A descriptive case study is a puzzle that has been solved. It provides the reader an opportunity to know how exactly some individual, company or sector removed the hurdles they were facing. The descriptive case study has enough information in it that readers need to understand. The information could answer the questions like what the problem was and what thinking and analyzing process was undertaken and how they came up with the said solution?
BENEFITS OF STUDYING DESCRIPTIVE CASE STUDY
- Good source of ideas about behavior
- Good opportunity for innovation
- Good method to study rare phenomena
- Good method to challenge theoretical assumptions
- Good alternative or complement to the group focus of psychology
FAST MOVING CONSUMER GOODS (FMCG) IN RURAL INDIA
What Rural Means?
Marketers today define rural as people living a different lifestyle as opposed to that of those who have settled in the bigger cities and towns. Rural is basically, a mindset. Those who possess it are rural and those who do not, are urban.
FMCG recognize rural India by certain characteristics. These are: low population numbers, low median income, poor infrastructure [roads, electricity, communications], and agrarian rather than industrial activity. Such rural areas are within the sphere of influence of neighboring cities and metros. This influence determines their aspiration levels and their viability as markets for many FMCG companies.
What are FMCG Goods?
We regularly talk about things like butter, potato chips, toothpastes, razors, household care products, packaged food and beverages, etc. But do we know under which category these things come? They are called FMCGs. FMCG is an acronym for Fast Moving Consumer Goods, which refer to things that we buy from local supermarkets on daily basis, the things that have high turnover and are relatively cheaper.
Fast Moving Consumer Goods (FMCG) goods are popularly named as consumer packaged goods. Items in this category include all consumables (other than groceries/pulses) people buy at regular intervals. The most common in the list are toilet soaps, detergents, shampoos, toothpaste, shaving products, shoe polish, packaged foodstuff, and household accessories and extends to certain electronic goods. These items are meant for daily use of frequent consumption and have a high return.
The sector is divided into two distinct segments - the premium segment catering mostly to the urban upper middle class and the popular segment with prices as low as 40% of the premium segment, catering to mass segments in urban and rural markets. The premium segment is less price-sensitive and more brand conscious.
The industry is volume driven and is characterized by low margins. The products are branded and backed by marketing, heavy advertising, slick packaging and strong distribution networks. Also, raw material prices play an important role in determining the pricing of the final product.
FMCG's growth story started following the deregulation of Indian economy in early 1990s which saw dismantling of the 'license raj', resulting in a spurt in new companies and entry of a number of foreign brands. With relatively lesser capital and technological requirements, a number of new brands emerged domestically as well while the relaxed FDI conditions led to induction of many global players in the segment. Both these factors resulted in leading to rapid development of the FMCG market in India. Riding on a rapidly growing economy, increasing per-capita incomes, and rising trend of urbanization, the FMCG market in India is expected to further expand to Rs 1,80,000 crore by 2015.
Despite the strong presence of MNC players, the unorganized sector has a significant presence in this industry. Availability of key raw materials, cheaper labor costs and presence across the entire value chain has provided Indian companies with a key competitive advantage in the twenty-first century. In most categories, the unorganized sector is almost as big if not bigger as the organized sector. Unorganized players offer higher margins to stockiest in order to gain market share.
The Indian FMCG sector with a market size of USD 14.8 billion is the fourth largest sector in the economy. The FMCG market is set to double from USD 14.7 billion in 2008-09 to USD 30 billion in 2012. FMCG sector will witness more than 60% growth in rural and semi-urban India by 2010. Indian consumer goods market is expected to reach USD 400 billion by 2010.
At present, urban India accounts for 66% of total FMCG consumption, with rural India accounting for the remaining 34%. However, rural India accounts for more than 40% consumption in major FMCG categories such as personal care, fabric care and hot beverages. In urban areas, home and personal care category, including skin care, household care and feminine hygiene will keep growing at relatively attractive rates.
Within the foods segment, it is estimated that processed foods, bakery, and dairy are long-term growth categories in both rural and urban areas. The growing incline of rural and semi-urban folks for FMCG products will be mainly responsible for the growth in this sector, as manufacturers will have to deepen their concentration for higher sales volumes.
Major Players in this sector include HUL (Hindustan Unilever Ltd.), ITC (Indian Tobacco Company), Nestlé India, GCMMF (AMUL), Dabur India, Asian Paints (India), Cadbury India, Britannia Industries, Procter & Gamble (P&G) Hygiene and Health Care, Marico Industries, Nirma, Coca-Cola, Pepsi and others.
