Ral Retail - The Next Phase in Retailing

Rural Retail The next phase in retailing
Contents
1. 1.1. Rural Market in India ________________________________________________1 Key Trends ________________________________________________________ 1
1.1.1. Rising Purchasing Power ____________________________________________ 1 1.1.2. Changing Infrastructural Scenario ____________________________________ 1 1.1.3. Government Initiatives ______________________________________________ 1 2. 2.1. 2.2. 3. 4. 4.1 4.2 4.3 4.4 4.5 5. 5.1 5.2 5.3 5.4 5.5 5.6 6. 6.1 6.1.1 6.1.2 6.1.3 6.1.4 7. 7.1. 7.1.1. Conventional Retail Channels _________________________________________3 The Distribution Network ___________________________________________ 3 Distribution Network: The Challenges_________________________________ 4 Meaning of Organized Rural Retail ____________________________________6 Key Components and Issues___________________________________________7 Real Estate _________________________________________________________7 Planning and Forecasting ____________________________________________7 Supply Chain Efficiency _____________________________________________7 Retail Leveraging Technology ________________________________________9 Human Resource Management _______________________________________9 Key Growth Drivers _________________________________________________10 Rising Income and Consumption of the Rural Population _______________10 Changing Consumption Patterns ____________________________________11 Increased Availability of Financial Services____________________________12 Increased Access to Information and Communication Technology ______13 Significant Improvement in Infrastructure ____________________________14 Supply Chain Streamlining _________________________________________15 Rural Retail: Global Experiences ______________________________________16 A look at Current Rural Retailing Scenario ____________________________16 China __________________________________________________________16 Russia__________________________________________________________17 Central European Countries- Poland _______________________________18 Latin America- Argentina and Brazil _______________________________19 Rural Retail in India_________________________________________________20 Insights on the Prominent Organised Rural Retailers ___________________ 24 DSCL-Hariyali Kisaan Bazaar _____________________________________24 1
7.1.2. 7.1.3. 7.1.4. 7.1.5. 7.1.6. 8. 8.1. 8.2. 8.3. 8.4. 8.5. 8.6. 9. 9.1 9.2 9.3 9.4
Tata Chemicals Ltd.-Tata Kisan Sansar _____________________________27 Godrej Agrovet Ltd. - Godrej Aadhaar______________________________28 ITC- Choupal Sagar ______________________________________________29 Triveni Engineering and Industries Ltd.-____________________________31 Indian Oil Corporation Ltd.- ______________________________________33 Poor Infrastructure_________________________________________________ 35 Seasonality of demand _____________________________________________ 35 Heterogeneous population __________________________________________ 35 Complex buying behaviour _________________________________________ 35 Duplicate or spurious products ______________________________________ 36 Highly price conscious consumers ___________________________________ 36
Challenges _________________________________________________________35
Implications ________________________________________________________37 Government ______________________________________________________37 Manufacturers ____________________________________________________38 Intermediaries_____________________________________________________38 Farmers __________________________________________________________38
Appendix 1: List of Figures _________________________________________________42 Appendix 2: List of Images __________________________________________________42 Appendix 3: List of Sources _________________________________________________42 Appendix 4: List of Boxes ___________________________________________________43 Appendix 5: List of Tables __________________________________________________43 Appendix 6: List of Abbreviations and Acronyms ________________________________43
1. Rural Market in India

The rural market in India is undergoing a silent but definite revolution on the back of enhanced purchasing power of rural consumers, the changing consumption patterns and increasing overall value of consumption of goods and services. The sheer size of the rural market which has witnessed tremendous growth in the recent years as large sections of rural population transformed into discerning consumers has caught the imagination and incited business interest of the top conglomerates in the country.
1.1.
Key Trends
On account of rising purchasing power in rural India, the corporate sector is discovering the huge potential that can be realized by creating access and focusing marketing efforts in the rural segment. According to the National Council for Applied Economic Research (NCAER), there are as many middle-income and above households in the rural areas as there are in the urban areas. In fact, there has been a significant increase in the consuming class, with an annual income of Rs.45,000 to Rs. 215,000, from 13.5 per cent in 1995-96 to 25 per cent in 2006-07. This has been accompanied by an overall decrease in the segment of population with an annual income of less than Rs. 22,000 from 54.6 per cent to 25.1 per cent during the same period (Refer figure-3). A report by Assocham further states that by 2012, the per capita income of rural population will double and the rising per capita income will lead to an increase in their consumption levels.
1.1.1. Rising Purchasing Power
1.1.2. Changing Infrastructural Scenario

The focused market attention on the rural markets is aided by the slowly but surely changing infrastructural scenario in rural India. The budget proposals are an acknowledgement of the fact that Indias poor infrastructure needs urgent attention, which in turn is likely to address many of the ills besieging the countrys vast agricultural sector and the bottlenecks facing rural marketing in general and organized rural retail in specific. The plan outlays have progressively escalated from Rs. 140 billion in the VIIth plan to Rs. 300 billion in the VIIIth plan, and Rs. 600 billion in the IXth plan to a mammoth Rs. 900 billion in the Xth plan.
1.1.3. Government Initiatives

The focused approach of the government to bring about overall rural prosperity is evidenced by initiatives such as the doubling of farm credit
to Rs. 2250 billion in 2007-08. Budgetary allocations such as a Rs. 1.53 billion allocation for high-yield milch animal scheme, Rs. 110 billion outlay for irrigation schemes, Rs. 1 billion for New Rainfed Area Development Programme, approximately Rs. 225 billion fertilizer subsidy and about Rs. 40 billion for rural electrification and special funds for coffee, cashew and rubber, weather based crop insurance scheme are measures in this direction. Regional Rural Banks have been instructed to expand their branch networks and extend their services to non-resident Indians as well to expand their scope in general. Incentives to the agricultural sector which has really been the backbone of the rural economy is bound to favourably and directly impact growth of the rural sector. However, the rural consumers demand differential marketing effort on account of his socio-economic profile, reference points, ability to discriminate between alternatives and value assignment behaviour, which are significantly different from his urban counterparts. The infrastructure requirements and the marketing institutions that characterize the rural markets are very different from the urban setting. Therefore, there is an immense opportunity for the marketer to create innovative and creative solutions to tap the rural potential. It has been observed that Indias rural markets are growing at double the rate of urban markets. Moreover, the total number of rural households is expected to rise from 135 million in 2001-02 to 153 million in 2009-10. This is likely to result in rural India becoming the largest potential market in the world. Focus charts
Figure 1: Rural and Urban Potential
Figure 2: Rural Population Dispersion Status
Figure 3: Rural Income Dispersal Projection
Source 1: NCAER-2004-05, YES BANK analysis
2. Conventional Retail Channels

In most developed countries, the retail market is characterized by the dominance of organized retailing. In US, the share of organized retailing is estimated to be around 80 per cent. Developed European countries have an organized retailing share of 70 per cent while in Brazil and China it is 40 per cent and 20 per cent respectively. India, on the other hand lags behind by a huge margin with only 4 per cent of the total sales controlled by the organized retailing. It is estimated that there is no organized marketing and distribution in 87 per cent of Indias villages, which is home to 50 per cent of the rural population. As a result, large firms have often resorted to dependence on makeshift and dispersed channels and supply chains to meet the safety stock level needed for catering to the pan-India market.
2.1.
The Distribution Network

Indias distribution network in most parts of the country, especially for nonperishable products consists of C&F agents (Carrying and Forwarding agents), stockist/ warehouses, regional distributors, wholesalers, and retail sellers. It is common to find many companies in unrelated/non conflicting product lines sharing the network in a territory. The traditional distribution model has followed a four-tiered structure consisting of regional distributors, C&F agents, super stockists, stockists and retail outlets, depending on the size of the market in consideration.
Typical Stakeholders of Rural Distribution Network
Figure 4: Typical Stakeholders' of Rural Distribution Network
Rural distribution in India has coverage through rural super distributors or super stockists who are in charge of several stockists, including mobile stockists who carry products in vans to all villages in their territory and leverage the circuit costs over a wide range of products and brands.
The rural market in India is also characterized by the presence of a large number of haats (periodic markets numbering around 42,000) and melas (exhibitions numbering around 25,000) that account for the retailing of a wide range of merchandise in the far reaches of the country. This is due to the fact that a mere 5 and 0.05 per cent of total households headed by petty shopkeepers and businessmen are in the rural area, catering to the need of more than 70 per cent of the country's population. Industry Highlights Hindustan Unilever Limited: HUL, a consumer product manufacturer covers an urban population of 1 million retail outlets and a rural market consisting of 50,000 villages through its supply chain network that consists of about 80 factories, 150 outsourcing units, 2000 suppliers and 5000 distributors. Marico: Maricos distribution network covers almost every Indian town with a population of over 20,000. Its parallel rural sales and distribution network ranks among the top three in the industry and contributes 24 per cent to the companys top line. The infrastructure comprises 882 direct distributors, 153 super distributors-catering to 2393 small stockists and 4523 van markets.
Box 1: Industry Highlights Source 2: Images Retail, May 2007
2.2.
Distribution Network: The Challenges

