Cracking the rural route to market code: Building an advantaged capability in emerging markets
To capture the opportunity to reach new customers in rural regions of developing countries, fast-moving consumer goods companies must improve their route-to-market approach.
Cracking the rural route-tomarket code Building an advantaged capability in emerging markets
Amsterdam Coen de Vuijst Partner +31-20-504-1941 coen.devuijst @strategyand.pwc.com Beijing Steven Veldhoen Partner +86-10-6563-8300 steven.veldhoen @strategyand.pwc.com Dallas Jose Baquero Partner +1-214-746-6516 joseg.baquero @strategyand.pwc.com
Delhi Vikash Agarwalla Principal +91-124-499-8707 vikash.agarwalla @strategyand.pwc.com Kuala Lumpur Edward Clayton Partner +60-3-2095-2088 edward.clayton @strategyand.pwc.com London Richard Rawlinson Partner +44-20-7393-3415 richard.rawlinson @strategyand.pwc.com
Mexico City Sergio Meneses Partner +52-55-9178-4200 sergio.meneses @strategyand.pwc.com Juan Valero Partner +52-55-9178-4200 juan.valero @strategyand.pwc.com Mumbai Nilesh Narwekar Partner +91-22-6128-1105 nilesh.narwekar @strategyand.pwc.com Jai Sinha Partner +91-22-6168-1102 jai.sinha @strategyand.pwc.com
São Paulo Carlos Ceravolo Partner +55-11-5501-6247 carlos.ceravolo @strategyand.pwc.com Fernando Fernandes Partner +55-11-5501-6222 fernando.fernandes @strategyand.pwc.com Shanghai Adam Xu Partner +86-21-2327-9800 adam.xu @strategyand.pwc.com
About the authors
Nilesh Narwekar is a partner with Strategy& in Mumbai and leads the firm’s consumer and industrial products practice in India. He has more than 15 years of experience in India and the Middle East and has led several strategy and business performance improvement studies covering growth strategy, market entry, supply chain improvements, and cost reduction. Vikash Agarwalla is a principal with Strategy& in Delhi and co-leads the firm’s consumer and retail practice in India. He has more than 11 years of management consulting experience focusing on business transformation, growth strategies, and operations excellence, with significant experience in consumer, retail, and industrial products in engagements across emerging markets.
Kamal Kant Sarda is an associate with Strategy& in Delhi and is a member of the firm’s consumer and retail practice in India. He has worked on strategy engagements and organizational transformations for clients in the fast-moving consumer goods, financialservices, and telecom industries in India, Southeast Asia, and the Middle East. Jagjeet Harode is a senior associate with Strategy& based in Mumbai. He is a senior member of the consumer and retail practice of the firm in India. His focus areas include growth strategy, route-to-market transformation, marketing and innovation strategy, and operational excellence in emerging markets.
Former Strategy& senior associate Kingshuk Sanyal also contributed to this report.
Companies in the fast-moving consumer goods (FMCG) industry — selling items such as groceries, health and beauty products, tobacco, tea, and beverages (both alcoholic and nonalcoholic) — have a critical opportunity to reach new customers in the rural regions of large developing economies like India. However, few FMCG companies have a comprehensive plan to profitably grow their rural business in these markets. To capture this opportunity, they must improve their route-tomarket (RTM) approach, including sales and distribution, which will allow them to profitably sell to and service trade accounts in rural areas. We believe a successful RTM approach requires four key components. First, companies must have a strong strategy for determining which rural markets they will cover. Second, they must define a route-tomarket mosaic — i.e., how the rural markets should be covered, and whether they will be covered directly (by the company’s own employees) or indirectly (by third parties such as distributors). Third, companies must choose the right channel partners for specific distribution channels. And fourth, they must build people, process, and technology capabilities to support the RTM approach. This report describes a tested and proven four-part methodology for deploying such a comprehensive approach. Although we have focused primarily on India, the methodology would be equally valid in accessing the rural areas of other large emerging markets, such as China.
