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Rural Marketing in India: Retailing Through

Microfinance Institutions

This is a time for MNCs to look at globalisation strategies through a new lens of inclusive

capitalism. For companies with the resources and persistence to compete at the bottom of the world

economic pyramid, the prospective rewards include growth, profits and incalculable contributions to

humankind,1 stated C.K. Prahalad and Stuart L. Hart, in their bookThe Fortune at the Bottom of

the Pyramid(2002). In India, rural markets contribute significantly to the growth of the countrys

economy. Realising the potential of these markets, big companies like Hindustan Unilever Limited(HUL), Coca-Cola, Godrej, Nokia, Bharti Airtel, Bajaj Allianz, etc., are customising their offerings to

cater to the bottom-of-the-pyramid market.

Of late, rural markets have caught the attention of multinational companies because of vast

opportunities offered by them. The increasing purchasing power of rural consumers, growing consumption

levels, media penetration into rural areas and saturation of urban markets are forcing these companies

to expand their rural outreach. But, poor transportational and poor infrastructural facilities are hindering

companies from penetrating into hinterlands. As a result, companies began reinventing their distribution

systems, to make the products reach every nook and corner of India. In this process, they tied-up with

Microfinance Institutions (MFIs) for distributing their products in rural areas. However, the partnership

between MFIs who work with a social mission and companies who operate with a for-profitmotive raises the question of sustainability of such partnerships in rural markets.

The Changing Landscape of Rural Markets in India

In the words of Mahatma Gandhi, India lives in its villages.2 The landscape of an Indian village

is often illustrated with expressions like clear blue skies, fresh green fields, swinging trees with

reflections in water, mud huts and cow-dung floorings, traditional bullock carts, serene temples and

This case study was written by Naga Sandhya Ramadugu and Girija Pasupuleti under the direction of Dr. Nagendra V. Chowdary,

IBSCDC. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of

a management situation. The case was compiled from published sources.

2009, IBSCDC.

No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever

without the permission of the copyright owner.

1 Prahalad C.K. and Stuart L. Hart, The Fortune at the Bottom of the Pyramid, http://www.cs.berkeley.edu/~brewer/ict4b/

Fortune-BoP.pdf, 2002

2

Rural Development, http://www.tn.gov.in/spc/tenthplan/CH_3.PDF

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peaceful village life. While, this beautiful village landscape portrays the rural scenic beauty, its

significance is much more than an artistic view. India is a land of 627,0003 villages nearly accounting

for 70% of its population (in the early 2000s). Indian hinterlands are vast in size, spread over3.2 million4 sq. km. and displays diversity in terms of culture, religious practices, language and dialects,

economic status, etc.

Despite cultural diversity, most of the rural India thrives on agriculture as its main occupation,

apart from the practice of non-farming and other traditional occupations (linked to religion). Indeed,

agriculture is considered as the lynch-pin of Indian economy because of its ability to generate

employment opportunities (in 2003, 60% of the total labour force was from agricultural sector) and

substantial contribution to Indian GDP (in 2008 at 17.2%)5 (although the share has been decreasing

over a period of time). The agricultural sector also forms base for many industrial and consumer

goods. While majority of rural India is dependent on agriculture, other employment patterns are also

emerging in these areas, which are similar to the urban ones. Rama Bijapurkar (Rama), the author ofWe Are Like That Only: Understanding the Logic of Consumer India , opines that the notion

about rural India being a mere agriculture-based economy does not hold true. Among other evidences,

in 20002001, the rural Net Domestic Product (NDP) shares comprised agriculture at 46%, industry

at 21% and services at 33%.6

When it comes to income generation, about 43%7 of the total national income generated is

contributed by rural India and is expected to grow in the coming years. Pankaj Gupta, practice head,

Consumer & Retail, Tata Strategic Management Group, stated, Total income in rural India (about

43% of total national income) is expected to increase from around $220 billion in 20042005 to

$425 billion by 20102011, a CAGR of 12%.8 These figures indicate the socio-economic status and

the increasing significance of rural India.

Ever since independence (1947), rural India has been striving towards substantial progress in

several social and economic indicators. For instance, 60%9 of the villages in India are connected by

roads (rural connectivity is one of the important components of rural developments). Similarly, more

than 90% of villages are electrified, though only 44% rural homes have electric connections10. Besides,

there has been a substantial growth in the literacy rate from 12.10% in 1951 to 59.40%11 in 2001.

