http://www.scribd.

com/doc/20541418/Distribution-Strategies-in-Rural-Markets

http://www.scribd.com/doc/35399173/Distribution-Strategy-in-rural-marketing

http://www.youtube.com/watch?v=75v2AsiDp6c

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 ‘P’ of the marketing mix which has invited maximum attention. Rao(1973), Sarin
et.al.(1988), 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
organisations did not operate in these areas only because of the lack of access to these markets. 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.

To address the issue of geographic spread and diversity every organisation operating in rural areas
devises its own distribution strategy. The strategy at the organisation’s end is decided after taking account
the products that the organisation distributes and objectives in rural markets. The literature on the evolution
of distribution channel structure points to the influence that distribution strategies have on the structure.
Each organisation by following its own unique strategy influences the structure in its own unique way.

The terminal point before reaching the rural consumer is the village retailer. The rural retailer by virtue of
his size, purchase behaviour and preferred channel partners influences the structure of the channel. In
terms of movement of the product very little is known about how exactly the product reaches the rural
retailer, which intermediaries does he purchases from. The problems are compounded by the fact that the
rural retailers are physically small in size, and the quantum of business done by each of them is also small.

The interaction of these three elements – the task environment, distribution strategy and rural retailer leads
to the formation of distribution structure. 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, and traces its existence to these three major elements in the conceptualisation and the
explanation hinges on the three influencers identified.

Survey method has been relied upon predominantly for this research. Six talukas across two states have
been selected and variations in the distribution channel structure across these taluka have been studied. A
total of 686 retailers across 103 villages were surveyed. The respondents were predominantly village
retailers and other intermediaries like the wholesalers and dealers in the channel. Responses were elicited
through the administration of a structured questionnaire. The three product categories which were chosen
for the study included tea powder, detergents and toothpaste.

Data gathered through the survey have been subjected to various statistical analysis, including correlation
and percentage analysis to understand the linkages between various variables; ANOVA to test if the
structure of distribution channels in the talukas selected were significantly different from each other. The
findings show significant differences in distribution structures across the selected talukas. This is inferred
as suggestive of the influence of the task environment. 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. The same is the case of the impact of distribution
strategy on structure of distribution. But the retailer behaviour in terms of quantity and frequency of
purchase has the influence on the structure as was hypothesised.

Implications of the above findings are discussed from the vantage point of rural marketers through a ‘Step-
wise plan’ for designing rural distribution.

Marketing to Rural India: Making the Ends Meet

Published: March 08, 2007 in India Knowledge@Wharton 
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

aSanchalak. This kiosk is within walking distance of target farmers.

 A warehousing hub managed by the former middleman, called aSamyojak.

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.