Shaping the rural retail

As the government sets out the ‘Open’ sign for foreign retailers, rural retail is back in focus of big retailers. Whether the farmers get benefited from it or not, the small traders feel they will not be able to withstand the competition. Will the rural India in general benefit from this step?
Shaping the rural retail

With the Union Cabinet approving 51 per cent FDI in multi-brand retail sector and 100 per cent FDI in single brand, the rural retail has turned out to be the most intact and unexploited terrain for Indian as well as foreign big retailers. Observe this: Wal-Mart, which already operates in India through 17 wholesale stores, is ramping up its operations in India. The company, considerably the most aggressive foreign supermarket operator in India, expects to open its first store selling directly to the public in 12-18 months, and aims to turn a profit in 10 years, which remarkably it hasn’t managed till now in China even after 12 years.

Now to pull off the target, the company intends to sign up 35,000 farmers over the next three years in India, up from the 6,700 it has now. Fresh produce accounts for about 30 per cent of Wal-Mart’s sales in its wholesale outlets in India. Says Ram Avtar Singh, a farmer from western UP, “The company experts come to train us and assist us right from when the crop is sown to when it’s harvested. They give us a higher price than the market for better quality.”

The government recently let in global supermarkets, despite heavy political opposition, in the hope of improving the supply chain and bringing down wastage and costs in a country where one-third of fresh produce rots and food inflation is persistent. Experts feel that investing in farmers to help them perk up quality and competence, and getting around the band of pricey middlemen, will ascertain whether global chains like Wal-Mart and Tesco Plc accomplish something where local operators have been disastrous and have failed to make a profit. Also, it will determine whether the politically weighed down pronouncement to consent to global supermarkets in order to modernise its food supply chain bears out to be the right one.
According to Wal-Mart officials, the company plans to procure as much using direct farming so the procurement from traders in local markets is as little as possible.

Under the reforms, foreign retailers must source at least 30 percent of their goods from local, small industries. BP Sinha, an emeritus scientist of IARI, Pusa, says that the company needs to find more farmers like Ram Avtar Singh. His acre of potatoes are well-shaped and high-quality, credit goes to modern irrigation and quality nutrients and seeds – all provided by the world’s largest retailer. However, most farmers in the country, don’t meet Wal-Mart’s standards.

Another expert feels that Wal-Mart must buy in small batches from small plot-holders in a country where more than 80 per cent of farms are under 2 hectares. That means contracting with thousands of farmers will still yield only a few thousand tonnes. In North America, retailers like Wal-Mart can buy from a few hundred farmers who provide hundreds of thousand of tonnes of produce between them. “It’s going to be a huge challenge and requires a lot of work on the ground,” says Sinha.

It is well-known that rural consumption is fast catching up with urban consumption. Yet, the scale at which rural markets are expanding can still make any marketer’s heart skip a beat. A recent study by Boston Consulting Group (BCG) and Confederation of Indian Industry (CII) has revealed that the Indian consumer market will grow almost 3.6 times between 2010 and 2020, and further that 24 per cent of this number will comprise small towns and villages. In fact, small towns and rural consumers will become the largest market segment at 36 per cent by 2020.

Going by this rate of expansion, the non-metro consumer market is an opportune space for numerous FMCG companies thriving in India. Yet, for a company that is looking to take its business forward aggressively, it is essential to treat this market differently. This can only be done by perfectly understanding the behaviour of consumers based beyond metros. These consumers aspire for higher standards of living. Since literacy levels and disposable incomes have risen, the demand for consumer goods have increased too in these areas. FMCG is seeing growth in the male grooming sector, in addition to the women’s grooming category. This change is driven by the media and advertising fuelling aspirations for a better lifestyle.

Until now, companies like US-based Colgate faced the primary problem of getting people to migrate from neem twigs to dental-care products like tooth-powders. Today, the use of toothpastes is on the rise. Indeed, offering low-cost products to these parts of India is not the key. Since lifestyles are changing, there is increasing demand for the brands seen on TV. The opportunity to create loyalty is rife and companies can make the most of it by simply cashing in through smaller quantities of sale. For instance, HUL discovered that such consumers use shampoos on special occasions, so bottles became expensive. By introducing single-use pouches, the company was able to tide over this peculiar difficulty. Such kind of affordability is what brands need to highlight today. Consumers would need to know that these FMCG products have been packaged especially for them.

In the current scenario, the Indian retailers have mixed experience. While some have gained with the revenue model they are following. Others have encountered losses. Hariyali Kisaan Bazaar, one of the country’s biggest rural retail chain by sales, which operates 230 stores across eight states and had seen good growth in the past two years, is confronting a fall in rural demand in the past two to three months.

