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Rural Retailing

- by Navya Chaudhary *

Part - I

Indian Rural Market

An Overview

The Indian rural market with its vast size and demand base offers great
opportunities to marketers. Two-thirds of countries consumers live in rural
areas and almost half of the national income is generated here. It is only
natural that rural markets form an important part of the total market of India.
Our nation is classified in around 450 districts, and approximately 630000
villages, which can be sorted in different parameters such as literacy levels,
accessibility, income levels, penetration, distances from nearest towns, etc.

Few Facts

70 % of India's population lives in 627000 villages in rural areas. According

to the NCAER study, there are almost twice as many 'lower middle income'
households in rural areas as in the urban areas.

• At the highest income level there are 2.3 million urban households
as against 1.6 million households in rural areas.
• Middle and high-income households in rural India is expected to
grow from 80 million to 111 million by 2007.
• In urban India, the same is expected to grow from 46 million to 59
million. Thus, the absolute size of rural India is expected to be
double that of urban India.


The above figures are a clear indication that the rural markets offer the great
potential to help the India Inc which has reached the plateau of their
business curve in urban India to bank upon the volume-driven growth.

The Indian rural market with its vast size and demand base offers a huge
opportunity that MNCs cannot afford to ignore. With 128 million households,
the rural population is nearly three times the urban.

Part - II

As a result of the growing affluence, fuelled by good monsoons and the increase in agricultural output to
200 million tonnes from 176 million tonnes in 1991, rural India has a large consuming class with 41 per
cent of India's middle-class and 58 per cent of the total disposable income.

The importance of the rural market for some FMCG and durable marketers is underlined by the fact that
the rural market accounts for close to 70 per cent of toilet-soap users and 38 per cent of all two-wheeler
The rural market accounts for half the total market for TV sets, fans, pressure cookers, bicycles, washing
soap, blades, tea, salt and toothpowder, What is more, the rural market for FMCG products is growing
much faster than the urban counterpart.

Features of Indian Rural Markets

• Large and Scattered market:

The rural market of India is large and scattered in the sense that it consists of over 63 crore
consumers from 5,70,000 villages spread throughout the country.
• Major income from agriculture:
Nearly 60 % of the rural income is from agriculture. Hence rural prosperity is tied with agricultural
• Low standard of living:
The consumer in the village area do have a low standard of living because of low literacy, low per
capita income, social backwardness, low savings, etc.
• Traditional Outlook:
The rural consumer values old customs and tradition. They do not prefer changes.
• Diverse socio-economic backwardness:
Rural consumers have diverse socio-economic backwardness. This is different in different parts
of the country.
• Infrastructure Facilities:
The Infrastructure Facilities like roads, warehouses, communication system, financial facilities are
inadequate in rural areas. Hence physical distribution becomes costly due to inadequate
Infrastructure facilities.

Part - III

The rural bazaar is booming beyond everyone's expectation. This has been primarily attributed to a spurt
in the purchasing capacity of farmers now enjoying an increasing marketable surplus of farm produce. In
addition, an estimated induction of Rs 140 billion in the rural sector through the government's rural
development schemes in the Seventh Plan and about Rs 300 billion in the Eighth Plan is also believed to
have significantly contributed to the rapid growth in demand. The high incomes combined with low cost of
living in the villages have meant more money to spend. And with the market providing them options,
tastes are also changing.

Problems in the Booming Rural Marketing

Although the rural market does offer a vast untapped potential, it should also be recognized that it is not
that easy to operate in rural market because of several problems. Rural marketing is thus a time
consuming affair and requires considerable investments in terms of evolving appropriate strategies with a
view to tackle the problems.

The major problems faced are:

• Underdeveloped People and Underdeveloped Markets:

The number of people below poverty line has not decreased in any appreciable manner. Thus
underdeveloped people and consequently underdeveloped market by and large characterize the
rural markets. Vast majorities of the rural people are tradition bound, fatalistic and believe in old
customs, traditions, habits, taboos and practices.
• Lack of Proper Physical Communication Facilities:
Nearly fifty percent of the villages in the country do not have all weather roads. Physical
communication of these villages is highly expensive. Even today most villages in the eastern
parts of the country are inaccessible during the monsoon.
• Media for Rural Communication:
Among the mass media at some point of time in the late 50's and 60's radio was considered to be
a potential medium for communication to the rural people. Another mass media is television and
cinemas. Statistics indicate that the rural areas account for hardly 2000 to 3500 mobile theatres,
which is far less when compared to the number of villages.

