There
comes a time in the career of most CEOs when they start speaking
about reaching out, about making a difference. Philanthropy, this
isn't: Rather, it is Big Business looking hopefully at the 80 per
cent of the world's population that lives in developing countries.
Can it, the argument goes, make a market of this five billion individuals
by either improving their lot or designing products and channels
that are different?
Hewlett-Packard CEO Carleton Fiorina calls
her company's shot at this e-inclusion; Ericsson CEO Carl-Henric
Svanberg calls his company's, 'The Next Billion Customers'; and
Unilever's Indian subsidiary Hindustan Lever Limited, Project Shakti.
There are others, but the challenge remains the same: Is it possible
to sell to the poor, profitably?
India is a good place to ask this question.
Of its population of a billion-plus, nearly 700 million live in
rural and semi-urban areas. That's around 12.2 per cent of the world's
population, and a market twice as large as the US. India's National
Council of Applied Economic Research estimates that by 2006-07,
the majority of these households (68.1 million, or around 400 million
consumers) will earn between Rs 22,000 and Rs 45,000 a year-in dollar
terms that translates into a range of $489-$1,000.
In terms of profit margins, this isn't the
greatest of market opportunities; in terms of volume, it is the
mother lode. Better still, any company that cracks this market has
the opportunity to replicate its success across South Asia, Africa,
Latin America, and Eastern Europe.
Dr. C.K. Prahalad, management guru, co-author
of the best-selling Competing For The Future, and professor at the
University of Michigan, is the high priest of this movement. Prahalad's
pyramid, part of a presentation the man makes on why it makes sense
to sell to the poor, is probably burned into the brains of most
marketers.
Their effort to tap the bottom of the pyramid
is nothing short of a quest for the Holy Grail. "Ninety per
cent of the increase in purchasing power and incremental consumption
will come from the people at the bottom of the pyramid," says
K. Ramachandran, CEO, Philips India.
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Making inroads: HLL's strategy of piggybacking
on SHGs seems to have paid off |
There are several roads to that and over the
past few years companies have tried most out: designing products
and packaging that'll work; providing access to credit or ways to
enhance income; improving access through innovative channels of
distribution; and shaping aspirations through education and communication.
Why does a mobile phone need a screen?"
asked Ericsson's Svanberg during a visit to India in mid-2003. He
had just stated his company's desire to explore everything from
low-cost infrastructure to lower-cost mobile phones, a desire born
out of the belief that India and China, both cost conscious markets,
would contribute a sizeable chunk of the next billion mobile telephony
customers, and was responding to a follow-up question on just what
that meant.
Ericsson hasn't launched a mobile phone without
a screen (at least, not yet), but fact is, people in rural areas
can do without a screen, especially if that means a lower-cost phone.
Consumer durables major LG follows a similar
approach: for instance, the refrigerators it sells in the rural
market do not have ice trays, deodorisers, and a few other add-ons.
The impact? These cost Rs 2,000 less. Does price matter? In a market
like India, it sure does. Every time mobile telephony rates fall,
the market's circumference increases to include the next lower income
layer.
Today, India's mobile telephony rates are the
lowest in the world (and headed South); not surprisingly, the market
is expected to double every 12 months or so.
The imperative to keep cellular tariffs low
could explain Nokia's launch in 2003 of equipment that could reduce
operating costs by as much as 50 per cent. Any telco that moves
to this equipment, then, can reduce its cost-to-subscriber by 50
per cent with no impact on profitability.
Often, cost isn't the only issue. Gillette
India's research showed that 97 per cent of Indian men still preferred
the old double-edged blade to new-age twin-blade and three-blade
shaving systems. Reason? Three out of four Indian men shave without
running water; most shaving systems need to be rinsed under running
water to remove the hair; ergo, 66 per cent of Indian men who tried
out a twin-blade razor reverted to a double-edged blade.