The dispersed population and the lack of cost effective modes for distribution has induced the firms in India to use multiple tiers in the distribution network (Refer figure-4). The role of these players in the distribution channel is extremely important as most of the retail stores can stock only 510 units of a given stock and often stock competing brands together in a small space. As a result, it is the distributors and sales agents who need to convince the retailer about stocking their products as well as ensuring that their items are replenished on time at the retail stores. Given the important role of the different parties in the distribution channel, their profit margins are also high (approximately 30 per cent of the retail price and the majority share is received by the retailer). It is typical for a local distributor to have 510 per cent margin while a C&F agent may make 24 per cent. Multiple layers in the
distribution network impact the final price the customer has to pay for the product. The taxation structure in India is also complex with products typically being taxed twice, once by the central government and again by the state government. The complex interstate tax laws do not enable firms to optimize the distribution network, as a result of which firms in India are often required to set up at least one warehouse in each state for compliance. To mitigate these problems, the Indian government recently adopted the VAT structure (Value Added Tax) from the 1st of April 2005. So far, 20 of the 28 states have implemented VAT as on date. Trucking industry, the carrier of most of the business related transportation within India has been highly fragmented with about 2.7 million commercial fleets being operated by over half a million fleet operators. The industry has been lacking in average load capacity which at 7 tonnes is way below the global standards. Although outsourcing of logistics activities to third party firms is on the increase, there are very few organized third party logistics providers in India. Those that are operating are mainly in the trucking industry. Third party logistics (TPL) is still largely under developed with most business managing distribution and logistics themselves. A recent survey conducted by a leading Indian business daily found that many of the TPLs in India lacked the scale and financial support to provide value added services such as inventory management and order processing. As the industry evolves and firms strive to become more efficient in the distribution and transportation, it is clear that such value added services are likely to be in great demand.
3. Meaning of Organized Rural Retail

The Census, Reserve Bank of India (RBI) and Insurance Regulatory and Development Authority (IRDA) (Refer-Box 2) generally distinguish between urban and rural areas based on three metrics viz., population size, population density and economic activity. One of the commonly used definition is taken from census which first classifies urban areas and than classifies all other areas as rural. This method of defining rural areas is not apt from the point of view of reaching out to the rural market and there is the need for clearly distinguishing rural areas based upon population size, population density, purchasing power and infrastructure facilities available. The FMCG (Fast Moving Consumer Goods) companies, which have been most successful in penetrating the rural market, generally define all areas below the population of 20,000 as rural. Some consumer durables companies (such as LG) define rural areas as all areas with a population below 50,000. Existing Definitions of Rural Census: All places having a statutory municipal body that have a minimum population equal to 50,000, population density of greater than equal to 400 per square k.m. and 75 per cent of the male working population engaged in non-agricultural activity is defined as a town. All other locations are treated as rural. RBI: Locations with population upto 10,000 are considered as rural. IRDA: All locations with a maximum population of 5000, population density of less than equal to 400 and 75 per cent of the male working population engaged in agricultural activity are termed as rural.
Box 2: Existing Definitions of "Rural"
4. Key Components and Issues

The rural retail market in India is attractive but is fraught with a number of issues. For tapping this market these issues, would be requiring a long term commitment, cost reengineering and sustained innovation. The key issues that have been identified in rural retail are:
4.1
Real Estate
The initial selection of the retail space is critical to the success of a rural retailing venture and some of the important selection criteria for choosing a retail space are the potential for real estate development in the area, air, road and rail connectivity, overall economic activity in the targeted catchment area, expected footfalls and sales conversion ratio. These factors along with the retail format, product mix and shop-in-shop facility planned, will determine the location, size and ownership structure of the real estate to be acquired.
4.2
Planning and Forecasting

Range planning should be accurate so as to ensure that the customers needs are met by the right width and depth of product and deliveries to the store are made at the right time. It consists of key decisions of products to source, number and volume of stock keeping units under each product category and the time of sale. Proper estimation of the above requires the retailer to meticulously observe and analyse factors such as customer profile, turnover, potential, capacity available, seasonality and local preferences. Based on this, a fairly robust demand forecasting system may have to be undertaken.
4.3
Supply Chain Efficiency

The rural retail supply chain presents many complex issues and needs focused efforts for solving them efficiently and effectively. The use of store level, time-phased planning has an enormous impact on minimizing the effect of these challenges while increasing sales and reducing supply chain costs. The key issues in achieving supply chain efficiency in rural retail are the following: Inclusion of the consumer in the supply chain process o Consumer demand forecast based on sales history and anticipated demand (in some cases by collaborating with customers as well as suppliers)
o o
Customised replenishment plan calculation at store level based on unique consumer demand forecast, ordering rules and parameters Replenishment plan calculation at each supply chain partner level for developing a fully integrated product needs schedule
Product life cycle management o Decision to list or de-list products taken at a central level by proper forecasting at the store level and not at the distribution centre level o Retail forecast for creating replenishment plan based on each stores unique position by identifying changes in demand o Distribution centre level replenishment plan calculated and shared with suppliers to provide complete visibility of product phase-ins and phase-outs Promotional planning o Promotional sales forecast added to the base forecast of consumer demand, at the store level o Replenishment plans for all stores added together to create the distribution centre's demand plan Seasonal products planning o Forecasts of each stores consumer demand for a seasonal product based on historical sales and market knowledge o Identification of season end dates to minimize carry-over and product returns o Aggregate replenishment plan for all stores created by distribution centre. The distribution centre and suppliers utilize the information to create own replenishment plans Category management o Future projections of sales, inventory, purchases etc. need to be converted to retail revenues, cost etc. based on current plans to compare with budget and take corrective action on real time feedback o Projections rolled up from stock keeping unit to category to department to total store
4.4
Retail Leveraging Technology

The foundation of modern retailing is precise estimation of each stock keeping unit of each product in each store. This is possible only by creating an information system which accurately captures consumer behaviour and shares it seamlessly with all partners across the chain. It is, therefore, imperative to have the right technology for supporting not only the current business but also have scale up flexibility to meet fast paced growth plans. The enabling technology should be easy to manage with a centralised information system for the operations of the company. The technology enabler should have common systems and platforms across all units including suppliers to ensure smoother operations. A good information technology set-up helps a company to efficiently manage inventory, reduce working capital requirements and streamline the supply chain and logistics costs, thus reducing operating costs.
4.5
Human Resource Management

Trained manpower is instrumental in the success of a retail store especially in the rural areas. Absence of good quality personnel supported by infrastructure and documented policies and procedures could result in malpractices and poor customer satisfaction. It is important that a company venturing into rural retail invest in training its people so as to overcome the dearth of skilled manpower. Moreover, by employing the locally available talent it can expect to reduce human resource issues as well as ensure smooth operations of stores. The employees must be motivated through a good work environment, encouraging management and well-documented company ethos, policies and procedures. The key processes that need to be documented for efficient operations at the store level include cashiering, inventory management, customer service, query resolution, capital expenditure and information technology. Above all, the training and development should be focused to instill confidence in the human resource and to result in a uniform experience across stores to the customers.
5. Key Growth Drivers

