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Case Study: ITC in Rural India

The Indian Context

India started its global foot printing right from the Stone Age with the well renowned Indus valley civilization which lasted for around 1500 years and covered a massive half a million mile of Indian map. Once termed as "Golden Sparrow", it attracted companies from Britain, France, and Portugal etc to start-up with trading and further invading the country to regularize its functional and political actions. It went the same until 1857 when East India Company acquired full control over India being attracted towards the richness and lack of administrating power. Right after independence in 1947, India has been grounded up with Religious violence corruption scandals and political instability. It was in the eighties when India came up as a well developed industrial hub for labour intensive products in textiles even without proper infrastructure facility in place. Even though proper distribution system was also not there when India was relenting to climb up the ladder, they had a very strong labour-management relation which helped the labour intensive industry to flourish in the global arena. India was very particular about retail opportunities through FDI, inspite of being pushed hard by Wal-Mart and Carrefour (France), it happened only after Economic liberalization in 199091 by Dr.Manmohan Singh under the govt. driven by Narasimha Rao. FDIs were striving hard to intrude into the market right after 1973, when govt. asked multinationals to dilute foreign equity to 40%. Some of the companies took it as an opportunity to stay in the virgin market even though there was an abundance of low wage, no distribution system, poor infrastructure and no readymade market setup. They were optimistic as the country was performing well right after the economic reforms and was showing a healthy signal of economic ground which stand apart at 8.5 %. This led to opening up foreign investment, which resulted in very rapid growth as foreign companies outsourced services to India because of combination of low wage and pool of skilled workers. It was then when Indian IT sector grew at a tremendous pace and drove the FDI inflows to massive $8.3 billion in 2005-06, with an expectation of toughing $12 billion in the year 2006-07. But up till 2006, Indian retail industry was estimated around $250 billion which comprised only 3% of the organized sector, in comparison to 65 % in the US. The govt. finally decided to open gates for foreign retailers for their operations, which was aggressively boycotted by the Left front. Key notable points are:Indian Civil society comprised of self sufficient non-governmental organizations (NGOs) which was one of the largest and vibrant in the world. Human rights and growth were monitored very closely. Better tax paradigm for the SME and small businesses. FDI tremendous growth post Indian IT boom (year 2000). Project Shakti by HUL and E-chaupal in the year2000 and 2001 respective were great success. 88% of Indian population is under $2/day income bracket.

The Rural Market Opportunities and Challenges faced in India

1. Despite poverty the poor provided market for products like tea, cooking oil, electric bicycles and radios. 2. 2005,rural market accounted for 56 percent of demand for fast moving consumer goods (FMCG), which included products such as food, household and personal care products, Confectionary and tobacco. 3. FMCG accounted for 80% of all consumers spending. 4. Most products bought by the rural consumers were manufactured, distributed, and sold by informal sector 5.Village shops were often located in shop keepers home. 6. Large companies did not invest in villages beyond the wholesalers that had a population of 100,000 population 7.Shopkeepers came to these towns and bought products on a cash-and carry basis and transported them in hired vehicles.

Comparing the Strategies of ITC and HUL

Hindustan Unilever focused on the Shakti Entrepreneur program which appointed village women. They sold HUL products directly to homes in clusters of villages. Company distributors brought products from district warehouses to the village entrepreneurs home. The average entrepreneur earned about 16$ per month in sales commissions. A field force of 1000 helped train the 30,800 Shakti entrepreneurs, who covered 100,000 villages in fifteen states. The Shakti Vani program provided valuable health and hygiene information, which helped promote the companys products, such as toothpaste. It trained women to communicate with fellow villagers using specially designed materials provided by HUL. IShakti was a more recent program to provide broader information through a rural community web portal. Villagers accessed information on a variety of topics including agriculture, education, veterinary services and entertainment through kiosks installed in partnership with the state government. HUL had a large range of FMCG products and did not sell others brands. It was laying a foundation for deeper rural penetration as income rose and consumption increased.

