PROJECT REPORT ON Study On Rural Distribution Models for FMCG

RURAL MARKETING

Submitted To:
Dr. SHALINI SINGH

Submitted By:
SUJIT YADAV (JIML-10-FS-45) SURPREET SINGH (JIML-10-FS-46) GAGANDEEP SINGH (JIML-10-FS-54) SHIKHA ASTHANA (JIML-10-FS-040)

JAIPURIA INSTITUTE OF MANAGEMENT

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TABLE OF CONTENTT

S.NO. 1 2

Details INTRODUCTION TO FMCG INDUSTRY CLASSIFICATION

Page

3 4

THE MAIN FMCG SEGEMENT ARE

DISTRIBUTION STRATEGIES IN RURAL MARKETS

6-9

METHOD OF DISTRIBUTION

10-11

6 7 8

CONCLUSION LITERACY RATE OF REPCENTAGE RURAL CONSUMERSPREFERENCES AND BEHAVIOUR CHANGING BUYING

12 17 19

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INTRODUCTION TO FMCG

Fast Moving Consumer Goods (FMCG), also known as Consumer Packaged Goods (CPG), are products that have a quick turnover, and relatively low cost. Consumers generally put less thought into the purchase of FMCG than they do for other products. Though the absolute profit made on FMCG products is relatively small, they generally sell in large numbers and so the cumulative profit on such products can be large.

FMCG industry is innovative, full of rich experience, reaches world wide, people working with FMCG may get frequent opportunity to travel meet new culture, gets experience very quickly and chances to rise in status is much easier. Unlike other sectors FMCG shares float in a steady manner irrespective of market dip world wide. So basically, fast moving consumer goods are pretty awesome.

This The Fast Moving Consumer Goods (FMCG) industry in India is one of the largest sectors in the country and over the years has been growing at a very steady pace. The sector consists of consumer non-durable products which broadly consists, personal care, household care and food & beverages. The Indian FMCG industry is largely classified as organised and unorganised. This sector is also buoyed by intense competition. Besides competition, this industry is also marked by a robust distribution network coupled with increasing influx of MNCs across the entire value chain sector continues to remain highly fragmented.

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INDUSTRY CLASSIFICATION

The FMCG industry is volume driven and is characterised by low margins. The products are branded and backed by marketing, heavy advertising, slick packaging and strong distribution networks. The FMCG segment can be classified under the premium segment and popular segment. The premium segment caters mostly to the higher/upper middle class which is not as price sensitive apart from being brand conscious. The price sensitive popular or mass segment consists of consumers belonging mainly to the semi-urban or rural areas who are not particularly brand conscious. Products sold in the popular segment have considerably lower prices than their premium counterparts. Following are the segment-wise product details along with the major players:

FMCG MARKETINGMarketing fast-moving consumer goods (FMCG) is one of the purest and most sophisticated forms of selling there is. The great FMCG-selling companies, such as Procter & Gamble and Coca-Cola, invented mass marketing almost singlehandedly and grew to become multinational giants in the process. FMCG played a major role in the rise of consumerism during the twentieth century and drove the development of the media from the days of the sponsored radio show of the 1920s. Selling FMCG provided the funds for the mushrooming growth of television and the establishment of advertising agencies as a vast, lucrative industry. In the West, and now increasingly in the rest of the world, almost everyone's lives are touched by FM

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THE MAIN FMCG SEGEMENT ARE

Personal care toothpaste, hair-care, skincare, soap, cosmetics, and paper

products such as tissues and sanitary towels;

Household care fabric wash (laundry soaps and synthetic detergents) and
household cleaners (such as dish/utensil cleaners, air-fresheners and insecticides);

Branded and packaged food and beverages soft drinks, cereals, biscuits,
snack food, chocolates, ice cream, tea, coffee, vegetables, meat, bottled water, etc.; and

Spirits and tobacco.

