Rural Market In India - Too Big To Fail

Published by MBA Skool Team, Published on September 05, 2012

“The future lies with those companies who see the poor as their customers.” – C.K. Prahalad, while Addressing Indian CEOs in Jan 2000

This line seems to be the mantra for all the FMCG companies operating in India. The one thing that was common in the speech of Mr. Harish Manwani and Mr. Y.C. Deveshwar, Chairman of HUL and ITC respectively, at the Annual General Meeting of the two companies held last July was the emphasis on broad based strategy to provide rural India access to markets and technology, financial inclusion, and human capital development.

India’s FMCG sector is the fourth largest sector in economy. The India Brand Equity Foundation (IBEF) estimates a total market size in excess of US $13.1 billion for FMCG industry in 2012.

Sales are expanding in double digits and FMCG sector has presented a picture of health. Due to the progress made in last two decades, there is a new sense of hope and energy. The saturation of the urban market and burgeoning Indian population, particularly the middle class and the rural segments, presents a huge opportunity to FMCG brands to convert consumers to branded products.

The shrink in the lower income group and the rise in higher income group have brightened the prospects for companies. FMCG is a low margin business with a high cost of raw materials and consumers in rural India looks for low-price and value-for-money products. FMCG companies have to focus on volumes to generate revenue. For instance, HUL’s Rin, Surf and Lux are available in most obscure villages.

Penetration levels as well as per capita consumption in product categories like jams, toothpaste, skincare, and hair wash etc in India is low indicating the untapped potential. Processed foods, bakery and dairy have a long term growth prospects in both rural and urban areas. Till date, the per capita consumption of most FMCG products is much below the world averages.

This is the latent potential that most FMCG companies are eyeing at. But before launching any products in rural segments, the needs and latent feelings of the rural people have to be well understood along with the cultural dynamics. The launch of ChocoBix, a chocolate flavored biscuit from Cadburys, based on the assumption that rural mothers prefer biscuit over chocolate is one such example.

The major challenge for FMCG companies comes from the unorganized sector. The market is highly fragmented and the basic technology for most products is fairly simple and easily available. Highly irregular market and poor infrastructure in terms of transport also limits the ability of MNCs.  A rural consumer is brand loyal and understands the symbols better. It enables local players to market their spurious look-alike brands. With nearly 4 million retailers in villages and non-existence of super markets, logistics are extremely difficult and there is a huge distribution network problem for most of the companies.  Also the limited mass media option is an obstacle to most of the FMCG companies to promote their products.

It is very clear that rural India is the hot target in future for the FMCG companies as it presents a plethora of opportunities, all waiting to be harnessed. As the Television reach and the IT culture moves into rural India, possibilities of change are becoming visible. They can be used along with traditional media to promote brand awareness. With growing urbanization, today’s rural children will grow in an age where they will have access to information on just one click of button. Consumers will become demanding and their buying behavior will change.

All the biggies in the industry like HUL, Marico, Colgate-Palmolive, Britannia, Nestle etc are showing huge interest in rural markets and are making huge investments also. Be it HUL’s launch of green variant of Lifebuoy or GCPL introducing smaller packs of soap and shampoo, FMCG are leaving no stone unturned to make their presence feel in the rural market.

ITC is experimenting with its e-Choupal and trying to leverage it for rural expansion, while HUL initiative with Project Shakti continues.

The tie-up of State Bank of India (SBI) with HUL to promote financial Inclusion of people by opening their bank accounts is one step ahead for inducing consumer brand engagement and spreading brand awareness.

Use of NGO’s in rural areas to educate customers about product benefits is another such effort from Reckitt and Colemen.

The year 2012 is going to be a very challenging year for these companies. Persistent Inflation, uncertain monsoons and economic volatility has raised the caution level for these companies.

FMCG companies will have to work hard to make inroads in the rural market in order to sustain their double digit growth rate targets in future. With myriad of choices, consumer is the king. There is huge potential and definitely a lot of money.

This article has been authored by Rahul Kumar from IIM Indore.


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