ITC in Rural India-Case Study

ITC in Rural India A Case Study

By Abhishek Tandon (2009A08) Jerrin Jacob (2009A18) Kumar Mithilesh (2009A44) Rachit Khemlani (2009A48) Ranbir Vasudeva (2009A49)

Subject: Rural & Social Marketing

ITC in Rural India

Q1. What is What  is notable in the Indian context? Rural India is on the rise. This can be more noted through following instances: •

•

• • • •

•

• •

In 2004, disapproving the claim by ruling co-alition of BJP that “India is shining”; rural folks outvoted them. NGOs worked closely with government and private sector. Self-help groups transformed village women into empowered entrepreneurs. Good deal of incentives were offered to small firms. SMEs were given more tax breaks. With the growth of IT sector, FDI increased tremendously. 88% of rural population population lived on less than $2/day. $2/day. Government has focused greatly on rural employment, electrification, etc. NREGS was a good step to provide jobs to rural folks. Distribution chains of big FMCG companies didn’t extend beyond wholesalers located in small towns that had a population of 100,000. HUL started Project Shakti in 2001 to strengthen strengthen its rural presence. It was a great success. ITC launched e-chaupal in 2000 to leverage on its agri-commodity business. Farmers were benefitted.

ITC e-chaupal: Its Impact/Results on the Rural India Wide reach: The project has come a long way since its inception, and is today recognized as India’s

largest Internet-based initiative, covering 1,300 choupals, linking 7,500 villages, and serving almost 1 million farmers. e-choupal has also established its presence in other states, such as Uttar Pradesh, Andhra Pradesh, and Karnataka. ITC, which exports US$140 million worth of agricultural commodities, sourced US$15 million worth of commodities from e-choupals in 2001. Convenience for farmers: Web-enabled, real-time data on crop prices gives farmers an accurate picture

of the prices they can expect from ITC and from different mandis. This information enables them to become informed decision-makers and thereby sell their produce at a price that gives them a higher profit margin. With the participation of agricultural supplies companies in e-commerce, the farmers now can also conveniently order agricultural inputs. Although the prices offered by ITC are not higher than those at the mandi, the farmer chooses ITC because the transactions are done closer to home and the practices of  weighing and quality assessment are more efficient and transparent. Farmers save on travel time and costs and incur less wastage. Their savings have been estimated at Rs 400 to Rs 500 (US$8 to US$10) per ton of soyabeans. Employment for villagers: The intermediaries are not removed from the value chain. Instead, their roles are redefined to samayojaks (coordinators), who assist ITC in setting up new e-choupals by

conducting village surveys and by identifying the best sanchalaks. They manage the physical transportation of sales made at the e-choupal, collect price data from local auctions, and maintain records. In turn, these coordinators earn a commission on product processed. Over the years, with initiatives like e-chaupal; farmers became more informed and empowered in India.

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ITC in Rural India

Key Elements of  of Empowerment  Empowerment  1) Farmer calls the shots

It is important to note that the final decision to sell their crops to the mandi or to ITC rests with the farmers themselves. The farmers can transact with the company directly and deal orders on the Internet. In the process, the farmers save about Rs 250–500 per ton, depending on their location relative to the collection center. ITC gains in terms of assured supply and savings of more than Rs 200 per ton by avoiding the transportation of the crop from the mandi to the collection center and other intermediary costs in the supply chain. 2) Information

Access to information through e-choupal has reduced the dependence of the farmers on the traditional agricultural intermediaries. It has also enabled them to align their agricultural output with market demand. E-choupals enable transparent listing listing of various “mandi” prices, giving the farmers a fair chance to choose where to sell their produce to gain a better price, thereby increasing their bargaining power. Historical data on supply, expert opinion on future price movements, information on farming practices and techniques, soil testing and weather information also contribute to the empowerment of the farmer. 3) Inclusion/Participation

The e-choupal model involved farmers in the design phase of the project. In some cases, farmers have also contributed to the content on the Web to ensure user-friendliness. The sanchalak who operates the computer is also a farmer selected from the village itself. Farmers actively access information for crop prices in mandis, and get inputs on soil testing, best farming practices, and expert advice from the system. 4) Accountability

The e-choupal system considerably reduced transaction costs for the farmers. The weighing techniques under the system are accurate and transparent, and farmers are paid in proportion to the quantity of their produce, unlike the mandi system. In addition, quality measurement is more open as results are immediately available to farmers. 5) Local Organizational Capacity

This initiative has created an organization at the local level that is transparent and accountable in its operations.