It's not hard to see just how deeply they penetrate our domestic lives. In the postmodern West, attitudes towards FMCG are changing along with consumer behaviour, and numerous lobby groups pressurize large corporations as part of a general attempt to foster many kinds of social reform. FMCG firms are easy targets of consumer boycotts, and must pay closer attention to notions of corporate responsibility than ever before. Green issues, health issues, and fears about biotechnology are just a few matters that companies cannot afford to ignore. In much of the developing world, however, FMCG are still welcomed as a symbol of progress towards The leading FMCG brands sell at a hefty premium, but with the greater power of the retailers, and the introduction of their own private label brands, second-tier brands are losing out and smaller manufacturers may go out of business. It's a secretive, highly complex war, where too many products are vying for customers' money. Many selling tactics are only successful for a short while, as competitors strangle one another in what in many respects is a zero-sum game.

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DISTRIBUTION STRATEGIES IN RURAL MARKETS Distribution strategy

A one of the ways could be using company delivery vans which can serve two purposes it can take the products to the customers in every corner of the market and it also enables the firm to establish direct contact with them and thereby facilitates sales promotion. The mediocre companies with sizable resources may chip in for syndicated distribution. Haats and Melas could also be a great platform to display merchandise. Also, every region consisting of several villages is generally served by one satellite town termed as Mandi where people prefer to go to buy their durable commodities. If marketing companies use these feeder towns they can have a vast coverage of rural arena.

Delivery Vans
Companies can use their own delivery vans to reach the rural consumers. There are certain advantages of using delivery vans. They take the products to customers and retail outlets in every corner of selected rural markets and enable the company to establish direct contact with the consumers which helps in sales promotion. We can take the example of HLLs distribution strategy in rural market. In 2009, HLL landed "Operation Harvest" with an objective to increase penetration, increase brand awareness, encouraging trials and identification of key distribution points and retail points. Around 80,000 villages having high growth potential, having a population of at least 2500, and well connected by roads, were selected. The vans were retrofitted with a public address system and their audiovisual equipment. These vans covered six villages a day for six days in a week. The cycle was repeated couple of times in the same villages. On reaching the villages, they would play audio-cassette and video-films. These cassettes and films had songs and sequences from popular films with advertisement of HLL coming at
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some intervals. Company representatives distributed free samples. Small shops of villages were provided with HLL products like Lifebuoy and Wheel. This helped company to understand the potential of the market.

Joint Distribution by Non-Competing Companies

Companies having lesser distribution reach in rural areas can collaborate with companies already having wide network in rural market. This type of tie-up can prove to be beneficial as one can reach to large number of retail outlets by utilising the network and the other one can earn better revenue. Also, this type of joint collaboration can help both companies to reduce distribution costs and can convert operation which seems to be unviable into financially viable operation.

Some examples of effective distribution tie-ups in rural market: Samsung has tied-up with the Indian Farmers Fertilizer Cooperative (IFFCO). Thus, Samsung will use IFFCO's cooperative network for marketing the hand-sets to rural consumers over a wide area. Nokia has entered into a partnership with HCL for distribution of its hand-sets. Motorola and Nokia have partnered with ITC e-Choupal which gave them wider reach in rural market. Procter & Gamble had tie-up with Godrej and Marico Industries, and now it is planning one with Nirma as well for distribution of Camay Soaps. Godrej has tie-up with Jodi Labs to use its extensive distribution network for marketing Godrej Tea across the country

Distribution up to Feeder Towns / Mandis

Companies can cater to the needs of rural consumers by making their products available upto feeder towns or mandis. Feeder markets or mandis provide excellent scope for distribution of products like consumer durables, clothes, kitchen equipment, agri-inputs and tools. The rural consumers visit these towns at regular
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intervals not only for selling their agricultural produce but also to purchase clothes, jewelry, hardware, radio, and other consumer durable products.