HKB, an innovative chain of rural agricultural supermarkets set up in India, aimed at empowering farmers and meeting the needs of rural households by providing access to agricultural products, services and retail. It operates 230 stores across eight states and had seen good growth in the past two years, said it had seen a fall in rural demand in the past two to three months. A drop in prices of potatoes, onions and some other vegetables, leading to low realisation for farmers, and an increase in cost of fertiliser, are reasons for these changed sentiment. Except on necessary agricultural inputs, rural consumers are just not spending as much as they used to, it said.

According to Ajay Shriram, chairman and senior managing director, DCM Shriram Consolidated, the rural marketplace is not as buoyant as it was two-th ree months ago. Income at the farm level has come down for crops like potato, onion, tomato, etc. At the same time, cost of farm inputs such as fuel, fertiliser and labour has moved up. Its rural retail arm is HKB, with annual turnover of nearly Rs 800 crore. Hariyali stores are operational in Haryana, Punjab, Uttar Pradesh, Rajasthan, Uttarakhand, Madhya Pradesh, Maharashtra and Andhra Pradesh. While the macro economic data continues to reflect weakness, the business sentiment has significantly improved on the back of government measures including the liberalisation of FDI policy in sectors like retail and others.

However, some section of Indian retailers and marketers are still worrying considering the low demands. Television and refrigerator makers such as LG Electronics have articulated this worry in recent months, attributing it to high inflation and a fall in government’s ability to spend on rural programmes. Figures for the fast moving consumer goods sector (FMCG) tell the same story. In the past few years, rural demand has been the key for FMCG companies to push overall sales. In the past three years, rural FMCG sales in volumes grew at a heady 15 per cent per annum, while urban sales growth has been around 10 per cent. However, rural sales growth was only 10 per cent in April-September 2011, according to the data available.

Data from Hariyali stores point to a decline in consumption of potash and phosphate after their prices went up 15-20 per cent, in tune with global price changes. Overall demand for agricultural inputs has not gone down, as these are a must for farmers’ livelihood. Hariyali stores sell agri-inputs, cattle feed, plastic furniture, FMCG products, and automobiles, besides services such as banking and crop insurance. A typical store caters to agricultural land of 50,000-70,000 acres and impacts the life of around 15,000 farmers and their families. “On a national level, we are seeing a general slowdown in purchases in rural India. Staple food is moving but in lower quantities. Everything is toned down,” says Shriram. He said it was early to quantify the impact on his company’s retail turnover.

Shriram’s view, though, is contradicted by ITC, another company that operates in several states and says it has not seen an impact. “We are not seeing any such downward trend in our sales growth at Choupal Saagars. Maybe because our catchments do not have many growers of commodities like onion and potato,” says S Sivakumar, chief executive of ITC’s agribusiness division. Choupal Saagar is a large-format rural mall, with 24 stores.

Rural retail has been a tough ride for companies. Most have faced problems due to infrastructure, distribution and fluctuating rural incomes, along with competition from local kirana stores, which operate at much lower costs. In early 2010, Triveni Engineering shut its rural retail arm, Khushali Bazaar, after incurring a loss of Rs 19 crore in five years. ITC has not expand its Choupal Sagaar business for the past few years. Godrej sold its Aadhaar rural retail business to the Future Group and the latter revamped it into a wholesale format. Hariyali Kisan Bazaar had to shut at least 70 outlets over the past couple of years. It has planned to add 10 stores this year. “Even in cities, retail is a difficult business. We will expand as and when sentiment improves and it makes logical business,” says Shriram.

The sheer size of the rural 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 Indian as well as foreign retailers.

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 India’s poor infrastructure needs urgent attention, which in turn is likely to address many of the ills besieging the country’s vast agricultural sector and the bottlenecks facing rural marketing in general and organised rural retail in specific. According to a study by CII, in most developed countries, the retail market is characterised by the dominance of organised retailing. In the US, the share of organised retailing is estimated to be around 80 per cent. Developed European countries have an organised 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 organised retailing. It is estimated that there is no organised marketing and distribution in 87 per cent of India’s villages, which is home to 50 per cent of the rural population. As a result, large firms have often resorted to dependence on makeshift and dispersed channels and supply chains to meet the ‘safety stock’ level needed for catering to the pan-India market.

The CII study says that India’s distribution network in most parts of the country, especially for nonperishable products consists of C&F agents (Carrying and Forwarding agents), stockiest, 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.

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. Consumers in the rural India will always be at benefits based on 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.

To wrap up, we can certainly understand that the government’s claim that FDI in multi-brand retail will bring modern technology to the country, improve rural infrastructure, reduce wastage of agricultural produce and enable the farmers to get better prices for their crops, besides generating employment and bringing down prices.

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The Changing Face of Rural India