5.1 Rising Income and Consumption of the Rural Population
There has been a significant increase in the income and correspondingly the consumption level of the rural masses. A recent study of NCAER demonstrates that the low-income population in rural India has come down from around 65 per cent during the early 1990s to 25 per cent at present while the middle-income households have gone up from 33 per cent to 70 per cent during the same period. The per capita income for the rural populace, which is at present Rs 7,000 is expected to double by 2012 supported by transition of subsistence agriculture to commercial farming. Correspondingly, the Monthly Per Capita Consumption Expenditure (MPCE) has shown a continual increase from Rs. 286.10 during 1993-94 to Rs. 559 in 2004-05 as revealed by the 61st NSSO survey (Refer figure-5). Moreover, the disposable surplus is high as the expenditure on house rent, drinking water or primary health care is negligible or in some cases nil. According to the NCAER, a new socio-economic category, the rural rich, has emerged which has shown an increase from 0.03 per cent in 1995-96 to almost 0.05 per cent in 2006-07. The above developments have led to India's rural population accounting for more than Rs. 4157 billion (US$100 billion) in consumer spending, making them by far the biggest buyers in the country.
Figure 5: Trends in All India Average Rural Consumption Source 3: NCAER 2004-05, YES BANK analysis
Conversion Rate: 1US$ = Rs.41.57, as on 17th August 2007, Source: Economic Times
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5.2
Changing Consumption Patterns

An increase in education level and media exposure has led to significant changes in the consumption pattern of rural India. In rural India the share of food in total expenditure has fallen throughout the three decades prior to 2004-05 and the overall fall was from 73 per cent to 55 per cent. However, the shares of milk and milk products, egg, fish and meat and fruits & nuts have increased by about 1 percentage point each, the share of vegetables has increased by 2.5 percentage points while that of beverages, refreshments & processed food has increased by 2 percentage points since 1972-73 whereas it has declined for cereals. In rural India expenditure on cereals forms 18 per cent of total consumption expenditure at present compared to 41 per cent in 1972-73.
Figure 6: Historical Trend Analysis of Food Consumption Pattern in Rural India Source 4: NSSO, YES BANK analysis
With economic development and diversification of the consumption basket over time, the choice tends towards a reduction of cereal consumption and an increase of consumption of other items such as the beverages,
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refreshments and processed food group. The share of miscellaneous goods and services (here including education, medical care, rent and taxes, sundry consumables, conveyance and other consumer services including conveyance) have grown from under 9 per cent to 23 per cent in rural India. Addressing this quantum growth of 23 per cent through organised rural retailing offers both a challenge and an opportunity.
5.3
Increased Availability of Financial Services

There has been a conscious effort by the banking fraternity to increase their services to the rural areas owing to RBI guidelines and in search for the fortune at the bottom of the pyramid. Figure 7 shows a steady increase in the rural deposits and credits in India.
Figure 7: Growth Trend of Rural Deposits & Credits Source 5: RBI, YES BANK analysis
The economic awakening of pastoral India is forcing the financial sector to sit up and take notice. This is evident in the slow but subtle shifts in the banking sector's credit portfolio. Between 2002 and 2006, the flow of institutional credit to agriculture has increased from Rs. 695.59 billion to Rs. 1493.43 billion (Refer figure-8). This is not only an indicator of greater financial inclusion but also that agriculture is no longer a taboo to large sections of the banking industry. In effect, agriculture in India is maturing into a viable economic activity and in several instances; government stipulation is no longer required for extension of credit. The greater access of rural areas to formal financial services can also be judged by the fact that the average size of population being served by a rural branch has meteorically jumped from 13,462 in 1991 to 16,650 in 2005. Moreover, the rural middle and upper middle class prefers approaching a rural bank branch or an NBFC (Non-Banking Financial Company) for fulfilling his financing
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requirements rather than approaching a moneylender. This is because the public sector banks and NBFCs offer them easier financing options to meet their credit needs.
* Only up to 31 December 2006
Figure 8: Flow of Institutional Credit to Agriculture Source 6: Ministry of Finance, YES BANK analysis
5.4
Increased Access to Information and Communication Technology

The mass media coverage in the rural areas has shown a continual increase with press media penetration increasing from 14 per cent in 2002 to 19 per cent in 2006 and cable and satellite (C&S) households increasing from 9.5 per cent to 20 per cent during the same period (Refer Figure-9). Moreover, the rural rich and the upwardly mobile rural population having significant purchasing power have mass media coverage almost akin to the urban masses.
Figure 9: Access to Press, TV and Mobile Services Source 7: Industry sources, YES BANK analysis
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The penetration of mobile telephony, although not comparable to urban centres, has brought about quite a few changes in rural India. The mobile telephony service acts as a bridge between the digital divide in the villages. The power of communication provides new opportunities of doing business and impetus to the growth of the service sector in the rural areas. A new class of brokers is likely to emerge to provide access to information which is the key to providing choices in an access-starved market. The low-entry barriers will ensure competition and growth of a sector that is at present characterized by the intermediaries thriving on the lack of information and competition to earn high margins. If the growth of availability of information is matched by relevant services and products at reasonable prices, an unprecedented economic boom can be foreseen in the near future.
5.5
Significant Improvement in Infrastructure

The new road connectivity and up gradation of existing road network have shown continual increase from 2005-06 to 2006-07 and expected to continue in 2007-08. Also rural electrification has been achieved in more than 80 per cent of the villages. The Government of India has a clear mandate towards rapid development of rural infrastructure to unleash the rural potential. The Government of India has conceived a time-bound plan under Bharat Nirman, which is a flagship programme for the country with a commitment of over Rs. 1740 billion to upgrade rural infrastructure. It has a holistic approach towards development of roads, telecom connectivity, rural housing, electrification and water supply. The different schemes for carrying out the Bharat Nirman programme are Pradhan Mantri Gram Sadak Yojana(PMGSY), Rajiv Gandhi Gramin Vidyutikaran Yojana, Indira Awaas Yojana and Rural Infrastructure Development Fund(RIDF). As part of the programme, Government of India intends that by end of financial year 2008 2009, every village of over 1000 population, or over 500 in hilly and tribal areas, has an all-weather road. To achieve the targets of Bharat Nirman, 1,46,185 k.m of road length is proposed to be constructed by 2009. This is expected to benefit 66,802 unconnected eligible habitations in the country. It will also provide telephone connection to 66,822 villages.
Source: Industry sources
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Figure 10: New Connectivity and Upgradation of Roads under PMGSY
Figure 11: Project-wise Number and Amount Sanctioned for Roads under RIDF Source 8: Ministry of Rural Development, YES BANK analysis
5.6
Supply Chain Streamlining

The existing supply chain in India is archaic and not in a position to cater to the needs of modern retailing, either rural or urban. The new and existing players entering the system are thus investing to get the back-end operations established which is essential for the efficient roll out of their retail network. The Bharti-Wal-Mart JV is focusing entirely on the supply chain and is willing to invest the next three to four years in setting up the network. Similarly, Reliance Retails plan of Rural Hubs, a procuring cum processing hub besides a one stop shop for farmers, is also an initiative towards supply chain streamlining. A number of other such initiatives, by corporates such as Pantaloons (Future Group), DSCL, ITC, Subhiksha and the likes, will be seen in the near future as the private sector try to bring about efficiency and best practices into their supply chains.
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6. Rural Retail: Global Experiences

This report concentrates on three main regions in the developing world- Asia, Central Europe and Latin America for analyzing the global retail scenario. The countries representing the region are China, Russia, Poland, Brazil and Argentina which also include the three major economies from the BRIC countries. All these countries have been showing robust economic growth with investor friendly environment. They are also pushing for a private-led equitable growth for balancing the rate of growth between the urban and rural areas. According to the latest estimates of United Nations, almost half of the world population continues to live in rural areas in 2007. Argentina, Brazil and Russia have predominantly urban populations, whereas in China, India and Poland, the majority of the populations still live in rural areas or smaller regional towns. The urban-rural divide is continually assuming significance considering the tremendous potential in the rural areas and the need for a focused effort to tap the rural consumption spree.
6.1
A look at Current Rural Retailing Scenario