Haats
Along with permanent retail outlets, haats can also be utilised to make the products available to rural consumers. Haats are held on a particular day of every week. Typically, an average haat has 300 stalls. A haat usually serves around 5000 visitors. So if we consider average population of an Indian village to be 1000, then one haat caters to the needs of 5 villages. There are almost 47,000 haats in India. The sale per haat per day is Rs. 2.25 Lakh (approximately) and average sale per outlet is Rs. 900 (approximately). large number of retailers also buy products from haats for their village stores. About 90% of sales on haats are on cash basis. The participation fees at haats are a flat Re. 1 to Rs. 5 per stall which is very low. These figures show that targeting haats for distribution purpose can prove to be beneficial for companies. Companies can tap the rural consumers for clothes, cosmetics, FMCGs, kitchen equipments and agricultural tools at these haats. Leading manufacturers are introducing sachets of tea, blues and washing powders in these haats to create a demand and then meet the demand in affordable packages.

Melas Over 25,000 melas are held every year all over the country. Out of these, 5000 are commercial melas, 2,000 are cultural melas and 18,000 religious melas. The following facts regarding melas will help us to understand their importance to marketers: Number of visitors per mela is approximately 7.5 lakh. On an average, 850 outlets are set-up in every mela. Average sale per day in a mela is Rs. 25 Lakh. Visitor turn-out in a mela is very high.

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 A large part of the visitors in these melas are women and children, which is significant because rural women are restricted to leave village often. Meals are generally used to sell durables, high-priced items and new products launched. Examples of effective use of meals by marketers are: Active participation of Maruti in rural melas like the kisan mela (Ludhiana), Sonepur mela (Bihar), Kila Raipur sports mela (Punjab) and Pushkar mela (Rajasthan). The melas provide both a platform for demonstration and improving product awareness, and also booking new sales. In 2001, HLL ran a campaign at the Allahabad Kumbh Mela to demonstrate to the visitors the importance of usage of soap for better health and hygiene. Rural people in general believe that washing hands with water alone is enough, so there is no need to use soaps. HLL representatives educated them about use of soap for better health and hygiene. This awareness campaign has helped HLL to increase the sales of Lifebuoy in rural market.

Automobiles
The Indian automotive industry currently has a turnover of US$ 34 billion. However, the automobile market remains untapped in rural India which has a strong purchasing power. Nearly 50 per cent of the Indian rural market, which includes 220 million households, is potential car buyers. Two-wheeler penetration in rural belts is still very low with less than 10 per cent households owning a twowheeler. Sensing a huge opportunity many automobile companies are trying to woo the rural consumer.

Hyundai Motors India has introduced a new marketing initiative 'Ghar Ghar Ki Pehchaan'-- to tap the India rural car market. The company has rolled out special schemes for government employees in rural areas and members of gram panchayats on the purchase of Santro. After establishing a strong foothold in urban and semi-urban markets, Maruti Suzuki has launched a pan-India campaign - 'Mera Sapna Meri Maruti' - to tap the rural market.

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Hero Honda has devised a major expansion strategy for the rural markets and is planning to strengthen retail financing to support the initiative, which could lead to setting up of its own finance arm. M&M, Bajaj Auto and TVS Motor have also launched special marketing schemes for rural markets.

Consumer durables
A survey carried out by the Federation of Indian Chambers of Commerce and Industry (FICCI), indicated that the consumer durable goods sector is all set to witness 14 per cent growth in 2010. The rural market is growing faster than the urban markets, although the penetration level in rural area is much lower. The rural Indian market, which accounts for nearly 70 per cent of the total number of households, witnessed a 25 per cent annual growth while the urban consumer durables market reflected an annual rate of 7 to 14 per cent. Many leading companies are now increasing their presence in rural India.

LG has set up 45 area offices and 59 rural and remote-area offices. Samsung rolled out its 'Dream Home' road show which was to visit 48 small towns in 100 days in an effort to increase brand awareness of its products.

