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2007-08/2 - Structure of Distribution in Rural Areas: Empirical Evidence from Villages in Karnataka and Gujarat 25/04/2007 Speaker(s) Rajesh K. Aithal The essence of marketing lies in the exchange process and channels of distribution facilitate this exchange process by providing the linkage between the producer and the consumer. Research in distribution channels has predominantly been embedded in the urban context and very few studies have been done in rural areas where the population density is low and spread out, and customers have low-purchasing capacities. This research is an attempt at filling this gap; it seeks to describe and explain the structure of distribution in the villages of two states. This research was undertaken with three broad objectives: first; to provide a description of the existing structure of distribution in villages, which basically translates into the number and type of retail shops in the villages, the purchase preference of retailers and the structure, which exist to serve them. Second; to explain the existing distribution structure in rural areas and to single out variables, which influence the channel structure. A literature review provides the inputs to the initial conceptualisation through which the variables are identified and their influence on the structure hypothesised. Third; to come-up with a framework that can be of use to organisations in rural markets, both existing as well as the ones, which are planning to enter rural areas for the first time. The framework would help organisations assess their own distribution efforts in rural areas and enable them to fine-tune their efforts in accordance with the drivers. Over and above these three objectives the overarching goal of the work was to contribute to existing theories of distribution by explaining the structure of distribution in areas with low and spread-out populations. Importance of distribution in the rural marketing has been acknowledged both by practitioners and scholars. It has been described as the first barrier which one has to overcome (Banga, 2005). In fact many a times rural distribution and rural marketing are synonymously used, and for most of the organisations operating in the rural area this third µP¶ of the marketing mix which has invited maximum attention. Rao(1973), Sarin, Krishnamoorty(2000) have acknowledged that distribution systems are the most critical component and a barrier which needs to be overcome (Prahalad & Hammond 2002) for success in marketing in rural areas. The task of distribution in these areas is considered to be more difficult than in urban areas (Mandira, 1977). Direct delivery of goods even to the top one percent of villages cost twice as much as servicing urban markets (Ganguly 1985). Within various issues in distribution channel research, the current work has identified structure of distribution channels in rural area as a critical issue of study as researchers have acknowledged the critical linkage between understanding structure of distribution and developing a viable distribution system (Robenson & Kollat, 1985). Thus providing a description and explanation of the distribution channel structure in the rural areas in the country would be a step forward in helping develop viable distribution systems in rural India. In the study the issue of distribution structure in rural areas has been conceptualised as being influenced by three broad sets of issues related to the environment, the distribution strategy and the rural retailer. The external environment geographically is about reaching the villages, which are spread-out, diverse, and with sparse population. According to Census of India 2001, 97 percent of India is rural geographically. The geographic dimension of rural markets has been such an overwhelming problem, that for decades many

and traces its existence to these three major elements in the conceptualisation and the explanation hinges on the three influencers identified. Each organisation by following its own unique strategy influences the structure in its own unique way. ANOVA to test if the structure of distribution channels in the talukas selected were significantly different from each other. which intermediaries does he purchases from. The problems are compounded by the fact that the rural retailers are physically small in size. This emergence of structure happens over a period of time. but because the current study is cross-sectional in nature it does not look into the evolutionary issue in channel structure formation. The study aims at providing an explanation of structure which exists at a particular point in time. The literature on the evolution of distribution channel structure points to the influence that distribution strategies have on the structure. Responses were elicited through the administration of a structured questionnaire. detergents and toothpaste. The physical characteristics of the village in terms of the accessibility have the predicted impact on the channel length. but the issue of the village population did not have a significant influence on the structure.organisations did not operate in these areas only because of the lack of access to these markets. The same is the case of the impact of distribution strategy on structure of distribution. But with the improvement in the status of roads and connectivity to villages the situation has improved but geographical aspect of the external environment still remains a formidable barrier which needs to be overcome. The rural retailer by virtue of his size. The interaction of these three elements ± the task environment. purchase behaviour and preferred channel partners influences the structure of the channel. The findings show significant differences in distribution structures across the selected talukas. A total of 686 retailers across 103 villages were surveyed. 2007 in India Knowledge@Wharton . This is inferred as suggestive of the influence of the task environment. and the quantum of business done by each of them is also small. Six talukas across two states have been selected and variations in the distribution channel structure across these taluka have been studied. The terminal point before reaching the rural consumer is the village retailer. including correlation and percentage analysis to understand the linkages between various variables. In terms of movement of the product very little is known about how exactly the product reaches the rural retailer. The respondents were predominantly village retailers and other intermediaries like the wholesalers and dealers in the channel. But the retailer behaviour in terms of quantity and frequency of purchase has the influence on the structure as was hypothesised. Marketing to Rural India: Making the Ends Meet Published: March 08. distribution strategy and rural retailer leads to the formation of distribution structure. To address the issue of geographic spread and diversity every organisation operating in rural areas devises its own distribution strategy. The three product categories which were chosen for the study included tea powder. Data gathered through the survey have been subjected to various statistical analysis. The strategy at the organisation¶s end is decided after taking account the products that the organisation distributes and objectives in rural markets. Implications of the above findings are discussed from the vantage point of rural marketers through a µStepwise plan¶ for designing rural distribution. Survey method has been relied upon predominantly for this research.