In contrast to this, ITC set up a system that empowered farmers in two ways: by providing them with real time information on prices, and giving them alternative selling channel, direct to ITC. It did this by setting up computer kiosks called e-Choupals, in villages. In each village it recruited a farmer to serve as its representative, called a sanchalak. ITC set up a computer in each sanchalaks home and through its web portal provided information on commodity prices from the previous day at each mandi in the state and at its own procurement center. ITC had reconfigured the traditional procurement system. It introduced a hub and spoke system. At the spokes were the e-Choupals, which enabled decentralized price discovery

and selling in villages. Delivery and procurement were centralized at procurement hubs, which included storage warehouses. ITCs procurement hubs were large, clean and well maintained. Farmers were able to wait in the shade and had access to cool drinking water and toilets. They had electronic weigh scales to avoid inaccuracy. The farmers were paid in cash rather than through deferred payment. ITC paid the farmers rates which were at least equal to or higher than the mandi price. This reconfiguration helped save farmers and ITCs costs from 9.25 ($/MT) and 8.38 to 3.00 and 5.38 respectively. ITC also introduced the concept of rural mini malls which sold a variety of products and services. It had various partnerships such as with the Apollo Hospital, who provided the mall with an Apollo certified medical doctor. Some of the existing procurement hubs were converted to rural mini malls depending on their feasibility.

ITCs Marketing Strategy for Saagar

ITC had 18 Choupal Saagars till 2007 mainly stated in 3 states (Madhya Pradesh, Uttar Pradesh and Maharashtra). The driving force for the Saagar was the diversity of products available there along with health and cheaper agricultural inputs which was priced at just 10 cents more than the governments Selling Price which was about 5 cents cheaper than most of the other private retailers. In order to Expand to about 100 Saagars from 18 at present the capital required would be around $82 - $123 Million investment which given by the statistics would be recovered @10.5% of the sales. As per the data given for a single Saagar the money recovered after 42 months would be around 11.04% and if the sale rises to $2 million then the total recovered amount will be around 31.21% for the next year. So the sales need to boost with increase in the apparel and garment sector which is one of majority of the market share. As per the expansion strategy the Sanchalaks has a major role to play along with more investment in e-choupals to generate awareness. The inaccessibility to many places is a major hindrance. The Sanchalaks main work was to make the people aware as they do not act as an ITCs agent but rather tend to act as Independent Entrepreneurs while technically they are equidistant both from the company and the villagers.

The effect on stakeholders at the BOP

With over 88% of the Indian population under $2 income level and Retail chains comprising of only 3 % of the organized sector, ITC had a very big unutilized BOP (bottom of the pyramid) market to penetrate. HUL was already strengthening its rural presence with its Project Shakti, empowering about 600 million villagers. Even though HUL had a large bucket of FMCG products, but it opening up for new players to foresee the extensive penetration as both income and consumption increased.

ITC was target the BOP, which included people with lower individual purchasing capacity and limited available solution. They had following key notes on the strategic planning: Target the potential buyers and create a healthy environment for the buyers. Improving infrastructure and maintain a fair price policy to gain buyers confidence. Setup local solution and infuse local representative to manage the operations

With the target segment in mind ITC tailored a project named e-Choupal in villages and recruited a farmer to serve as its representative called Sanchalak. They maintained transparency by providing technological power to commodity pricing and gaining farmers confidence as it was setup in each Sanchalak home. It flourished to around 6500 e-Choupal kiosk a covering 3.5 million farmers in nine different states. With the technology and farmers confidence in place, ITC had to setup a centralized procurement hub other than the traditional Mandi.ITC gave price protection to the farmer by giving them the best prevailing market price and that too in cash exceedingly cutting out risk in credit business which prevailed in the Mandi. The entire procurement was done by Samyojak, who were commission agent to the ITCs procurement channel. Farmers were supported by excellent amenities and facilities too like cool drinking water and toilets, shade in the waiting area, accurate electronic weighting machines, etc. Since rural people are daily wage earners, they rely mostly on day to day consumption of goods which demand a small quantity packing unit for ITC. They are more concerned about per-use cost instead of the overall cost of the product and associated savings. They prefer to buy products in small packets and a single digit price tag. ITC broadened its rural distribution by building up mini-mall called Choupal Saagars at some of its procurement hub, in order to sell a wide variety of product and services catering to the villagers as a whole. Some of the services offered were packaged consumer goods, agricultural ingredients and inputs, health, insurance and banking services etc. Local representatives and Sanchalaks played an important role in selling/ promoting and creating awareness about the product and services.