Different Brand

A stagnant FMCG market eggs on HLL to go rural with a vengeance. But, apart from the resultant sparkle in its topline, there's also an academic lesson to learn from HLL's new strategy. Read on...

By Ranju Sarkar

Kalamma's house in Shivanenigudem, Andhra Pradesh, is a typical village home with red tiled roofs. The room meant for visitors also looks the same with a good display of pictures of Gods and Goddesses on the walls. It's only when you take a closer look, you are in for a surprise. The Gods and Goddesses are in good company with a host of Hindustan Lever brands: Breeze, 501, Rin Shakti, Nihar, Aim etcetra. Yes, Kalamma---a member of the several Self Help Groups (SHGs) active in the village---is now one of HLL's new brand ambassadors. She sells HLL's products in the village, where the company doesn't reach directly but is serviced by wholesalers.

HLL is piloting a new rural business model in 50 villages of Nalgonda district that promises to provide it the next big leap in distribution---once implemented across the country, it could multiply HLL's direct reach by four-folds to eight-folds. There are around 6.3 lakh villages in the country, of which HLL's distribution system directly reaches 70,000 villages---or 12 per cent of rural India, while it enjoys an indirect reach in another 2.3 lakh villages which are serviced by wholesalers.

HLL's objective would be to bring all these villages under direct reach. Says Dalip Sehgal, Director (New Ventures), HLL: ''The question is can we improve our reach in rural areas through a viable, sustainable model.'' It can, if all the building blocks of the model are put properly. The genesis of the idea may have come from HLL's Project Millennium, which was set up to look at new growth ideas. Rural market, along with 5-6 other activities, was identified as a key growth area.

HLL reaches villages with a population of 2,000 and above. At the next level, it wants to reach villages with a population of less than 2,000 (1,000-2,000 and sub-1,000). To achieve that, it has two choices: expand the existing infrastructure or create a new distribution system which can service these villages, where the traditional distribution model may not be viable. Clearly, these groups offer HLL multiple opportunity. Adds Sehgal: ''We would like to improve our reach, not just in terms of availability and communication, but also in terms of income levels of consumers.''

To understand what Sehgal means, let's look at the key drivers of rural demand: penetration, consumption, income and population. According to HLL, the first two components account for 50 per cent of the demand growth, followed by income (20-22 per cent) and population (10-15 per cent). Says K. Srinivas, Business Manager (New Ventures), HLL's man responsible for Nalgonda: ''Till now, we have been focused on the first two, but we realised that unless we do something about the income bit, it won't catalyse consumption.'' To understand HLL's rural business model, it's important to understand the working of these groups.

How The SHGs Work

Inspired by the success of women Self Help Groups (SHGs) in Bangladesh---these are primarily thrift and savings group consisting of 15-20 people---the Government of India promoted these groups in India in the mid-1980s, which were set up with either NGO or state government support.

These provide rural women a platform to save money---they keep pooling money, save in a bank, and by the end of the year, they get a matching loan from the same bank. This way, the group's corpus doubles, and individual members can borrow internally from the group and start a business.

These groups are increasingly being used by the government for social development. In Andhra Pradesh, for instance, all government schemes, the pulse polio programme or the LPG (cooking gas) connections are routed through these groups. There are around 6 lakh SHGs in the country.

Typically, each of these group save Re 1 per day or Rs 30 per month (some groups save more). A group with 15 members and a saving of Rs 30 per head, would save Rs 450 per month or Rs 5,400 in a year. The members can borrow from the group's kitty (typically, the interest rates are 2-2.5 per cent month or 24-30 per cent per annum). At the end of the year, the group---if the repayments within the group is 95 per cent and the attendance by members is 75 per cent---can take a matching loan from regional rural banks, who are refinanced by NABARD. This way their corpus doubles.