the two are coming together. Companies such as Unilever.On one side are the fast-moving consumer goods (FMCG) and the consumer durables companies. the low penetration rates can be attributed to three major factors: low income levels." Several European multinational firms -. an independent. a market research firm that has published a Guide to Indian Markets 2006. a professor of marketing at Wharton. Other numbers are equally revealing.S. According to Raju. sales are up 200%. says: "No consumer goods company today can afford to forget that the rural market is a very big part of the Indian consumer market." he says. According to the National Council of Applied Economic Research (NCAER). or merchants. Among U. firms -. companies such as Colgate and Gillette have made considerable headway. rural India buys 46% of all soft drinks sold. According to NCAER. On the other are consumers in rural India. however. which means convincing people to change to toothpaste instead of using neem twigs to clean their teeth. the penetration of consumer durables has risen sharply in India's villages between 2000 and 2005. It's not like getting someone to switch brands. In Mumbai and New Delhi corner offices. Soft drinks giant Coca-Cola is growing at 37% in rural markets. In color TVs. In several categories. The fact that this has not happened in the past is not for want of trying.S. reaches barely 25% of the rural market. You can't build a presence for a brand in India unless you have a strategy for reaching the villages. But income levels are going up.have been making inroads into rural India for years. 49% of motorcycles and 59% of cigarettes. Jagmohan Singh Raju. the penetration is still low. potentially the largest segment of the market. According to MART. a New Delhi-based research organization that offers rural solutions to the corporate world. In absolute numbers. "A company like Colgate has to build toothpaste as a category. 77%. which was the traditional practice. for instance. "This is difficult to do and requires patience and investment by companies. Finally. Almost a third of the rural population now uses shampoo compared with 13% in 2000. non-profit research institution. Phillips and Nestle have long been known to India's rustic dukaandaars. rural households form 71. in motorcycles. compared with 24% in urban areas. infrastructure is improving and lifestyles are changing. . executives have long recognized that to build real sales volumes they will have to reach outside the big cities. firms. This trend is not limited just to utilitarian products: 11% of rural women use lipstick. Coke.and a few U. According to Hansa Research. inadequate infrastructure facilities and different lifestyles. according to Hansa Research. Spending in this segment is growing rapidly and consumption patterns are closing in on those of urban India." Companies that have figured this out are doing better in the villages than in the cities.7% of the total households in the country. marketing to rural customers often involves building categories by persuading them to try and adopt products they may not have used before. rural India already accounts for the lion's share. This means the upside potential is huge for companies that develop effective rural marketing strategies.

" says Dalip Sehgal. and it has become a case study for business schools and evolved beyond its original goals. and to improve rural living standards with greater awareness of health and hygiene. pricing. The company's Project Shakti (its name means "strength") was born out of this realization. promotion and place-. "The lives of thousands of women have changed . Rojamma initially made ends meet by working in her parents' fields. When the Indian economy opened up in early 1990s. "Today she is a proud entrepreneur and enjoys not only the money she earns from the project but also the respect of society. Distribution channels can make or break a company's rural marketing efforts. "Women from SHGs become Shakti entrepreneurs -. Launched in distributors [of Hindustan Lever products] in rural markets. It has been highly successful in marketing in rural India and has been a pioneer in reaching out to the smallest of villages with innovative products such as single-use packets of shampoo that sell for a penny. "This micro-enterprise offers low risks and high returns. while also making them part of the company's marketing network. It involved working with rural self-help groups (SHGs) to educate rural women. Hindustan Lever's drive into rural India was prompted in part by growing competition. as an example of a typical Shakti distributor. has been learning these lessons for nearly a (or distribution). The Shakti website features a video profile of Rojamma. speaking in village after village to impoverished and often illiterate women about the need to bathe their children and wash their clothes regularly and also selling them soap and detergent." says Sehgal. she does not want to invest in a bottle.000 or fewer residents. Hindustan Lever -. (The rural consumer uses shampoo on rare among India's largest FMCG companies." such as soap. a young woman from the state of Andhra Pradesh in Southern India. Infrastructure has always been the bugbear of the Indian marketer.which is in the process of changing its name to Hindustan Unilever to reflect the fact that it is the Indian subsidiary of the Dutch conglomerate -. shampoo and detergent. products must be priced low. They have live promotions and demonstrations during breaks. multinationals such as Procter & Gamble stepped up their activities. "The objectives of Project Shakti are to create income-generating capabilities for underprivileged rural women by providing a small-scale enterprise opportunity. Project Shakti was an important part of this strategy.) Independent agencies run media vans that show movies in distant villages. A mother of two who was left to fend for herself and two daughters after her husband abandoned the family. To sell in villages. whose 2006 revenues were $2. executive director of the Shakti initiative. Empowering Women Consumers Hindustan Lever. toothpaste." says Sehgal. She then joined the Shakti project and became a distributor of Hindustan Lever products.product. The area where innovation has moved to center stage is in the fourth P -. forcing Hindustan Lever to seek higher revenues and growth by reaching into villages with 1. profit margins must be kept to the minimum and the marketing message must be kept simple. The products distributed include a range of mass-market items especially relevant to rural consumers.FMCG and consumer durables companies have in the past tried tinkering with all the four 'P's -.of the marketing mix.8 billion. The commission Rojamma earned on her sales helped provide for her family.