Part - IV

• Many Languages and Dialects:

The number of languages and dialects vary widely from state to state, region to region and
probably from district to district. The messages have to be delivered in the local languages and
dialects. Even though the number of recognized languages are only 16, the dialects are
estimated to be around 850.
• Dispersed Market:
Rural areas are scattered and it is next to impossible to ensure the availability of a brand all over
the country. Seven Indian states account for 76% of the country's rural retail outlets, the total
number of which is placed at around 3.7 million. Advertising in such a highly heterogeneous
market, which is widely spread, is very expensive.
• Low Per Capita Income:
Even though about 33-35% of gross domestic product is generated in the rural areas it is shared
by 74% of the population. Hence the per capita incomes are low compared to the urban areas.
• Low Levels of Literacy:
The literacy rate is low in rural areas as compared to urban areas. This again leads to problem of
communication for promotion purposes. Print medium becomes ineffective and to an extent
irrelevant in rural areas since its reach is poor and so is the level of literacy.
• Prevalence of spurious brands and seasonal demand:
For any branded product there are a multitude of 'local variants', which are cheaper, and,
therefore, more desirable to villagers.
• Different way of thinking:
There is a vast difference in the lifestyles of the people. The kind of choices of brands that an
urban customer enjoys is different from the choices available to the rural customer. The rural
customer usually has 2 or 3 brands to choose from whereas the urban one has multiple choices.
The difference is also in the way of thinking. The rural customer has a fairly simple thinking as
compared to the urban counterpart.

The 4A Approach

The rural market may be alluring but it is not without its problems: Low per capita disposable incomes that
is half the urban disposable income; large number of daily wage earners, acute dependence on the
vagaries of the monsoon; seasonal consumption linked to harvests and festivals and special occasions;
poor roads; power problems; and inaccessibility to conventional advertising media.

Part - V

However, the rural consumer is not unlike his urban counterpart in many ways.

The more daring MNCs are meeting the consequent challenges of availability, affordability,
acceptability and awareness (the so-called 4 As).

The first challenge is to ensure availability of the product or service. India's 627,000 villages are spread
over 3.2 million sq km; 700 million Indians may live in rural areas, finding them is not easy. However,
given the poor state of roads, it is an even greater challenge to regularly reach products to the far-flung
villages. Any serious marketer must strive to reach at least 13,113 villages with a population of more than
5,000. Marketers must trade off the distribution cost with incremental market penetration. Over the years,
India's largest MNC, Hindustan Lever, a subsidiary of Unilever, has built a strong distribution system,
which helps its brands reach the interiors of the rural market. To service remote village, stockists use
auto-rickshaws, bullock-carts and even boats in the backwaters of Kerela. Coca-Cola, which considers
rural India as a future growth driver, has evolved a hub and spoke distribution model to reach the villages.
To ensure full loads, the company depot supplies, twice a week, large distributors which who act as hubs.
These distributors appoint and supply, once a week, smaller distributors in adjoining areas. LG
Electronics defines all cities and towns other than the seven metros cities as rural and semi-urban market.
To tap these unexplored country markets, LG has set up 45 area offices and 59 rural/remote area offices.

Study on buying behaviour of rural consumer indicates that the rural retailers influences 35% of purchase
occasions. Therefore sheer product availability can affect decision of brand choice, volumes and market
share. Some of the FMCG giants like HLL took out project streamline to significantly enhance the control
on the rural supply chain through a network of rural sub-stockists, who are based in the villages only.
Apart from this to acquire further edge in distribution HLL started Project Shakti in partnership with Self
Help groups of rural women.