Potential growth in India’s rural markets
India has the largest rural population in the world — 850 million people, or about one-fourth of the world’s total rural demographic. This group represents the biggest market within India — 70 percent of Indians live in rural areas, contributing about half of the country’s gross domestic product. These consumers are becoming increasingly attractive to marketers. Rural household incomes in India are expected to rise at a rapid pace, giving consumers in these regions the opportunity to make more discretionary purchases. In addition, social indicators have improved, including rural literacy rates, which have climbed from 58.7 percent in 2001 to 68.9 percent in 2011 and are expected to continue rising in the next few years. This will allow rural consumers to make more informed buying decisions, in turn helping brands garner greater market share. Historically, fast-moving consumer goods (FMCG) companies in the country have been able to grow rapidly, and that expansion trend is likely to continue. According to Nielsen, the total revenue of FMCG companies in rural India was approximately US$9 billion in 2010, and projections call for it to reach $100 billion by 2025. Recently, rural households have shown greater adoption rates in most of the FMCG categories — like glucose products, deodorant, hair-coloring products, floor and toilet cleaners, household insecticides, and skin cream — yet their penetration rates still lag those of urban households (see Exhibit 1, next page). Clearly, there is significant room for FMCG companies to grow by better accessing rural markets. Because the market is so promising, our analysis shows that companies that have focused on effectively servicing rural markets (in addition to urban markets) have experienced above-average market performance in terms of revenue and profit growth and shareholder value creation (see Exhibit 2, page 6).
Rural consumers will make more informed buying decisions, helping brands garner greater market share.
Exhibit 1 FMCG penetration for urban vs. rural markets in India, by category
91% 84% 77%
75% 71% 72% 69% 65% 59% 56% 63% 60%
32% 26% 21% 15% 10% 12% 4% 5% 2%
26% 19% 18% 18%
Cosmetic Deodorant powder and perfumes
HouseFloor cleaners hold insecticides
Source: IRS; CMIE; IBEF
Exhibit 2 Financial performance of FMCG companies that focus on Indian rural market
9.5%* Revenue growth rate comparison
7.1%* Proﬁt after tax margin comparison
2.06* Market capitalization/ sales ratio comparison
* Represents average for 227 listed companies across FMCG sector. Source: Company financial reports; Strategy& analysis
Challenges in targeting rural markets
Although the potential in rural markets is clear, companies face several key challenges in capturing this opportunity: • High cost-to-serve: Rural markets are highly fragmented and geographically disparate. In India, the universe consists of several hundred thousand villages, many of which have just a few thousand people, or a few hundred. For FMCG companies, such markets present distribution challenges that significantly increase the cost of reaching and serving customers. • Seasonal demand: Rural markets depend — directly or indirectly — on the agricultural harvest. Demand for virtually all products increases when agricultural produce is available for sale in the market, because that is when consumers have money to spend. As a result, they do much of their shopping for the year during this period, stocking up on essentials. The size of the harvest has a significant impact on demand, which rises with higher yields and falls when yields decline. In addition, the monsoon season is often very difficult to predict, and hence it can impact both distribution and shopping behavior. • Limited reach of traditional media: Traditional media like TV, radio, and print may not effectively reach rural markets. As a result, FMCG companies often have a limited ability to persuade consumers through marketing messages. • Heterogeneous consumers: Even in a very small village, consumers can vary widely in their occupations, castes, religions, and spending patterns. This leads to an even more fragmented market. As a result, it is difficult for brands to capture a share of rural markets sustainably. Several of these issues are outside the control of FMCG companies, including seasonal demand, the limited reach of media, and the heterogeneous consumer base. All three are slowly changing, but there is little that companies can do to influence that rate of progress. However, the first and biggest challenge — the high cost-to-serve in rural markets — is directly within their reach. As a result, we believe
In India, the universe consists of several hundred thousand villages.
that this aspect should be their highest priority. Optimizing the cost-toserve flips the economics by increasing the ROI, and thus makes rural markets more profitable and sustainable growth targets. Drilling down one level, we believe that addressing the cost-to-serve requires a comprehensive plan by FMCG companies, consisting of a holistic rural strategy, the right product segmentation, tailored marketing, and a route-to-market (RTM) approach (see Exhibit 3). In this report, we are focusing specifically on the RTM component. Although many FMCG companies are taking steps to improve their product segmentation and marketing, few have looked at the RTM aspect, primarily because it presents a difficult challenge. For this reason, we believe that FMCG companies can generate the biggest and fastest wins by focusing their effort, capital, and management attention on RTM.
Exhibit 3 Elements of the overall rural strategy
Market coverage Which rural markets should be covered? RTM mosaic How should the rural markets be covered?
Products: assortment segmentation
Channel partners How to choose channel partners and solve scale problems? Capabilities (people, process, technology) What people, process, technology, and other capabilities are required?
