X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Bottom of the pyramid: The flipside - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Jun 8, 2009

    Bottom of the pyramid: The flipside

    In the previous article, we saw the huge opportunity provided by the bottom of the pyramid segment. In this article, we shall take a look at the other side of the coin.

    High volume, low value: There are 4 bn people at the bottom of the pyramid (BOP) across the globe. Their annual per capita income based on purchasing power parity is less than US$ 1,500, the minimum amount considered necessary to sustain a decent life. Of this more than a billion people have per capita income of less than US$ 1 per day. Further, as per United Nations, the richest 20% in the world account for 85% of the total income, while the bottom 20% owns just about 1.1%. Though they constitute the majority of the population, people at this level live in acute poverty and struggle to meet even their basic needs. Further, as seen from the table, the majority is spent on food. With cost of living expected to increase, these people would find it difficult to spend larger part on discretionary items going forward.

    Sector share of household expenditure (%)
    (%) National BOP
    Food 67.9 70.5
    Housing 4.4 2.5
    Water 0.1 0.1
    Energy 11.5 11.8
    Household goods 1.9 1.7
    Health 2.9 2.9
    Transportation 2.5 2.1
    ICT 1.0 0.6
    Education 1.4 1.2
    Other 6.5 6.6
    Source: World Resource Institute

    Also, their propensity to save is more in terms of survival and security needs and life cycle needs. Further, the poor pay a premium on items of consumption due to local monopolies, poor distribution and strong traditional intermediaries, thus further hampering their meager savings. Also, they earn income on a daily basis. So for instance if a hand cart puller misses work on a single day, it means he earns no income for that day.

    BOP : Declining volumes
      Soaps Detergents
    Total market size as of Feb 2009 Rs 78 bn Rs 102 bn
    Overall volumes* ( March 08 to Feb 09) 2.0% growth 3.6% dip
    Small packs share of overall market 25.0% 60.0%
    Volume dip for small packs 8.5% 5.0%
    Urban: volume dip for small packs 10.9% 9.6%
    Rural: volume dip for small packs 7.1% 1.6%
    Source : Nielson, Business newspaper

    The BOP segment is spread across the country and is very fragmented. Even the needs of the people in this segment are very basic. The products have to be priced cheaper, thus earning lower margins. As seen from the chart, Nestle at the BOP segment witnesses more sales at low priced goods with only 4% sales coming from products costing Rs 10, while 53% comes from products priced at Rs 5. Also, nearly 66% of product category sales come from chocolates and confectioneries which are low priced than beverages.

    They also do frequent purchases in small quantities and hence the processing and transactions costs are higher. Further, not all products except soaps, detergents, shampoo and razor blades do well as small packs account for large share in volumes. Hence, it increases the costs for companies to target all segments.

    Price premium paid by BOP segment
    Parameters Dharavi Warden Road Poverty Premium
    Credit (annual Interest) 600-1000% 12-18% 53.0
    Municipal Water (m3) US$ 1.12 US$ 0.03 37.0
    Phone call (per minute) US$ 0.05 US$ 0.03 1.8
    Diarrhoea medication US$ 20 US$ 2 10.0
    Rice (per kg) US$ 0.28 US$ 0.24 1.2
    Source : (Prahalad, 2005)

    As per the latest Nielsen data for the 11-month period from March 2008 to February 2009, bottom of pyramid no longer looks attractive. The soap and detergent sales at price points of Rs 10 and below have actually declined. This is worrisome as 1/4th of soap sales and 60% of detergent sales come from this segment. However, rural areas have witnessed lower decline, bringing some relief to FMCG companies as they can bank on these areas.

    Not an easy segment to target: Companies like Amul, Nirma and SBI have been successful in targeting this segment. However, HUL has witnessed mix success. For instance, Wheel helped HLL regain its market position. Furthermore, despite gross margins of 18% (vs. 25% for high-end products), the company achieved a return on capital employed (ROCE) of 93%, 4 times higher than that on its high-end products. However, in case of confectioneries, HUL pulled out of the business as it did not generate satisfactory financial results. Also, due to continuous losses in its ice-cream business, HUL decided to focus only on economically better-off customers in select cities.

    Hence, the BOP is not an easy segment to target. This potential market cannot be accessed with products and services currently offered to Tier 1 consumers, and will require fundamentally different approaches than the middle income segment. While, it is a volume game, margins may take a hit. Further, the needs are different and hence the 4Ps of marketing have to be targeted in a different way. The companies need to take a call on whether servicing this mass audience is worth the price or not.

    Also, better infrastructure, education and means to increase the income of the people in this segment are the need of the day. One cannot reduce poverty by selling more products as BOP consumers cannot buy more on account of their meager disposable incomes.

     

     

    Equitymaster requests your view! Post a comment on "Bottom of the pyramid: The flipside". Click here!

    2 Responses to "Bottom of the pyramid: The flipside"

    sudi p

    Jun 10, 2009

    Every theory has got it's limitation. Economic or management theories has got no universal application.It needs to be applied selectively. We have seen the fallout of BOP theory in US subprime crisis.

    Like 

    gg

    Jun 9, 2009

    Good to see some intelligent commentary on the BOTP which has unfortunately been reduced to a handy buzzword in investor presentations and research reports

    Like 
      
    Equitymaster requests your view! Post a comment on "Bottom of the pyramid: The flipside". Click here!
     

    More Views on News

    Marico: Earnings Hit by Lower Volumes and Firming Input Prices (Quarterly Results Update - Detailed)

    Aug 9, 2017

    While GST implementation brought down volumes and profitability in the short run, Marico remains optimistic in the long run.

    P&G: Strong Core Growth (Quarterly Results Update - Detailed)

    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.

    Nestle India: Sales Traction From New Products (Quarterly Results Update - Detailed)

    Nov 30, 2016

    Nestle India declared results for the quarter ended September 2016. Here is our analysis of the result.

    GSK Consumer: Price Hike Hurts Volumes (Quarterly Results Update - Detailed)

    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.

    Marico: Margin Expansion Drives Profit Growth (Quarterly Results Update - Detailed)

    Nov 28, 2016

    Marico has reported a flat topline while the bottomline has grown by 18% YoY during the quarter.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    More
    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: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE FMCG


    Aug 22, 2017 03:03 PM

    S&P BSE FMCG 5-YR ANALYSIS

    COMPARE COMPANY

    MARKET STATS