The second challenge is to ensure affordability of the product or service. With low disposable incomes,
products need to be affordable to the rural consumer, most of whom are on daily wages. Some
companies have addressed the affordability problem by introducing small unit packs. Godrej recently
introduced three brands of Cinthol, Fair Glow and Godrej in 50-gm packs, priced at Rs 4-5 meant
specifically for Madhya Pradesh, Bihar and Uttar Pradesh - the so-called `Bimaru' States.

Part - VI

Hindustan Lever, among the first MNCs to realise the potential of India's rural market, has launched a
variant of its largest selling soap brand, Lifebuoy at Rs 2 for 50 gm. The move is mainly targeted at the
rural market. Coca-Cola has addressed the affordability issue by introducing the returnable 200-ml glass
bottle priced at Rs 5. The initiative has paid off: Eighty per cent of new drinkers now come from the rural
markets. Coca-Cola has also introduced Sunfill, a powdered soft-drink concentrate. The instant and
ready-to-mix Sunfill is available in a single-serve sachet of 25 gm priced at Rs 2 and multiserve sachet of
200 gm priced at Rs 15.


The third challenge is to gain acceptability for the product or service. Therefore, there is a need to offer
products that suit the rural market. One company, which has reaped rich dividends by doing so, is LG
Electronics. In 1998, it developed a customised TV for the rural market and christened it Sampoorna. It
was a runway hit selling 100,000 sets in the very first year. Because of the lack of electricity and
refrigerators in the rural areas, Coca-Cola provides low-cost ice-boxes - a tin box for new outlets and
thermocol box for seasonal outlets.

The insurance companies that have tailor-made products for the rural market have performed well. HDFC
Standard LIFE topped private insurers by selling policies worth Rs 3.5 crore in total premia. The company
tied up with non-governmental organisations and offered reasonably priced policies in the nature of group
insurance covers.

Mass media is able to reach only to 57% of the rural population. Creating awareness then, means utilizing
targeted, unconventional media including ambient media .For generating awareness, events like fairs and
festivals, Haats, etc., are used as occasions for brand communication. Cinema vans, shop-fronts, walls
and wells are other media vehicles that have been utilized to increase brand and pack visibility. Ideas like
putting stickers on the hand pumps, walls of the wells putting on tin plates on al the tree surrounding the
pond are some of the innovative media used by personal wash like Lux and Lifebuoy and fabric wash
items like Rin and Wheel. Idea was to advertise not only at the point of purchase but also at the time of

Part - VII

With large parts of rural India inaccessible to conventional advertising media - only 41 per cent rural
households have access to TV - building awareness is another challenge. Fortunately, however, the rural
consumer has the same likes as the urban consumer - movies and music - and for both the urban and
rural consumer, the family is the key unit of identity. However, the rural consumer expressions differ from
his urban counterpart. Outing for the former is confined to local fairs and festivals and TV viewing is
confined to the state-owned Doordarshan. Consumption of branded products is treated as a special treat
or indulgence.

Hindustan Lever relies heavily on its own company-organised media. These are promotional events
organised by stockists. Godrej Consumer Products, which is trying to push its soap brands into the
interior areas, uses radio to reach the local people in their language.

Coca-Cola uses a combination of TV, cinema and radio to reach 53.6 per cent of rural households. It
doubled its spend on advertising on Doordarshan, which alone reached 41 per cent of rural households. It
has also used banners, posters and tapped all the local forms of entertainment. Since price is a key issue
in the rural areas, Coca-Cola advertising stressed its `magical' price point of Rs 5 per bottle in all
media.LG Electronics uses vans and road shows to reach rural customers. The company uses local
language advertising. Philips India uses wall writing and radio advertising to drive its growth in rural areas.

The key dilemma for MNCs eager to tap the large and fast-growing rural market is whether they can do so
without hurting the company's profit margins. In case of nestle, company's product portfolio is essentially
designed for urban consumers which cautions companies from plunging headlong into the rural market as
capturing rural consumers can be expensive.

Role of Rural Retailing

Retailing is the final phase of the distribution channel and it is clear by now that it is availability and
distribution that drives growth in rural Indian markets. Hence retailing will be significant and will undergo
greater organisation and maturity as is being witnessed in the urban markets, even in the rural markets.
Innovative retail models which take into account the nuances of rural markets is the way forward.