These developments, apart from the awareness through media like radio, television, etc., led to

3 Rural Retailing, http://www.indiabiznews.com/biznews/categoryNewsDesc.jsp?catId=12618, July 21st 2009

4 Balakrishna P., et al., Selling in Rural India, http://www.blonnet.com/2004/02/16/stories/2004021600160900.htm, February

16 th 20045 The World Factbook, https://www.cia.gov/library/publications/the-world-factbook/geos/in.html

6 Bijapurkar Rama, Rural Consumer India, We Are Like That Only: Understanding The Logic Of Consumer India , Penguin

Books India, 2007, page 228

7 Why Companies See Bright Prospects in Rural India, http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4386,

June 18th 2009

8 Ibid.

9 Pradhan Mantri Gram Sadak Yojana (PMGSY), http://pmgsy.nic.in/pmg61.asp

10 Katiyar Ruchi, Rural Marketing: Challenges, Opportunities & Strategies, http://www.coolavenues.com/know/mktg/

ruchi_1.php, 2006

11 Literacy as seen in the 2001 census, http://indiabudget.nic.in/es2001-02/chapt2002/chap106.pdf

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changing lifestyles of rural individuals (unlike earlier when they preferred buying basic products such

as soaps and oil), especially in terms of product demand, buying patterns and consumer behaviour.

With time, from an aspirant buyer class, this segment has transformed to a consuming class whichdesires to own branded goods (Exhibit I).

Exhibit IValue Orientation-based Market Structure Model

Source: Bijapurkar Rama, Rural Consumer India, We Are Like That Only: Understanding The Logic Of Consumer India,

Penguin Books India, 2007, page 70

*The numbers in the figure refer to the numbers of householders for each class in 1995, 2000 and

2006.

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Rural masses, like the urbanites turned savvy and exhibited similar consumption habits like

their urban counterparts, which in turn has triggered demand for various consumer products.

Rural markets account for half the total market for FMCGs like television sets, fans, pressurecookers, bicycles, washing soap, blades, tea, salt and toothpowder.12 The National Sample Survey

data of 20032004 reveals that rural India accounts for 62% of consumer expenditure in comparison

with 38% of urban India.13

The increasing demand from rural areas is attributable to factors like growth in income (Exhibit II)

and increase in purchasing power. According to Pankaj Gupta, Several factors have led to an increase

in rural purchasing power. The increase in procurement prices [the government sets the minimum

support price MSP for many farm products] has contributed to a rise in rural demand. A series of

good harvests on the back of several good monsoons boosted rural employment in agricultural and

allied activities. Government schemes like NREGS [National Rural Employment Guarantee Scheme,

which guarantees 100 days of employment to one member of every rural household] reduced ruralunderemployment and raised wages. Also, farmers benefited from loan waivers [introduced in the last

Union Budget].14

12 Selling in Rural India, op. cit.

13 Rural Consumer India, op.cit.

14 Why Companies See Bright Prospects in Rural India, op. cit.

Exhibit IIIncome Index of Rural India and Growth of Rural Households in each

Income Category (from 2005 to 2009)

Source: The Rural Potential, http://www.livemint.com/2009/03/25204646/099CEDD9-FDE2-4AE8-8345-10BB21374AB4ArtVPF.pdf

The sense of growing awareness among the rural masses helped them in knowing about the

provisions granted to them by the government. The various media communication channels such

as radio, television, satellite channels, cinema and internet also played a major role in improving

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rural demand, by influencing the attitude, perceptions and buying patterns of rural consumers

(Exhibit III). With shift in consumption, rural markets therefore, became attractive avenues for

several companies, both India-based and MNCs. Besides, the factors like saturation and highcompetition in urban markets also beefed-up companies to explore untapped rural areas. Unlike

earlier, where agro-based businesses highly focussed on rural markets, these markets also became

mainstay for businesses like FMCGs, two-wheelers, consumer durables, etc. Companies like HUL,

Britannia, Colgate Palmolive, Coca-Cola, etc., started catering to the needs of rural consumers.

Although, rural markets offer huge opportunity like urban ones, the nature of these two markets

is dissimilar. Rural markets are highly dispersed, lack infrastructural facilities, display low literacy

rates and exhibit huge diversity in language, cultural, religious and income aspects. For instance,

17% of villages account for 50% of rural population and 60% rural wealth15 (Exhibit IV).