The Road Ahead

The rural revolution is fuelled by rising purchasing power, changing consumer habits, increased access to information and communication technology, better infrastructure and increased government programmes to boost the rural economy. The recent study by Associated Chambers of Commerce and Industry of India (ASSOCHAM), disclosed that around 200 million out of 700 million rural population in India are engaged in agricultural and non-agricultural activities, and have a decent per capita income. A large section of the rural population is choosing dairy, food processing and packaging as professions, beyond traditional farming. Furthermore, large retail players like Reliance, Spencer's and Subhiksha are procuring farm commodities in bulk directly from farmers, giving them better money for their produce. The rural population is now looking at better options

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beyond post offices and commercial banks for higher returns on their surplus earnings. However, Rural India lacks a good distribution system. Rural Indian purchasing habits exhibit an "earn today, spend today" mentality. Most rural homes have restricted storage space and no refrigeration so villagers tend to only buy their immediate requirements. To succeed, corporations need to understand the psyche of the rural family along with the rural distribution network. For example, Hindustan Lever used a strategy of volume driven growth in rural markets, which was hugely successful.

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Method of Distribution
The urban model of distribution in which the products are transported directly from the bottling plant to retailers is not very effective in rural markets as taking stock directly to retail point would be costly due to the long distance to be covered. So Coca Cola has opted for a hub and spoke method of distribution system. It worked this way: Coke bottles were transported from the bottling plants to the hubs (large distributors) and from hubs to spokes (smaller distributors) situated in small towns. These spokes then distribute the stocks to village retailers who cater to the demand in rural market.

RURAL MARKET Marketing and Distribution

Marketing function is sacrosanct in case of FMCG companies. Major features of the marketing function include the following: 1. High Initial Launch Cost - New products require a large front-ended

investment in product development, market research, test marketing and launch. Creating awareness and develop franchise for a new brand requires enormous initial expenditure on launch advertisements, free samples and product promotions. Launch costs are as high as 50-100% of revenue in the first year. For established brands, advertisement expenditure varies from 5 12% depending on the categories. 2. Limited Mass Media Options - The challenge associated with the launch and/or brand-building initiatives is that few no mass media options. TV reaches 67% of urban consumers and 35% of rural consumers. Alternatives like wall paintings, theatres, video vehicles, special packaging and consumer promotions become an expensive but required activity associated with a successful FMCG.

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3. Huge Distribution Network - India is home to six million retail outlets,

including 2 million in 5,160 towns and four million in 627,000 villages. Super markets virtually do not exist in India. This makes logistics particularly for new players extremely difficult. It also makes new product launches difficult since retailers are reluctant to allocate resources and time to slow moving products. Critical factors for success are the ability to build, develop, and maintain a robust distribution network One of the age-old problems that FMCG has been facing not only in India but globally is that of distribution. Integrating operations with your distributors and channel partners is a Herculean task

. Few ways to reduce pain involved in this link:

Reducing supply chain costs by reducing intermediaries - Organised retail chains have set up systems for inventory management and quick servicing, thereby offering the opportunity for a company/supplier to reduce distribution cost by reducing intermediaries such as wholesalers/distributors and supplying directly to the warehouse of retail chain.

Increasing sales by driving channel width - The relative share of grocers to FMCG sales has dropped from over 50% in the early 90's to 35% in the late 90's. On the other hand the contribution of chemist outlets and paan outlets has been increasing. This has been a result of both SKU's (sachets) and hardware (mini dispensers) being specifically designed to facilitate entry to these outlets and increase consumer interface.

Retail
According to a study, conducted in Sep 2007, by the Confederation of Indian Industry (CII) on the Indian rural retail sector, opportunities in rural retail were estimated to be over US$ 34 billion in 2010. This figure is expected to touch US$ 43 billion in 2012 and go up to US$ 58 billion by 2015. The rural markets in 2011 have grown at 25 per cent compared to the 7-14 per cent growth rate of the urban consumer retail market. The retail sector offers opportunities for exploration and investment in rural areas.

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ITC launched India's first rural mall, 'Chaupal Sagar', which offers products ranging from FMCG to electronics appliance to automobiles. ITC has 23 stores across India. The 'Hariyali Bazaar' by the DCM Sriram Group had initially started off by providing farm-related inputs and services and now plans to introduce the complete shopping basket soon. It has 180 stores across India. The centres are also IT-enabled and provide farmers critical data like inputs and access to weather forecasts, market prices and other technical knowledge. Tata Chemicals with Tata Kisan Sansar has set up agri-stores to provide products and services. Indian Oil Corporation (IOC) is planning to invest US$ 189.103 million in rural areas during the financial year 2011.

