Cracking the Rural Distribution Conundrum

Executive Summary
The changing face of Indian economy has seen the emergence of a Rural Markets as a growth engine for corporate entities. Moreover the saturated urban markets have forced marketers to look towards the rural segment of the market. Unlike the Urban markets the single most important factor in gaining an upper hand in these markets is the distribution and reach of brands. Accessing the rural market through the rural distribution network is important as it has direct implications on the rural penetration of brands. The low volumes and high cost of distribution, or the Distribution Cost-Volume Cycle requires a substantial Distribution effort to reach the retail shelf.This report investigates the current trends and strategies adopted by leading companies and attempts to isolate the most effective ways to product redistribution. While benchmarking against the industry wide best practices, innovative channels have been explored to devise a comprehensive strategy to develop a distribution model that serves the basic objectives of low cost distribution and enhanced reach, and takes it further to shape it as a tool delivering a sustainable competitive advantage to the company. Special attention has been given to the pricing and packaging issues that are relevant to converting distribution reach into rural penetration. Lastly the wholesale channel, which is one of the most prevalent channel members in the Indian context, has been scrutinized to highlight the possible strategies that deliver maximum value to the company and help it to aintain its rural distribution excellence Objective: y To have a low-cost system of distribution. This suggests the use of a longer channel with the retailer at the tail-end servicing the customer. This is the strategy followed by Nirma to compete with HLL. Nirma relies on the wholesaler network. HLL is trying to get around this problem by giving credit to the distributors. y To efficiently service the channels in an intensive effort to build volumes. The HLL strategy Operation Harvest, uses a fleet of vans, which regularly visits remote villages with a population of less than 5,000 at regular intervals to restock small shops with its primary productsLifebuoy and Wheel soaps. Insights:
The following sector-wise distribution details describe the recent attempts/strategies followed in India: 1. Telecom Sector: Recently Airtel and Samsung have tied up with IFFCO to sell their mobiles and services. IFFCO is (the world's largest) Indian farmers co-operative of fertilizers. It has about 37,000 member units spanning allover India. Some of the other telecom giants & DTH service providers are looking at dying PCOs as a channel of distribution. 2. FMCG sector: Indian part of Unilever, HLL, sells its goods through rural women who become its salesrepresentatives. These women are trained by HLL and usually supported by Microfinance or local self-help groups. ITC has created a supply chain infrastructure something called "e-choupal" system. E-choupal is run by an agent, typically covers about surrounding 10 villages (within 5 KM radius). Reckitt Benckiser with both its FMCG and OTC products has been successfully working on the same 2-tier model as Live India currently has planned for by achieving and constantly improving its desired Sales per capita in Rural Segments through its scalable approach. 3. Soft drinks: Pepsi and Coke have mastered something called "Hub and Spoke" model. Using this system, initially the goods are transported to hubs (towns) from the plant and later the stock is transported to spokes (using all types of transport vehicles: Cycle, Rickshaw, Auto, hand-cart, camel-cart, etc). They also use annual haat and village fairs. 4. Pharma sector: Nicholas Piramal has focused on general practitioners, to cater to rural markets to increase its penetration with a field-force of 800 people. Most of the pharma companies are looking at post-office as their distribution platform. Some of these companies conduct health-care workshops in the rural areas by tapping the local doctors. 5. Consumer Electronics: LG has set up 45 area offices and 59 rural/remote area offices. Samsung rolled out its 'Dream Home' roadshow which was to visit 48 towns in 100 days in an effort to increase brand awareness of its products.

Winners Curse (Piyush | Praneet Mishra | Ranjeet Mohapatra) | IIM Lucknow

Cracking the Rural Distribution Conundrum

Pricing
Rural consumption of packaged hot drinks has steadily increased over the review period, with the urban-rural split for off-trade hot drinks volume standing at 74% to 26% in 2008. Hot drinks players are making a substantial effort to increase their footprint in rural areas. Smaller pack sizes in the form of sachets have helped malt-based hot drinks to enter rural markets, but affordability remains a problem for most rural consumers. The rural customers prefer packaging which can be used for some other purposes. Generally, a container pack is purchased for the first time and then refill packs are purchased subsequently. The percentage of total sales in refill packs as compared to container packs is much higher in rural markets as compared to the urban markets. Due to saturation in urban markets, rural consumers are offering lucrative potential to hot drinks players. Other hot drinks are expected to witness a heightened presence in rural areas with the entry of Dabur India. With its strong foothold in the rural markets and the association of its products with a traditional health supplement Chywanprash, the company is expected to drive sales of malt-based hot drinks in rural areas.

