Indian rural markets have strong headroom for growth across most of the large FMCG categories thus necessitating the need of a powerful Rural Route to Market (RTM) platform
Headroom for Growth
India has the largest rural population in the world – 850 million, which is also around 25 percent of world’s total rural population. Rural India houses around 70 percent of Indian population and contributes to around 50 percent to the gross domestic product. Historically, revenues of FMCG companies in rural India have shown a rapid growth, reaching a market size of Rs 54,000 cr in 2010. In 2025, this market is expected to reach Rs 600,000 cr.
Though, there has been significant rural uptake across all of the FMCG categories, the rural penetration levels for many of the FMCG categories are still very low compared to their urban levels, for instance, Glucose, Deodorant and Perfumes, Hair Color, Floor/Toilet Cleaners, Household Insecticides, Skin Creams, Instant Noodles, etc. It would not be too far-fetched to state that Indian rural markets have strong headroom for growth across many of the large FMCG categories.
Also, the rural household income in India is expected to rise at a rapid pace, allowing rural citizens to earn more and in turn spend more. With more money in their hands, currently rewarding rural markets waould be even more lucrative to target. Other social indicators like literacy have improved from 58.7 percent (2001) to 68.9 percent (2011) and this is expected to go further up. This will allow rural consumers to make more informed buying decisions, in turn helping brands garner more market share.
Challenges in Targeting Rural Markets
Though there is still a very high untapped potential in rural markets, there are few key challenges to successfully tapping the rural potential. Key challenges are:
High cost to serve: From a FMCG company perspective, the cost to reach and serve the rural markets is high, in comparison to urban markets because of the sheer nature of rural markets, which can be described as highly fragmented with respect to spending, earnings, density, etc.
Seasonal demand: Rural markets depend directly or indirectly on agricultural harvest. Demand increases when agricultural produce is available for selling in the market. Also, better crops lead to higher demand and vice versa. On top of that, the monsoon is very difficult to predict, therefore, high seasonality makes the overall scheme of things more difficult than visualised.
Limited reach of traditional media: Owing to a plethora of issues, traditional media like TV, radio, print, etc, does not properly reach the rural markets. Hence, it renders the traditional media/marketing approximately ineffective in capturing the rural market.
Heterogeneous consumer: Even in a very small village, consumers are widely different in terms of their occupation, caste, religion, and region – leading to completely diverse preferences for products. This makes it very difficult for brands to capture the rural market share sustainably. |
Four pillars of a Powerful Rural RTM Platform
We believe that for developing a holistic rural strategy, considered choices around right product segmentation, tailored marketing and effective and efficient RTM are required.
In our view, the winning recipe of RTM must contain prioritized markets, a well defined RTM model, aligned channel partners, and the right set of focused capabilities to sufficiently energize the organization. In our opinion, there is no “one silver bullet” to win the rural markets. Key to success is getting lots of small things right and managing the execution perfectly.
The world ‘rural’ lacks a proper definition. Companies have different way of defining rural and that basically causes confusion within the organization as to what rural exactly is. Without clear definition of rural, it becomes even more difficult when a company has to define its rural strategy and everyone in the organization has to imbibe it!
A clear and simple definition of rural is the very first step in designing the appropriate RTM model. As per the Census, rural is defined as all areas not classified as urban (and a few more caveats)! However, this definition is relatively difficult to understand and also, it is relatively easier to have a uniform population cut-off for all RTM planning perspective. Different companies choose different population cut-offs, depending on their category penetrations (example, < one lakh population, < 50,000, < 25,000) as well as current RTM coverage.
Companies can have their own definition of rural but that definition needs to be used consistently from the CXOs (C-suite executives) who define the rural strategy, to the front end sales officers/salesmen, who cycle/drive to the rural shops, distributors and their sales force.
The second mantra around market coverage is “prioritization”. There are more than six hundred thousand villages in India. Blindly targeting every village will not produce any significant improvement in topline but would shrink bottom line a lot because of increased RTM cost. Therefore, for every important category, clear prioritization of the rural markets based on relative attractiveness and right to win is the key to success both at the macro (state) level and micro (district / taluka) level.
Typically, companies adopt a ‘one size fits all’ model across all of its rural markets, that is, same or similar models are put up across markets with very little variation driven by the population, category dynamics, and competitive strength. In our view, to effectively tacklet this issue, a multi-pronged and modular RTM model is required.
Generally, four different types of models are available for Rural RTM based on different routes, a company’s ability to control the value chain, and the cost it incurs. Typically, companies use the model that provides them the most advantage in the market place and which is supported by their capability systems. In our view, the winning strategy must ensure that the right set of models are selected based on population tier, company’s relative market share and taking into consideration the overall economics (e.g, Profit to Serve) across the value chain.