Q2. What are What  are the opportunities and challenges of rural of rural markets in India? Opportunities 1. Low penetration level of FMCG products

The rural Indian population is large and its growth rate is also high. The FMCG sector in the urban areas is becoming quite saturated (though it will continue to dominate in the next 8 – 10 years) while the penetration in the rural areas are only about 1%. The rural areas have and will continue to make up more than 50% (153 million) of India’s total households and accounting for more than its current 66% contribution to total FMCG consumption. c onsumption. 3

ITC in

ural India

2. Huge Consumer Base Over 70% of India’s 1.1 billion lus populati on lives in around 627,0 0 villages i rural areas. This simply shows the gre t potential r ral India bri gs to the much needed v lumes and will help the F MCG companies to bank u on the volu e driven growth. Rural I dia has a large consumin class with 1 per cent of India's middl -class and 58% of the total disposabl income. Currently, nearly 34% of th e offtake of FMCG comp nies comes f  om rural areas.

So rce: Census of In dia, NSSO, 2001

3. Imminent Growt The pur hasing pow r in rural India is rising steadily an it has resullted in the g rowth of the rural market. he market has been growing at 3-4% per annum a ding more t an one million new cons mers every year and now a counts for cllose to 50% f volume co sumption of  FMCG. The growth rates of lot of FMC are higher in rural mark ets than urb n markets. I product cat gories like toilet soaps, t lcum powder, cooking oil, vanaspati ghee, tea, cigarettes and hair oil, the sha re of rural market is mor than 50%.

Sales of consu of  consu er product in Rural In ia 66% 66%

70% 60%

58%

57%

53%

60%

58%

58%

51%

50%

47%

42%

40%

32%

43%

29%

30% 20% 10% 0% Cigarettes ttes

Cook Cookin ing g Oil Electr Electric ic Bulbs

R ral share 198 ‐86

Tea

Toilet Soap

Toothpaste

Washing Powder

Rur l share 1998‐ 9

Source: NCAER, In ian Market Dem graphics Report, 2002

4. Rising Rural Pro perity India is now seeing dramatic shift towards prosperity in ural househ lds. As per the NCAER study (2007), there are as any ‘middle income and above’ hou eholds in th rural areas as there are in the urban ar as. There are almost twi e as many ‘llower middle income’ ho seholds in r ral areas as in the urban ar as.

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ITC in Rural India

Source: NCAER Rural Infrastructure Report, 2007

5. Effectiveness of Communication

A rural consumer is brand loyal and understands understands symbols better. The rural audience has matured enough enough to understand the communication developed for the urban markets, especially with reference to FMCG products. Television has been a major effective communication system for rural mass and, as a result, companies should identify themselves with their advertisements. Advertisements touching the emotions of the rural folks could drive a quantum jump in sales. 6. IT Penetration in Rural India

Today there are over 15 million villagers in India who are aware of the Internet and over 300,000 villagers have used it! The rural consumers spend spend time and money to access higher level information. information. Studies have indicated that if the content has direct relevance and will result in commercial gains, people in rural areas are willing to pay for information services. Consumerism has altered rural buying behavior in recent years. Spending patterns of those who spend are now adapting to face the technology bug. If  television could change the language of brand communication in rural India, affordable Web connectivity through various types of communication hubs will surely impact the currency of  information exchange. As the electronic ethos and IT culture moves into rural India, the possibilities of  change are becoming visible.

Challenges 1. Rural Consumer is different

There is a vast difference in the lifestyles of the rural and urban consumers. The rural Indian consumer is economically, socially, and psychographically different from his urban counterpart. The kind of choices that an urban consumer makes is very different from the choices available to their rural counterparts. The behavior of rural consumer stems from fairly simple thought process in contrast to a much more complex one of urban counterpart. 2. Lack of market data to understand consumer behaviour

Urban Indians and those living in small towns have been the target consumers for big FMCG companies so far. Therefore, there has hardly been any research into the consumer behavior of the rural areas, whereas there is considerable amount of data on the urban consumers regarding things such as - who is the influencer, who is the buyer, how do they go and buy, how much money do they spend on their purchases, etc. On the rural front the efforts have started only recently and will take time to come out with substantial results. So the primary challenge is to understand the buyer and his behavior.