6.1.1 China
The Chinese Government has embarked on an ambitious national rural retail network in February 2005 for transforming the rural retail sector within a time frame of five years. This programme is expected to cover 70 per cent of all villages and is likely to open huge opportunities for the organized retail players. The underlying promise of a distribution infrastructure improvement, preferential treatment and support from local governments is likely to pave the way for the private retail operators to access the hitherto unexplored rural market. The rural population amounts to more than 70 per cent of the country's population but has a disproportionate consumption capacity. Moreover, there are, approximately two country markets only for every sixty thousand peasants. These rudimentary open-air fairs are filled with fake commodities and illegal dealings due to lack of quality surveillance equipment and regulations. Registration fee, commissions and taxes increase the transaction cost and discourage peasants from entry. The proposed national rural retail network finds a way around these existing rural retail structures and is cost effective besides ensuring faster
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implementation. The programme aims at enticing willing retail operators to take over or co-operate with existing rural stores and country fairs by means of franchising or voluntary retail operation. This programme aims to ensure a smoother transition to organized retailing with participation of the existing channel members and provide urban retailing convenience in rural areas. On successful completion, this programme expects to see around 250,000 supermarkets and convenience stores chain in the major towns and villages by the end of 2008.
6.1.2
Russia
Russia has around 27 per cent of the total population residing in the rural areas. Big cities like Moscow, St. Petersburg, Novosibirsk, Volgograd, Kazan, etc. are reaching saturation point and an emerging need for expansion of retail into the lesser accessed regions is evolving. However, the sheer size of Russia with twelve time zones and the geographical position of cities with more than one million population, significantly constrains logistic efficiency. The logistic services are not highly developed in the country and frequent delay in deliveries is a challenging problem for the retailers. The existing retailers face stiff competition at the regional level where remoteness of the territories has a strong impact. Until few years ago the retailers were highly dependent on the suppliers but now the retailers are gaining bargaining power and have started demanding stringent delivery schedules, lower prices, easier credit terms, standardized packaging and labeling. For many of the largest retail players, Moscow has traditionally been an obvious entry point into Russia. It still accounts for around 25 per cent of the retail trade in Russia. However, a new trend is emerging wherein the retail players are announcing entry strategy through store openings in regional cities like Samara (e.g. Castorama), Saint Petersburg (e.g. Media Marketing-belonging to METRO group), etc. Three important developments that have been responsible for the above trends are: Rising income levels of population in the regional areas Stiff competition in Moscow and the other cities with a population of more than one million Scarcity of quality retail space in the bigger cities for both new and old players
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Regional chains are being developed by retailers mainly through the franchising route while the scale up is being accomplished through the inorganic route of acquisition of existing retail stores in the regional areas.
6.1.3
Central European Countries- Poland

The major trends in retailing are to a certain extent similar to all the Central European countries and are: The market share of small businesses, groceries and local markets is constantly declining in favour of the homogenised supermarkets, hypermarkets and discount stores Retail sale is likely to continue growing at a substantial rate despite last years slump in some countries. The growth is expected to be the fastest in Romania, Bulgaria and Slovakia Discount stores are rapidly gaining market share while supermarkets and hypermarkets are losing their position As the retail market in major cities is nearing saturation, retail chains are exploring opportunities further afield in more rural areas, bolstering sales and changing consumer habits The number of shoppers who choose the best quality products instead of the least expensive is increasing. More and more customers are beginning to appreciate the quality of services provided as well as ease and comfort of shopping instead of simply the value for money factor In Poland as the urban metropolitan areas are increasingly becoming saturated the retailers have started looking at smaller formats to expand into the rural areas. The country has a very low population density and only 4 per cent of the population living in the capital city while around 37 per cent population in the rural areas. Thus, the small towns and rural areas have a tremendous potential for the discount stores and supermarkets. This is attracting large players like Aldi who are set to enter the Polish market. The key to the rural market has been through supermarkets and discount stores which are efficient in meeting local needs offering a broad array of customized products. Thus, there has been a rapid expansion of supermarkets like Carrefour and Tesco. Discount stores have also been hugely successful in smaller towns and rural areas (having a population of less than 10,000) and are expected to grow rapidly. The discount stores
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are expected to achieve a peak in 10 years but it may drag out for 20-30 years until incomes have increased significantly.
6.1.4
Latin America- Argentina and Brazil

Latin America is slowly recovering from the economic crisis from 1998. Over the past three years, Brazil is showing a strong comeback and has climbed to 27th rank in the ATKearney Global Retail Development Index (GRDI). With a population of 185 million, Brazils retail market is worth Rs. 10392.50 billion (US$250 billion). Argentina has also a similar case with consumer spending decreasing after the economic crisis of 1998 but showing a comeback. However, some segmentsincluding restaurants and certain retail franchiseshave managed continuous growth. The share of organized retail is sizable with a share of more than 40 per cent though it does not figure on the top 30 countries in the GRDI. Small markets and family-owned retail outlets have gradually been replaced by larger chain stores. The developments mentioned above pertain mainly to the urban areas and rural retail scenario in the Latin American countries like Brazil and Argentina do not present so high a potential as in the other countries discussed above. This is because majority of the population live in the urban areas. Brazil has a rural population of only about 16 per cent while Argentina is lesser at around 10 per cent of the total population.
Conversion Rate: 1US$ = Rs.41.57, as on 17th August 2007, Source: Economic Times
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7. Rural Retail in India

The Indian retail industry is gearing up for massive structural changes on both the urban and the rural front with global players like Wal-Mart and Tesco competing for a share of the Indian retail market and domestic companies lining up huge investments for setting up rural retail chains. At an estimated market size of greater than Rs. 1400 billion (approximately US$34 billion, includes only FMCG, durables, agricultural inputs including tractors and 2-4 wheelers) and more than 60 per cent of the countrys 1.12 billion population, the rural retail market is too precious to be missed by corporate India. Moreover, for ensuring a sustained double-digit growth of the economy, the rural economy must be given a new impetus and as such the rural retail initiatives by the corporate sector are both timely and apt.
Rural Market Size Estimation*

2500 2000 Rs. Billion 1500 1000 500 0 2000 2005E Rs. Billion Year 2010F 2015F
* Includes FMCG, Durables, Agricultural inputs Figure 12: Rural Market Size Estimation Source 9: Industry estimates, YES BANK analysis
At present almost all the companies venturing into the rural market have a significant agribusiness interest. Most of these stores started out as shops selling agricultural inputs but have now become destination stores offering FMCG, consumer goods, automobiles and electronics, thus providing the last mile accessibility to the rural consumers. The rationale for approaching the rural consumers with an organized retail format has been mainly to offer the consumer choice of authentic products in a streamlined and a user friendly package. The traditional methods of approaching the rural consumer have been through each prospective seller of goods and services reaching out to the individual
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with more often than not, similar products which created heightened conundrum in the consumers mind. For the promoting agency too, this has often meant wastage and duplication of resources that could have been used more effectively elsewhere. Most of the players started their rural foray in 2002-04. Initial successes have led to ambitious expansion plans being drawn up by these players for the coming years. The key success factors in organised rural retailing are: Customized offerings suiting the rural mindset Attaining scale of operations coupled with a strong backend infrastructure Developing and implementing streamlined technological solutions for effective store management Uniformity in product quality, services and formats to instill trust and goodwill among the consumers At present the rural retail industry is still in its formative stages and is expected to take a few years from now for the above objectives to be achieved.
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The Agriculturally Advanced Northern and Southern States are Expected to Lead the Growth in Organized Rural Retail
Figure 13: Percentage of Surfaced Road to Total Road Length
Regions with high penetration Figure 14: Projection of Urbanisation for the Different Regions Regions with low penetration but high potential requiring market development
Regions with low penetration but high potential
Figure 15: Rural Retail Potential Map Source 10: Population projections for India & states, 2001-2006; Census India, 2001; Ministry of Human Resource & Development; Department of Road Transport & Highways, YES BANK analysis
Figure 16: Percentage of Villages with Electricity Source 11: YES BANK analysis
The growth of organized rural retailing in India has seen major action mainly in the Indo-Gangetic plains consisting of the states of Uttar Pradesh, Punjab and Haryana owing mainly to the advanced state of agriculture in these states. In the coming years the relatively wealthier southern states are expected to be the fore runners in the growth of the rural retail industry. The eastern region has mainly been left out of the advent of the organized rural retailing but holds immense potential if appropriate market development efforts are made by the corporates.
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Rural Retail: An analysis of the States in India
Figure 17: An analysis of the States in India
Monthly Per Capita Consumption Expenditure (MPCE) (Rural) in Rs.