Part - VIII

Study on buying behaviour of rural consumer indicates that the rural retailers influences 35% of purchase
decisions. Therefore sheer product availability can affect decision of brand choice, volumes and market
share. India offers a huge, sustainable and growing rural market which can be tapped effectively through
innovative distribution channels with retailing being the most critical element of this strategy as it is the
final touch point and the actual touch point with the customer which can be the most critical influence in
the buying process.
Developments in Rural Retailing

Rural Malls: Chaupal Sagar

Chaupal Sagar is one of the first organised retail forays into the hinterland. It was soft-launched on 15
August. It is actually a warehouse for storing the farm produce that ITC buys through its e-chaupals. The
mall has come up in one part of this warehouse.It has been set up by the international business division
of tobacco major ITC. It has been initiated as rural shopping-cum-information centres in Madhya Pradesh.
The first rural mall has come up 40-odd kilometres journey from Bhopal towards Sehore.

ITC Spent 3 years and Rs.80 crores on research and development of this concept including investments
in E-choupal.


ITC describes the establishment as a set to create a high-quality, low-cost fulfilment channel for rural
India. However, any organisation is driven by the profit motive which are served through this initiative:

 Reap benefits from the market they have created

 Creating an entry barrier for other prospective players
ITC has very effectively integrated its profit and social motives.


KSA Technopak - "It is definitely a pioneering venture because no other Indian company has yet entered
rural retailing with the all-under-one-roof concept."

Malls stocking wide variety of products with floor space of 7000 sq.ft plus a trading zone and information
centre. It is a Hub cum Supermarket, which has been set up in a section of the ITC rural warehouses.

Part - IX


Chaupal Sagar cannot be shoehorned into any of the existing retailing categories. At 7,000 square feet, it
is too small to be a mall.

It has opted for self-service, stocking its merchandise on shelves lining the neat aisles, it stocks a breadth
of products no supermarket can. It offers almost everything - from toothpastes to televisions, hair oils to
motorcycles, mixer-grinders to water pumps, shirts to fertilisers... It defies pigeonholing. It is just a very
sharply thought-out rural store.

Most of the brands it sells are national such as Marico, LG, Philips, torches from Eveready, shirts from
ITC's apparel business, bikes from TVS, and tractors from Eicher.


Spread over 5 acres of land at Sehore in Madhya Pradesh: -

• Rural shopping malls will be open from 6 am to 9 pm.

• Features and facilities at these ITC malls can overshadow those in the metros. The ITC store
sells everything that a rural consumer may ask for - sarees to kurta-pyjamas to shirts (in the
range of Rs 99-500), footwear, groceries, electronic durable from TVs to microwaves, cosmetics
and other accessories, farm consumption products like seeds, fertilisers, pumps, generators and
even tractors, motorcycles and scooters.
• Banking and automated teller machines will be standard at the malls.
• Insurance products for farmers.
• Entertainment facilities, restaurants, public facilities and parking space will also be available.
• There is even a fuel pump in tie-up with BPCL and a cafeteria.
• Parking lot for 160 tractors.
• There will be a primary healthcare facility to be serviced by a private healthcare service provider.
• Information centres: The company will create the facility for providing online information on
commodity rates and weather.
• Shopping malls will have a training facility on modern farm techniques.
• Farmers can come and log on to the Internet and check the pricing and sell their commodities.
• There will also be godowns for storing the wheat and soybean and also for stocking products
retailed at the mall.
• Part - X
• Business Model
•  The business model of Chaupal Sagar is linked closely with the E-chaupal initiative of ITC.
•  Role of ITC is to create infrastructure such as space, computers, and building.
•  ITC will charge a fee for the services and items sold at the mall.
• E-CHAUPAL: E-Chaupal is the backbone of these rural malls. While the first layer (E-Chaupal)
provides the farmers necessary information about weather and prices, this hypermarket initiative
will provide them another platform to sell their produce and purchase necessary farm and
household goods under the same roof.