Source: Kanjilal Abir, et al., Media effect and its measurement in Rural India, http://www.exchange4media.com/e4m/

media_matter/matter_110804.asp

Exhibit IIIChanging Attitude of Rural India

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As rural India is largely dependent on agricultural sector, which is monsoon-driven, the economicstatus of the majority of rural population is linked with the natural environmental factors that are

erratic and unpredictable. Adding to this, there are many people living in the category of lower-

middle and low-income groups whose standard of living is relatively low. Therefore, companies face

difficulties in reaching out to rural consumers. As Rama says, If there is any one part of Consumer

India that epitomises the line every truism about India can be contradicted by another truism, it is

rural Consumer India.16

Companies began to evolve effective strategies to deal with these challenges. They conceptualised

a framework called 4 As Affordability, Awareness, Acceptability and Availability to tackle the

problems of rural markets. For instance, to make the products affordable to lower income groups,

companies introduced affordable packs like Chik Shampoo sachets priced at INR 1, Parle-G Tikki

Biscuit packs offered at INR 2, Lifebuoy soap (50 grams) at INR 2, etc.

Similarly, to create awareness about the products, companies customise promotional and advertising

strategies that are distinct from regular communication channels. They use wall paintings, cinema

vans, folk theatre, community programmes, congregating locations like fairs, haats (weekly rural

markets) and melas(also refers to fair), etc., for enhancing the visibility of product. To have a

larger impact of brand communication, the promotional activity is carried out in local languages and

Exhibit IVProfile of Indian Villages

Source: Bijapurkar Rama, Rural Consumer India, We Are Like That Only: Understanding The Logic Of Consumer India,

Penguin Books India, 2007, page 228

Population Number of Total

Villages Villages

(in %)

Less than 200 92,541 15.6 Hardly any shops in these 220,000 villages

200500 127,054 21.4

5011000 144,817 24.4

10012000 129,662 21.9

20015000 80,313 13.5 17% of villages account for 50% of rural populationand 60% rural wealth

500110,000 18,758 3.2

Total number

of villages 5,93,154* 100

*Inhabited villages; total number of villages is 6,38,691


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dialects. For example, the local language newspapers and regional TV channels are used extensively

for promoting products in rural areas.

To make the products acceptable, companies customise them as per the needs and requirements

of rural consumers. For instance, in 1998, LG Electronics developed a television set called

Sampoorna, for a low price and good quality. This product was a huge success with sales of

100,00017 sets in the first year of its launch. On similar lines, companies also focused on availability

factor, i.e., to reach the far-flung areas of India. In order to accomplish this, companies revised

their existing distribution systems.

Distribution and Retailing in Rural India

For decades, distribution in rural areas remained a herculean task because of its geography and

sparse population. Lack of connectivity with rural areas, inadequate communication systems, badstate of roads (in few cases), high distribution cost to serve the interiors of villages, etc., deterred the

companies from entering rural areas. The deficiency in infrastructural facilities made the physical

distribution of goods a costly affair for marketers. Direct delivery of goods even to the top 1% of

villages costed twice as much as servicing urban markets.18 Even in the final phase of distribution,

i.e., retailing, companies sold their products through haats, melas, kirana shops and other

unorganised forms of retailing.

Kirana shops usually existed in rural areas with a population of more than 500. 19 These stores

often have a limited variety of products and hence sell them at high prices. The article Growing

Rural Retailcited, The typical shop is cluttered and congested with limited variety and few national

brands. Many of the goods are sold at prices higher than the maximum retail price with shopkeepersgiving goods shortages, transportation costs etc., as rationale. What these stores ended up doing,

according to Pradeep Kashyap, the director of MART, is make shopping for the rural consumer a

hellish experience.20 But, the number of unorganised retail stores in rural India is high in number.

According to the study conducted by Rural Marketing Agencies Association of India (RMAAI) and

Francis Kanoi Marketing Research (2008), the total number of rural retail outlets in India is estimated

at 4.1 million 21 (Annexure I).

17 Why Companies See Bright Prospects in Rural India, op.cit.

18 Aithal Rajesh K., Structure of Distribution in Rural Areas: Empirical Evidence from Villages in Karnataka and Gujarat,

https://www.irma.ac.in/researchandpublication/rp_detail.php?rp_id=404, August 2nd 2007

19 Growing rural retail, http://www.financialexpress.com/news/growing-rural-retail/184875/0, November 25 th 2006

20 Ibid.

21 Kamath Vinay, How rural retail stacks up, http://www.thehindubusinessline.com/catalyst/2008/08/28/stories/

2008082850100300.htm, August 28th 2008

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Companies nevertheless realised that rural markets can be mainly tapped with the focus on

distribution and retailing. As a result, every company began to design its own distribution strategy.

