Competing for market share in rural India. Case study. Authors. Raghu
Venkatnarayan is an Executive Director in the. Advisory Practice, Ernst & Young,
India.
Case study
Competing for market share in rural India Authors Raghu Venkatnarayan is an Executive Director in the Advisory Practice, Ernst & Young, India Anant Sood is a Senior Manager in the Advisory Practice, Ernst & Young, India
Competing for market share in rural India
This article discusses how the project team assisted a manufacturing company to improve its market share performance by focusing on growth opportunities in semi-urban and rural markets in India. It highlights an approach which has successfully enhanced market share performance and could be adopted by other product-based businesses.
I
ndia is among the few markets which has shown some resilience to the general slowdown in the global economy and is on track to continue in this direction, with high growth rates anticipated over the next few years.
A key contributor to India’s strength has been the significant growth in consumption from its rural market. Estimates put the Indian rural market close to 45% of the total Indian GDP. The rural population is defined as those who live outside the top 400 cities/towns1 (see Table 1).
NCAER (National Council of Applied Economic Research, India) reports, Industry classification, Ernst & Young Analysis 2 Industry reports, NCAER data, Ernst & Young Analysis 3 NSSO (National Sample Survey Organisation, NCAER reports 1
Table 1. Population distribution in India Number
% of population
Typical population (in 100,000)
Metros
8
7
50+
Cities
19
4
10+
Towns
396
9
1 to 10
4,738
8
Less than 1
600,000
72
Less than 5
Semi-urban towns Villages Categorised as rural India
Rural India accounts for more than 70% of the total number of Indian households and close to two-fifths of total consumption2 3 (see Table 2). Table 2. Rural vs. urban population Rural
Urban
Total
Households
145m
61m
206m
Population
732m
295m
1,027m
Earners/ household
1.4m
1.3m
-
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In demographic terms, rural India is more advantageously placed, with the number of working population there outnumbering the total urban population (see Table 3). Table 3. Age distribution of rural population in India Age group
Population (rural) mn
Greater than 70
22
61 to 70
33
51 to 60
56
41 to 50
77
31 to 40
107
21 to 30
127
Less than 20
311
concentrated. For example, there are 4,700 towns and over 600,000 villages spread across the length and breadth of India. Yet more than half of the population and approximately 60% of the total rural wealth is concentrated in just 17% of these same villages. Given these characteristics, deploying an optimal distribution structure for such a market becomes a challenge for any company, especially those which have been geared toward managing a distribution
chain predominantly in urban markets. For instance, decisions on distribution networks have to take into account both the size of the potential market as well as the cost required to service the dispersed demand that rural India represents. The two maps (see Map 1 and Map 2) demonstrate this point. Map 1 is an evaluation of all districts in a particular state MP (Madhya Pradesh) on the basis of market potential and the second is based on cost-to-serve. It is clear that both present very different outcomes for any district.
Total working population
A clear demonstration of the importance of rural India is shown by looking at the number of organizations which derive a significant proportion of their overall sales from outside of the country’s largest towns and cities (see Table 4). Table 4. Company presence in rural markets Company
Category
% sales from rural markets4
Hindustan Unilever
Household products
45%
Hero Honda
Two wheelers
60%
Dabur
Personal products
40%
Dish TV
Media
33%
TVS
Two wheelers
50%
However, while rural India has tremendous market potential, there are some inherent characteristics which make it significantly different from urban India. In particular, the way in which the population is simultaneously dispersed and yet 4
Publically available information
“ Distribution equity refers to the maturity and flexibility of a business’s distribution network.”
Competing for market share in rural India
Map 1. Assessment of districts in Madhya Pradesh based on market potential Ujjain Market potential
14.35
Panna
Income
3.84
Market potential
1.47
Consumption
4.63
Income
0.39
Awareness
5.12
Consumption
0.44
Mkt. support
0.76
Awareness
0.55
Mkt. support
0.08
Chhindwara Market potential
4.60
Income
1.07
Consumption
1.39
Awareness
1.86
Mkt. support
0.27
Excellent
Good
Decent
Poor
Good
Decent
Poor
Map 2. Assessment of districts in Madhya Pradesh based on market potential and ease-to-serve Market unattractive based on ease-to-serve approach
Excellent
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Given this situation, organizations need to relook at their “distribution equity,” i.e., their ability to drive market share performance through their distribution network. The various elements that need to be addressed while evaluating and leveraging a firm’s distribution equity are shown in Figure 1.