Below 450 450-550 550-650 650-800 800 and above
Opportunity Matrix for Rural Retail in India based on MPCE and Agricultural Activity
High
Rajasthan, Gujarat, Maharashtra, Andhra Pradesh, Tamil Nadu, Kerala, West Bengal Punjab, Uttar Pradesh, Haryana
Potential
Bihar, Orissa, Madhya Pradesh, Chhattisgarh, Jharkhand Not economically viable
Low
Penetration
Figure 18: Opportunity Matrix for Rural Retail in India Source 12: NSSO, YES BANK analysis
High
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Some of the prominent players in the rural retail sector in India are: 1. DCM Shriram Consolidated Ltd. 2. Tata Chemicals Ltd. 3. Godrej Agrovet Ltd. 4. ITC Ltd. 5. Triveni Engineers and Industries Ltd. 6. Indian Oil Corporation Ltd. Murugappa Group: The latest entrant into rural retail The Chennai-based, Murugappa Group, in April, 2007, launched its agricultural retail venture with the opening of its first agricultural retail stores branded Mana Gromor, at Sattanpali in Guntur District of Andhra Pradesh. The Group has decided to initially set up 100 Mana Gromor stores. These stores, costing about Rs. 25 lakhs each, will come up in Andhra Pradesh, Tamil Nadu, Karnataka and Maharashtra. These outlets are designed to service the requirements of about 5,000 farmers living in 50 villages surrounding the shop. Apart from various agricultural inputs the stores will also provide hassle free credit to farmers and also impart education and training to farmers on soil condition, water management, crop timing and optimum use of inputs. Each store will be equipped with a testing laboratory to analyse soil samples, etc. collected by its trained personnel from the fields.
Box 3: Murugappa Group Source 13: Images Retail, May 2007
7.1.
Insights on the Prominent Organised Rural Retailers#
7.1.1. DSCL-Hariyali Kisaan Bazaar

DSCL is a DCM group company with primary business interest in agribusiness, chemicals and plastic. Hariyali Kisaan Bazaar (HKB) is the rural retail initiative of DSCL and to achieve faster growth the company has decided to convert HKB into a subsidiary company. HKB is expected to expand its network to around 200-250 stores in the next 12-15 months. HKB apparently started as a marketing arm to leverage DSCLs strong brand equity (especially its Shriram brand in Uttar Paradesh) and to reach out to the rural masses. The HKB chain, seeks to empower the farmer by
YES BANK analysis
24
setting up centres, which bridge the last mile gap by providing all encompassing solutions to the farmers under one roof. DSCL started the first HKB store at Delpandarva in Uttar Paradesh (UP) where it had a strong brand image and then rolled out other stores in different parts of UP. Thereafter, it seems to be following a focused approach of expansion into the high potential regions of the IndoGangetic plains consisting of the states of Punjab and Haryana. At present HKB has established its presence in the northern and central parts of India and has intensified its efforts to penetrate into the southern states which are high potential states with low penetration of organized rural retail. The HKB stores are characterized by being located away from town centres and have, on an average, an area of about two acres. These stores also include fuel pump facilities. Each HKB centre operates in a catchment of about twenty k.m. and caters to agricultural land of about 50000-70000 acres. A typical store provides the following services: A complete range of good quality, multi-brand agricultural inputs like fertilizers, seeds, pesticides, farm implements and tools, veterinary products, animal feed, irrigation items and other key inputs like diesel, petrol at fair prices Access to modern retail banking & farm credit through simplified and transparent processes as also other financial services like insurance A wide range of FMCG, consumer durables and apparels. Agricultural consultancy services through a team of qualified Agronomists Farm produce buyback opportunities, access to new markets and output related services
Image 1: Hariyali Kisaan Bazaar
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DSCL is planning to explore the potential of sourcing fresh fruits and vegetables as well as grains like wheat and rice from farmers and supply the same to various retail chains across the country. It will leverage the existing network of HKB stores and act as the interface between the farmers and the retail chains. DSCL will place contract farming orders with farmers and is likely to invest heavily on creating back-end infrastructure as it will be required to set up an extensive network of cold chain, refrigeration, transportation and distribution centres. Currently, DSCL is running pilot projects of sourcing for Big Bazaar and RPG-Spencers. Key features of Hariyali Kisaan Bazaar Store management is superior with proper layout, visual merchandising and attractive in-store promotional display The stores besides having quality agricultural inputs also provide for a wide range of FMCG, consumer durables, electronics, apparels, etc. and thus cater to the needs of the entire rural community The location of the stores at a distance from the town centres makes it easily accessible for the consumers from the surrounding villages Urban Health Care to Rural Population Fortis HealthWorld (FHWL), the one stop healthcare retail chain has announced its plans to reach rural India through its tie up with Hariyali Kisaan Bazaar. By setting up FHWL health stores in conjunction with Hariyali Kisaan Bazaar, Fortis HealthWorld seeks to empower rural India, mainly the farming community by providing services to meet all healthcare needs under one roof. With the intension of reaching out to the remotest corner of rural India and providing the best of products and services for all healthcare needs to the farmers and their family Fortis HealthWorld will have the following key features at the stores: OPD facility (Doctors consultation) Telemedicine Routine pathology tests collection centre (SRL Ranbaxy). Prescription, OTC, Alternate medicines (Ayurveda & Homeopathy) and also veterinary medicines. Wide range of fast moving health good and support systems.
Box 4: Urban Healthcare to Rural Population
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7.1.2. Tata Chemicals Ltd.-Tata Kisan Sansar

The fertilizer business of Tata Chemicals Ltd. (TCL) is mainly concentrated in the Indo-Gangetic plains having the most fertile soils and being the main grain cropped area in the country. Tata Kisan Kendras (TKK) were initially setup as one stop agricultural input shops for fulfilling the Indian farmers requirements, from seed sowing to post-harvest activities in the year 1998. The TKKs enabled farmers to purchase required products and also get expert information. Four years later the company conducted a strategic review of the TKKs and decided to evolve its focus and give it a greater thrust as a distribution tool. Finally after an extensive branding exercise, the TKKs evolved into Tata Kisan Sansar (TKS)-a one stop farmer solution shop. The TKS was set up with the objective of helping farmers to create value by improving farm productivity through better agronomic practices, facilitating farm credit and providing quality agricultural inputs from a single source leading to improved farm income. This in turn helped TCL in establishing a reputation as an approachable and reliable business partner for the farmer that offered end to end farm management solutions. The TKS network operates on a hub and spoke model wherein the company owned Tata Krishi Vikas Kendras (TKVK) act as the hub with the franchisee TKS as the spoke. The TKVK serves as a resource centre for both the TKS (franchisee) and the farmer. Each TKVK contains the entire infrastructure necessary to work as a comprehensive resource centre to fulfill the needs of the TKS network. Every TKVK is equipped with an administrative office, a training hall, a crop clinic, a soil-testing laboratory, a research and development farm, a storage godown, an exhibition hall and a TKS retail outlet, all under one roof. Each TKVK has a command area of around sixty k.m. and covers forty TKS. The franchisee TKS typically operates as a branded retail outlet of TCL, providing agricultural inputs, farm equipments, farm advisory services, farmer credit financing and produce buyback arrangements. Each TKS spans a radius of about eight k.m. and covers about sixty villages.
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Image 2: Tata Krishi Vikas Kendra (TKVK)
The TKS network seems to be expanding with the strategy of exploring the potential of the states of Punjab, Haryana, Uttar Pradesh, Bihar and West Bengal that have a majority share in TCLs fertilizer business. Moreover, each TKS seeks to service one mandi and further expansions are carried out in locations where there are gaps in servicing a mandi through TKS. Key features of Tata Kisan Sansar Formation of strong relationships and brand awareness among the farming community Scope of revamping the TKS stores to a slightly larger format to provide products and services to the entire rural community
Image 3: Tata Kisan Sansar
7.1.3. Godrej Agrovet Ltd. - Godrej Aadhaar