Wholesale Channels
According to the study, the wholesaler is the most important source of information for the retailer. The wholesaler is also the most important influence on the retailer (Kilaru, 1994) Many times a rural wholesaler deliberately undercuts the price of a fast-moving brand in order to increase the traffic in his shop. This may actually trigger a chain reaction wherein others also cut their price of the brand resulting in a lower margin for the wholesalers leading to a overall lack of interest in the brand. Retailers in interior areas are not visited by agents of distributors of companies due to infrastructure issues. Therefore, they go to town or feeder village once or twice a month to buy their stock and generally stick to a single wholesaler. Rural retailers have a great influence on the buyer in order to promote sales; however they in turn s are influenced by the commission and credit received so as to do such a promotion, which is directly adopted from the wholesaler. Retailers in interior villages do not avail of company discount schemes as they prefer to stock in lesser numbers and are more dependent on stock flow. However the retailers in the feeder markets are important redistribution junctions and do evaluate available discount schemes. Hence wholesalers need to address this aspect while servicing different villages. The typical wholesalers are also sometimes supplemented by some of the retail outlets in the feeder villages which had a higher turnover and served as semi-wholesalers.

Proposed Distribution Model: A Commercially Feasible and Scalable Approach to Distribution Current Model of Live Life Ltd uses a large number of points in rural areas to reach maximum areas because the locations are many and scattered. Proposed Revisions: Distributor should supply smaller quantities at higher frequencies. Reduce dependence on wholesalers by having a higher number of distributors and sub-distributors. Optimizing efforts and reducing expenses through devising a proper PJP (6 working days/week). It should consider for factors like Market/Haat days, Number of Outlets and Vehicle used to the purpose. Usually a distributor area of about 50 km. radius would be included with daily 30-40 outlets to be covered of which about 20-25 would be productive calls. This would ensure better monitoring, price discipline and control over the sale and distribution of products.
Winners Curse (Piyush | Praneet Mishra | Ranjeet Mohapatra) | IIM Lucknow

Cracking the Rural Distribution Conundrum

Channel Efficiency & Cost: This can be approached in a manner similar to HUL for its Rural Segments. So like HUL which has removed it Star seller channel, later on Live India Ltd. too can look y to remove one of the layers of Sub-DBs (Sub Distributors). It can also look to reduce margins of its SD (Super Distributor) like HUL which has also reduced the margins of the Rural Distributors by 2% from 6.76% to 4.76%. What will now happen is that the Super Distributors or the RDs will have to service the retail y outlets previously serviced by the Sub-Distributor/Star sellers. Channel Value Delivery: It can be reasonable assumed that the SDs will give a better quality of coverage to the rural outlets. This y is because they would be covering the outlets directly. The calls on the retail outlets will be more reliable (i.e. same day every week), credit would be y given to the retail outlets, quality of execution of promotions will improve and visibility and stock weights will improve. With better coverage, business will increase. This will help the SD get more margin money (on an absolute sense) and reduce the fixed y costs per call. y Also, SDs will have a larger area and hence the fixed cost of distribution will be distributed over a larger number of stores. This would reduce the cost of coverage per store.
How will the Super Distributors cope with the situation? Here is how the SDs will cope with the situation. SDs will start milk runs: The SDs vans will start from a base town (the town in which the SD is located) loaded with stock. It will travel on a particular route selling to retail outlets on that route (these retails outlets would earlier have been serviced by the SubDBs). The route will typically end at the base town itself. For village clusters that are faraway from the base town, the SD may retain the Sub-DB, replenishing his stocks on a regular basis (once a week/fortnight). The Sub-DB would continue to service the retailers as before. Wholesalers might be appointed. Instead of SubDBs, the SD may sell to wholesalers in that area. The retail outlets would come to the wholesaler to buy their stocks/supplies. The SD may have his seller who takes visits retail outlets for 3-4 days and takes orders. These orders are conveyed to the SD who dispatches to the seller, the stocks. The seller then spends the balance of the week 2-3 days supplying the stocks and collecting the cash. Some retail outlets will be dropped from coverage. The dropped outlet will have to depend on the wholesaler and buy from him

Looking towards the various bottle necks that are in prevalent in the Rural Distribution channel, it is imperative that the solution should also focus on maximizing the existing infrastructure and ensuring participation and economic sustainability of all stakeholders Joint Distribution by Non-Competing Companies to help both companies to reduce distribution costs and can convert operation which seems to be unviable into financially viable operation. For example, Motorola and Nokia have partnered with ITC e-Choupal which gave them wider reach in rural market. Godrej has a tie-up with Jyothi Labs to use its extensive distribution network. SHG Linkage. NYKS Haat Distribution model to channelize the non-student youths in a low cost distribution model which has been implemented in UP by Colgate Palmolive. Focus on models similar to ITCs e-choupal initiative to reach the rural consumers through forward and backward linkages for the agri-related business. It has also brought out the concept of Rural mall. Petrol Pumps and Extension counters, 60% of which are located near to villages can be explored to see the possibility of selling rural based items from these outlets. Use of Haats and Melas in the rural channel to achieve increased reach and penetration as well as spread brand awareness. Using Mobile traders to do door to door selling by travelling to villages. It is estimated that these traders reach nearly a half of the rural population. Alternative channels of Distribution whose services can be tapped  Milkman Services  Vegetable vendors.  Paan-beedi shops.  Telephone booths.

