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Rural India - the key to fortunes - Views on News from Equitymaster
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  • Oct 30, 1999

    Rural India - the key to fortunes

    A mention of rural India may conjure up an image of abject poverty in the minds of many people. This, however, does not hold true in the case of a few fast moving consumer goods (FMCG) companies that have over the years been giving their rural operations a renewed thrust. Why would these companies be tapping into the rural markets in the first place?

    First, let's take a look at the distribution networks of three leading FMCG companies in India - Hindustan Lever Limited, Colgate Palmolive and Britannia. These three companies are market leaders in their core areas and much of their success has to do with the intricate marketing networks they have developed over the years. Hindustan Lever, as would be expected, has the largest reach in terms of the markets serviced. Colgate, on the other hand, has adopted a concentrated approach by focusing on fewer markets. Britannia, compared to the first two, has a much smaller reach.

    These companies, however, have one thing in common. A desire to step up their presence in the relatively virgin rural markets. The facts reveal it all - Hindustan Lever ha stepped up the share of rural turnover to 50% of total, while Colgate and Britannia now derive 35% and 30% respectively of their turnover from rural markets. Why this infatuation with the rural markets?

    Rural India accounts for over 75% of India's population and this in itself offers a tremendous opportunity for generating volume driven growth. Contrary to general perceptions, incomes in rural India have improved dramatically over the years mainly due to the eleven successive normal monsoons and increasing crop yields. Foodgrain production topped 200 m tonnes in financial year 1999 as compared to a production level of only 176 m tonnes in financial year 1991. Further, the tax benefits associated with incomes in rural areas boost spending power of the average rural family. These factors have created a vast market that has led to a rush amongst companies to tap this latent demand.

    First off the block was Hindustan Lever, which identified the potential of the rural market some years back. It launched 'Operation Bharat' to tap rural demand, focussing on personal care products. The benefit of the strategy was apparent over the last three years. While demand in urban India suffered due to an industrial slowdown, rural demand continued to remain buoyant as a result of the sustained improvement in rural incomes. The company was thus successful in attaining its growth targets - double profits every three years and revenues every four. The advantages were apparent and the rush inevitable.

    Britannia and Colgate, apart from Hindustan Lever, are the only FMCG companies in India that derive over 30% of their revenues from rural markets. Britannia has rejuvenated its rural thrust by the launch of Tiger biscuits, while Colgate has been attempting to woo the rural masses by offering low priced products in convenient packaging.

    The success of these companies has as much to do with understanding the psyche of the rural family as it has to do with a rural distribution network. A typical rural family is a price conscious consumer and this is where the key to success lies. Hindustan Lever, for example, extended its strategy of volume driven growth into rural markets and met with much success. Britannia on the other had launched Tiger to take on the existing economy brands in the market.

    The Indian rural markets are today witnessing competition in almost all product segments. However, companies that have the first mover advantage, are still leading their peers in terms of market shares. Whether the rural markets will meet with the expectations of the ever increasing number of companies seeking to grab a chunk of the rural markets is yet to be seen? One thing, however, is for sure: rural markets are set to play an important role in the strategies of the FMCG companies.



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