For instance, to penetrate into the rural markets, soft drink brands like Pepsi and Coca-Cola, adoptedhub and spoke format of distribution. Speaking about this model, George Kovoor, the then executive

vice president, traditional trade Pepsi Foods Ltd., (currently the vice president of China and Hong

Kong Market Units Pepsico Foods China), said, The spoke is typically closest to the retail outlets

and is serviced by a hub distributor who is supplied directly from the plant or the companys warehouse.

This format allows for large loads travelling longer distances and short loads doing short distances,

which is cost-effective.22 Speaking about transportation, a Coca-Cola spokesperson stated, We

use all possible means of transport that range from trucks, auto rickshaws, cycle rickshaws and hand

carts to even camel carts in Rajasthan and mules in the hilly areas, to cart our products from the

nearest hub.23

Another big company that realised the significance of sound distribution network and ensuredproduct availability in rural areas is HUL. HULs rural marketing initiatives indeed dates back to

mid-1980s, when Wheel detergent brand was introduced for rural consumers in response to Nirma

(which was launched by Karsanbhai Patel, an India-based chemist after recognising the vacuum in

affordable detergent segment in rural areas). Since then, HUL focused on rural markets and banked

upon them for its future growth. HUL, for reaching out to the rural consumer, emerged with innovative

methods of creating awareness about its products.

The company built a strong rural distribution network through ProjectBharat(home-to-home

operations), Project Streamline (for control on rural supply chains), Indirect Coverage Method,

Operation Harvest, Cinema Van Operations, etc. (Annexure II). Despite these programmes, HUL

could not penetrate deeper into the remote areas and consequently decided to launch a new project

on a much larger scale.

Microfinance Institutions: Corporates New Channel for Reaching Rural

Customers

In 2001, HUL came out with Project Shakti (Shakti) (Annexure II), with a vision to reach over

100,000 villages and 100 million consumers.24 The primary objective of this project was to enhance

the companys direct rural reach and provide a livelihood to the rural people. In order to accomplish

this objective, HUL decided to tap the potential of Self Help Groups (SHGs) of rural women. Aware

of the fact that the Indian microfinance sector is mainly based on womens SHGs, HUL partneredwith women from SHGs and made them direct-to-consumers sales distributors (direct-to-home

distributors) under Project Shakti.

According to this project, a woman from SHG, was appointed as Shakti dealer (called as Shakti

entrepreneur) and given stocks, comprising HULs products like Lifebuoy soap, Pepsodent toothpaste,

22 Shashidhar Ajita, Colas countryside crusade, http://www.thehindubusinessline.com/catalyst/2003/07/03/stories/

2003070300160300.htm, July 3rd 2003

23 Ibid.

24 Distribution Network, http://www.hul.co.in/HLL_Flash/knowus/bs_distributionnet.html

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Annapurna salt, Clinic Plus shampoo, etc. In order to carry out the business, the Shakti entrepreneur

was trained by HUL for 3 months, on various techniques of marketing and business management

(HUL provided training in support with district authorities and non-governmental organisations). Thecompany also provided ongoing support to Shakti entrepreneur in the course of business. This in

turn, enabled poor women to earn livelihood. A typical Shakti entrepreneur conducted business of

INR 15,000 per month, which gave her an income in excess of INR 1,000 per month on a sustainable

basis.25 Besides, by providing training and support, HUL also enabled them to become business-

savvy professionals, capable of running their own enterprise26.

To become a Shakti entrepreneur, a rural woman borrowed money from her SHG or a micro-

finance bank. SHGs were normally created and supported by government agencies, banks, or Non-

Governmental Organisations (NGOs) majorly by NGO-sponsored MFIs. Usually, a SHG comprises

of 1020 members, who were mostly poor and underprivileged people. These members organise

themselves into groups, save regularly and contribute these savings towards to a common fund. Thiscommon fund is used to give out loans for the needy group members.

While Shakti entrepreneur programme benefited rural women, it also paid-off well for HUL in

terms of rural sales. After 2 years of initiating this project, i.e., in 2003, Project Shakti contributed

to 10%15%27 of HULs rural sales. In terms of penetration, the company reached out to around

10,00028 villages (every Shakti entrepreneur served 610 villages, with the population ranging

from 1,000 to 2,00029). This initiative made HULs products available in the areas, which hitherto

lacked access and also increased brand visibility.