As per the analysis by ASSOCHAM, Companies like Hindustan Unilever Ltd and Dabur India originates half of their sales from rural India. While Colgate Palmolive India and Marico constitutes nearly 37% respectively, however Nestle India Ltd and GSK Consumer drive 25 per cent of sales from rural India.
With factors like rapid urbanization, increase in demands, presence of large number of young population, etc., a large number of opportunities are available in the FMCG sector.
Indian Competitiveness and Comparison with the World Markets
The following factors make India a competitive player in FMCG sector:
Availability of raw materials
Because of the diverse agro-climatic conditions in India, there is a large raw material base suitable for food processing industries. India is the largest producer of livestock, milk, sugarcane, coconut, spices and cashew and is the second largest producer of rice, wheat and fruits & vegetables. India also produces caustic soda and soda ash, which are required for the production of soaps and detergents. The availability of these raw materials gives India the location advantage.
Labor cost comparison
Low cost labor gives India a competitive advantage. India's labor cost is amongst the lowest in the world, after China & Indonesia. Low labor costs give the advantage of low cost of production. Many MNC's have established their plants in India to outsource for domestic and export markets.
Presence across value chain
Indian companies have their presence across the value chain of FMCG sector, right from the supply of raw materials to packaged goods in the food-processing sector. This brings India a more cost competitive advantage. For example, Amul supplies milk as well as dairy products like cheese, butter, etc.
Growth Prospects of FMCG in Rural India
With the presence of 12.2% of the world population in the villages of India, the Indian rural FMCG market is something no one can overlook. Increased focus on farm sector will boost rural incomes, hence providing better growth prospects to the FMCG companies. Better infrastructure facilities will improve their supply chain. FMCG sector is also likely to benefit from growing demand in the market. Because of the low per capita consumption for almost all the products in the country, FMCG companies have immense possibilities for growth. And if the companies are able to change the mindset of the consumers, i.e. if they are able to take the consumers to branded products and offer new generation products, they would be able to generate higher growth in the near future.
It is expected that the rural income will rise in future, boosting purchasing power in the countryside. However, the demand in urban areas would be the key growth driver over the long term. Also, increase in the urban population, along with increase in income levels and the availability of new categories, would help the urban areas maintain their position in terms of consumption. At present, urban India accounts for 66% of total FMCG consumption, with rural India accounting for the remaining 34%. However, rural India accounts for more than 40% consumption in major FMCG categories such as personal care, fabric care, and hot beverages. In urban areas, home and personal care category, including skin care, household care and feminine hygiene, will keep growing at relatively attractive rates. Within the foods segment, it is estimated that processed foods, bakery, and dairy are long-term growth categories in both rural and urban areas.
FMCG RURAL DEMAND TO SHOW 50% GROWTH IN 2012 - ASSOCHAM
In a Press Release on January 3rd 2010, The Associated Chambers of Commerce and Industry in India (ASSOCHAM) have forecasted an extremely robust growth in the FMCG sector. The Press Release is detailed below:
Fast Moving Consumer Goods (FMCG) will be witnessing more than 50% of growth in its Rural and Semi-Urban Segments by 2012 which in totality is projected to grow at an CAGR of 10% to carry forward its market size to over Rs.1,06,300 crore from present level of Rs. 87,900 crore, according to an analysis carried out by the Associated Chambers of Commerce and Industry of India (ASSOCHAM).
The growing penchant and insatiable appetite of rural and semi-urban folks for FMCG products will mainly be responsible for this development as their manufacturers will have to deepen their concentration for higher sales volumes in such niche areas.
Also, the urban population will develop a larger craze for organic products in the FMCG sector from health point of view and as their will not be a large number of products of organic nature in the FMCG sector, this industry will have to look for larger market size in the rural and semi-urban areas, says the Chamber's analysis.
In the rural and semi-urban areas, FMCG market penetration is currently about 2% in general as against its total growth rate of about 8%. The Indian rural market with its vast size and demand base offered a huge opportunity that FMCG companies cannot afford to ignore. With 150 million households, the rural population is nearly three times the urban.