Background Client: a top three agricultural equipment manufacturer in India, facing deteriorating/ stagnating market share in some key states in India. The root cause identified during the initial assessment was an ineffective channel, i.e., the inability of the company to drive sales in line with market growth.
Figure 1. Factors affecting firm’s distribution equity Distribution structure
Deployment of the distribution network structure
Distribution funding
Presence of adequate network funding to enable flow of credit as required
Market coverage
Effective coverage of the markets allocated
Additional sales enablers
Enablers including BTL activities, advertising, pricing mechanisms
Each of the elements mentioned typically gets addressed as part of separate functional structures (sales, marketing, dealer development/management, finance, etc.) and consequently do not get adequate attention as part of an overarching strategy. The remainder of this study looks at how the various elements of the distribution equity of an Indian manufacturing company were addressed as part of an initiative to yield significant improvement in marketshare performance.
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Non-banking financial institutions
Competitive environment: the existing Indian market consisted of a large number of domestic and international players comprising well-entrenched market leaders and aggressive new entrants. How we addressed the challenge: we carried out a detailed assessment (see Figure 2) of our client’s existing performance structure, evaluating both brand and distribution equity. We conducted in-depth primary interviews with more than 750 respondents comprising customers (farmers) and influencers (bankers, NBFCs5, competition dealers, etc.) to identify the key areas for improvement.
Competing for market share in rural India
Figure 2. Assessment framework 1.1 Market presence 1.2 Customer acceptance
Brand equity
1.3 Consistent customer experience Market share performance
2.1 Network strategy 2.2 Channel management Distribution equity
2.3 Sales force effectiveness 2.4 Market enablers
The brand effect While analysis of brand equity revealed some findings, none of them adequately addressed the level of underperformance by the client in key markets.
Analysis revealed there was a little correlation between the level of brand recognition/awareness and the market shares of players (see Figure 3).
Additional analysis revealed a positioning mismatch between customer requirements and recognition of product benefits by the client (see Figure 4).
Figure 3. Market share vs. awareness for different brands
Figure 4. Mismatch between customer requirements and product benifits Percentage of respondents recognizing a brand as leading for different applications/usage
84% 60%
57% 45%
35%
Awareness
0%
4%
Market share (FY09)
Multi purpose
Product usage 1
Product usage 2
Total
Product category 1
64%
21%
11%
97
Product category 2
71%
9%
18%
285
Product category 3
65%
13%
17%
23
Total
69%
12%
17%
405
60% 40%
Player 7
11% Player 4
Player 3
Client
11%
Player 5
9% Player 1
39%
50% 16%
Product usage by variants
70% 43%
Player 6
89%
30% 20% 10% 0%
Product usage 1
Client
Player 1
Product usage 2
Multipurpose
Player 2 Positioning mis-match
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The distribution equity effect The assessment of the client’s distribution equity, however, revealed key areas which seemed to explain the reasons behind the underperformance.
1. Network strategy Mapping the quality of the distribution chain with market share revealed a mismatch in the nature and type of dealers deployed in specific markets. For example,
“ While only partway through implementation, the client witnessed a 50% increase in its market share.”
Figure 5a. Mapping districts in MP based on market potential vale and “cost to serve”
some high-performing dealers had been allocated less attractive markets (see Figure 5a and 5b). In order to improve strategic deployment, a detailed review was required of the client’s existing network, with implementation plans for each category of dealer (see Figure 6).
