On one side are the fast-moving consumer goods (FMCG) and the consumer durables companies. On the other are consumers in rural India, potentially the largest segment of the market. Finally, the two are coming together.

The fact that this has not happened in the past is not for want of trying. In Mumbai and New Delhi corner offices, executives have long recognized that to build real sales volumes they will have to reach outside the big cities. In several categories, rural India already accounts for the lion’s share. According to MART, a New Delhi-based research organization that offers rural solutions to the corporate world, rural India buys 46% of all soft drinks sold, 49% of motorcycles and 59% of cigarettes. This trend is not limited just to utilitarian products: 11% of rural women use lipstick.

Other numbers are equally revealing. According to the National Council of Applied Economic Research (NCAER), an independent, non-profit research institution, rural households form 71.7% of the total households in the country. Spending in this segment is growing rapidly and consumption patterns are closing in on those of urban India. Jagmohan Singh Raju, a professor of marketing at Wharton, says: “No consumer goods company today can afford to forget that the rural market is a very big part of the Indian consumer market. You can’t build a presence for a brand in India unless you have a strategy for reaching the villages.”

Several European multinational firms — and a few U.S. firms — have been making inroads into rural India for years. Companies such as Unilever, Phillips and Nestle have long been known to India’s rustic dukaandaars, or merchants. Among U.S. firms, companies such as Colgate and Gillette have made considerable headway. According to Raju, marketing to rural customers often involves building categories by persuading them to try and adopt products they may not have used before. “A company like Colgate has to build toothpaste as a category, which means convincing people to change to toothpaste instead of using neem twigs to clean their teeth, which was the traditional practice,” he says. “This is difficult to do and requires patience and investment by companies. It’s not like getting someone to switch brands.”

Companies that have figured this out are doing better in the villages than in the cities. Soft drinks giant Coca-Cola is growing at 37% in rural markets, compared with 24% in urban areas. According to Hansa Research, a market research firm that has published a Guide to Indian Markets 2006, the penetration of consumer durables has risen sharply in India’s villages between 2000 and 2005. In color TVs, sales are up 200%; in motorcycles, 77%. In absolute numbers, however, the penetration is still low. Coke, for instance, reaches barely 25% of the rural market. This means the upside potential is huge for companies that develop effective rural marketing strategies.

According to NCAER, the low penetration rates can be attributed to three major factors: low income levels, inadequate infrastructure facilities and different lifestyles. But income levels are going up, infrastructure is improving and lifestyles are changing. Almost a third of the rural population now uses shampoo compared with 13% in 2000, according to Hansa Research.

FMCG and consumer durables companies have in the past tried tinkering with all the four ‘P’s — product, pricing, promotion and place— of the marketing mix. Hindustan Lever — 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 — is among India’s largest FMCG companies. 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. (The rural consumer uses shampoo on rare occasions; she does not want to invest in a bottle.) Independent agencies run media vans that show movies in distant villages. They have live promotions and demonstrations during breaks.

The area where innovation has moved to center stage is in the fourth P — place (or distribution). Infrastructure has always been the bugbear of the Indian marketer. Distribution channels can make or break a company’s rural marketing efforts. To sell in villages, products must be priced low, profit margins must be kept to the minimum and the marketing message must be kept simple.   

Empowering Women Consumers

Hindustan Lever, whose 2006 revenues were $2.8 billion, has been learning these lessons for nearly a decade. The company’s Project Shakti (its name means “strength”) was born out of this realization, and it has become a case study for business schools and evolved beyond its original goals. “The objectives of Project Shakti are to create income-generating capabilities for underprivileged rural women by providing a small-scale enterprise opportunity, and to improve rural living standards with greater awareness of health and hygiene,” says Dalip Sehgal, executive director of the Shakti initiative.

Hindustan Lever’s drive into rural India was prompted in part by growing competition. When the Indian economy opened up in early 1990s, multinationals such as Procter & Gamble stepped up their activities, forcing Hindustan Lever to seek higher revenues and growth by reaching into villages with 1,000 or fewer residents. Launched in 2001, Project Shakti was an important part of this strategy. It involved working with rural self-help groups (SHGs) to educate rural women, while also making them part of the company’s marketing network. “Women from SHGs become Shakti entrepreneurs — direct-to-home distributors [of Hindustan Lever products] in rural markets,” says Sehgal. “This micro-enterprise offers low risks and high returns. The products distributed include a range of mass-market items especially relevant to rural consumers,” such as soap, toothpaste, shampoo and detergent.