ASSOCHAM also analyzed that the FMCG products, which will attract the eyes of rural and semi-urban folks, will mainly comprise soaps, detergents, cold drinks, consumer durables, toothpastes, batteries, biscuits, namkeens, mosquito repellants, refined oil, and hair oil. In the semi-urban areas which will include townships of larger sizes, the Chamber estimates, a good number of malls will have been put up in the next 2-3 years which will sell large volumes of FMCG products and thereby increase their demand phenomenally.
Though the rural and semi-urban demand of FMCG products will grow larger and higher, it will put a severe pressure on the margins of manufacturers of FMCG products because of cut-throat competition, says the Chamber analysis. The branded companies in the FMCG sector that will make killings will include a known number like Nirma, HLL, Dabur, ITC, Godrej, Britannia, Coca-Cola, Pepsi etc.
The rising rural and semi-urban income levels coupled with massive advertisement of FMCG products in the electronic media will spread so much of awakening in the rural and semi-urban folks towards fast moving consumer goods products so much that these will enlarge their affordability for them.
ASSOCHAM has therefore suggested that to tap the rural and semi-urban market, better infrastructure facilities like roads, better telecom connectivity to rural persons, proper sanitation and healthcare facilities should be created.
Advantages to the Sector
Indian Government has enacted policies aimed at attaining international competitiveness through lifting of the quantitative restrictions, reducing excise duties, automatic foreign investment and food laws resulting in an environment that fosters growth. 100% export oriented units can be set up by government approval and use of foreign brand names is now freely permitted.
Central & State Initiatives
Recently Government has announced a cut of 4% in excise duty to fight with the slowdown of the Economy. This announcement has a positive impact on the industry. But the benefit from the 4% reduction in excise duty is not likely to be uniform across FMCG categories or players. The changes in excise duty do not impact cigarettes (ITC, Godfrey Phillips), biscuits (Britannia Industries, ITC) or ready-to-eat foods, as these products are either subject to specific duty or are exempt from excise. Even players with manufacturing facilities located mainly in tax-free zones will also not see material excise duty savings. Only large FMCG-makers may be the key ones to bet and gain on excise cut.
Foreign Direct Investment (FDI)
Automatic investment approval (including foreign technology agreements within specified norms), up to 100% foreign equity or 100% for NRI and Overseas Corporate Bodies (OCBs) investment, is allowed for most of the food processing sector except malted food, alcoholic beverages and those reserved for small scale industries (SSI). There is a continuous growth in net FDI Inflow. There is an increase of about 150% in Net Inflow for Vegetable Oils & Vanaspati.
Vast Rural Market
Rural India accounts for more than 700 Million consumers or 70% of the Indian population and accounts for 50% of the total FMCG market. The working rural population is approximately 400 Millions. And an average citizen in rural India has less than half of the purchasing power as compare to his urban counterpart. Still there is an untapped market and most of the FMCG Companies are taking different steps to capture rural market share. The market for FMCG products in rural India is estimated about 52%t and is projected to touch about 60% within a year. HUL is the largest player in the industry and has the widest market coverage.
Export - "Leveraging the Cost Advantage"
Cheap labor and quality product & services have helped India to represent as a cost advantage over other Countries. Even the Government has offered zero import duty on capital goods and raw material for 100% export oriented units. Multi National Companies outsource its product requirements from its Indian company to have a cost advantage. It adds a cost advantage as well as easily available raw materials.
Major Key Sectoral opportunities for Indian FMCG Sector are mentioned below:
- Dairy Based Products
India is the largest milk producer in the world, yet only around 15 per cent of the milk is processed. The organized liquid milk business is in its infancy and also has large long-term growth potential. Even investment opportunities exist in value-added products like desserts, puddings etc.
- Packaged Food
Only about 10-12 per cent of output is processed and consumed in packaged form, thus highlighting the huge potential for expansion of this industry.
- Oral Care
The oral care industry, especially toothpastes, remains under penetrated in India with penetration rates around 50%. With rise in per capita incomes and awareness of oral hygiene, the growth potential is huge. Lower price and smaller packs are also likely to drive potential up trading.
Indian tea market is dominated by unorganized players. More than 50% of the market share is capture by unorganized players highlighting high potential for organized players.
RURAL MARKETING BY FMCG SECTOR
With the urban market saturated, FMCG companies are now targeting the rural markets. In spite of the income imbalance between urban and rural India, rural holds great potential since 70% of India's population lives there. Due to the recent government measures like waiver of loans, national rural employment guarantee scheme and increasing minimum support price, disposable income in rural India has been rapidly increasing. However, rural markets present their own sets of problems. These include poor infrastructure, dispersed settlements, lack of education and a virtually non-existent medium for communication. Furthermore, retailers cannot be present in all the centers as many of them are so small that it makes them economically unfeasible.
