Profitably selling to India s rural consumers

India’s rural markets have shown promising potential for generating profitable returns. However, profitably selling to India’s rural consumers requires many challenges to overcome.
Profitably selling to India s rural consumers

The future of India’s growth story would be largely written by the rural markets, which are as yet under-penetrated and relatively untapped vis-à-vis their urban counterparts. Rural India contains 70 percent of India population and generates around 50 percent of India’s GDP. With a base of 850 million potential consumers spread across 650,000 villages coupled with a per capita consumption growth of 19 percent during 2009-12, this is one market which every company is vying to crack.

However, the challenges in the rural markets are markedly diverse and different from that of an urban market. The rural consumer base is characterized by its huge numbers, low literacy level, unpredictable purchasing power dependent on the vagaries of nature and a close knit community influenced by the factors of caste, religion and social distinctions.

Addressing the rural
Tapping this market poses the following challenges, which every marketer needs to address:

Logistics and Warehousing
The primary bottleneck in rural India is the lack of infrastructure facilities especially during the last mile connectivity. Nearly 80 percent of villages are not connected by good roads and suffer from severe shortage of both private and public warehouses. Coupled with a lack of an established supply chain network, these challenges increase the cost-to-serve which serves as a deterrent leading to under penetration. Besides, due to poor transportation facilities it is difficult for marketers to access the rural market.

In addition to this, there is a lack of public as well as private warehousing in these areas. Corporates who are betting big on demand from hinterland will have to line up logistics push in these pockets to have a sound distribution network to cash in on the demand.

Seasonal Demand and Dependence on Credit
Even though the per capita GDP in rural India has grown at a CAGR of 6.2 percent since 2000, yet the purchasing power of the rural consumer is dependent primarily upon the agricultural income. Due to this dependency, the income levels are subject to the vagaries of monsoon and skewed basis the individual landholding. A good monsoon translates into a higher disposable income which in turn drives demand growth and higher landholding ensures a greater purchasing power.

In adverse situations, seasonality drives dependency on credit wherein channel partners and retailers seek credit from the businesses which puts a strain on the working capital management. This is a challenge for companies which may face variations in demand growth and credit cycles due to uncontrollable factors.

About 62 percent of villages in rural India have a population below 1,000 and only 3 percent of the villages have a population above 5,000. Most villages with a population less than 500 people do not have any shops. Lack of a well-established supply chain network and the need for multiple channel partners to reach the consumers at the village level is a major challenge for any entrant into the rural market.

The presence of multiple tiers of intermediaries increases the cost of distribution which prevent the companies from having a low unit price for their products which is an essential requirement for acquiring the price sensitive rural consumer. Also, the channel partners in rural India lack the operation scale, skill sets and capabilities which reduce their effectiveness in a market which requires innovative solutions and unique business models for penetration.

Low Literacy
The low literacy levels of the rural consumer pose a challenge to the effectiveness of promotional campaigns. The limited reach of print media coupled with the low literacy levels severely restrict the ability of the rural consumer to differentiate between established brands and local competitors. Added to this is the erratic power supplies to the villages which hamper the communication through television.

Acquiring skilled manpower penetrating the rural markets requires different skill sets compared to the urban market. In rural markets, the communities are closely knit and the purchase decisions are influenced basis relationships. Marketing in such communities requires sales force which are attuned to the sensitivities of the village level consumer.

However, acquiring qualified sales force to serve rural markets is a major challenge as those from the urban markets do not want to shift to the rural areas forcing companies to recruit locally. Locally recruited sales force lack the orientation, attitude and unique skill sets which are essential to penetrate the rural markets. These twin challenges prevent the companies from effectively penetrating the rural markets holistically.

Way Forward

India’s rural markets are the next growth driver for the retail sector and has shown promising potential for generating profitable returns. However, the above challenges pose major risks to any entrant into the rural markets.

Clearly, the rural-urban gap is narrowing, yet rural markets will evolve in a unique way. Those with a deep understanding of the drivers are most likely to succeed in the long-term. Reducing the cost-to-serve the rural consumer with innovative and collaborative channel solutions holds the key to crack this market.

Authors: Rajat Wahi Partner, KPMG India and Suvasis Ghosh, Associate Director, KPMG India

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The Changing Face of Rural India