Rural strategy Routeto-market: effective and efﬁcient
Source: Strategy& analysis
Marketing: tailored and grassroots
Four key components of RTM
There is no silver bullet for an effective and efficient RTM approach. Each company’s situation is unique. However, there are four standard components that apply in most situations: market coverage, RTM mosaic, channel partners, and capabilities. Market coverage Part of the challenge in reaching rural markets is that the word “rural” lacks a proper definition. Some organizations define it by the size of the population in the target village or town. Others go by the primary occupation of residents (primarily the number who work in agriculture). Still others categorize towns depending on whether they have some kind of municipal office within their borders. These are all equally valid, but the lack of a standard definition causes confusion within the organization. Accordingly, the first step is to define the word in clear, simple terms that everyone in the organization can easily understand and apply. That includes the CXOs who develop and implement the rural strategy, the sales officers who service accounts, and even the third-party distributors and their sales staffs. Based on our experience, the best categorization scheme uses population numbers and nothing else — it is the easiest to understand, and it leaves little room for confusion among frontline workers. Once the organization has a definition in place that delineates rural markets, and has communicated it throughout the workforce, the next step is to prioritize those markets. There are more than 600,000 villages in India. Blindly targeting every one of them would not produce any significant top-line improvement but would shrink the bottom line significantly because of the added RTM cost. Therefore, for every important category, companies must segment and prioritize rural markets. Again, there is no universally applicable “best” way to do this. Exhibit 4, next page, shows a prioritization map for the cities and villages in the Indian state of Maharashtra, based on accessibility (as defined by population clusters, or the relative ease of reaching a large
For every important category, companies must segment and prioritize rural markets.
Exhibit 4 Prioritization map market areas in Maharashtra — Example
20 Satara Raigarh 15 Sindhudurg Ratnagiri 10 Nagpur Bhandara Thane Jalna Washim Bid Aurangabad Osmanabad Latur Parbhani Buldana Jalgaon Nanded Kolhapur Ahmednagar Nashik Solapur Sangli
Wardha Chandrapur Gondia 5 Gadchiroli
Yavatmal Amravati Hingoli Akola Nandurbar 35 40 45 50
Note: Attractiveness index has been defined as the weighted average ownership of select categories in the rural markets of the states and union territories. Accessibility has been defined as the percentage of population living in villages with more than 2,000 people. Source: Census 2011; Strategy& analysis
number of potential rural consumers) and attractiveness (as determined by the ownership of consumer goods in those villages, according to data tracked by the Indian government). RTM mosaic Typically, companies adopt a one-size-fits-all approach to access and service all their rural markets. This leads to problems, given that the markets are highly fragmented. Instead, a multipronged and modular RTM mosaic is required. Generally, four different options are available for rural markets, based on different routes, the company’s ability to control the value chain, and the incurred cost (see Exhibit 5, next page): • The active model has the greatest cost-to-serve and requires scale to implement profitably. However, it provides the greatest level of control, from the manufacturing plant to the store shelf. • The hub-and-spoke model introduces an additional distribution link — the regional/local hub — which may reduce costs somewhat in comparison to the active model, but also reduces control. • The wholesaler model allows the company to offload some of the distribution responsibilities to a third-party wholesale player, which in turn directly services individual stores in target rural markets. Though this model offers the lowest cost, it typically works only for high-velocity brands/products. • The NGO/assist model features lower costs but also the least control, as it relies on an external entity such as a nongovernmental organization (NGO) to distribute products that will trigger some positive social, economic, or public-health outcome in rural markets. To profitably serve rural markets, companies should apply the right set of models, creating a mosaic that can serve different markets, depending on a range of criteria (population size, the company’s relative market share, and economic factors such as the profit-to-serve for any potential channel partners). To be clear, companies don’t need to be strong across all four RTM models, but given the disparity of rural markets, they definitely need more than one. Channel partners The third aspect of the RTM approach is the right set of channel partners, with aligned strategic priorities. For example, hands-off
Companies should apply the right set of models, creating a mosaic that can serve different markets.