ruralnaukri. Some Shakti distributors -. health and entertainment. other companies want to hop on to the Shakti bandwagon. Much of the additional income goes to educating children. That is why the rural market is critical for companies. Hindustan Lever has also tied up with partners such as Tata Consultancy Services. The Vani project." The Shakti model was piloted in 50 villages of the Nalgonda district in Andhra Pradesh. a financial services institution that is involved with providing micro-credit loans. One service that is likely to be added soon is insurance. and ICICI. which provides an income of Rs 700-1. Indeed.000 villages in states like Madhya Pradesh. is operational in more than 20. "Affluent consumers demonstrate that they have 'arrived' by buying bigger houses or cars.whom the company calls "entrepreneurs" -invest the extra money in buying vehicles such as motor scooters that allow them to go into more ITC's eChoupal Initiative Another innovator in rural distribution -. a community portal. Chattisgarh and Andhra Pradesh. The first-mover advantage is significant. India's largest software firm." says Ajay Gupta.000 Shakti distributors covering 500.000 of India's more than 600. It has now spread to more than a dozen states. People at lower income levels do so by buying premium brands.because of Shakti.000 (around $25) a month on a sustainable basis." iShakti is in its early days. it was launched in November 2004. By 2010. Calcutta-based tobacco-to- . it makes an enormous difference to women who live in remote villages in dire poverty.the $3. and iShakti. and also to purchasing consumer durables such as television sets. Meanwhile.000 women distributors covering 80. In many cases. According to Wharton's Raju. earnings from Shakti help them double their household income. there are behavioural reasons why rural consumers represent a sound bet for companies that are willing to invest in reaching them." A typical Shakti distributor sells products worth Rs 10. with help from Shakti distributors. They can also ask questions on any of these subjects and have them answered by experts. a job site for the rural market. agriculture. employment. the potential for growth is enormous. With the network now in place." says a Hindustan Lever spokesperson. According to media reports. CEO of www. a social awareness program.6 billion. which further expands the rural market for such products. creating 26. however. since studies have shown that just 15% of Indian consumers use products such as shampoo. This means brand loyalty is very high among less affluent consumers.000 villages. "These computers are equipped with software developed by Unilever through which users can access content in categories including education.000 (around $250) a month. "This initiative has been extremely successful. the Shakti project includes Shakti Vani (or voice). which is actively involved with the iShakti portal. In addition to the distribution network. the goal is to recruit 100. "Desktop computers are set up in the homes of Shakti entrepreneurs. Hindustan Lever has been able to reach rural consumers in thousands of remote Indian villages. Karnataka.000 villages.000-15. Shakti distributors now account for 15% of the company's sales in rural India. While this may not seem to be a high income.