• The e-Choupal model required that ITC to make significant investments to create and maintain its
own IT network in rural India and to identify and train a local farmer to manage each e-Choupal.
• E-Choupal combines a Web portal in the local language and PCs with Internet access placed in
the villages to create a two-way channel between ITC and the villagers. The project started with a
pilot in June 2000 in Madhya Pradesh with Soybean farmers. Currently, it covers six states, and
multiple commodities like prawns, cotton and coffee with 4000 Choupals.
Part - XI

Plans are to reach 15 states by 2010, covering 100,000 villages with 20,000 Choupals.

Each e-Choupal (equipped with a PC with Internet connectivity, printer and UPS) typically housed in the
farmer's house, is linked to the Internet via phone lines or, increasingly, by a VSAT connection, and
serves an average of 600 farmers in 10 surrounding villages within about a five kilometer radius. Using
the system costs farmers nothing, but the host farmer, called a sanchalak, incurs some operating costs
(The IT part of each e-Choupal costs about Rs 1.3 lakh, each e-Choupal is estimated to pay back for itself
in 4.5 years) and is obligated by a public oath to serve the entire community; the sanchalak benefits from
increased prestige and a commission paid him for all e-Choupal transactions. The farmers can use the
computer to access daily closing prices on local mandis, as well as to track global price trends or find
information about new farming techniques-either directly or, because many farmers are illiterate, via the
sanchalak. They also use the e-Choupal to order seed, fertilizer, and other products such as consumer
goods from ITC or its partners, at prices lower than those available from village traders; the sanchalak
typically aggregates the village demand for these products and transmits the order to an ITC
representative. At harvest time, ITC offers to buy the crop directly from any farmer at the previous day's
closing price; the farmer then transports his crop to an ITC processing center, where the crop is weighed
electronically and assessed for quality. The farmer is then paid for the crop and a transport fee. "Bonus
points," which are exchangeable for products that ITC sells, are given for crops with quality above the
norm. In this way, the e-Choupal system bypasses the government-mandated trading mandis.

Farmers benefit from more accurate weighing, faster processing time, and prompt payment, and from
access to a wide range of information, including accurate market price knowledge, and market trends,
which help them decide when, where, and at what price to sell. Farmers selling directly to ITC through an
e-Choupal typically receive a higher price for their crops than they would receive through the mandi
system, on average about 2.5% higher (about US$6 per ton). The total benefit to farmers includes lower
prices for inputs and other goods, higher yields, and a sense of empowerment. At the same time, ITC
benefits from net procurement costs that are about 2.5% lower (it saves the commission fee and part of
the transport costs it would otherwise pay to traders who serve as its buying agents at the mandi) and it
has more direct control over the quality of what it buys.

By building a network of warehouses near the production centres and by providing inputs to the farmers
and test output at the individual farm level, ITC is able to preserve the source and quality information of
produce purchased. By helping the farmer identify and control his inputs and farming practices and by
paying better for better quality, ITC is able to improve the quality of produce that it purchases. In the
commodities market, these two combine to help ITC create the differentiator that it set out to establish in
the beginning.

Part - XII

ITC gains additional benefits from using this network as a distribution channel for its products (and those
of its partners) and a source of innovation for new products. It is also being used to provide services like
rural market research to those interested.