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ITC in

ural India

3. Dispersed popul tion in villa ges Even gr ater challen e lies in ter s of the vast differences in the rural areas which severely limits the marketer’s ability to segment, tar et and positiion his offeri ngs. The po ulation is di persed to such an extent that 90% of th rural population is conce ntrated in villlages with population of le ss than 2000.

P pulation Ra ge in Rural India (1991) 120 100

1.8

9

100

80 60 40 20

52

26.3 9.5

25.7

29.8

16.8

9.5

11.2

7

0 Less than 500

00‐999

1000‐1999

% of population of  population

2000‐4999

5000‐ 999

10000 & abov

Cumulative % of popu of  population

Source: Cen us of India, 2001

Also with agriculture being the m in business f rural f  rural sector, the purcha ing power o rural consu er is highly u predictable hich can le d to high variations in de and pattern . 4. Infl ence of Ret iler Rural c nsumer’s brand choices are greatly estricted an this is wh re the retailer comes into the picture. he rural cu tomer generally goes to the same ret iler to buy oods. Naturally there’s very strong b nding in terms of trust b tween the t o. Also with the low education levels of rural sector the rural bu ing behavior is such that the consum r doesn't as for the thi gs explicitly by brand bu t like "laal wala sabun dena" or "paanch rupey waa i chai dena".. Now in suc h a scenario he brand be omes subservi nt to the ret iler and he ushes whatever brand fetches him the greatest returns. Thus, as there is a nee to understa d the rural onsumer, si ilarly need is there to study the retailler as he is a chief  influenc r in the buying decision. 5. Het rogeneous culture and customs There is a common saying about Indian villa ges – “Paanch koas mei paani badle, aath koas mein waani”. The beliefs and customs of villagers change very rapidly fro one place o another. ithin areas, different groups hold differ nt beliefs regarding their choices. This kind of diversity is not found in urban markets. He ce, it becom s tricky to live up to the e xpectations f rural consumers exactly. 6. Spu ious products Rural m sses are illit rate people and they ide tify a produ t by its pack aging (color, visuals, size etc.). So it be omes very asy for cou terfeit prod cts to eat i to the mark  t share of established re puted brands. he retailer allso gets a lar er profit on selling the lo k-alike rather than the ge uine produc s and hence is biased towar s the fake p oducts.

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ITC in Rural India 7. Inadequate Infrastructure and Poor Connectivity

Due to the poor infrastructure, % of villages are not accessible by regular modes of transport. Distribution of products becomes an arduous task here. Access to villages is hampered because of poor road, rail and telecommunications links. 8. Cyclic Income

Farmers are very much dependent on rains in India. Also, the rural economy in India is primarily driven by crops. Hence, villagers acquire greater ability to buy FMCG goods during the periods of harvesting.

Q3. What is What  is the effect of  effect of stakeholders stakeholders on the Bottom of Pyramid of Pyramid (BOP)? The people at the BOP may be served by falling back on the Bottom of the Pyramid (BOP) marketing strategies and the 4 A’s -  Availability, Affordability, Acceptability and Awareness. The BOP marketing strategies basically talk about aggregating the demand of consumers who have low individual purchasing power and are spread out. The basic commercial model for the bottom of the pyramid markets constitutes of four things namely, • • • •

creating buying power, improving access, tailoring local solutions and, shaping aspirations.

The 4 A’s model is explained in the context of ITC, as below:

 Availability The first A is about making the product reach the consumers and the biggest barrier was overcome when a system for trading came into existence through e-chaupal. Distribution system was very critical for echaupal and through the “Hub & Scope Model” of procurement; ITC has ensured its success in rural areas. 6,500 e-chaupals cater to 40,000 villages in nine states, reaching 3.5 million farmers. With an echaupal covering average 6 villages and a Chaupal Saagar located close to small town (within 3-18 miles); bigger villages were targeted first, then the ones which were near a small town. Other than being a point of distribution, the procurement hubs were also used for promoting products to villagers who came frequently for either purchase of agricultural inputs or sale of their produce.  Acceptability It includes issues needed to be addressed to improve the willingness to consume, distribute or sell a product. In order to ensure how the product or service could be made more acceptable to the rural consumers, Sanchalaks were appointed. These sanchalaks are chosen among the villagers and this helps 7