Godrej Aadhaar (GA) is the rural services cum retailing venture of Godrej Agrovet Ltd. (GAL) and belongs to the Godrej group. GAL is a key player
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in the Indian agricultural sector with a large presence in cattle, poultry and aqua feeds, agricultural inputs and oil palm development. The GA initiative seems to have evolved out of an objective of GAL to become a complete agricultural solution provider to the farmers and to reach out to the farming community directly by reducing the participation of intermediaries in the channel. The GA stores, in order to achieve this objective, provide quality agricultural inputs, professional crop advisory services, transfer of information (weather, price, and demand-supply), crop finance and output buyback services. Overtime the concept has metamorphosed to become a multi-category retail outlet providing not only complete agricultural solutions but a wide range of products and services suited to meet the daily needs of the rural populace. GA, in order to expand into the semi-urban and rural market, have decided to move out of the standalone store format to a hub and spoke model wherein the hub would cover about 10,000 sq ft and the spoke around 3,000 sq ft. Besides, providing agricultural inputs and a wide array of consumer products, these outlets will include a host of services such as banking, insurance, pharmacy, postal services and petrol pumps to make GA a destination point for all conveniences in rural areas.
Key features of Godrej Aadhaar Unique capability led empowerment process of the Indian farmer to sustain an improved productivity cycle. Demonstration of the improved productivity benefits of the Aadhaar programs, cycle after cycle, results in an enduring relationship with the farmer, while enhancing their capability to sustain thereon The new format Aadhaars promise a very conducive urban retail atmosphere and a women-friendly interface, thus halting shopping migration of consumers to nearby big towns
7.1.4. ITC- Choupal Sagar

The Choupal Sagar is the rural retail initiative of ITCs International Business Division (ITC-IBD). ITC-IBD is involved in the trading of a wide range of agricultural commodities and aqua foods. It is one of Indias largest exporters of agricultural commodities and has one of the finest supply chain models in India, achieved through its e-Choupal initiative.
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The Choupal Sagar initiative is a procurement driven effort of ITC-IBD to establish the hub-and-spoke Choupal network at two tiers in the villages which are as follows: First tier is the e-Choupal (spoke) at the village level which is located within five k.m distance of all target farmers. Second tier is the Choupal Sagar (hub) at the cluster level which is located within thirty k.m distance of the e-choupals(a single Choupal Sagar hub caters to around forty e-Choupal spokes) The e-Choupal acts as the procurement centre for ITC-IBD wherein a farmer finalize his contract with a Sanchalak (representative of ITC-IBD in the e-Choupal) for selling his agricultural produce. After finalizing the contract a farmer carry their produce to the Choupal Sagar hubs, deposits the produce at the warehouse and collects payments. The Choupal Sagar, which combines a procurement yard and a warehouse with a multicategory hypermarket, is designed to leverage the traffic of the cash rich farmers who come to deposit their produce at the warehouse.
Image 4: ITC-Choupal Sagar
The expansion of the Choupal Sagar network seems to be following the procurement objective of ITC-IBD. The existing stores at Madhya Pradesh, Uttar Pradesh and Maharashtra have the objective of procurement of soyabean and wheat. The future stores are expected to come up in states like Rajasthan (for soyabean and wheat), Karnataka (for coffee) and Andhra Pradesh (for aqua products).
30
Key features of Choupal Sagar The stores cater to the needs of the entire rural population with a wide range and depth of merchandise Uniformity in layout and design across all the existing stores The store management is superior with excellent visual merchandising and promotional display A qualified team of seven Agronomists are actively involved in agricultural advisory and supervision of field trials 7.1.5.
Triveni Engineering and Industries Ltd.-Triveni Khushali Bazaar

Triveni Khushali Bazaar is an initiative under Triveni Retail Ventures Ltd. which is a subsidiary of Triveni Engineering & Industries Ltd (TEIL). TEIL is one of Indias leading companies in the business of sugar manufacturing and engineered-to-order mechanical equipments. TEILs association with the sugar industry dates back to the pre-independence era. At present, with four plants in the state of Uttar Pradesh, it is the largest sugar producer in the country. Triveni Khushali Bazaar (TKB) started as an effort to further Trivenis agribusiness interest with a better and improved reach to its primary stakeholders-the farmers. TEIL has a command area of over one lakh ha under sugarcane cultivation that covers more than 1.46 lakh farmers and procures over Rs. 3 billion worth of sugarcane per annum from these farmers. However, presently there has been a conscious effort by the management to clearly differentiate between the agribusiness and the retail initiative. TKB is positioning itself as a lifestyle solution provider for the rural masses in the semi-urban and rural areas besides also providing for the needs of the farming community by banking on the TEIL brand. TKB operates through company owned large and small format stores. The larger stores are located near to the sugar mills (the TKB at Deoband, Uttar Pradesh is located next to the sugar mill) or rural and semi-urban commercial centres. The smaller stores on the other hand are located near to the villages. TKB is following a strategy in which it is expanding its store network in a concentric pattern in the states of Uttar Pradesh and Uttarakhand. In the near future, it may move on to other states such as Haryana and Punjab.
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Image 5: Triveni Khushali Bazaar
The larger TKB stores are designed like dome shaped structures operating on a low capital cost (leased) model. The stores cater to the entire basket of goods required by the rural populace besides the farming community with products such as agricultural inputs, farming implements (for sale and rental), cement, diesel, consumer goods and services such as facilitating institutional credit, insurance and agricultural consultancy. TKB has established tie-up with a number of leading companies like HPCL, Apollo, IFFCO, Chambal, Atlas, Godrej, HUL, etc. to sell their products through these stores. It has also signed a MoU with SBI to provide unlimited, unsecured financing to farmers. Key features of Triveni Khushali Bazaar Easy accessibility and brand visibility as the larger stores are located adjacent to main roads near large mandis or towns. The smaller stores are located near to villages The stores carry a broad range of products which can cater to the needs of the entire rural population and not just the farming community Provision of quality agricultural inputs in the Terai region of Uttar Pradesh which have problems of shortages during peak season Unique provision of easy credit to the farmers on the basis of crop hypothecation without a lien on land Employing a team of qualified agronomists to offer consultancy services to the farmers
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Tapping employees of TEIL and the sugar mills as customers
7.1.6. Indian Oil Corporation Ltd.-Kisan Seva Kendras

The government owned Indian Oil Corporation Ltd. (IOCL) is the largest company in India in terms of sales. As the flagship national oil company IOCL, together with its IBP Division, distributes petroleum products to millions of people everyday through a countrywide network of 32,550 sales points. It also operates the largest and the widest network of petrol and diesel stations in the country, numbering 16,455. The Kisan Seva Kendras (KSK) is the recent rural retail initiative of IOCL to strengthen its presence and explore the potential of the rural market with fuel and non-fuel retail. The KSKs seeks to achieve a first mover advantage in the rural areas that have a low penetration of organised retail and thereby build and retain a loyal customer base. In view of the increased margin pressure on fuel retail, it is a prudent initiative by IOCL to diversify into non-fuel retailing by leveraging its extensive network in the rural areas.
Image 6: Indian Oil Kisan Sewa Kendra
The KSKs are low cost (a typical outlet costs around Rs. four to five lakhs) retail outlets and are operated on a dealership basis by IOCL. The kendras are set up on the dealers land who gets the revenues from the non-fuel sales besides earning a margin on the sale of diesel (60 paise per litre of diesel) which is similar to that earned by the petrol pump operators. At present IOCL is not charging a share in the revenues from non-fuel sales (IOCL takes a one time security deposit from the KSK
33
dealers) but it is likely to happen on a later date when non-fuel sales will pick up in the rural areas. The management of the KSK rests with the dealer and IOCL have formed tie-ups with various companies like National Seeds Corporation, Indo-Gulf Fertilizers, Dabur, Godrej, TATA, Airtel, Bank of Baroda, Dena Bank and Oriental Bank of Commerce for the products and services at the KSK. The KSKs seem to be following an expansion strategy based on the potential of fuel sales in an area and the minimum fuel sales required to set up a KSK is thirty kilo litre (kl) per month. The average fuel sale in the KSKs is fifty kl per month which is a healthy figure when compared to the all-India average throughput of 70 kl per month per outlet. Key features of Kisan Seva Kendra Extensive network that have reach across the length and breadth of the country Low cost and de-risk model of the KSKs as the management of the kendras rests on the dealers The IOCL brand has a top of the mind recall in the entire country
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8. Challenges
The key challenges encountered in retailing in rural areas are:
8.1.
Poor Infrastructure
Poor physical and institutional infrastructure is the main reason that is holding back the private sector in exploiting the potential of the rural market. Although at present the situation is slowly improving, it may take some years before the issues are satisfactorily resolved. Thus, the corporates venturing into the sector have to factor these issues into their future plans for effectively tapping the rural market, thereby increasing shareholder value and the stock of the rural poor.
8.2.
Seasonality of demand
There is high seasonality of cash inflows and outflows in the rural households owing mainly to the agrarian nature of the rural economy. This fact is of particular importance for inventory planning and category management in the rural stores.
8.3.
Heterogeneous population
In comparison to the urban centres, rural India is characterized by a highly heterogeneous population in terms of purchasing power, language, literacy rate, social and religious customs, tastes and preferences. Therefore, understanding of the rural consumer and designing customized offerings is going to be a key challenge in exploring the rural market.
8.4.
Complex buying behaviour

