JANUARY 18, 2004
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Consumer As Art Patron
Is the consumer a show-me-the-features value seeker? Or is she also an art patron? Maybe it's time to face up to it.


Brand Vitality
Timex, the 'Billennium brand', sells durability no more. Its new get-with-it game is to think ahead of the curve.

More Net Specials
Business Today,  January 4, 2004
 
 
AN IDEAS SUPER POWER
Calling Kumbakonam...

... and Chapra. With a population in excess of a billion, India may teach the world a thing or two about reaching out to the under-privileged, profitably.

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.

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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