Initially, it starts off with individuals taking loans for self-consumption: a marriage or illness in the family. Soon the government agencies---the district collectors or the District Rural Development Authority (DRDA) which facilitates these groups----the banks and NABARD realised that to sustain these groups, it was important to have income-generating activities. As bank loans are strictly for productive activities, the groups began different activities: bought cattle for dairy activities, weaving, toy-manufacturing, leasing a farm or opening a small shop in the village. It's here that HLL saw an opportunity.

How HLL's Rural Model Works

HLL's approach: can you get these groups as your brand ambassadors, who can buy the products and sell them in their villages? HLL would supply them the stocks, but the groups would decide who would do the enterprising. The group could nominate one or two people to sell the products. They could sell the products to other members in the group, consume within the family or sell to others in the village. Every time a women sells, she makes a margin (10 per cent; retailers make 8 per cent).

If a group nominates a person to do the selling, the profits are ploughed back into the group's kitty. But if the individual borrows from the group to start the enterprise, the individual can retain the profits. Both models exist, but HLL is increasingly realising that it's the individual model, and not the group model, that works in reality. Banks lend the groups at an interest rate of 12 per cent per annum or 1 per cent per month; the groups in turn, lend it internally to their members at 24 per cent per annum or 2 per cent per month.

The potential: consider a village with a population of 1,000 people, and an average spend of Rs 4 per head per month on personal products; now, if everybody buys from this group, HLL's share of the rural consumer's spend would be Rs 4,000 (Rs 4 X 1000). If half the people buy, HLL's share of the consumer's spend would be Rs 2,000.

Now, consider the income potential for the women brand ambassadors or the group. If she has a turnover of Rs 2,000 per month---at 10 per cent gross margin---she makes a profit of Rs 200 per month. Assuming that she would have borrowed this money (Rs 2,000) from the group, she would have to pay an interest (at 2 per cent per month) of Rs 480 per annum or Rs 40 per month. After providing for interest costs, she will be still making a profit of Rs 160 per month or Rs 1,920 per annum. Thus, by taking a loan of Rs 2,000 and retained earnings of around Rs 2,000, she can double her capital by the end of the year.

But the situation on the ground is not really as rosy as these back-of-the-envelope calculation may suggest. These women have to cope with competition from retailers in the village. HLL is aware of the problems, and the need to scale up the model. But since most of these women are first-time entrepreneurs, HLL has launched the pilot with 12 SKUs to keep things as simple as possible.

The Early Learnings

Even as the model evolves every day, there are huge learnings for HLL from the Nalgonda experiment. The first is the transition from a group model to an individual model. The second, and a more important, issue is door-to-door selling---along the lines of what Amway or Aviance does in urban areas---which is not happening. This is because in most villages, door-to-door selling is seen as the job of a particular community (the Manihaars, who go from village to village and sell the products) and there's a stigma attached to the same.

They don't want to do door-to-door selling; they wait at home for consumers to come. A related problem is that men don't like to go and buy the products from the women's home. To overcome these problems, HLL decided to create an artificial point of contact by organising something called a 'Shakti Roju' or a Shakti Day. With a bit of hype and excitement through music and promotions, an artificial marketplace is created.

HLL chips in with a bit of promotions. For instance, on a purchase of products worth Rs 50, a consumer is entitled to one coupon for a lucky draw. On a purchase of Rs 100, he's entitled to three coupons. Prizes worth Rs 1,000 (like suitcases) are distributed. Shakti Day allows these groups do a cool business of anywhere between Rs 5,000 and 7,000 in 4-5 hours. That's not all. Not many people in the village would know that a lady is dealing in HLL's products; these forum allows it to create awareness. HLL uses MACTS-represented animators to talk about and demonstrate its brands.

Scaling Up The Model

Although the model has tremendous potential for HLL and other companies, the success would depend on the viability of the constituents. Says Pradeep Kashyap, President, MART, which is coordinating and implementing the entire pilot for HLL in Nalgonda: ''The scale of operations are too small. The model needs to be upscaled and expanded. Women can't make enough money with 10-12 brands. You have to bring in non-competing brands to expand the portfolio.'' So, along with HLL's brands, the women could cart a Philips bulb or Nippo batteries. HLL is not averse to it. But considering these are first-time entrepreneurs, it doesn't want to rush things.

