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The Mirage Of Rural India!
The opportunity in rural India has got many excited over the last decade, but is it worth it?
Photo Credit : Shutterstock
The single biggest discussion in boardrooms of B2C consumer companies - FMCG, consumer durables, auto and now financial services, has been the immense opportunity of rural India. For the last few years, rural India has been propped up as a once in a lifetime opportunity that cannot be missed upon. Is the rural bandwagon a hidden diamond or a Trojan horse?
It is a no brainer to fathom why rural India is getting most businesses excited. Two thirds of our population stays there across 6 lakh villages. More and more studies indicate that rural incomes are rising at early double digits and their consumption is growing faster than urban India. Leading FMCGs have rural contributing close to one third of their top-line with Unilever and Dabur generating more than 40% of their top-line from rural India. With 4G connectivity on the rise, thanks to Jio, rural India is getting connected to Urban India at an alarming pace.
However, there are certain challenges that remain with doing business with rural India. The cost to serve for serving rural markets are 7% - 9% (of revenue) higher than urban markets. In addition, succeeding in rural India depends on activation of strong influencer networks - sarpanches for auto, housewives for FMCG, leveraging public centres and community hotspots, all of which are difficult to execute and expensive on-ground activations.
With net profits of most consumer oriented companies in early double digits, the incremental cost to serve is a hefty price to pay. In addition, the quality of on-ground labor and their persistent attrition puts 10-15% of steady rural business at considerable risk. Moreover, leading companies face tremendous competition from local brands or from counterfeit products. For instance, it can be amusing to see the number of eerily looking similar bottles of Parachute hair oil in rural Andhra Pradesh. The entire business from rural India is dependent on monsoons and crop productivity which is largely out of control of any leading company. All of these make doing business with rural India at best profit neutral. For instance, most branches of PSUs in rural India have not turned profitable. The additional cost to serve for rural India has made the return on capital employed for leading consumer companies significantly lower than the opportunity cost of capital (10% - 12%).
So why does everybody get so excited with rural India? For starters, the sheer opportunity size is mind-boggling. Moreover, for leading companies that have explored most micro markets (e.g metro, tier 1, tier 2), rural is the last untapped opportunity that is an avenue for top-line growth. The underlying assumption is that with scale comes efficiency, which will hopefully translate to profits someday. For companies who are not in the bracket of Unilever, it is a theme that can be delayed for now. For sane headed companies with limited capital, the better theme to focus might still be premiumization in metro and at best Tier 1 towns. While premiumization can be difficult with competitive pressures in metros, it is a theme that is easier to tap into with the rise of the aspirational booming middle class.
Given that as Indians, we suffer from the ‘log kya kahenge’ syndrome; it is difficult to ignore a theme everyone seems to be obsessing over. So, at best, a limited presence to tap into rural markets might be a good idea. To minimise the burden of cost to serve, it is best to serve the top 20,000 / 600,000 villages that provide 60% of the rural opportunity. It is advisable to avoid a direct network and to leverage a partner network, for instance a feeder wholesale to tap into these areas. Needless to say, only a limited selection of SKUs, primarily easy on the wallet and with significant brand strength would operate in these areas.
In conclusion, although rural seems a no-brainer, it is a theme that can be very risky for companies with limited capital. With India expected to see the dual themes of premiumization and rural play out in the next decade, premiumization might seem a better fit for companies who are not blessed with unlimited cash to burn!
Like the lazy Garfield would often say, it is sometimes best to do nothing and let someone else figure it out for you!
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.