November 30, -0001
Winds of change
Contrary to commonly-held perceptions, incomes in rural India have gone up dramatically over the years. Rural markets are growing two-times faster than urban markets and for many product categories, rural markets account for well over 60 per cent of the national demand. Both consumption and production have grown substantially and food grain production was in excess of 227.3 million tonnes in 2007-08 which was an increase of more than 10 million tonnes over the previous fiscal.
According to a McKinsey survey conducted in 2007, rural India, with a population of 627 million, (approximately 74.3 per cent of the total population), would become bigger than the total consumer market in countries such as South Korea or Canada in another twenty years. And it would grow almost four times from its existing size in 2007, which was estimated at US$ 577 billion.
Therefore, leading global players like Intel, Microsoft, Shell, Philips, Siemens and Bosch are keen to foray into the rural Indian market to capitalise on the growing opportunities.
According to the Federation of Indian Chambers of Commerce and Industry (FICCI), the number of rural households using fast moving consumer goods (FMCG) products has grown from 136 million in 2004 to 143 million in 2007. A pointer to the fact that rural consumers are moving away from commodities to branded products.
In a report by market research firm AC Nielsen, in April-May 2008, it was seen for the first time that the rural market has outpaced urban India in certain key product categories. The FMCG sector in rural areas is projected to grow by 40 per cent against the 25 per cent growth in urban areas.
Companies like ITC, Godrej Agrovet, and DCM Shriram, who have a strong rural presence, are likely to eclipse the growth of their urban counterparts like Reliance Fresh and the Food Bazaar chain.
Some FMCGs products like toothpaste, hair oil and shampoo have done better in rural and semi-urban centres. Coca-Cola is aggressively pushing its new bottled water brand Bonaqua in these areas. Godrej and Nestle India too have reported better sales in such areas.
According to a study, conducted in Sep 2007, by the Confederation of Indian Industry (CII) on the Indian rural retail sector, opportunities in rural retail were estimated to be over US$ 34 billion in 2007. This figure is expected to touch US$ 43 billion in 2010 and go up to US$ 58 billion by 2015. The rural markets in 2008 have grown at 25 per cent compared to the 7-10 per cent growth rate of the urban consumer retail market.
The retail sector offers opportunities for exploration and investment in rural areas.
According to a report, 'Insurance in Next 2 Years', by The Associated Chambers of Commerce and Industry of India (ASSOCHAM), in May 2008, the insurance sector size was estimated at US$ 12.8 billion, and it is likely to see an unprecedented growth of 200 per cent, touching US$ 51.2 billion by 2009-10. Rural India may offer a business opportunity worth US$ 23 billion for the insurance companies if the segment can be wooed with innovative saving schemes at affordable premiums.
Presently, only eight to ten per cent of rural Indian households are covered by life insurance. The remaining ninety per cent offer a huge potential for insurance companies. India's untapped rural market holds tremendous growth opportunities for life insurance companies with business worth US$ 231.67 million for insurance firms.
According to international consultancy firm Celent, the rural market will grow to a potential of US$ 1.9 billion by 2015 from the current US$ 487 million.
Another opportunity lies in offering low-interest personal loans to the rural population, at the rate of six to seven per cent compared to 10 – 12 per cent in the urban areas, for renovating or modernising their houses and at the time of marriages of family members or relatives.
The Indian pharmaceuticals market is regarded as one of the fastest growing in the world. In 2006-07, this market was valued at over US$ 7 billion with the rural segment having a remarkable share of this market. Driven by factors such as rising rural incomes and a strong distribution network, India's rural pharmaceuticals market is also experiencing strong growth. Industry estimates say that while small towns contribute 20 per cent to the country's pharmaceuticals market, rural areas account for 21 per cent. In 2006-07, the rural Indian market was estimated at around US$ 1.4 billion, having grown at about 40 per cent in 2006-07 against 21 per cent in the previous year.
A Gartner forecast revealed that Indian cellular services revenue will grow at a CAGR (compound annual growth rate) of 18.4 per cent to touch US$ 25.6 billion by 2011, with most of the growth coming from rural markets.
With the next 100 million mobile subscribers expected to come from non-urban areas, many Indian mobile service providers are targeting the rural market with aggressive tariffs and low-cost handsets.
Indian villages are finally getting to benefit from the IT revolution in India.
E-Panchayats are slowly taking over rural India and an 'E-medicine' scheme for rural areas has been launched by the Gujarat government's health department in May 2008. A study by internet research firm JuxtConsult reveals that one out of every seven regular internet users is from the rural belt and surprisingly, the rural net users are younger than their urban counterparts.
Moreover, BPOs are slowly growing roots in rural areas.
The Indian automotive industry currently has a turnover of US$ 34 billion. However, the automobile market remains untapped in rural India which has a strong purchasing power. Nearly 50 per cent of the Indian rural market, which includes 220 million households, is potential car buyers. Two-wheeler penetration in rural belts is still very low with less than 10 per cent households owning a two-wheeler. Sensing a huge opportunity many automobile companies are trying to woo the rural consumer.
A survey carried out by the Federation of Indian Chambers of Commerce and Industry (FICCI), indicated that the consumer durable goods sector is all set to witness 12 per cent growth in 2008. The rural market is growing faster than the urban markets, although the penetration level in rural area is much lower. The rural Indian market, which accounts for nearly 70 per cent of the total number of households, witnessed a 25 per cent annual growth while the urban consumer durables market reflected an annual rate of 7 to 10 per cent.
Many leading companies are now increasing their presence in rural India.
The road ahead
The rural revolution is fuelled by rising purchasing power, changing consumer habits, increased access to information and communication technology, better infrastructure and increased government programmes to boost the rural economy.
The recent study by Associated Chambers of Commerce and Industry of India (ASSOCHAM), disclosed that around 200 million out of 700 million rural population in India are engaged in agricultural and non-agricultural activities, and have a decent per capita income. A large section of the rural population is choosing dairy, food processing and packaging as professions, beyond traditional farming. Furthermore, large retail players like Reliance, Spencer's and Subhiksha are procuring farm commodities in bulk directly from farmers, giving them better money for their produce. The rural population is now looking at better options beyond post offices and commercial banks for higher returns on their surplus earnings.
However, Rural India lacks a good distribution system. Rural Indian purchasing habits exhibit an "earn today, spend today" mentality. Most rural homes have restricted storage space and no refrigeration so villagers tend to only buy their immediate requirements.
To succeed, corporations need to understand the psyche of the rural family along with the rural distribution network. For example, Hindustan Lever used a strategy of volume driven growth in rural markets, which was hugely successful.