Jun 5, 2009|
The bottom of pyramid - a mixed opportunity
India's demographic profile has offered Indian companies several options to cater to diverse profile of customers. However, the segment that has excited the maximum interest in the recent past has been the bottom of pyramid (BOP). First used in 1932 by U.S. president Franklin D. Roosevelt and later highlighted by Professors C.K. Prahalad and Stuart L. Hart in 1998, Bottom of Pyramid (BOP) has caught the eye of many. It represents a latent market providing a new growth opportunity. It also opens the doors of innovation for the companies. In this series of articles on BOP we rationalize whether companies should tap this opportunity.
What is BOP?
As per Wikipedia, in economics, the bottom of the pyramid is the largest, but poorest socio-economic group. In global terms, there are 4 bn people across the world that live on less than US$ 2 per day, mostly in developing countries. This forms nearly two-thirds of the world's population and is estimated to touch 6 bn people within 40 years. Further, the developed economies are now saturated markets. The multinational companies are therefore increasing their presence to developing markets. Also the bulk of the world's population growth is occurring among the poor strata of the society in these developing economies.
For eg: India has 357 m people earning less than US$ 1 per day and around 750 m people surviving with less than US$ 2 a day. This segment accounts for 30% of national income and 33% of consumption. Even if we were to exclude the population earning less than US$ 1 a day, 393 m people still form 34% of India’s population and more than the entire US population. Just to give the big picture, if these 393 m people spend Re 1 per day every day, it amounts to Rs 143 bn in all, nearly equivalent to HUL's annual sales.
*based on purchasing parity in US$
Source: U.N. World Development Report
Though these people spend a minuscule amount of their income on discretionary items, the total combined income makes for a very large opportunity. As can be seen in case of Indian FMCG companies, sachets and small packs (generally targeting the poorer sections) are said to account now for more than half of sales of several FMCG products. HUL and P&G sell nearly half their premium detergents in tiny packs.
The BOP can provide opportunities for developing new goods and service. It opens up doors to new ideas as these consumers have to be served differently. Further, while the margins per unit may be low, it is a volume story. Eg: More than 40% of FMCG market is at prices upto Rs 10. Mr Prahalad has rightly said "the bottom of the economic pyramid is a sandbox for innovation. It can push companies to discover creative ways to configure their products, finances, and supply chains to enhance productivity".
The successful strategies can also be implemented higher up in the pyramid. For eg: The sachet strategy has been so successful that, 70% of total shampoo sales in rural India are by sachets. The purpose was to initiate rural consumers to use shampoo in the place of traditional substitutes and in the process increase sales volumes and make shampoo affordable for the masses. After seeing the success, urban consumers too responded in a positive way. Recently SBI launched Chota SIP (investments in mutual funds at small ticket size) to target the lower income group. The consumers in this segment are brand-conscious and value conscious. Also once established, the company can introduce more products to leverage the existing brand. HUL through project Shakti covers 1,35000 villages in 15 states. This micro-enterprise has helped HUL to push growth rates in several categories such as personal wash, fabric wash, shampoos, oral care and skin care. Brands like Annapurna, Lux, Lifebuoy, Breeze, Wheel, Fair & Lovely, Lakme, Ponds, Clinic Plus and Pepsodent have sold good numbers in smaller markets. The parent company seeing the success in India is betting on Project Shakti to reach to the bottom of the pyramid in Asian, African and Latin American markets.
In the next article we highlight the drawbacks of this segment
More Views on News
Aug 9, 2017
While GST implementation brought down volumes and profitability in the short run, Marico remains optimistic in the long run.
Dec 9, 2016
Procter & Gamble Hygiene and Health Care has announced the first quarter results of the financial year ended June 2017 (1QFY17). The company's sales rose by 12.5%YoY while net profit rose by 50.1% YoY during the quarter.
Nov 30, 2016
Nestle India declared results for the quarter ended September 2016. Here is our analysis of the result.
Nov 30, 2016
GSK Consumer Healthcare declared results for the quarter ended September 2016. The revenues dropped by 1.3% during the quarter as compared to a year ago; while the profits declined by 16.6% YoY during the quarter.
Nov 28, 2016
Marico has reported a flat topline while the bottomline has grown by 18% YoY during the quarter.
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407