Management thinker C K Prahalad strongly believes that focusing on the poor represents an opportunity rather than a problem. In India, companies that subscribe to this view, from ITC to HLL, have been constantly trying to cater to rural India, spread across 6,27,000 villages, which is home to 70 per cent of India's population. What's more, 90 per cent of the rural population is concentrated in villages with a population of less than 2,000 (Source: HLL).
But while exploring unchartered territories, opportunities occasionally throw up problems. First, break-even points are much longer than expected. ITC executives claim that the break-even for the eChoupal initiative can be as long as seven years. Many companies have even had to cut back on their efforts.
For instance, multi-national beverage giants Pepsi and Coca-Cola could not contain their attractive price point of Rs 5 for more than two years "" rising input costs was the culprit. The Strategist looks at the lessons that companies pick up while selling to what Prahalad calls the "bottom of the pyramid".
Social re-farmer
Tobacco to hospitality major, ITC launched eChoupal in June 2000. Soon, farmers got Internet access at a distance of one-three km away from home. The computer terminals were operated by a farmer who was the sanchalak (co-ordinator). The learning had just started. ITC experimented with having postmen, village teachers and panchayat pradhans as sanchalaks, but finally settled on farmers.
The logic: farmers would relate to their peers. The portals at eChoupal provided information on prices of crops across different mandis (markets), tips on best practices in farming, weather information, answers by expert panelists and so on, in local languages. Till date, 33,000 villages have been connected through 5,300 eChoupals. In its fifth year, the company has picked up some valuable lessons.
"The key barrier was a small number of individual farmers in a single area," says S Sivakumar, chief executive, Agri Business, ITC Ltd. It led to related issues such as a wide geographical dispersion of villages, substantial heterogeneity in demographics, psychographics, resources and weak infrastructure. Dispersion was inevitable because the eChoupals were present in villages having a population of 1,500-2,000, of which about 100 to 150 are farmers.
To tackle the issue of dispersion, ITC optimised the distance and the number of hubs and spokes. There were two issues. First, how much would a farmer travel for accessing the eChoupal and what would be the infrastructure costs. For instance, for a query on what fertiliser to use or whether it will rain the next day, a farmer was unwilling to go beyond walking distance.
However, for selling his produce or making purchases, he was willing to travel an average of 25 km. Hence, ITC set up two meeting points. Information was accessible through the eChoupal in the sanchalak's house and Choupal Sagar, where transactions take place, were located not more than 25 km away.
"They would love to do transactions next door, but that would send our infrastructure costs for a toss," clarifies Sivakumar.
The profiles of sanchalaks or samyojaks (a traditional grey merchant who manages the Choupal Sagar and takes care of logistics, operations and so on) is another area that had to be fine-tuned. As ITC expanded the number of its eChoupals from a paltry six to 5,300 in a five-year time frame, it was becoming difficult to find good quality sanchalaks.
"When you are working on a smaller scale, you can pick and choose. Now you have to take what is available. Then, you have to spend more time and resources in training them," says Sivakumar.
Even the infrastructure had to be revisited. When the scale of the eChoupal project was small the company could work with BSNL exchanges. The BSNL bandwidth was below 30 kbps (at present, 128 kbps is considered a decent speed) and worked as long as you just had a website to surf. If the farmer had to download anything more, or use videos or web cameras to learn, this bandwidth was insufficient.
"We didn't want the constraint of not being present in villages that didn't have fixed telephone lines and introduced VSAT," says Sivakumar. With just a dish and Internet accessibility, all this was made possible.
Then, there were other investments. Take power as an instance. The company has to install solar power and batteries as back-up systems in every place where it has a computer. But as more people started to visit the eChoupals, the computer usage time shot up from about 20 minutes to anything between two to four hours.
This is one area that ITC is still struggling with. "We also need to take into account that the farmer does not just use the computer. He also consumes electricity for the fan and lights," says Sivakumar.
Other limitations came in the form of warehousing and retailing. Earlier, ITC hired existing warehouses. But as volumes went up, the limitations in terms of space and quality came to the forefront.
Sivakumar reveals that the new Choupal Sagar "" costing nearly Rs 5 crore "" is an answer to the problem since it doubles up both as a warehouse and a retail store.
Also, scaling up would also mean more overheads because just setting up each eChoupal costs Rs 3 lakh. As the company plans to triple its reach to cover one lakh villages in the next five years, reducing its break-even points would be high on the agenda.
HLL's angel
Project Shakti, a low cost distribution model, was rolled out in 2000 by Hindustan Lever Limited (HLL) to attack the bottom of the pyramid. True, the company had experimented with mobile retailing for rural markets in the late-1980s and Project Bharat in the mid-1990s that focused on increasing penetration and raising awareness.
