have to factor these issues into their future plans for

effectively tapping the rural market, thereby increasing shareholder value

and the stock of the rural poor.

8.2. Seasonality of demandThere is high seasonality of cash inflows and outflows in the rural

households owing mainly to the agrarian nature of the rural economy. This

fact is of particular importance for inventory planning and category

management in the rural stores.

8.3. Heterogeneous populationIn comparison to the urban centres, rural India is characterized by a highly

heterogeneous population in terms of purchasing power, language, literacy

rate, social and religious customs, tastes and preferences. Therefore,

understanding of the rural consumer and designing customized offerings is

going to be a key challenge in exploring the rural market.

8.4. Complex buying behaviour

The rural consumers lifestyle revolves around key factors such as social and

religious customs, climatic considerations, etc. that not only have a bearing

on the yield and consequently the revenue but also his belief system. The

combination of these factors influences the buying behaviour. For the

marketer, it translates into the need for gaining an appreciation of not only

prevalent norms and customs but also the economic condition of theresidents, before embarking on a marketing campaign. Such interplay of

climatic and social factors is seldom seen in the urban context even for the

consumers in the same income bracket.


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8.5. Duplicate or spurious products

The phenomenon of duplicate or spurious products is prevalent all over

India but it is much more rampant and virulent in the rural areas. The

problem is thriving on the demand-supply gap existing in the rural areas.

The company distributors in many cases stick to the villages closest to theirtowns and service the small retailers in the far off villages through mobile

distributors who stock counterfeit products. The manufacturers are resorting

to legal means to curb the menace of fake products. However, the most

effective method may exist in building a better rural distribution network

which is most likely to put the manufacturers of fake products out of

business.

8.6. Highly price conscious consumers

The rural consumers are more price conscious than quality conscious. The

mindset for securing quality for an extra additional rupee has still not seepedin to the desired extent into the rural mind. The key lies in making the rural

consumer aware through sufficient promotional efforts. It is likely that as

soon as the rural consumer becomes aware that the branded goods are

costlier (than the local unbranded or fake products) due to their quality,

which is beneficial to them, they will switch over and become a part of the

branded products purchaser category.


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9.Implications

The rural retail sector in India is at a nascent stage and as the industry emerges the key

implications for the various stakeholders can be enumerated as below:

9.1 Government

9.1.1 Employment generation

A direct impact of the growth of rural retail in India will be employment

generation. Retail business is labour intensive and thus there is ample

scope for creation of both direct and indirect employment in rural retail

and ancillary services. The generation of indirect employment may be

expected to result from direct fallout of the changes in the value chain at

the manufacturers level, as well as other support activities like grading,

sorting, packaging, storage, transportation and various other supportservices such as security, information technology, training, facility

management, etc.

9.1.2 Infrastructure development

With the increased attention to the rural areas by the corporate sector on

the back of increasing demand, there is a catalytic growth in

infrastructure development being witnessed in the countryside. This is

aided by the thrust provided by the government initiatives such as Bharat

Nirman and is expected to eventually result in a well established and

efficient supply chain.

9.1.3 Revenue and tax generation

Increased activity in the rural retail domain holds the promise of

increasing revenue and tax generation for the government. It is likely to

happen through the resurgence of the rural economy as well as the fact

that increased sales will occur through the organised route. Moreover, the

unorganised sector is notorious for tax evasion, which is not likely to be

the case with organised retail.

9.1.4 Check rural migration

The reasons for migration of individuals from the rural to urban areas are

mainly in the search of better employment and quality of life. As the rural

retail phenomenon evolves it can be expected to usher in huge

employment opportunities as well as a general increase in the standard of

life in the rural areas with increase in rural economic activity.


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9.2 Manufacturers

9.2.1 Increased efficiency in supply chain

Improved supply chain efficiency will lead to better production

schedules and accurate forecasting of demand.