What Should The FMCG players do now?

They should not only price their products competitively, but also offer their rural prospects maximum value for money spent. Certainly, reaching out to 3.33 million retail outlets is an uphill task. The only way out for Indian FMCG players: put in place an aggressive cost structure that would enable them to offer low-price and value-for-money products. But then, FMCG is a low-margin business with a high cost of raw materials. Consider the case of Marico: its material cost works out to a high of 59 per cent on sales. Therein lays the rural marketing paradox. However, customer-centric and market-savvy FMCG companies have always chased prospects when they perceive there is a latent demand. For instance, Hindustan Lever's Rin, Surf and Lux are available even in India's most obscure villages. Hindustan Lever had given shape to its rural strategy a few years ago when it perceived that its urban market was shrinking due to an industrial slowdown. Its Operation Bharat that focused on personal care products made the most out of surging rural incomes. The result was there for all to see. The company has been able to clock in doubledigit profits every three years and log in double-digit revenues every four years. Britannia with its Tiger brand of biscuits and Colgate-Palmolive with its lowpriced and conveniently-packaged products designed for the rural masses have been other pioneers in rural marketing

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UNDERSTANDING AND TAPPING THE INDIAN RURAL MARKET SCENARIO OF RURAL MARKETS-CHANGING DEMOGRAPHICS
Rural market of India consists of about 75% of the population of the country. Apparently in terms of the number of people, the Indian rural market is almost twice as large as the entire market of USA or Russia. This market is not only large, but very much scattered geographically. It is also as diverse as it is scattered Indian economy is largely an agricultural & rural oriented economy, The rural market scene has undergone a steady and encouraging change over the last three decades. The marketing boom in the rural areas has been caused by such factors as: increased discretionary income; marketable surplus of product, like vegetables and eggs; rural development schemes; improved infrastructure; increased retailing and retailers; increased awareness with information explosion, expanding TV networks; liberalized Government policies for rural development; emphasis on rural markets by companies, new cadre of entrepreneurship, Competitive and creative sales promotion, packaging revolution; Changing life styles in the rural areas.

RISING RURAL INCOMES

According to Indias NCAER (National Council of Applied Economic Research), rural India has a population of about 750 million in around 200 million households distributed across 600,000 villages. Though 350 million of these people are desperately poor and survive only at subsistence level, the remaining 400 million are economically better off due to a combination of 11 years of favorable monsoon conditions, increased agricultural yields and a rise in rural mini industries. The annual size of the rural economy in value terms is currently estimated at about Rs.60,000 crore for FMCG products, Rs.5,000 crore for durables, Rs.45,000 crore for agricultural inputs and implements and Rs.8000 crore for automobiles. In fact, 50% of national income is generated in rural India.

PROJECTION OF INCOME OF RURAL HOUSEHOLDS

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CLASS

ANNUAL INCOME

NUMBER (PEOPLE 1995-97

OF IN 2001-02 0.7(4)

HOUSEHOLDS MILLIONS) 2006-07 1.(7)

The Very Rich The Consuming The Climbers

Above Rs.2.15 lacs Rs 45000 2.15 Lacs Rs.22000 45000

0.4(2)

15.9(92)

19.9(11.5)

34.8(20.2)

37.3(21.6)

57(331)

68.1(39.5)

The Aspirants

Rs.16000 22000

36.9(21.4)

29.3(170)

19.5(113)

The Destitute

Less than Rs16000

27.7(161)

21.4(124)

According to NCAER, there are almost twice as many middle income and above households in rural areas as compared to urban areas. NCAER projects that by 2009-10 the number of lower middle income households will rise to 80 million with 81% of it living in rural areas. The growing high middle classes and shrinking lower income groups are a positive signal.