As Project Shakti distribution model became successful, the company extended this initiative to

several other inaccessible areas of the country. The company also planned to partner with non-competing companies (like insurance) to enable them access rural areas through Project Shakti

distribution model. Commenting on HULs partnerships with other companies, an analyst stated that

it was enlightened self-interest as more income in the hands of villagers could translate into greater

sales of the products of daily consumption that it sells.30

Taking inspiration from HUL, other companies started tying up with SHGs and MFIs for generating

business in rural areas. For instance in 2008, Godrej & Boyce, a consumer durables and industrial

products company, developed a nano refrigerator called ChotuKool for village segment. This

refrigerator was distributed through the SHG members ofSwayam Shikshan Prayog, an NGO run

MFI. Indeed for businesses, corporate-MFI tie ups are acting more than just being distribution channels.

The partnerships are enabling companies to understand the rural consumers better.

25 Distribution Network, op.cit.

26 Shakti Changing Lives in Rural India, http://www.hul.co.in/citizen_lever/project_shakti.asp

27 10% Of HLLs Rural Sales from Project Shakti, http://www.financialexpress.com/news/10-of-hlls-rural-sales-from-project-

shakti/79677/, November 25th 2003

28 Ibid.

29 Kamath Vinay, Where HLLs Shakti Comes From, http://www.thehindubusinessline.com/catalyst/2003/05/29/stories/

2003052900020100.htm, May 29th 2003

30 Kamath Vinay, HLLs Shakti to help partners in rural India, http://thehindubusinessline.com/2003/04/26/stories/

2003042601370600.htm, April 26 th 2003

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In the case ofChotuKool, on the basis of feedback given by MFI distributors, the product price

was brought down from INR 3,700 to INR 3,200.31 Besides, the refrigerator was co-created by

women of Osmanabad (a district in Maharashtra, India), who altered the products colour and design(ChotuKoolunlike a normal refrigerator works on battery and weighs only 7.8 kgs. It has to be

loaded with items from the top and the colour was candy red). The result of these alterations was

that it ensured rural consumers acceptability. Along side, the product also became easy for distribution,

with decrease in size and weight.

Along with companies, MFIs are also showing equal interest in collaborations, since they are

creating win-win situations. Companies-MFI partnerships are enabling to generate wealth in rural

segments and thereby reduce poverty rates. In the example of ChotuKool, the sale of each

refrigerator is generating commission of INR 150 for SHG member and INR 100 forSakhi Retail32.

As a result, many other MFIs like SKS Microfinance, Spandana Sphoorty are coming forward to

tie-up with companies, for distributing their products.

SKS Microfinance (SKS) collaborated with Metro, a German-based wholesaler to supply its products

to kirana shops that belongs to SKS loan borrowers. SKS through this collaboration launched a pilot

programme in Hyderabad, India, with the objective of improving the lives of poor by giving them access

to quality products. According to this programme, SKS loan officers take orders from kirana stores

and pass it to Metro through GPRS device. Once the orders are received, Metro delivers the goods

directly to the kirana shops. The advantage of this partnership is that, it helps the shop owners to

cut-down the time and cost involved in buying the goods. Metro provides a special inventory list for

SKS kirana stores, with a wide variety at reduced prices. As a result, both kirana owners as well as

their customers are benefiting. SKS is working not only with Metro but also on several other corporate

partnerships including, Airtel and Nokia and HUL. Moreover, the MFI had already tied-up with companies

like Bajaj Allianz and D.light to offer micro-insurance and solar lanterns, respectively.

Corporate-MFI Partnerships: The Opportunities and Challenges

For the last few years, microfinance sector in India has been witnessing a substantial growth.

According to industry estimates, MFIs serve over 50 million individual customers, majority of which are

served and governed through SHG model.33 Because of this wide reach, companies are looking at

MFIs and SHGs as potential distribution channels that can open up untapped rural markets.

On the other hand, MFIs are teaming up with companies with the idea of serving the poor in

better ways. Vikram Akula, CEO of SKS stated, Yet, linking with experts in various industriesallows us to better serve the poor. Micro-credit has certainly made great strides in helping improve

the lives of the poor. But by forging synergies with high-quality partners we are creating a whole

greater than the sum of its parts. The promise of microfinance is even greater when we do more

than what we could do alone.34

31 Karunakaran Naren, et al., Indias New Retailers, http://business.outlookindia.com/newolb/article.aspx?240795, July 11 th 2009

32 Sakhi is a company created by Swayam Shikshan Prayog (SSP) for direct delivery of quality goods to women and households.