9.2.2 Higher potential of category growth and ease in launching new

and innovative products

Organised rural retail may enable manufacturers to isolate retail chain

data which is invaluable for performance tracking and evaluation of

product category. It offers manufacturers meaningful and actionable

information for various category management initiatives as well as

measuring the performance of specific projects such as new launches and

line extensions.

9.2.3 Greater reach into the rural marketAs the organised rural retail formats penetrate deeper into the rural areas

the manufacturers are likely to gain access to the marginally penetrated

rural markets. It has also the scope of reducing the dependence on the

intermediaries, who are in many cases unreliable and augment the

problem of spurious products through inadequate servicing.

9.3 Intermediaries

In the existing supply chain structure, there are many levels of redundant

intermediaries, who do not add value to the products or services reaching

the rural populace. As the rural retail revolution progresses, these

intermediaries are most likely to play a pivotal role for the corporates in

increasing the market penetration. The intermediaries are likely to benefit

from alternative options as they get re-intermediated in the supply chain.

The re-intermediation might result in the origination of new roles and

functions for these supply chain players and might result in innovative

marketing channels in the rural areas. This change process is likely to

eventually bring about efficiency in delivery of goods and services and

lower costs for the consumers.

9.4 Farmers

9.4.1 Increased efficiency in agriculture

Development and growth of organised rural retail is most likely to result

in disintermediation in the food supply chain and increase production

efficiency through alignment of production with consumer demand.

Organised rural retail is also likely to promote improved farming


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technologies which will directly impact agricultural production both in

quantity and quality, thereby helping better crop realization to the benefit

of the farmers.

9.4.2 Better price discovery

Investments in technology up-gradation in the entire value chain

including production, packaging, grading, storage and logistics will

reduce wastage and duplication of efforts and enable farmers to realize

better prices.

9.4.3 Check the growth of duplicate or spurious products

The increased penetration of organised rural retail may check the growth

in the sale of duplicate and spurious products. It is likely through greater

availability of branded and authentic products and the rural consumers

would get access to better quality at affordable prices without facing thehazards of duplicate or spurious products.


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Table 1: Rural Retail A Snapshot

Retail storeYear oflaunch

Geographicalpresence

Number ofstores

Future plans(no. ofstores)

DSCL-HariyaliKisan Bazaar

2002

Punjab, Haryana,Rajasthan, Madhya

Pradesh, UttarPradesh, Uttarakhand

70200-250 innext 12-15

months

Tata KisanSansar (TKS)

2004Uttar Pradesh, Punjab,Haryana, Bihar, West

Bengal

800 TKSfranchisees

Notavailable

Godrej Aadhaar 2003

Punjab, Haryana,Maharashtra, Gujarat,

Andhra Pradesh,Orissa, West Bengal

31

Setup 1000

stores in nextfive years

ITC-ChoupalSagar

2004Madhya Pradesh,

Uttar Pradesh,Maharashtra

19Not

available

Triveni KhushaliBazaar

2005Uttar Pradesh,Uttarakhand

4580 by 2008and 200 by

2009

IOCL-KisanSeva Kendras

(KSK)2006

States with highest

density of KSK-UttarPradesh, Madhya

Pradesh, Punjab, TamilNadu, Karnataka,

Bihar

14003000 in nextfour to five

years


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41

Table 2: Operational Details

Store

Storearea

(sq.ft.)

Catchments

radius (km)

Field staff

(Agronomist)

SKU*

(agri)

SKU*(non-

agri)

Footfalls*

(peak)

Footfalls

HariyaliKisanBazaar

9000-1000

25 4 300 3000-3500 200-350

TATAKisanSansar

300 10 -- 200 NA 200 15

GodrejAadhaar

3000-5000

10 4-6150-250

950-1000 300-500 30

ITC-Choupal

Sagar#7000 25 8 -- -- 100-500 50

TriveniKhushaliBazaar

(Motherstores)

1500-6000

10 4250-300

2500-3000 400-500

IOCL-Krishi

SevaKendra

4400 10-15 -- -- -- 100-150

* The figures may vary depending upon the store location.# The stores have an average of 15000 SKUs.