Like Hindustan Lever's project Shakti. rice and wheat. The company exports various agricultural products -.has also been trying to build a platform that others can use. Sivakumar. mall sells consumer goods as well as agri-products. ITC significantly improved the efficiency of the channel and created value for both the farmer and itself.between the farmer and the market that it facilitated has allowed ITC to use it for distribution of goods and services from the market to the farmer. "This 7. ITC has the right credentials to launch this trust. in August 2004. This is within a tractor-driveable distance of target farmers. And there has been a stream of new initiatives. there is money to be made from the reverse flow. of course. That may not sound like much. At a recent seminar on rural marketing. ITC chairman Y. And ITC itself gains. It has thus evolved into a business platform." says Sivakumar. but had the choice to sell their produce either at the local market or directly to ITC at their hub locations. "In 2000. ITC embarked on an initiative to deploy technology to reengineer the procurement of soybeans from rural India. called aSanchalak. ITC generated $23 million selling chemicals and fertilisers. For instance. a simplified structure. to name a few. A warehousing hub managed by the former middleman. the connectivity -. the . called aSamyojak. "While the eChoupal network was initiated to facilitate more efficient and effective procurement. but it's early conglomerate ITC -. a rural retail outlet at the hub. (The former middlemen were given a role to avoid resistance to the project.consisting of a personal computer with Internet access were set up at the villages. In a recent move. ITC introduced the Choupal Sagar." says S.000 sq. In 2005-06. A hub location services a cluster of eChoupals." He explains that soybean farmers could access this kiosk for information on prices. ITC has set up its first urban outlet. The first was set up at Sehore in Madhya Pradesh.both physical and informational -. By purchasing directly from the farmer. ft. Deveshwar outlined plans to create a trust that could work as an agency through which companies -both private and public -. They joined because they could see that their traditional business was in jeopardy.soybean.called eChoupals -. The eChoupal infrastructure consists of: y A kiosk with Internet access in the house of a trained farmer. The trust route would hopefully make other companies more willing to sign up with their offerings. It needs to source them from farmers. y y This is. The benefits to the farmer are obvious. its eChoupal venture has been the subject of several case studies.) A collaborative network of companies orchestrated by ITC with a pan-India presence. This kiosk is within walking distance of target farmers.C." says Sivakumar. CEO of ITC's agribusiness division. ITC's foray into an enhanced distribution network came from the recognition that the existing agri-produce distribution channels were inefficient.could market goods and services to Indian farmers. "Kiosks -. Apart from the more efficient channel.

"We are starting with raising rural incomes. and create more than 10 million e-farmers.5 billion over the next few years to create a farm-to-storefront infrastructure for a pan-India retail network.000 towns and villages. you have to first put more money in their pockets.000 villages. "Both projects have created tremendous goodwill for Hindustan Lever and ITC. has a catalyzing effect on the whole community. They will stock the brand that sells the most. Its network now encompasses 240. accounting for 42% of the rural population. For consumers to buy products. a mobile services provider. What about other companies? Does it make sense for them to climb on the bandwagon? Sivakumar gives the example of PI Industries.3% in 2003 to 33% in 2005 after partnering with ITC to sell through the eChoupal. making up 50% of the rural population. company officials are equally confident about Project Shakti. Which is likely to succeed? Observers say there is place for both. whose initials once stood for Indian Tobacco Company. the Indian rural market is huge. while Shakti and eChoupal are different in orientation -. and the eChoupals' efforts to raise rural incomes by improving agricultural efficiency for the whole community." says Sivakumar. . too.each has been very successful in its own way.000 villages." This lesson has hardly been lost on Indian-owned companies. "You can't think of success just in financial terms. (Only part of this money is for the rural component. the eChoupal network will cover more than 100. We are creating a virtuous circle of higher income. "If you look at rural retail in India. Merchants will often stock just one brand in a category. The Mukesh Ambani-led group plans to pump in $5. "Over the next decade." Room for All Both Project Shakti and eChoupal have been around for less than a decade.other end of the eChoupal chain. According to Wharton's Raju. they do not have the resources to stock multiple brands. the battle for rural wallets will include not just European and U.5 million farmers. At Hindustan Lever. This. as critical as the one to reach focuses on individuals while the other is corporate-based -. "The eChoupal project is already benefiting more than 3. representing one-sixth of rural India. "The level of affordability in rural India is low. who parted ways with him in 2005. the outlet size is very small. is connecting rural India through Reliance Infocomm. which has increased its market share in Madhya Pradesh from 12." he says. Raju believes that the drive to gain access to rural retailers is. Over the coming months. They say they are in the business of creating entrepreneurs and arranging micro-credit for them.) Mukesh Ambani has company. A retail initiative by the $22. to retail fresh fruit and vegetables. multinationals but also fast-growing Indian companies. higher productivity and higher consumption. Brother Anil Ambani. especially for ITC." He adds that there is a distinction between the commission paid to Shakti entrepreneurs and the micro-credit arranged for them." That is no small asset.S. It plans to double the rural coverage to 400.6 billion Reliance Industries is a case in point. in some ways. Sivakumar claims the ITC model is superior because it involves two-way traffic." he says.

plans to set up 1. The rural initiative of the Mumbai-based $1. These days. which will need its supply chain. Gandhi. revered as the father of modern India.3 billion House of Godrej -. Like Thoreau and Tolstoy.Godrej Aadhaar -. From the Goenkas to the Gulabchands.000 stores across India in the next five years. believed that the country's future lay in her villages. every marketer would agree.There are many others. every major Indian business group has plans to move into the hinterland. . Delhi-based telecom major Bharti Airtel chairman Sunil Mittal has tied up with Wal-Mart. from the Tatas to the Thapars.

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