33 Desai Kalpesh, Microfinance: Impact on the Indian market, Microfinance World, JulySeptember 2009, page 17

34 Akula Vikram, Microfinance is more than credit, Microfinance World, JulySeptember 2009, page 20

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Beyond this, MFIs are looking at the monetary benefits of such tie-ups, which can create a social

impact. For instance, the commission earned from sales, adds to the revenue of MFIs. This helps in

reducing the interest rates on loans, thereby benefiting the poor. Besides, corporate-MFI tie-ups arealso resulting in the creation of micro-entrepreneurs, who can earn livelihood and improve their

lifestyles. In this context the CEO of the Washington DC-based Grameen Foundation, Alex Counts

says, It will have a far-reaching impact on poverty, while generating profits up and down the value

chain from poor families to multinational corporations.35

Along side, collaborations with companies are also enabling MFIs to enhance their operational

efficiency. Prema Gopalan, founder of Swayam Shikshan Prayog says, Earlier, we spent 75 paise

for distributing a kg of fuel pellets (used in Oorja cooking stoves). Now, its down to 26 paise due to

better route planning and demand aggregation.36

The corporate-MFI partnerships however, are not exempted from challenges. One of biggest

challenges for such partnerships is the alignment of goals. While the basic objective of MFIs is

reduction of poverty and empowerment of poor, companies operate with the goals of maximising

profits and creation of value for shareholders. Therefore, blending the developmental approach with

profit perspective is a major challenge for corporates as well as MFIs. In this context, Vikram Akula

states, I should emphasise that we dont just partner with anyone. At SKS we do significant due

diligence on products to ensure that they are in the best interests of our customers. We make sure

our partners are aligned with our goal of empowering and serving the poor.37

Despite ensuring that corporate-MFI tie-ups benefit the poor, problems are cropping up at different

levels. For instance, Padmaja Reddy, MD of Spandana Sphoorty Financial (MFI) views that

companies are not really serving the poor with social objective. The MFI, which distributes PureIt(water purifiers) for HUL, asked the latter to reduce the retail price of the product, as tie-up between

them was saving huge distribution costs for HUL. But HUL declined to bring-down the price. Padmaja

Reddy opines, The company should transfer a portion of the benefits accrued to the consumer. The

partnership should benefit the poor.38 Hence, ensuring social vision becomes necessary for the

success of such partnerships.

At the independent level, both companies and MFIs are confronted with many difficulties. For

instance, producing cost-effective goods for the rural segments, creating awareness about the products

to rural poor, gaining their acceptability, etc., are few challenges at the companies front. Ensuring

that poor are always served with quality goods, consumers (MFI clients) are not obligated to purchase

the products, ensuring that the social mission of MFI is not overlooked, etc., are few challenges to bedealt by MFI.

Nevertheless, companies are increasingly leveraging the outreach of MFIs for penetrating into rural

markets. They are developing the business models that include poor in the value chain and create social

impact. At the same time, they are ensuring that such business models are commercially viable.

35 Indias New Retailers, op.cit.

36 Ibid.

37 Microfinance is more than credit, op.cit.

38 Indias New Retailers, op.cit.

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Annexure IEstimate of the Number of Retail Outlets in Rural India

Source: Kamath Vinay, How rural retail stacks up, http://www.thehindubusinessline.com/catalyst/2008/08/28/stories/

2008082850100300.htm, August 28th 2008

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financed his stocks and provided warehousing facilities to store them. The RS also undertook demand

stimulation activities on behalf of the company.

The second characteristic of this period we realised that the RS would be able to provide customer

service only if he was serviced well. This knowledge led to the establishment of the Company

Depots system. This system helped in transshipment, bulk breaking, and as a stockpoint to minimise

stock-outs at the RS level.

In the recent past, a significant change has been the replacement of the Company Depot by a system

of third party Carrying and Forwarding Agents (C&FAs). The C&FAs act as buffer stock-points to

ensure that stock-outs did not take place. The C&FA system has also resulted in cost savings in terms

of direct transportation and reduced time lag in delivery. The most important benefit has been

improved customer service to the RS.

The role performed by the Redistribution Stockists has also undergone changes over the years.

Financing stocks, providing manpower, providing service to retailers, implementing promotional

activities, extending indirect coverage, reporting sales and stock data, screening for transit damages

are some of the functions performed by the RS today.

HLL has grown manifold over the years. In the process, the number of factories and the number of

SKUs too have increased. In order to rationalise the logistics and planning task, an innovative step has

been the formation of the Mother Depot and Just in Time System (MD-JIT). Certain C&FAs were

selected across the country to act as mother depots. Each of them has a minimum number of JIT

depots attached for stock requirements. All brands and packs required for the set of markets which

the MD and JITs service in a given area are sent to the mother depot by all manufacturing units. The

JITs draw their requirements from the MD on a weekly or bi-weekly basis.