Hindustan Unilever Limited (HUL) - Shakti
Hindustan Unilever Limited (HUL) to tap this market conceived of Project Shakti. This project was started in 2001 with the aim of increasing the company's rural distribution reach as well as providing rural women with income-generating opportunities. This is a case where the social goals are helping achieve business goals.
The recruitment of a Shakti Entrepreneur or Shakti Amma (SA) begins with the executives of HUL identifying the uncovered village. The representative of the company meets the panchayat and the village head and identify the woman who they believe will be suitable as a SA. After training she is asked to put up Rs 20,000 as investment which is used to buy products for selling. The products are then sold door-to-door or through petty shops at home. On an average a Shakti Amma makes a 10% margin on the products she sells.
An initiative which helps support Project Shakti is the Shakti Vani program. Under this program, trained communicators visit schools and village congregations to drive messages on sanitation, good hygiene practices and women empowerment. This serves as a rural communication vehicle and helps the SA in their sales.
The main advantage of the Shakti program for HUL is having more feet on the ground. Shakti Ammas are able to reach far flung areas, which were economically unviable for the company to tap on its own, besides being a brand ambassador for the company. Moreover, the company has ready consumers in the SAs who become users of the products besides selling them.
Although the company has been successful in the initiative and has been scaling up, it faces problems from time to time for which it comes up with innovative solutions. For example, a problem faced by HUL was that the SAs were more inclined to stay at home and sell rather than going from door to door since there is a stigma attached to direct selling. Moreover, men were not liable to go to a woman's house and buy products. The company countered this problem by hosting Shakti Days. Here an artificial market place was created with music and promotion and the ladies were able to sell their products in a few hours without encountering any stigma or bias.
This model has been the growth driver for HUL and presently about half of HUL's FMCG sales come from rural markets. The Shakti network at the end of 2008 was 45,000 Ammas covering 100,000+ villages across 15 states reaching 3 m homes. The long term aim of the company is to have 100,000 Ammas covering 500,000 villages and reaching 600 m people. We feel that with this initiative, HUL has been successful in maintaining its distribution reach advantage over its competitors. This program will help provide HUL with a growing customer base which will benefit the company for years to come.
ITC - e-Choupal
The e-Choupal model has been specifically designed to tackle the challenges posed by the unique features of Indian agriculture, characterized by fragmented farms, weak infrastructure and the involvement of numerous intermediaries, among others.
Appreciating the imperative of intermediaries in the Indian context, 'e-Choupal' leverages Information Technology to virtually cluster all the value chain participants, delivering the same benefits as vertical integration does in mature agricultural economies like the USA.
'e-Choupal' makes use of the physical transmission capabilities of current intermediaries - aggregation, logistics, counter-party risk and bridge financing, while dis-intermediating them from the chain of information flow and market signals.
With a judicious blend of click & mortar capabilities, village internet kiosks managed by farmers - called sanchalaks - themselves, enable the agricultural community access ready information in their local language on the weather & market prices, disseminate knowledge on scientific farm practices & risk management, facilitate the sale of farm inputs (now with embedded knowledge) and purchase farm produce from the farmers' doorsteps (decision making is now information-based).
Real-time information and customized knowledge provided by 'e-Choupal' enhance the ability of farmers to take decisions and align their farm output with market demand and secure quality & productivity. The aggregation of the demand for farm inputs from individual farmers gives them access to high quality inputs from established and reputed manufacturers at fair prices. As a direct marketing channel, virtually linked to the 'mandi' system for price discovery, 'e-Choupal' eliminates wasteful intermediation and multiple handling. Thereby it significantly reduces transaction costs.
'e-Choupal' ensures world-class quality in delivering all these goods & services through several product / service specific partnerships with the leaders in the respective fields, in addition to ITC's own expertise.
While the farmers benefit through enhanced farm productivity and higher farm gate prices, ITC benefits from the lower net cost of procurement (despite offering better prices to the farmer) having eliminated costs in the supply chain that do not add value.
Launched in June 2000, 'e-Choupal', has already become the largest initiative among all Internet-based interventions in rural India. As India's 'kissan' Company, ITC has taken care to involve farmers in the designing and management of the entire 'e-Choupal' initiative. The active participation of farmers in this rural initiative has created a sense of ownership in the project among the farmers. They see the 'e-Choupal' as the new age cooperative for all practical purposes.
