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Bottom of the pyramid: The flipside - Views on News from Equitymaster
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  • 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.



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    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.



    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

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

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    Aug 22, 2017 03:03 PM