At present, HLLs products, manufactured across the country, are distributed through a network of

about 7,000 redistribution stockists covering about one million retail outlets. The distribution network

directly covers the entire urban population.

In addition to the ongoing commitment to the traditional grocery trade, HLL is building a special

relationship with the small but fast emerging modern trade. Our scale enables us to provide superior

customer service including daily servicing, improving their range availability whilst reducing

inventories. We are using the opportunity of interfacing more directly with our consumers in this retail

environment through specially designed communication and promotions. This is building traffic into

the stores while yielding high growth for our business.

An IT-powered system has been implemented to supply stocks to redistribution stockists on a

continuous replenishment basis. The objective is to catalyse HLLs growth by ensuring that the

right product is available at the right place in right quantities, in the most cost-effective manner. For

this, stockists have been connected with the company through an Internet-based network, called

RSNet, for online interaction on orders, despatches, information sharing and monitoring. RS Net

covers about 80% of the companys turnover. Today, the sales system gets to know every day

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what HLL stockists have sold to almost a million outlets across the country. RS Net is part of

Project Leap, HLLs end-to-end supply chain, which also includes a back-end system connecting

suppliers, all company sites and stretching right upto stockists.

RS Net has come as a force multiplier for HLL Way, the companys action-plan to maximise the

number of outlets reached and to achieve leadership in every outlet, by unshackling the field force to

solely focus on secondary sales from the stockists to retailers and market activation. HLL Way has

also led to implementing best practices in customer management and common norms and processes

across the company. Powered by the IT tools it has further improved customer service, while

ensuring superior availability and impactful visibility at retail points.

The challenge of the rural markets

70% of Indias population resides in villages. Penetrating the rural markets is, therefore, one of the

key challenges for any marketer. While rural markets present a great opportunity to companies, they

also impose major challenges.

At HLL, we have been at the forefront of experimenting with innovative methods to reach the rural

consumer.

Indirect coverage

Under the Indirect Coverage (IDC) method, company vans were replaced by vans belonging to

Redistribution Stockists, which serviced a select group of neighbouring markets.

Operation Harvest

The reach of conventional media and, therefore, awareness of different products in rural markets isweak. It was also not always feasible for the Redistribution Stockist to cover all these markets due to

high costs involved. Yet, these markets are important since growth opportunities are high.

Operation Harvest endeavoured to supplement the role of conventional media in rural India and, in

the process, forge relationships and loyalty with rural consumers. Operation Harvest also involved

conducting of product awareness programmes on vans.

Cinema van operations

These are typically funded by the Redistribution Stockists. Cinema Van Operations have films and

audio cassettes with song and dance sequences from popular films, also comprising advertisements

of HLL products.

Single Distribution Channel

For rural India, HLL has established a single distribution channel by consolidating categories. In a

significant move, with long-term benefits, HLL has mounted an initiative, Project Streamline, to

further increase its rural reach with the help of rural sub-stockists. It has already appointed 6000 such

sub-stockists. As a result, the distribution network directly covers about 50,000 villages, reaching

about 250 million consumers.

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Project Streamline

Project Streamline was conceptualised to significantly enhance our control on the rural supply chainthrough a network of rural sub-stockists, who are based in these very villages. As part of the project,

higher quality servicing, in terms of frequency, credit and full-line availability, would be provided to

rural trade. Thereby, giving us a substantial competitive edge over the next decade.

The principle of Project Streamline is to leverage our scale and organisational synergy to increase

reach in rural markets. The pivot of Streamline is the Rural Distributor (RD), who has15-20 rural sub-

stockists attached to him. Each of these sub-stockists is located in a rural market. The sub-stockist

then performs the role of driving distribution in neighbouring villages using unconventional means of

transport such as tractor, bullock cart, et al.

From 1998, the project has been rolled out in select states of the country where the terrain or poor

stage of market development typically makes any distribution system unviable. The Streamline

system has extended direct HLL reach in these markets to about 37% of Indias rural population from

25% in 1995. Most important, the number of HLL brands and SKUs stocked by village retailers has

gone up significantly. Having done that, the project now aims to expand our coverage to 50% of rural

population by 2003.