Strategy for Success

• Use of ITC warehouses

This will help in cost control as well as better utilisation of space in these warehouses. It will also
provide convenience and familiarity with the target customer.
• Targeted at Farmers selling to ITC warehouse through E-chaupal
With its network of e-chaupals, ITC communicates its latest commodity prices to the farmers via
the Internet or VSAT lines. If they find these attractive, they sell their produce to ITC. The
sanchalak (the person who operates an e-chaupal; most of them are farmers) of villages near
these malls reckons that half the farmers in his village deal only with ITC. Now, by setting up the
mall next to the warehouse, ITC is trying to monetise the footfalls from farmers; that is every time
sanchalaks- and farmers visit ITC's soybean factories in MP to sell their produce, they also have
the opportunity to spend their freshly earned cash.
ITC realised that the farmers had just got money, that they would spend it anyway, and that they
had an empty vehicle with which they could lug the stuff back.
• ITC intends to capture the rural folks' out-of-village shopping
The warehouse is one bulwark of its strategy, obviously. But the farmers will come here only after
every harvest. To ensure that they keep coming to Chaupal Sagar even at other times, the
company is offering a slew of other goodies. Another building is coming up next to the main
warehouse. When completed, it will house a bank, a cafeteria, apart from an insurance office and
a learning centre. ITC has tied up with agri-institutes to offer farmer training programmes. Then,
plots of land have been earmarked to display large agricultural machinery like threshers. Other
parcels of land have been earmarked for pesticide and fertiliser companies for demonstrating
their products. A petrol pump is coming up as well.
To attract footfalls during the lean season, ITC plans to organise various activities and events
including melas,training programs, demonstrations.
The hubs are strategically located to attract suburban crowds as well.
• Retail channel for its own brands as well as for other brands
Working through the sanchalaks, ITC first pushed its own products, like salt, into the hinterland,
and then invited others like Parachute and Philips to ride on this distribution chain. Today, it plans
to similarly create revenue streams around its warehouses.

Part - XIII

Financing Scheme

• ITC is investing initially Rs 3 crore (Rs 30 million) in each such shopping mall. However it is
working out a strategy to make it cost-effective for them.
• To keep its own investment to the minimum, ITC is encouraging the samyojak - a local broker or
middleman co-opted by ITC - to pick up equity and manage these shops as part owners.
• Assisted by four ITC salesmen, the samyojaks will assess demand, ensure just-in-time delivery,
manage customer service and keep accounts.
• Uniqueness Of the Model: lies in the fact that it works equally well for ITC as the buyer of farm
produce and ITC as the seller of desirables.
• Charge fees from the brands being showcased at the mall as well as for the services being
provided at the Mall.

Results & Expectations

• During the peak season, a hub sees traffic of about 200 tractors per day on an average, as
farmers come to sell their crops at the hubs.
• Initial response: On the first day the store notched up a business of about Rs 70,000-80,000.
Footfall of about 700-800 people on weekdays and soaring to 1,000 on weekends with
conversion levels of 35%.
The rural mall sells everything from fertilisers and hair oil
to mixer-grinders and tractors

Part - XIV

Future Plans

• ITC chairman Yogi Deveshwar has promised his shareholders that the company would open
1,000 rural malls in India. This is the first one to have come up.
• Encouraged by its image as a fair and reliable buyer of farm produce, ITC decided to invest in 5-
acre malls, costing between Rs 3-5 crore each, across 15 states. The first five - four in Madhya
Pradesh and one in UP - will be inaugurated by March 2004.
• The first shopping mall is being set up near Sehore, and the second one will come up in June
near Itarsi in Oshangabad district.
• ITC is planning to set up 40 rural shopping centres in those. states where it has a presence through its e-
chaupals and IT hubs spread across rural Madhya Pradesh and Uttar Pradesh.

Haryali Bazaars Bring Organised Retailing to Farmers

• Having successfully pioneered a new concept of Haryali Kissan Bazaars in 2002 in Hardoi, agri-
inputs focused DCM Sriram Consolidated Ltd. (DSCL) opened eight more (Ladwa in Haryana,
Ferozepur in Punjab, Kota in Rajasthan and four locations in UP).
• The store complex is spread over 2-3 acres and caters to all the farmers requirements (both DCM
Sriram products & other sources): farm inputs ((fertilizers, seeds, pesticides, animal feed), farm
implements, spare parts, irrigation equipment, spraying equipment. Further, the uniformed
salesman, an agricultural graduate, gives free agricultural related advice in personal interactions
or through mobile phones (averaging 20 calls a day). Twenty such stores, each catering to 100
villages, are planned by 2005.

Innovative Rural Retail Models

Indian FMCG firms with rural experience have typically used three rural retail methods--direct distribution
structures, van operations and super-stockist structures. Each of these methods need to be evaluated
taking into consideration the current network, cost impact of the proposed structure and quality control
issue associated with each of these structures.

Direct Retail/Distribution Structures

Project Shakti
Project Shakti - Hindustan Lever Ltd's (HLL) rural self-help group initiative to push the penetration of its
products to reach areas of low access and low market potential.