Thus the above mentioned model needs to be augmented with the recent innovative initiatives to make it more viable and achieve a deeper reach, which is the ultimate aim of any rural distribution model.
Winners Curse (Piyush | Praneet Mishra | Ranjeet Mohapatra) | IIM Lucknow

Cracking the Rural Distribution Conundrum

Suggested Innovations The Chain-leader model An innovative model is proposed for boosting the sales of Live Life Company by introducing chain dealership at an individual level. It targets the unemployed rural youth who would register at the companys distributor and obtain a few SKUs by paying the wholesale price. Then they would retail it in their respective villages and encouraging other such people to join the chain. If he recruits 3 such dealers the chain is considered completed at his level. The individuals who join his chain subsequently continue the process thereby creating a multiplication effect. Once two levels of the chain are completed, the individual dealer at the top of the chain is upgraded to chain-leader and receives a discount on the product thereby encouraging him to retail more and boosting the sales of the company. MIS at the dealer level Incorporating Management Information Systems for the distributors level would substantially benefit the company by providing information about demand of the wholesalers and then they would be able to stock the required products/SKUs.

Strategies for Pricing and Packaging

Avoiding sophisticated packaging Since most of the rural customers fall in the low income group category, they are not willing to pay a premium for fancy external packaging. Hence the prime aim of the company should be to provide low priced products without compromising on quality. This can be done only by reducing the cost on packaging. Product-bundling and Gifts These are considered most effective pricing and packaging strategies in rural markets. Similar products can be combined and sold at a lesser price. In this case, the Energy Bar (power bite) can be bundled with the Health drinks (Hoshiar and Badshah) and retailed at a lesser price than both the prices combined. Offering a free gift inside the pack which complements the core offering of the product would be a great advantage to the company. Since most of the rural customers are illiterate and the reach of media is poor in the rural areas, hence the free gift should be included inside the pack rather than with the retailer.

Low Price points As almost one-third of the rural customers are daily wage earners, they never have enough money on any given day to invest in large SKUs as they have to purchase variety of products for their daily needs with their limited earnings. Therefore low price point packs are more successful in rural areas. So Live life company should concentrate on distributing low price point packs in the rural market. Coinage pricing strategy Coinage pricing strategy is mostly used for FMCGs in rural markets. For the convenience of retailers and consumers, the price points of the products are fixed at whole coinage prices like Re.1/-, Rs.2/-, Rs. 5/and Rs.10/- etc. so as to eliminate the need for change. The pack sizes are determined according to the price. This can be adopted by Live Life Company for the OTC products especially Roshan Pain balms and for biscuits (Tasty treats) and Energy bars (power Bite).

Winners Curse (Piyush | Praneet Mishra | Ranjeet Mohapatra) | IIM Lucknow

Cracking the Rural Distribution Conundrum

Strategies to maximize Wholesaler effect:An important fact in the wholesale channel is that the typical wholesaler is actually more of a trader than a distributor and hence supports or withdraws a brand during periods of boom or recession. This is a significant factor to account for while formulating strategies for the same. Since the wholesaler is the frontline source of information for rural retailers, hence this means that Live Life Ltd would do well to motivate the wholesaler to get the retailer in the rural market to stock its products, more so for newer products. A possible strategy is to tie up with the wholesaler to magnify promotional campaigns during the village haats and mandis, which are a huge source of rural marketplace transactions. To avoid the occurrence of price undercutting, Live Life Ltd should only use a single or a few wholesalers to sell to retailers. This would essentially avoid undercutting and maintain interest in the brand. Identification of feeder villages is of critical significance. This is because the rural retailers of interior villages depend on these to procure their goods. Hence wholesalers/sub-wholesalers should be well placed at these junctions to redistribute goods. . Effective promotion to retailers/wholesalers in the feeder village is required to motivate them to push these items to retail outlets in the interior villages. Feeder villages that service a wide area can also be serviced by exclusive wholesalers who would be compensated by margins and/or discounts. The company gains by making inroads due to aggressive pushing of products by wholesaler. These wholesalers can be further contracted to run company motor vans in the nearby villages and small towns to supplement marketing efforts and spread product awareness. Attach wholesalers in feeder villages to company stockists. This serves two purposes, firstly it ensures smooth and timely flow of goods, and secondly maintaining personal contact could also enlist the wholesaler in providing relevant market data that provides insights on effect of marketing and distribution of self and competitor products. Remember that wholesalers have a great retailer redistribution network in the rural markets; however their loyalty is essentially to profits and not to the company. Hence the larger wholesalers can be converted to sub-distributors to earn their loyalty. This could be done on a annul basis wherein the top two or three wholesalers in the country are promoted to distributor level, serving as a added incentive for the wholesalers to perform.

Winners Curse (Piyush | Praneet Mishra | Ranjeet Mohapatra) | IIM Lucknow