Project Shakti

Distribution will acquire a further edge with Project Shakti, HLLs partnership with Self Help Groups

of rural women. The project, started in 2001, already covers over 5000 villages in 52 districts of

Andhra Pradesh, Karnataka Madhya Pradesh and Gujarat, and is being progressively extended. The

vision is to reach over 100,000 villages, thereby touching about 100 million consumers. The SHGshave chosen to adopt distribution of HLLs products as a business venture, armed with training from

HLL and support from government agencies concerned and NGOs. A typical Shakti entrepreneur

conducts business of around Rs.15000 per month, which gives her an income in excess of Rs.1000

per month on a sustainable basis. As most of these women are from below the poverty line, and live

in extremely small villages (less than 2000 population), this earning is very significant, and is almost

double of their past household income. For HLL, the project is bringing new villages under direct

distribution coverage. Plans are being drawn up to cover more states, and provide products/services

in agriculture, health, insurance and education. This will both catalyse holistic rural development and

also help the SHGs generate even more income. This model creates a symbiotic partnership between

HLL and its consumers, some of whom will also draw on the company for their livelihood, and helpsbuild a self-sustaining virtuous cycle of growth.

Project Bharat

The first and largest rural home-to-home operation to have ever been mounted by any company,

sought to address many of these issues. The operation was conducted in high-potential districts of the

country. The exercise was started by our Personal Products Division in 1998, and covered 13 million

households by the end of 1999.

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In the course of the operation, company vans visited villages across the country and distributed

sample packs comprising a low-unit-price pack each of shampoo, talcum powder, toothpaste and skin

cream priced at Rs. 15. The distribution was supported by explanation of product usage and a video

show, which was interspersed with product communication. Thus we generated awareness of its

product categories and the availability of affordable packs.

Consumers were also made aware of the superior benefits of using our products vis--vis their

current habits, and the affordability of the pack sizes on offer. The project, thus, successfully

addressed issues of awareness, attitudes and habits. Hopefully, as consumers in rural areas get

exposed to such value-added, value-for-money alternatives, they will continue to buy into the

categories. The project saw a 100% increase in penetration, usership and top-of-mind awareness in

the districts targetted.

However, sampling once is not adequate to convert non-users. So Personal Products rolled out afollow-up programme, the Integrated Rural Promotion Van (IRPV), to once more target villages with

a population of over 2,000.

Influencing affordability

Project Streamline focused on extending distribution, and Project Bharats influence was restricted to

raising penetration and awareness levels. On the anvil, is a new rural programme, which will reach

villages with a population below 2000 and influence income as well.

This path-breaking venture aims to facilitate the doubling of our share of the rural consumers wallet

in three years. The model is unique in that it influences all the variables that influence growth. This

model triples physical reach, doubles communication reach, creates a platform for influencing attitudechanges and raising incomes.

Our rural growth engine raises incomes of rural families by channel intervention through rural Self-Help

Groups (SHG), which operate like direct-to-home distributors. The model consists of groups of (1520)

villagers below the poverty line (Rs.750 per month) taking micro-credit from banks, and using that to buy

our products, which they will then directly sell to consumers. In the process, generating employment and

incomes for themselves, and increasing the reach of our products.

We are tying up with various Non-Governmental Organisations, United Nations Development

Programme (UNDP), and voluntary organisations to propagate health and hygiene messages. The

goal is to reach 2,35,000 villages up from the current 85,000; 75% of the population up from 43%

today; and a message reach of 65% up from the current TV reach of 33%. In the process we aim to

increase access, influence attitudes, create a channel to raise awareness of its brands and catalyse

affluence in rural India.

Enhancing awareness

Mass media reaches only 57% of the rural population. Generating awareness, then, means utilising

targeted, unconventional media including ambient media. We have been utilising events such as fairs

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and festivals, haats, et al, as occasions for brand communication. Cinema vans, shop-fronts, walls and

wells are other media vehicles that we have utilised to heighten brand and pack visibility.

Overcoming attitudes and habits

Creating distributive reach is not sufficient to tap the rural markets. Market development can be a

difficult task because in rural India, both consumption and penetration is low. For instance, only three

out of 10 people in rural areas use toothpaste or talcum powder, or shampoo and skin care products,

and only six use washing powders.

Even in categories with high penetration, such as soaps, consumption is once per five bathing

occasions.

Compiled by the author from Distribution Network, http://www.hul.co.in/HLL_Flash/knowus/

bs_distr ibutionnet.h tml#rura l_marke ts and Rural Marketing, http: //www.hul.co.in/HLL_Flash/knowus/bs_ruralmark.html

509-096-1

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