The Shakti website features a video profile of Rojamma, a young woman from the state of Andhra Pradesh in Southern India, as an example of a typical Shakti distributor. A mother of two who was left to fend for herself and two daughters after her husband abandoned the family, Rojamma initially made ends meet by working in her parents’ fields. She then joined the Shakti project and became a distributor of Hindustan Lever products, 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. The commission Rojamma earned on her sales helped provide for her family. “Today she is a proud entrepreneur and enjoys not only the money she earns from the project but also the respect of society,” says Sehgal. “The lives of thousands of women have changed because of Shakti.”

A typical Shakti distributor sells products worth Rs 10,000-15,000 (around $250) a month, which provides an income of Rs 700-1,000 (around $25) a month on a sustainable basis. While this may not seem to be a high income, it makes an enormous difference to women who live in remote villages in dire poverty. In many cases, earnings from Shakti help them double their household income. Much of the additional income goes to educating children, and also to purchasing consumer durables such as television sets, which further expands the rural market for such products. Some Shakti distributors — whom the company calls “entrepreneurs” — invest the extra money in buying vehicles such as motor scooters that allow them to go into more villages.

Indeed, with help from Shakti distributors, Hindustan Lever has been able to reach rural consumers in thousands of remote Indian villages. According to media reports, Shakti distributors now account for 15% of the company’s sales in rural India. Meanwhile, the potential for growth is enormous, since studies have shown that just 15% of Indian consumers use products such as shampoo. According to Wharton’s Raju, there are behavioural reasons why rural consumers represent a sound bet for companies that are willing to invest in reaching them. “Affluent consumers demonstrate that they have ‘arrived’ by buying bigger houses or cars. People at lower income levels do so by buying premium brands. This means brand loyalty is very high among less affluent consumers. That is why the rural market is critical for companies. The first-mover advantage is significant.”

The Shakti model was piloted in 50 villages of the Nalgonda district in Andhra Pradesh. It has now spread to more than a dozen states, creating 26,000 women distributors covering 80,000 villages. By 2010, the goal is to recruit 100,000 Shakti distributors covering 500,000 of India’s more than 600,000 villages. “This initiative has been extremely successful,” says Ajay Gupta, CEO of www.ruralnaukri.com, a job site for the rural market.

In addition to the distribution network, the Shakti project includes Shakti Vani (or voice), a social awareness program, and iShakti, a community portal. “Desktop computers are set up in the homes of Shakti entrepreneurs,” says a Hindustan Lever spokesperson. “These computers are equipped with software developed by Unilever through which users can access content in categories including education, employment, agriculture, health and entertainment. They can also ask questions on any of these subjects and have them answered by experts.”

iShakti is in its early days; it was launched in November 2004. The Vani project, however, is operational in more than 20,000 villages in states like Madhya Pradesh, Karnataka, Chattisgarh and Andhra Pradesh. Hindustan Lever has also tied up with partners such as Tata Consultancy Services, India’s largest software firm, which is actively involved with the iShakti portal, and ICICI, a financial services institution that is involved with providing micro-credit loans. With the network now in place, other companies want to hop on to the Shakti bandwagon. One service that is likely to be added soon is insurance.

ITC’s eChoupal Initiative

Another innovator in rural distribution — the $3.6 billion, Calcutta-based tobacco-to-hotels conglomerate ITC — has also been trying to build a platform that others can use. At a recent seminar on rural marketing, ITC chairman Y.C. Deveshwar outlined plans to create a trust that could work as an agency through which companies — both private and public — could market goods and services to Indian farmers. The trust route would hopefully make other companies more willing to sign up with their offerings. ITC has the right credentials to launch this trust. Like Hindustan Lever’s project Shakti, its eChoupal venture has been the subject of several case studies.

ITC’s foray into an enhanced distribution network came from the recognition that the existing agri-produce distribution channels were inefficient. The company exports various agricultural products — soybean, rice and wheat, to name a few. It needs to source them from farmers.

“In 2000, ITC embarked on an initiative to deploy technology to reengineer the procurement of soybeans from rural India,” says S. Sivakumar, CEO of ITC’s agri-business division. “Kiosks — called eChoupals — consisting of a personal computer with Internet access were set up at the villages.” He explains that soybean farmers could access this kiosk for information on prices, but had the choice to sell their produce either at the local market or directly to ITC at their hub locations. A hub location services a cluster of eChoupals. By purchasing directly from the farmer, ITC significantly improved the efficiency of the channel and created value for both the farmer and itself.