Agrees Sehgal: ''We would need a fair number of partners, but we need to understand the dynamics of selling through these groups. It's too early. One thing is clear: if stage I doesn't work, the pilot doesn't go to stage II.'' Which explains why Sehgal is cautious. ''To sell more, they would need additional investment. Don't forget, they're first-time business people. It doesn't make sense to give them 100s of SKUs. While business viability would increase, the complexity would go up exponentially (if you increase the portfolio).''

Also, HLL would not like to increase their scale without increasing their capacity. The other option is to increase their area. Today, almost every village has an SHG catering to it. One SHG could cater to 2-3 villages. But for this to happen, they need to do door-to-door selling. In one particular case, the husband has taken the initiative, and maybe seeing him, women would take to it. If there's no social taboo, they can be taught to do door-to-door selling. Explains Sehgal: ''They have to learn how to do business.''

Similarly, take the viability of the MACTS. HLL provides them a margin of 3 per cent, which they think is inadequate. On an average, a MACTS clocks sales of Rs 30,000 to Rs 40,000 per month. Now, if the sales were much higher (say, 3 per cent of Rs 5 lakh per month, would be Rs 15,000), it wouldn't be a problem. The stockists don't mind a lower margin as their volume of thruput is high which compensates for the lower margin.

The problem: volumes are unviable for MACTS. At Rs 30,000 per month, it will earn a profit of Rs 900. In which, the MACTS can't even afford to keep a store-keeper to man the stocks (the groups come anytime to take the stocks) forget about delivering them to the villages. The lower volumes of SHGs compounds the problem. The MACTS also need to hire someone to keep accounts or pay the rent for the warehouse. So, unless the scale improves, the model is simply unviable for MACTS; a minimum scale of operation could be Rs 1 lakh per month. So, HLL will have to either increase the scale, or hike the margin--- or do both.

Modifying The Model

For HLL, the first noticeable change has come in terms of marketshares in the three blocks where the pilot is being implemented: in fabric wash, HLL was extremely weak at 1-2 per cent, which it has been able to move upto 15 per cent; in tea, marketshare has increased from 37 per cent to 50 per cent; in oral care, its share of the pie has increased from 34 per cent to 50 per cent. And more than anything else, HLL is today directly present in 50 villages where it was not present earlier.

Marketshare gains are fine but for the model to succeed, it needs to be viable for everyone across the chain---the SHGs, MACTS and, the company. Adds Kashyap: ''The first thing that needs to be addressed is the viability of the model.'' Irrespective of what the numbers reflect, HLL believes MACTS is a viable proposition. The key question: can it use MACTS to reach out villages? Adds Srinivas: ''Ìf I use MACTS as HLL's customers and link the SHGs with MACTS, some of the SHGs would become consumers, others would continue do some business.'' As SHGs are part of MACTS, they would still share the profits.

The idea: since viability at the SHG level would be difficult to achieve, the only way the model can be made viable is to scale it up---take it to the next level, MACTS. Since each of these MACTS have 25-30 groups affiliated to them, the sales turnover can go up from Rs 2,000 to Rs 50,000 per month (25 X 2000). So, from a distribution model, it becomes a consumption model. The SHGs would buy from MACTS as its primarily their federation, they have strong loyalty, can expect a decent price and, above all, get a share in the profits as all earnings of the MACTS would be shared equally among the SHGs.

By the end of the year, HLL would like to cover the balance 900 villages to achieve 100 per cent coverage in Nalgonda district. Adds Sehgal: ''Once we have covered the entire district, we would roll out the model in Andhra, Tamil Nadu, Karnataka and Gujarat.'' The first target would be to reach out the 2.3 lakh villages where it has an indirect coverage, and ultimately, the entire universe of villages. The possible impact: it can improve its reach by 4-8 folds. But for the rural gamble to work, it needs make the model viable.
  

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