Gillette's research centre in Boston came up
with the solution: Vector Plus, a razor with a knob that when pressed
separates the blades making it easy to remove the hair.
"This is the biggest initiative taken
by Gillette for India across the chain from R&D to product development,
testing, placement, marketing and distribution," says Manoj
Kumar, Regional Business Director, Gillette India. Vector Plus was
launched in October and Gillette India is busy pushing it through
100,000 outlets across 3,500 towns; if it does well, it will probably
be rolled out across other markets where running water is a problem
(God knows there are enough of those).
The two-wheeler and consumer durable boom in
urban India can be attributed to the emergence of consumer finance.
Pradeep Kashyap, Managing Director, Marketing And Research Team
(MART), a rural marketing consultancy, believes "this will
be one of the main reasons for an increase in sales of consumer
durables as it converts a consumer's willingness to buy into action".
Some banks do cater to semi-urban markets.
However, the reach of most banks and financial services firms is
limited. "We see a lot of opportunities in the mass market
for future growth," says Chanda Kochchar, Executive Director,
ICICI Bank, "but we need to set up a distribution network and
develop a credit delivery mechanism and bring down costs of operation
in order to penetrate these areas."
Technology could provide the answer just as
it did in the case of retail banking. By wiring their innards and
reducing transaction costs, banks such as HDFC Bank and ICICI Bank
have been able to grow at a scorching pace: in the past nine years,
the former has added 3.5 million retail customers; the latter, 6
million.
ICICI Bank is working with IIT Madras Professor
Ashok Jhunjhunwala (See Indian Innovator on page 128) to develop
an automated teller machine (ATM) that will cost just around Rs
30,000; today, one costs Rs 600,000.
The bank has already made a go of disbursing
loans through an atm at Nellikuppam, a village in Tamil Nadu (the
loans are sanctioned at the nearest branch of the bank located,
in this case, the town of Cuddalore, around 15 kilometres away);
n-Logue, a company that has been promoted by Jhunjhunwala's TeNet
Group, has wired up the village. Kochchar says the new ATM will
be "a bare bones cash dispensing machine which will help us
reach more small towns".
The emergence of self help groups (SHGs) as
micro-credit organisations is a wholly Indian phenomenon.
Typically, these are groups of 10-20 women
in rural areas who contribute Rs 10 to Rs 20 per head per month
(even per week) to create a corpus from which small loans are then
made to members at an interest rate of around 13 per cent. Andhra
Pradesh accounts for over 40 per cent of the one million SHGs present
in India.
Fast moving consumer goods major Hindustan
Lever Limited has leveraged this fact to launch Project Shakti,
an effort to harness SHGs to create entrepreneurs and, at the same
time, improve distribution efficiencies. Put simply, this involves
getting the SHG to loan money to one of its members to become a
distributor-cum-retailer of HLL products for a cluster of villages;
even HLL, arguably the company with the widest reach in India doesn't
reach most villages directly.
Today, Project Shakti covers 5,000 villages
in Andhra Pradesh, Karnataka, Madhya Pradesh, and Gujarat. By 2010,
HLL hopes to reach over 100,000 villages and 100 million rural consumers
through this route. The company's success has encouraged others
to experiment with the SHG route: TTK Prestige's Project Mahila
Prestige (in Andhra Pradesh, again), for instance, sells pressure
cookers.
More than SHGs, however, ITC's efforts to build
hybrid online-plus-offline communities of farmers (See Distribution's
Disruptive Duo on page 86), the e-choupal have proved effective
in reaching rural consumers.
As a purchaser of agricultural commodities
the company gains (in terms of cost and quality) and as sellers,
the farmers benefit (the middlemen no longer control access to markets).
Mutual economic benefit makes the concept of the e-choupal sustainable
and a clutch of companies wishing to tap rural markets is queuing
up to tap the adventitious benefit: selling their products to member
farmers. Better still, there is no reason initiatives like e-choupal
and Project Shakti shouldn't work in other markets.
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