The rural consumers lifestyle revolves around key factors such as social and religious customs, climatic considerations, etc. that not only have a bearing on the yield and consequently the revenue but also his belief system. The combination of these factors influences the buying behaviour. For the marketer, it translates into the need for gaining an appreciation of not only prevalent norms and customs but also the economic condition of the residents, before embarking on a marketing campaign. Such interplay of climatic and social factors is seldom seen in the urban context even for the consumers in the same income bracket.
35
8.5.
Duplicate or spurious products

The phenomenon of duplicate or spurious products is prevalent all over India but it is much more rampant and virulent in the rural areas. The problem is thriving on the demand-supply gap existing in the rural areas. The company distributors in many cases stick to the villages closest to their towns and service the small retailers in the far off villages through mobile distributors who stock counterfeit products. The manufacturers are resorting to legal means to curb the menace of fake products. However, the most effective method may exist in building a better rural distribution network which is most likely to put the manufacturers of fake products out of business.
8.6.
Highly price conscious consumers

The rural consumers are more price conscious than quality conscious. The mindset for securing quality for an extra additional rupee has still not seeped in to the desired extent into the rural mind. The key lies in making the rural consumer aware through sufficient promotional efforts. It is likely that as soon as the rural consumer becomes aware that the branded goods are costlier (than the local unbranded or fake products) due to their quality, which is beneficial to them, they will switch over and become a part of the branded products purchaser category.
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9. Implications
The rural retail sector in India is at a nascent stage and as the industry emerges the key implications for the various stakeholders can be enumerated as below:
9.1
Government
9.1.1 Employment generation
A direct impact of the growth of rural retail in India will be employment generation. Retail business is labour intensive and thus there is ample scope for creation of both direct and indirect employment in rural retail and ancillary services. The generation of indirect employment may be expected to result from direct fallout of the changes in the value chain at the manufacturers level, as well as other support activities like grading, sorting, packaging, storage, transportation and various other support services such as security, information technology, training, facility management, etc.
9.1.2
Infrastructure development
With the increased attention to the rural areas by the corporate sector on the back of increasing demand, there is a catalytic growth in infrastructure development being witnessed in the countryside. This is aided by the thrust provided by the government initiatives such as Bharat Nirman and is expected to eventually result in a well established and efficient supply chain.
9.1.3
Revenue and tax generation

Increased activity in the rural retail domain holds the promise of increasing revenue and tax generation for the government. It is likely to happen through the resurgence of the rural economy as well as the fact that increased sales will occur through the organised route. Moreover, the unorganised sector is notorious for tax evasion, which is not likely to be the case with organised retail.
9.1.4
Check rural migration

The reasons for migration of individuals from the rural to urban areas are mainly in the search of better employment and quality of life. As the rural retail phenomenon evolves it can be expected to usher in huge employment opportunities as well as a general increase in the standard of life in the rural areas with increase in rural economic activity.
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9.2
Manufacturers
9.2.1 Increased efficiency in supply chain
Improved supply chain efficiency will lead to better production schedules and accurate forecasting of demand.
9.2.2 Higher potential of category growth and ease in launching new and innovative products
Organised rural retail may enable manufacturers to isolate retail chain data which is invaluable for performance tracking and evaluation of product category. It offers manufacturers meaningful and actionable information for various category management initiatives as well as measuring the performance of specific projects such as new launches and line extensions.
9.2.3
Greater reach into the rural market

As the organised rural retail formats penetrate deeper into the rural areas the manufacturers are likely to gain access to the marginally penetrated rural markets. It has also the scope of reducing the dependence on the intermediaries, who are in many cases unreliable and augment the problem of spurious products through inadequate servicing.
9.3
Intermediaries
In the existing supply chain structure, there are many levels of redundant intermediaries, who do not add value to the products or services reaching the rural populace. As the rural retail revolution progresses, these intermediaries are most likely to play a pivotal role for the corporates in increasing the market penetration. The intermediaries are likely to benefit from alternative options as they get re-intermediated in the supply chain. The re-intermediation might result in the origination of new roles and functions for these supply chain players and might result in innovative marketing channels in the rural areas. This change process is likely to eventually bring about efficiency in delivery of goods and services and lower costs for the consumers.
9.4
Farmers
9.4.1 Increased efficiency in agriculture
Development and growth of organised rural retail is most likely to result in disintermediation in the food supply chain and increase production efficiency through alignment of production with consumer demand. Organised rural retail is also likely to promote improved farming
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technologies which will directly impact agricultural production both in quantity and quality, thereby helping better crop realization to the benefit of the farmers.
9.4.2 Better price discovery

Investments in technology up-gradation in the entire value chain including production, packaging, grading, storage and logistics will reduce wastage and duplication of efforts and enable farmers to realize better prices.
9.4.3 Check the growth of duplicate or spurious products

The increased penetration of organised rural retail may check the growth in the sale of duplicate and spurious products. It is likely through greater availability of branded and authentic products and the rural consumers would get access to better quality at affordable prices without facing the hazards of duplicate or spurious products.
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Rural Retail The next phase in retailing Table 1: Rural Retail A Snapshot
Retail store
Year of launch
Geographical presence Punjab, Haryana, Rajasthan, Madhya Pradesh, Uttar Pradesh, Uttarakhand Uttar Pradesh, Punjab, Haryana, Bihar, West Bengal Punjab, Haryana, Maharashtra, Gujarat, Andhra Pradesh, Orissa, West Bengal Madhya Pradesh, Uttar Pradesh, Maharashtra Uttar Pradesh, Uttarakhand States with highest density of KSK-Uttar Pradesh, Madhya Pradesh, Punjab, Tamil Nadu, Karnataka, Bihar
Number of stores
Future plans (no. of stores) 200-250 in next 12-15 months Not available Setup 1000 stores in next five years Not available 80 by 2008 and 200 by 2009 3000 in next four to five years
DSCL-Hariyali Kisan Bazaar
2002
70
Tata Kisan Sansar (TKS)
2004
800 TKS franchisees
Godrej Aadhaar
2003
31
ITC-Choupal Sagar Triveni Khushali Bazaar
2004
19
2005
45
IOCL-Kisan Seva Kendras (KSK)
2006
1400
40
Table 2: Operational Details
Store Hariyali Kisan Bazaar TATA Kisan Sansar Godrej Aadhaar ITCChoupal Sagar# Triveni Khushali Bazaar (Mother stores) IOCLKrishi Seva Kendra
Store area (sq.ft.) 90001000 300 30005000 7000
Catchments Field staff radius (km) (Agronomist) 25 4
SKU* (agri) 300
SKU*(non- Footfalls* Sales/month Footfalls(average)* agri) (peak) (average)* 3000-3500 200-350 33 2-5 lakhs
10 10 25
-4-6 8
200 150250 --
NA 950-1000 --
200 300-500 100-500
15-20 30-40 50-60
-2-3 lakhs 20-30 lakhs
15006000
10
250300
2500-3000
400-500
40
2-5 lakhs
4400
10-15
--
--
--
100-150
--
30000
* The figures may vary depending upon the store location. # The stores have an average of 15000 SKUs.
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Appendix 1: List of Figures

Figure 1: Rural and Urban Potential ..................................................................................................2 Figure 2: Rural Population Dispersion Status ......................................................................................2 Figure 3: Rural Income Dispersal Projection ........................................................................................2 Figure 4: Typical Stakeholders' of Rural Distribution Network ................................................................3 Figure 5: Trends in All India Average Rural Consumption ...................................................................10 Figure 6: Historical Trend Analysis of Food Consumption Pattern in Rural India......................................11 Figure 7: Growth Trend of Rural Deposits & Credits ...........................................................................12
Figure 8: Flow of Institutional Credit to Agriculture.............................................................13 Figure 9: Access to Press, TV and Mobile Services..............................................................13 Figure 10: New Connectivity and Upgradation of Roads under PMGSY.............................15 Figure 11: Project-wise Number and Amount Sanctioned for Roads under RIDF ...............15 Figure 12: Rural Market Size Estimation ...........................................................................................20 Figure 13: Percentage of Surfaced Road to Total Road Length ...............................................................22 Figure 14: Projection of Urbanisation for the Different Regions ..........................................22 Figure 16: Percentage of Villages with Electricity ...............................................................................22 Figure 17: An analysis of the States in India ......................................................................................23 Figure 18: Opportunity Matrix for Rural Retail in India .......................................................................23
Appendix 2: List of Images