“While the eChoupal network was initiated to facilitate more efficient and effective procurement, the connectivity — both physical and informational — 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,” says Sivakumar. It has thus evolved into a business platform.

The eChoupal infrastructure consists of:

  • A kiosk with Internet access in the house of a trained farmer, called a Sanchalak. This kiosk is within walking distance of target farmers.
  • A warehousing hub managed by the former middleman, called a Samyojak. This is within a tractor-driveable distance of target farmers. (The former middlemen were given a role to avoid resistance to the project. They joined because they could see that their traditional business was in jeopardy.)
  • A collaborative network of companies orchestrated by ITC with a pan-India presence.

This is, of course, a simplified structure. And there has been a stream of new initiatives. For instance, in August 2004, ITC introduced the Choupal Sagar, a rural retail outlet at the hub. The first was set up at Sehore in Madhya Pradesh. “This 7,000 sq. ft. mall sells consumer goods as well as agri-products,” says Sivakumar.

The benefits to the farmer are obvious. And ITC itself gains. Apart from the more efficient channel, there is money to be made from the reverse flow. In 2005-06, ITC generated $23 million selling chemicals and fertilisers. That may not sound like much, but it’s early yet. In a recent move, ITC has set up its first urban outlet, the other end of the eChoupal chain, to retail fresh fruit and vegetables.

What about other companies? Does it make sense for them to climb on the bandwagon? Sivakumar gives the example of PI Industries, which has increased its market share in Madhya Pradesh from 12.3% in 2003 to 33% in 2005 after partnering with ITC to sell through the eChoupal. “The eChoupal project is already benefiting more than 3.5 million farmers,” says Sivakumar. “Over the next decade, the eChoupal network will cover more than 100,000 villages, representing one-sixth of rural India, and create more than 10 million e-farmers.”

Room for All

Both Project Shakti and eChoupal have been around for less than a decade. Which is likely to succeed? Observers say there is place for both; the Indian rural market is huge. According to Wharton’s Raju, while Shakti and eChoupal are different in orientation — one focuses on individuals while the other is corporate-based — each has been very successful in its own way. “You can’t think of success just in financial terms,” he says. “Both projects have created tremendous goodwill for Hindustan Lever and ITC.” That is no small asset, especially for ITC, whose initials once stood for Indian Tobacco Company.

Sivakumar claims the ITC model is superior because it involves two-way traffic. “We are starting with raising rural incomes,” he says. “The level of affordability in rural India is low. For consumers to buy products, you have to first put more money in their pockets. We are creating a virtuous circle of higher income, higher productivity and higher consumption.” He adds that there is a distinction between the commission paid to Shakti entrepreneurs and the micro-credit arranged for them, and the eChoupals’ efforts to raise rural incomes by improving agricultural efficiency for the whole community. At Hindustan Lever, company officials are equally confident about Project Shakti. They say they are in the business of creating entrepreneurs and arranging micro-credit for them. This, too, has a catalyzing effect on the whole community.

Raju believes that the drive to gain access to rural retailers is, in some ways, as critical as the one to reach consumers. “If you look at rural retail in India, the outlet size is very small. Merchants will often stock just one brand in a category; they do not have the resources to stock multiple brands. They will stock the brand that sells the most.”

This lesson has hardly been lost on Indian-owned companies. Over the coming months, the battle for rural wallets will include not just European and U.S. multinationals but also fast-growing Indian companies. A retail initiative by the $22.6 billion Reliance Industries is a case in point. The Mukesh Ambani-led group plans to pump in $5.5 billion over the next few years to create a farm-to-storefront infrastructure for a pan-India retail network. (Only part of this money is for the rural component.)

Mukesh Ambani has company. Brother Anil Ambani, who parted ways with him in 2005, is connecting rural India through Reliance Infocomm, a mobile services provider. Its network now encompasses 240,000 towns and villages, accounting for 42% of the rural population. It plans to double the rural coverage to 400,000 villages, making up 50% of the rural population.

There are many others. The rural initiative of the Mumbai-based $1.3 billion House of Godrej — Godrej Aadhaar — plans to set up 1,000 stores across India in the next five years. Delhi-based telecom major Bharti Airtel chairman Sunil Mittal has tied up with Wal-Mart, which will need its supply chain. From the Goenkas to the Gulabchands, from the Tatas to the Thapars, every major Indian business group has plans to move into the hinterland.

Like Thoreau and Tolstoy, Gandhi, revered as the father of modern India, believed that the country’s future lay in her villages. These days, every marketer would agree.