Profit to Serve is a function of Population, Per Capita Consumption, Market Share, and Gross margin minus the Cost to Serve. Cost to Serve completely depends on the type of model selected for servicing the outlets. Active RTM will provide the best control but is the costliest. Other models are lower cost but the control is also much reduced. Therefore, multiple models need to be simultaneously implemented to serve different markets. Along with this, there should be pre-defined exception rules based on a solid business case, and these rules must be aligned with all of the stakeholders across the value chain.
While selecting channel partners, companies must look for profile and value partners and try to solve the scale issues in a cost effective way. Distributors who ‘drive business’ compared to those who ‘only’ invest must be prioritized. Grassroot level analysis of trade partner profitability should not only include Return on Investment (ROI) but also include absolute quantum of earnings – absolute money earned also matters when scales are small– a typical case in rural area.
We have also seen companies leveraging different types of partnership models to reduce RTM cost. Models vary from partnering with other business units of the same companies to partnering with NGOs/government.
Even in other countries, trade channel partnerships for rural markets are common and is increasingly becoming more ubiquitous. Even in 1970, Whirlpool used Sony’s network to sell its products in Japan. Sony got better product selection for its customers and Whirlpool got access to Sony’s rural distribution network.
In China, Haier Group started selling GE products in 2009. GE partnered with them because of their excellent rural sales network and Haier also gained significant uptake in its sales.
Capabilities: People, Process and Technology
The right set of capabilities can be the key differentiator for an organisation and can even provide it with long term sustainable advantage. The key thing to understand is that the rural markets require a different set of capabilities and focus and therefore, a straightforward “copy-paste” of the urban choices may not be the right answer.
People agenda becomes even more important for rural RTM because significant decision making is involved to handle multiple scenarios and one size fits all model does not work. Hence, to drive a strong rural focus, a separate organization structure needs to be institutionalized. There are many companies which have adopted this model e.g., HUL, GPI, Reckitt Benckiser. These companies have dedicated organisational structure for most of their focused rural markets. Also, KRAs for rural teams are different from their urban counterparts. Rural sales managers need to have more experience because rural markets are inherently complex.
Processes also need to be standardized to drive efficiency and reduce cost. To the point focus on a few basic sales processes such as town coverage, servicing, route planning, and sales call are required for rural RTM.
Technology (especially mobile based ones) could be used to drive adherence to norms and operational efficiency, thereby enabling companies to gain greater share of the market. Call completion tracking (route tracking of the salesmen), adherence to steps of the call, route planning for the next day (for pre-sell model), suggestive ordering to capture the right order (based on stock levels) and stock carriage (for ready-sell model) and in-market replenishment for stock-outs are some of the many things to drive sales force efficiency even at the most granular level by leveraging mobiles.
Also, tracking sales forces’ daily visits are significantly more important for rural markets. Few villages might not provide sufficient sales numbers today, and the sales force may not pay visit to these villages. This can hamper future growth because those villages can be potential future growth engines. Leveraging sales force movement using GPS enabled devices can be one of the many options available.
Company assets (e.g. merchandising) and basic competition data capture can allow companies to equip themselves for broader strategies. If utilized properly, even a ‘light-touch’ MIS and data sharing can do wonders for e.g., identifying the initiatives which are creating impact and vice versa. Based on the capability and cost required, management can help create a data driven organisation by leveraging such MIS systems. Also, stakeholders may have different requirements for the depth of data capture (e.g., primary, secondary and tertiary sales data).
Rural RTM as Competitive Advantage
When FMCG companies develop capabilities to use well thought out rural RTM, they not only become more effective at serving their customers but also control cost and complexity. A comprehensive rural RTM strategy will entail making considered choices around the four pillars – market coverage, RTM model, channel partners and capabilities. Companies which have done this well have seen a significant upside in terms of several performance metrics – topline, profitability as well as shareholder value. Given the fierce competition in FMCG space, this capability alone can help create a long term sustainable advantage for the FMCG companies.
FMCG companies garner tangible results by following a well-defined and well-weaved approach around rural RTM. These results typically include increased revenue through increased reach, improved trade partner experience through better trade servicing, enhanced customer experience through aligned RTM as per better customer preferences, more efficient sales force and low cost to serve channel partners with better managed complexity. All of these rewards are within the reach of any FMCG firm that can embrace an advantaged RTM model based on the context in which it operates.
Vikash Agarwalla (Principal & co-leader Consumer & Retail), Kingshuk Sanyal (Engagement Manager & senior member Consumer & Retail), &. Kamal Kant Sarda (Associate & member Consumer & Retail) are with Strategy & (formerly Booz & Company) – a global management consulting firm; they are based at the New Delhi office.