Image 1: Hariyali Kisaan Bazaar ................................................................................................... 25 Image 2: Tata Krishi Vikas Kendra (TKVK)................................................................................. 28 Image 3: Tata Kisan Sansar............................................................................................................. 28 Image 4: ITC-Choupal Sagar.......................................................................................................... 30 Image 5: Triveni Khushali Bazaar ................................................................................................. 32 Image 6: Indian Oil Kisan Sewa Kendra ...................................................................................... 33
Appendix 3: List of Sources

Source 1: NCAER-2004-05, YES BANK analysis ...................................................................................2 Source 2: Images Retail, May 2007.....................................................................................................4 Source 3: NCAER 2004-05, YES BANK analysis .................................................................................10 Source 4: NSSO, YES BANK analysis ...............................................................................................11 Source 5: RBI, YES BANK analysis ..................................................................................................12
Source 6: Ministry of Finance, YES BANK analysis............................................................13 Source 7: Industry sources, YES BANK analysis .................................................................13 Source 8: Ministry of Rural Development, YES BANK analysis .........................................15 Source 9: Industry estimates, YES BANK analysis ..............................................................................20 Source 11: YES BANK analysis .......................................................................................................22 Source 12: NSSO, YES BANK analysis .............................................................................................23
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Source 13: Images Retail, May 2007 .................................................................................................24
Appendix 4: List of Boxes

Box 1: Industry Highlights ............................................................................................................... 4 Box 2: Existing Definitions of "Rural" ............................................................................................. 6 Box 3: Murugappa Group............................................................................................................... 24 Box 4: Urban Healthcare to Rural Population ............................................................................. 26
Appendix 5: List of Tables

Table 1: Rural Retail A Snapshot................................................................................................ 40 Table 2: Operational Details.......................................................................................................... 41
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Appendix 6: List of Abbreviations and Acronyms
44
The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the growth of industry in India, partnering industry and government alike through advisory and consultative processes. CII is a non-government, not-for-profit, industry led and industry managed organisation, playing a proactive role in Indias development process. Founded over 111 years ago, it is Indias premier business association, with a direct membership of over 6300 organisations from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 companies from around 336 national and regional sectoral associations. A facilitator, CII catalyses change by working closely with government on policy issues, enhancing efficiency, competitiveness and expanding business opportunities for industry through a range of specialised services and global linkages. It also provides a platform for sectoral consensus building and networking. Major emphasis is laid on projecting a positive image of business, assisting industry to identify and execute corporate citizenship programmes. CIIs theme of Competitiveness for Sustainable and Inclusive Growth reflects the Confederations commitment to balanced development that encompasses all sectors of the economy and all sections of society, at all levels Global, National, Regional, State and Zonal. Partnerships with over 120 NGOs across the country carry forward our initiatives in integrated development which include health, education, livelihood, diversity management, skill development and water, to name a few. With 57 offices in India, 8 overseas in Australia, Austria, China, France, Japan, Singapore, UK, USA and institutional partnerships with 240 counterpart organisations in 101 countries, CII serves as a reference point for Indian industry and the international business community. YES BANK, Indias new age private sector Bank, is the outcome of the professional commitment of its Founder, Rana Kapoor supported by his highly competent top management team, to establish a high quality, customer centric, service driven, private Indian Bank catering to Emerging India. YES BANK has adopted international best practices, the highest standards of service quality and operational excellence, and offers comprehensive banking and financial solutions to all its valued customers. A key strength and differentiating feature of YES BANK is its knowledge driven approach to banking and an unprecedented customer experience for its retail and wealth management clients. YES BANK is steadily building corporate and institutional banking, financial markets, investment banking, corporate finance, business (SME) and transaction banking, retail banking and wealth management business lines across the country. The Banks constant endeavour is to provide a delightful banking experience expressed with simplicity, empathy and totality. Any information or queries should be directed to: YES BANK Ltd. Nehru Centre, 9th Floor, Discovery of India Dr. A.B. Road, Worli, Mumbai- 400 018, India Tel: +91-22-55699000/24900650 Fax: +91-22-24900314 YES BANK Ltd. 7th Floor, Tower-B, Building No.-8, DLF Cyber City, Phase-III, Gurgaon, Haryana-122002, Tel: +91-124-4619030 Fax: +91-124-44147193
Kalyan Chakravarthy GKD, Food & Agribusiness Strategic Advisory & Research, Email: kalyan.chakravarthy@yesbank.in V Sridhar, Food & Agribusiness Strategic Advisory & Research, Email: sridhar.v@yesbank.in Priyank Bhardwaj, Food & Agribusiness Strategic Advisory & Research, Email: priyank.bhardwaj@yesbank.in Nirvanjyoti Bhattacharjee, Food & Agribusiness Strategic Advisory & Research, Email: nirvan.bhattacharjee@yesbank.in
Disclaimer: The information and opinions contained in this document have been compiled or arrived at from sources believed to be reliable, but no representation or warranty expressed is made to their accuracy, completeness or correctness. This document is for information purpose only. The information contained in this document is published for the assistance of the recipient but is not to be relied upon as authoritative or taken in substitution for the exercise of judgment by any recipient. This document is not intended to be a substitute for professional, technical or legal advice. All opinions expressed in this document are subject to change without notice. Neither YES Bank Ltd & CII, nor other legal entities in the group to which it belongs, accept any liability whatsoever for any direct or consequential loss howsoever arising from any use of this document or its contents or otherwise arising in connection herewith.
45

Ral Retail - The Next Phase in Retailing

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Ral Retail - The Next Phase in Retailing

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Rural Retail The next phase in retailing

Rural Retail The next phase in retailing

Rural Retail The next phase in retailing

1. Rural Market in India

1.1.1. Rising Purchasing Power

1.1.2. Changing Infrastructural Scenario

1.1.3. Government Initiatives

Rural Retail The next phase in retailing

Figure 2: Rural Population Dispersion Status

Figure 3: Rural Income Dispersal Projection

Source 1: NCAER-2004-05, YES BANK analysis

Rural Retail The next phase in retailing

2. Conventional Retail Channels

The Distribution Network

Typical Stakeholders of Rural Distribution Network

Figure 4: Typical Stakeholders' of Rural Distribution Network

Rural Retail The next phase in retailing

Distribution Network: The Challenges

Rural Retail The next phase in retailing

Rural Retail The next phase in retailing

3. Meaning of Organized Rural Retail

Rural Retail The next phase in retailing

4. Key Components and Issues

Planning and Forecasting

Supply Chain Efficiency

Rural Retail The next phase in retailing

Rural Retail The next phase in retailing

Retail Leveraging Technology

Human Resource Management

Rural Retail The next phase in retailing

5. Key Growth Drivers

Rural Retail The next phase in retailing

Changing Consumption Patterns

Rural Retail The next phase in retailing

Increased Availability of Financial Services

Rural Retail The next phase in retailing

* Only up to 31 December 2006

Increased Access to Information and Communication Technology

Rural Retail The next phase in retailing

Significant Improvement in Infrastructure

Source: Industry sources

Rural Retail The next phase in retailing

Figure 10: New Connectivity and Upgradation of Roads under PMGSY

Supply Chain Streamlining

Rural Retail The next phase in retailing

6. Rural Retail: Global Experiences

A look at Current Rural Retailing Scenario

Rural Retail The next phase in retailing

Rural Retail The next phase in retailing

Central European Countries- Poland

Rural Retail The next phase in retailing

Latin America- Argentina and Brazil

Rural Retail The next phase in retailing

7. Rural Retail in India

Rural Market Size Estimation*

Rural Retail The next phase in retailing

Rural Retail The next phase in retailing

Figure 13: Percentage of Surfaced Road to Total Road Length

Rural Retail The next phase in retailing

Rural Retail: An analysis of the States in India

Figure 17: An analysis of the States in India

Monthly Per Capita Consumption Expenditure (MPCE) (Rural) in Rs.