But Project Shakti was introduced with an aim to bring down distribution costs in rural markets. The traditional distribution systems used in urban markets were costly to replicate in smaller areas.
"We had to create a low-cost vehicle for markets that had a population of less than 2,000," says Sharat Dhall, business manager, Shakti, HLL. The company appointed women entrepreneurs from villages as distributors of HLL's range of products.
The 15-month pilot project in Andhra Pradesh turned out to be a good learning ground. For instance, the company initially decided to save distributor margins by cutting one layer of distribution "" the local distributor.
These savings helped in giving higher margins to the Shakti entrepreneurs and retailers. Stocks were directly sent to the Shakti distributor from the local C-and-F (carry and forward) depots. However, cutting the local distributor had its own shortcomings because they help redistribute stocks in smaller quantities. To expect that service from a large C-and-F depot was difficult.
Then, local distributors also managed issues like giving credit to the small retailer"" they had more information about the credit worthiness of local retailers or the Shakti entrepreneurs. Within six months, HLL had to reinstate the local distributor in Project Shakti.
Another learning was that most Shakti entrepreneurs had never ventured into business. Thus, hand holding became critical. HLL invested in creating awareness about the Shakti woman entrepreneur. HLL offered incentives to villagers who buy from the Shakti representative.
"If consumers cannot locate the Shakti woman easily, it naturally takes more time for her to establish the business," says Dhall.
However, Shakti's still trying to effectively bring down distribution costs. Dhall points out that targetting the BOP is at least 5-10 per cent costlier than selling in urban markets. "We need to keep driving costs down, especially while scaling up," he says.
Manpower costs is one area where a lot could be done "" it forms 80 per cent of total costs in selling to the BOP. The task is manpower intensive as employees are required to identify and develop new BOP markets, train the entrepreneurs and revisit existing markets to ensure that it has adequate stocks.
Hence, HLL is experimenting with three-four pilot models. It has rolled out mobile trainers who move from village to village and perform multi-functions from selecting entrepreneurs, training them and hand holding. It is also experimenting with exclusive trainers.
At present, Shakti accounts for 5-6 per cent of HLL's total sales and reached a break-even point on operational expenses in 2004. By end-2006, the company expects Shakti to contribute 7.5 per cent of total sales or 25 per cent of rural sales.
"It's a high investment model by traditional standards. Hence, one cannot expect it to account for more than 25 per cent of rural sales in such a short while," says Dhall.
The project is now extended to cover 60,000 villages having a population of less than 10,000. And HLL has 15,000 Shakti entrepreneurs (roughly one entrepreneur for four villages).
The company has taken inspiration from Shakti for other developing markets. In 2003, the company rolled out Joita in Bangladesh. The same model is being replicated in other markets like Sri Lanka, Mozambique and Ghana on a pilot basis.
Credit Policy
The estimated demand for credit in India ranges from $3 billion to $9 billion every year. However, the formal sector is barely able to provide $200-300 million.
There are more than six lakh villages but only 30,000 bank branches. More than 80 per cent of the rural population does not have a bank account. These statistics made it worthwhile for ICICI Bank to lend to the bottom of the pyramid.
When ICICI Bank acquired Bank of Madura in 2001, it added 263 branches to the network. As many of these branches were located in semi-urban or rural areas and had a healthy micro finance practice, ICICI Bank had a ready-made platform to spread its rural wings.
But it was not as easy. Nachiket Mor, executive director, ICICI Bank points out that despite maintaining standards like a 100 per cent recovery on micro financing and so on, the Bank of Madura model was not scaleable.
"We could not scale up because the cost in setting up a branch was very high," says Mor. Then, even as the transaction intensity in rural areas was high, the value of each transaction was low.
For instance, in a rural branch, customers will visit the bank every two days. However, the value of the transaction could be as little as Rs 20-50 on each occasion.
Hence, ICICI Bank had to look beyond a branch. It divided its clients on the basis of their socio economic classifications (SEC R1 - R4). The rich farmers (R1) would deal directly with a bank branch, while the R2 would go through agents and referral services, and R3 would deal with local financial institutions who deal with the bank and so on.
Another way of dealing with customers is through Internet kiosks that are managed by the bank's partners. ICICI bank claims to have a presence through 2,000 kiosks in rural areas and estimates that the financial services industry will have around two lakh touch points in a five year time-frame.
Mor adds that another way to build a comprehensive solution for rural India is by cross-selling financial products to the same customer. For instance, the cost to serve a customer who takes a loan is as high as 25 per cent.
If the bank can also sell health insurance, weather insurance and other financial products to the same customer, then the cost to serve can come down to 7-8 per cent. As Indian companies are discovering, as they solve problems at the bottom of the pyramid, several business opportunities emerge. But that is another story altogether.
Next week: How companies are enlarging their business potential at the BOP