Exhibit 5 Four RTM models for rural markets
Pros and cons Cost and control
– High level of control – Most expensive option – Requires scale
– Balanced in terms of cost and control
– Low-cost option – Low on control and monitoring – Calls for high demand and high channel partner margins – Low-cost option – Very low on control and monitoring – Achieving scalability is difﬁcult
Source: Strategy& analysis
distributors — which make financial investments in their own business but little else — are less attractive. By contrast, distributors that are operationally involved have the potential to drive business. To that end, companies should define and carefully select the right channel partners and ensure a good value proposition for them — i.e., not only ROI but also the absolute value of earnings, which is a critical factor in the small-scale operations common in rural areas. Since channel partners typically handle multiple products in rural areas, it is critical to design and provide incentives to drive “right” behavior. We have also seen companies leveraging different types of partnership structures to optimize RTM cost and mitigate potential challenges due to lower scale (see Exhibit 6, next page). For example, in one partnership arrangement, business units can collaborate with others in the same company and use a single distribution model across all products. This is used in rural markets by companies such as Dabur and PepsiCo. Other organizations partner with companies in allied industries, third-party distribution companies, or government organizations and NGOs.
Exhibit 6 RTM partnership options
RTM partnership options
Within company across business units
Single-company distribution model for multiple businesses (e.g., Dabur, HUL)
With other companies in the same/allied industries
Multi-company distributor model for same/aligned industries (e.g., HUL, ITC, Pﬁzer, Ranbaxy, Tata Docomo)
With third-party distribution companies
Multi-category and multicompany distributor for sub-10,000 rural markets (e.g., Bajaj, HUL, ITC, Nestlé, Prakash Snacks)
With government organizations and/or NGOs
Godrej allied with IndiaPost for distributing ChotuKool, a small (43liter) refrigerator costing about 4,000 rupees, in rural markets
Source: Strategy& analysis
In other countries, trade channel partnerships have become more common in accessing rural markets, a trend that has played out for several decades now. For example, Whirlpool used Sony’s network to sell its products in Japan starting in 1970. Through that relationship, Sony was able to offer a broader product selection to its customers, and Whirlpool gained access to Sony’s rural distribution network. Critical capabilities: People, process, and technology The right set of supporting capabilities can be the key differentiator in an RTM strategy, giving companies a long-term sustainable advantage. These capabilities fall into three categories: people, process, and technology. The people agenda is critical in developing and implementing a rural RTM approach, which requires a different mind-set and focus. This may necessitate a different RTM organizational structure for rural markets. Key performance indicators are also substantially different. In addition, the talent acquisition and management models need to be streamlined,
as Hindustan Unilever (HUL), Godfrey Phillips India, and Reckitt Benckiser have done. In many cases, rural sales managers have more experience than their urban counterparts, reflecting the inherent capability of serving rural markets. Regarding processes, companies need to implement standards to drive efficiency and reduce costs in all phases of sales and service for rural accounts. For example, route planning is a crucial process, to ensure that sales reps and managers can cover their territories as efficiently as possible. Trade servicing also requires standardization, so that frontline employees execute the right tasks, and in the right order, at each outlet. Because such processes can be complex in rural markets — with a variety of store formats of different sizes and degrees of operational maturity — technology is becoming a viable means of driving norms and standards. This is particularly true with mobile-based applications, which can link to the GPS functionality in smartphones and tablets to help both managers and sales representatives improve operational efficiency. For example, call completion tracking, disciplined adherence to steps on service calls, route planning for the next day (for presold goods), suggestive ordering based on stock levels, and in-market replenishment for stockouts are some of the many functions that companies can execute faster, more accurately, and with lower costs using mobile technology. Internally, company assets such as merchandising can be handled more efficiently using technology, as can capturing basic data regarding the performance of competitors. More broadly, even a basic, “light touch” management information system and data-sharing platform can improve performance dramatically. For example, these tools can identify the initiatives that are creating real impact, and those that are falling short.
Technology is becoming a viable means of driving norms and standards.
Rural RTM as competitive advantage
In summary, when FMCG companies develop and implement a winning RTM approach — with the right underlying capabilities — they become more effective not only at serving their customers but also at reducing cost and complexity. To get there, companies must have clear and concise answers for the four pillars of RTM: market coverage, RTM mosaic, channel partners, and capabilities. They must also get the details right, and manage the execution flawlessly. These are sizable endeavors, but the right approach can generate clear results, including increased revenue and reach, an improved trade partner experience, a better customer experience, a more efficient sales force, lower costs to serve channel partners, and reduced complexity. All of these rewards are within the reach of any FMCG firm that can embrace a customized RTM approach based on its unique needs.
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