Figure 5b. Mapping of districts in MP based on quality of network presence
25 23 22
Chambal 24
21 26 20
11
Malwa
22 33 5
9
4 7
6 8
10 10 11
28 17
13
9
14
27
CMP 18
15
19
29 30
31
34
16
12
Excellent
Good
Decent
Poor
33
Dealer present and above threshold sales
Dealer with less than 4 billing in 6 months
Dealer present and below threshold sales
Vacant territory
36 35
38
32
39 37
40 EMP
Competing for market share in rural India
Figure 6. Recommended actions based on the dealer type Action steps 2
DD Territories with good market share
BB Territories with high visibilty
2
Territories with low visibility
FF
5
Territories with low visibilty
Improve coverage
3
Increase awareness
4
Improve conversion
5
Enhance dealer network
1
GG
3
Territories with low market share/vacant
Again, specific action steps emerged for each one of the elements shown in Figure 7. For example, precise guidelines for various funding approaches were developed to enable mapping of optimal funding options (see Figure 8) with the type of dealer, the sales levels and the quality of the market they were playing in.
2
Territories with good market share
CC
The second step in the assessment was an evaluation of how the channel was performing. Key to this approach was tracking and monitoring how the channel was being funded.
Infuse funds
4
AA
2. Channel management
1
1
CC
Total no. of territories
4
5
Figure 7. Channel management approach • Should the network be self-funded, funded by distributor/stockist or provided channel funding/CC? • What should be liability borne by company in each case? What rate of interest should channel partner be charged?
• What indicators of the channel partner’s funding system should the organization team be actively tracking? • How should dealer’s fund in market/stock be tracked?
Mode of funding
• How should dealer’s funds be distributed among sales/service/spares?
Network funding Monitoring of funds
Distribution of funds
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“ A focus on distribution equity will yield greater returns to organizations planning to succeed in rural markets in India.” Figure 8. Mode of funding Physical stock value as on date
Market outstanding as on date
Physical stock norm (days of sale)
Adjusted RCT
Monthly sales target
Physical stock value (average value “monthly sales target” stocking norm/30)
Market o/s value (average value “monthly sales target” adjusted RCT/30)
Required funding at dealership (physical stock + market o/s value)
Current funding at dealership (physical stock + market o/s value)
Funding gap (required - current)
Bank RCT 35%
2
Candidate for territory bifurcation
No
Industry size>500?
3
Probable candidate for distribution funding
No
Competing for market share in rural India
Deployment of appropriate funding methods and effective monitoring of the funds deployed led to a significant improvement in the dealers’ profitability and enhanced their ability to service the market more effectively.
3. Sales force effectiveness Another critical aspect was the effectiveness of the sales force (including both the client’s and the dealers’ sales forces in the local markets). Based on the analysis, we found contact by a sales person during the sales cycle was one of the most critical components impacting successful sales performance (see Figure 9). Analysis of customer buying behavior revealed that customer conversion dramatically drops when the salesman has not met the customer during the sales
process. For example, conversion ratio was 36% when a company salesman met the customer, irrespective of whether the customer visited the dealership or not. Conversion ratios went up to 48% when the customer visited the dealership and was visited by the salesman. However, when the salesman did not contact the customer during the sales process, the conversion was only 5%, irrespective of the customer having visited the dealership. As a consequence, running initiatives to increase the number of sales personnel (of both company and dealer) in the market and also increasing the frequency of visits made to a customer during the sales process dramatically improved sales performance.
By focusing on the key elements of the client’s distribution equity and introducing some very specific changes, the effect was a significant overall improvement within a very short period of time (see Figure 10). While only part-way through implementation, the client witnessed a 50% increase in its market share and is currently looking at rolling out a similar program across its entire network within India. Figure 10. Sales and market share performance
8%
Dealership visit
83
100
January
February
Implementation launch — mid December 2010 FY 09
Salesman contact
253
226
180
December Customer conversion ratios
12.35%
11.21%
90
Figure 9. Analysis of customer buying behavior Customer conversion driver
Overall impact
FY 10
36%
Summary Salesman contact
Dealership visit
48%
Salesman contact
Dealership visit
5%
While organizations spend significant amounts of time and effort in developing their brand equity, in rural India, given the nature of the market, it is critical for organizations to focus equally, if not more so, on their distribution equity. We believe this will yield greater returns to organizations planning to succeed in rural markets in India.
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