Fast moving consumer goods companies, who bet their topline growth on the size of the vast rural market, are finding that the odds on this one are against them. So much so that the companies like Procter & gamble, Nestle and Cadbury, after an exploratory safari or two, have come scurrying back to urban market and decided to stay away from rural markets.
Even HLL has recently phased out Lipton Tea, a two year-old, low-priced rural tea brand – with one of the highest recall values in the branded tea industry – following competition from loose tea. The downswing in agricultural growth, volumes has been effected. HLL has also found that local regional brands and the poor infrastructure to reach the rural markets have affected volume growth.
While P&G or Nestle can opt out of the rural chase and choose to concentrate on its premium market, for makers of mass products like soap, shampoo, toothpaste and so on, the elusive rural market is a real cause for worry. FMCGs like HLL, Colgate and Marico cannot afford to ignore these markets, which comprise 75 per cent of the population. In a scenario where almost 50 per cent of the sales come from rural market for most FMCGs this is serious cause for worry—because that’s where the next phase of sale growth will come from.
Mr. Harsh Mariwala, managing director of Marico Industries admits that FMGC companies have not even scratched the surface of the ‘real rural’ markets. The main reason for this is that neither companies nor their channel partners find it economically viable to penetrate the rural markets directly. Low purchasing power leads to low demand, which in turns lead to low sales value and has an adverse cost benefit.
Once a brand reaches a market, there are local brands to content with, lower trade costs and lower price point. This situation has begun to worry analyst, who feel that with the saturation in the urban markets in addition to competition, the real volumes have to come in from the rural markets. Also, product pricing in such markets has to be realistic, which means the companies would have to operate on extremely low margins to build up volumes.
To counter these problems, FMCG companies are investing in their distribution channels by way of subsidies with a view that the channel becomes viable in future. Rural products are being worked upon and a wide basket of products are being offered in order that the sum of the volumes increases the economic viability.