Another path-breaking initiative - the 'Choupal Pradarshan Khet', brings the benefits of agricultural best practices to small and marginal farmers. Backed by intensive research and knowledge, this initiative provides agri-extension services which are qualitatively superior and involves pro-active handholding of farmers to ensure productivity gains. The services are customized to meet local conditions, ensure timely availability of farm inputs including credit, and provide a cluster of farmer schools for capturing indigenous knowledge. This initiative, which has covered over 70,000 hectares, has a multiplier impact and reaches out to over 1.6 million farmers.
Companies leverage the deep-rooted FMCG firms' network in rural India
In process of understanding and reaching the scattered rural markets of India, FMCG majors HUL and ITC have formed a strong rural distribution network over the years. These networks reach out to the billion dollar consumer market which companies from various sectors aim to connect with. Hence, companies across sectors such as telecom, pharmaceuticals, banking and even cosmetics are queuing up to join forces with FMCG firms to leverage the entrenched network.
Pharmaceutical giants Ranbaxy and Pfizer recently tied up with the FMCG Company, ITC in order to distribute their over the counter (OTC) products across 6,500 e-Choupal centers spread across 40,000 villages. The e-Choupal initiative by ITC is by far one of the most successful initiatives in empowering the rural farmers thus building a healthy rural network across 40,000 villages in 9 states. The initiative currently empowers 4 million farmers while the number is growing fast. The alliance will open windows for the less equipped consumers in rural areas and provide them with better medical and healthcare products currently available only in urban cities and towns.
As corporate partnerships to push rural growth are on an upswing, the recent Reserve Bank of India (RBI) decision to allow "for profit" companies to be business correspondents of banks has encouraged such tie-ups.
For instance, in a step to promote financial inclusion, SBI bank has tied up with HUL. HUL's 'Shakti Ammas' network, the self-help groups that distribute the company's products in remote villages with a population of 2,000 and less, will now be opening SBI bank accounts for people. The alliance will ensure that the rural folks not only get access to capital, but also generate savings. While multiple banks can use a company as a business correspondent, more than one bank cannot be in the same village. Hence, the wide spread network of consumer product companies is the most effective way to gain access to scattered rural market of India.
The Hindustan Unilever (HUL) board also recently announced its strategic alliance with Tata Teleservices for distribution of latter's telecom products by leveraging company's distribution network in rural markets in India.
Creating a distribution network from scratch is a costly affair and hence arrangements with FMCG players are a win-win for both parties as network costs are shared. However, companies leveraging the FMCG's network will be successful only if they come up with a differential pricing mechanism, keeping in mind the sensitivity of the market.
Nonetheless, such tie-ups will induce further consumer brand engagements giving further exposure to the rural folks and also make them aware of various products and services available in the market.
- Rising per capita income, increased literacy and rapid urbanization have caused rapid growth and change in demand patterns. Apart from the demand for basic goods, convenience and luxury goods are growing at a fast pace too. The urban population between the ages of 15 to 34 years is expected to increase from 107 m in 2001 to 138 m in 2011, an increase of 30% per annum. In fact by 2020 it is expected that the average age in India will be 29 years. This would unleash a latent demand with more money and a new mindset. With growing incomes at both the rural and the urban level, the market potential is expected to expand further.
- While the homegrown companies are looking to expand beyond the Indian shores, the MNC subsidiaries are likely to look for greater leverage of their respective parent's strength. Since India is a big potential market, none of the big MNCs can afford to ignore the region for long. The decade ahead is likely to see more MNCs looking to enter India, as organized retailing picks up.
- Due to the large size of the market, penetration level in most product categories like jams, skin care, toothpaste, hair wash etc. in India is low. This is more visible when a comparison is done between the rural and the urban areas. Existence of unsaturated markets provides an excellent opportunity for the industry players in the form of a vastly untapped market as the income rises. Another key positive for the sector is the current government's focus making India the hub of agri-processing.
- FMCG products are witnessing a retailing revolution in recent times. While some retail chains have large retail formats enabling huge volumes, some are focused on affordability which has resulted in margins getting squeezed. The Indian market is dominated by more than 12 m small 'mom and pop' retail outlets. However only 4% is in the organized sector, thereby reducing the reach. With FDI expected to be allowed, the share from the retail formats is expected to increase.