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42

Appendix 1: List of Figures

Figure 1: Rural and Urban Potential ..................................................................................................2Figure 2: Rural Population Dispersion Status ......................................................................................2Figure 3: Rural Income Dispersal Projection ........................................................................................2Figure 4: Typical Stakeholders' of Rural Distribution Network................................................................3Figure 5: Trends in All India Average Rural Consumption...................................................................10Figure 6: Historical Trend Analysis of Food Consumption Pattern in Rural India......................................11Figure 7: Growth Trend of Rural Deposits & Credits...........................................................................12Figure 8: Flow of Institutional Credit to Agriculture.............................................................13Figure 9: Access to Press, TV and Mobile Services..............................................................13Figure 10: New Connectivity and Upgradation of Roads under PMGSY.............................15Figure 11: Project-wise Number and Amount Sanctioned for Roads under RIDF ...............15Figure 12: Rural Market Size Estimation...........................................................................................20Figure 13: Percentage of Surfaced Road to Total Road Length...............................................................22

Figure 14: Projection of Urbanisation for the Different Regions .......................................... 22Figure 16: Percentage of Villages with Electricity ...............................................................................22Figure 17: An analysis of the States in India ......................................................................................23Figure 18: Opportunity Matrix for Rural Retail in India .......................................................................23

Appendix 2: List of Images

Image 1: Hariyali Kisaan Bazaar ................................................................................................... 25Image 2: Tata Krishi Vikas Kendra (TKVK)................................................................................. 28Image 3: Tata Kisan Sansar............................................................................................................. 28Image 4: ITC-Choupal Sagar.......................................................................................................... 30Image 5: Triveni Khushali Bazaar ................................................................................................. 32Image 6: Indian Oil Kisan Sewa Kendra ...................................................................................... 33

Appendix 3: List of Sources

Source 1: NCAER-2004-05, YES BANK analysis ...................................................................................2Source 2: Images Retail, May 2007.....................................................................................................4Source 3: NCAER 2004-05, YES BANK analysis .................................................................................10

Source 4: NSSO, YES BANK analysis ...............................................................................................11Source 5: RBI, YES BANK analysis ..................................................................................................12Source 6: Ministry of Finance, YES BANK analysis............................................................13Source 7: Industry sources, YES BANK analysis .................................................................13Source 8: Ministry of Rural Development, YES BANK analysis.........................................15Source 9: Industry estimates, YES BANK analysis ..............................................................................20Source 11: YES BANK analysis .......................................................................................................22Source 12: NSSO, YES BANK analysis .............................................................................................23


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Source 13: Images Retail, May 2007 .................................................................................................24

Appendix 4: List of Boxes

Box 1: Industry Highlights ............................................................................................................... 4Box 2: Existing Definitions of "Rural" ............................................................................................. 6Box 3: Murugappa Group............................................................................................................... 24Box 4: Urban Healthcare to Rural Population ............................................................................. 26

Appendix 5: List of Tables

Table 1: Rural Retail A Snapshot ................................................................................................ 40Table 2: Operational Details.......................................................................................................... 41


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Appendix 6: List of Abbreviations and Acronyms


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The Confederation of Indian Industry (CII) works to create and sustain an environmentconducive to the growth of industry in India, partnering industry and government alike

through advisory and consultative processes.

CII is a non-government, not-for-profit, industry led and industry managed organisation, playing aproactive role in Indias development process. Founded over 111 years ago, it is Indias premier businessassociation, with a direct membership of over 6300 organisations from the private as well as public sectors,

including SMEs and MNCs, and an indirect membership of over 90,000 companies from around 336 nationaland regional sectoral associations.

A facilitator, CII catalyses change by working closely with go

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