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GROWING LITERACY LEVELS Although rural India with 59.4% literate persons (census 2001) lags behind the urban with 80.3%, the absolute number of literate people in Rural India is 16.5 crore as compared to 16.0 in the urban.

LITERACY RATE OF REPCENTAGE YEAR

1981 1991 2001

MALE
49.60 57.90 71.40

FEMALE
21.70 30.60 46.70

PERSON
36.07 47.70 59.40

SHARE OF SECOND HAND GOODS IN 2001-02 (% OF TOTAL PURCHASE)

It is a positive sign for retailers that rural markets are not far behind the urban markets in terms of demand and market growth rates barring some segments. Life cycle advantage: many products have achieved maturity in the urban markets but are still in the growth phase in rural markets because of the different rates of adoption and diffusion in both markets. 50% of the total rural FMCG consumption is in U.P, Maharastra, A.P and West Bengal.

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R ra s a o c n u a le u l h re f o s m b s 9 -9 2 3 To pwe o th o d r 7 3 W s in c k ah g ae 7 2 Ta e 5 7 T ile s a s o t op 5 4 H ir o C a a il/ re m 4 6 To ps o th a te 3 8 P c a e b c its a k g d is u 4 9 E c le tricb lb u 3 2 Sa po h mo 2 4

9 -9 8 9 7 8 6 7 6 0 5 8 5 2 4 7 4 4 4 2 3 3

Consumer Durables
Agricultural goods include Agri -inputs, Implements, product of allied sectors like poultry, livestock etc. This market accounts for RS 450 Billion annually. Services in rural include health care, telecommunications, banking, insurance and education etc.

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RURAL CONSUMERS- CHANGING PREFERENCES AND BUYING BEHAVIOUR

The increasing literacy level and media explosion, people are becoming conscious about their lifestyles and about their rights to live a better life. The rural youth have become major influencing factors in the purchase decisions, especially in consumer durables.

OPPORTUNITIES AND CHALLENGES FOR RETAILERS

The rural market is made up of two broad components i.e., the market for consumption goods and the market for agricultural inputs. The rural market is largely agriculture oriented. The traditional rural markets for consumption goods suffer from many problems including that of spurious products; limited choice of brands per outlet; the traditional trader being more interested in pushing stock rather than providing solution; and less transparency resulting in decreased productivity for the farmer. These problems force the rural consumers to visit nearby towns and cities

THE MAJOR HURDLES IN TAPPING THE RURAL MARKETS CAN BE SUMMARISED AS:
High initial market development expenditure; Generating effective demand for manufactured foods; Wholesale and dealer network problems; Mass communication and promotion problems; Banking and credit problems; Management and sales managing problems; Market research problems; Inadequate infrastructure facilities; Highly dispersed and thinly populated markets; Low level of exposure to different product categories and product brands; Cultural gap between urban based marketers and rural consumers.

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THE RETAILERS WHO WANT TO VENTURE INTO RURAL ORGANIZED RETAIL WILL HAVE TO FACE THE CHALLENGES OF AVAILABILITY, AFFORDABILITY, ACCEPTABILITY AND AWARENESS (THE SO-CALLED 4 AS)
The first challenge is to ensure availability of the product or service. The second challenge is to ensure affordability of the product or service. The third challenge is to gain acceptability for the modern store formats and new products. Therefore; there is a need to offer products that suit the rural market in a no-frills environment. The most important challenge that of building awareness is very crucial.

Strategies
By communicating & changing quality perception BY PROPER COMMUNICATION IN INDIAN LANGUAGE

BY PROVIDING WHAT CUSTOMER WANT

The customers want value for money. They do not see any value in frills associated with the products. "Nokia" has launched a simple product, which has captured the market. effectively for launch of Kadak Chap Tea in Etawah district.

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CONCLUSION

The geographic dimension of rural markets has been such an overwhelming problem, That for decades many organizations did not operate in these areas only because of the lack of access to these markets. But with the improvement in the status of roads and connectivity to villages the situation has improved but geographical aspect of the external environment still remains a barrier which needs to be overcome.

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