Malls Or 'mandis'

www.jagooindia.com Executive Summary Today in India, we have two huge but vastly different markets that are growing simultaneously. On one side, we have Middle Class, which every company is chasing, while on the other hand, we have Bottom of Pyramid - the market where most of the consumers live on less than $2 a day. This market was completely ignored till Dr. C. K. Prahlad, a top management thinker all over the world, and Harvey C. Fruehauf, Professor at University of Michigan Business School, brought the focus of world on this huge untapped market. They showed the way that even this market could be hugely profitable. But still, barring a few like LG and HLL, most have burned their fingers. The paper deals with understanding the dynamics of growth in Indian market and has tried to evaluate both of these highly attractive markets in India - the burgeoning Middle Class (MC) and Bottom of Pyramid (BOP) - on various parameters in terms of challenges, present scenario, characteristics, and future growth potential. Under the circumstances, where differences exist between equally lucrative markets, where should companies venture? Which sectors are suitable to make BOP venture successful, and which are not? One approach is to move along the path they have followed till now, i.e., cater to middle income group, and the other approach is to cater BOP and move in un-chartered territory. In this paper, we have identified each market, its attractiveness, size, potential and challenges, and mapped the parameters which determine the success and failure of any company in either of these markets. There cannot be one answer, which is applicable to every company and every industry. The mantra of success is SWOT analysis, which companies need to do before taking strategic decisions. Both markets are attractive to bring profits to company provided it ventures with its core strengths. Introduction In India, we have two markets - Middle Class and the Bottom Of Pyramid, people who are at the bottom of income pyramid. Most of these people earn less than $2 per day. Based on various segmentation parameters, broadly we can further divide middle class into two segments: 1. Urban MC 2. Rural MC Both these segments, as we will see, differ completely in their characteristics, and thus, need to be treated differently. On similar lines, we can divide BOP class also into two broad segments: 3. Urban BOP 4. Rural BOP Properties of Various Segments & Challenges for the Company to Tap Them Middle Class Total Population: 216 Million1 Number of Households: 43.2 Million2 Annual Household Income: Rs. 2 Lacs - Rs. 10 Lacs

1. Urban Middle Class Population: 110 Million1 With the liberalization of economy in 1990-91, this class of consumers has really arrived in the consumer market. This class of people has now ever-growing aspirations. and subsequently. they are now looking forward to the best of products available globally for consumption. The common consumption and buying behavior observed in last few years are: They are spending more on lifestyle activities and services. MC seeks an experience and places a premium on brand, quality, and more importantly, on personal choice and preference. Between 1996-97 and 2000-01, per capita income grew by 10% on CAGR3. They are post-liberalization children, and unlike their parents, have no guilt of consumption. Better communication and literacy leap has increased the aspirations of Indian consumers. Most are strivers and try hard to construct a better life. Comfortable with borrowing to fund consumption. Challenges Before Companies This market not only presents the opportunities but also throwing challenges. Most of the global corporations who have either come or are coming to India are targeting this consumer class. The competition is becoming intense day-by-day with increasingly segmented demands of consumers with companies catering to segments based on their USP (Unique Selling Point). In broad terms, the market can be defined as Highly Segmented, High Growth, High Margins and Low Volumes. 2. Rural Middle Class Population: 106 Million1 Rural MC is gradually coming up as an independent class coming out of the shadows of their urban cousins. An important aspect, which has led to the emergence of this class, has been a definite shift of village economics from agriculture to other economic activities. This is an important development as this shift makes the whole economy less dependent on monsoons. There has been mindset shift of Rural MC. They aspire to wear western outfits and cosmetics as compared to traditional ones. Still differentiating factors to be noted are: Rural market is highly segmented based on geography. A farmer in rural Punjab is more progressive than his counter part in Bihar. Unlike their urban counterparts, decisions in rural households are taken collectively. The result is that a complete family clan or even the complete village ends up purchasing only one brand. A Rural MC is still connected to its rural roots. They may have the capacity to buy a washing machine worth Rs. 20,000 but would prefer hand-washed clothes. 53% of sales in FMCG markets and 59% sales in consumer durables are in rural India3.

They are not as inclined towards lifestyle products as compared to Urban MC. 'Word of Mouth' is the most reliable promotion. Challenges Before Companies This market presents huge opportunities as well as challenges to a company. The biggest challenge is the distribution network. We have about 600,000 odd villages in the country. The market is highly segmented as per the needs. Different regions have different needs, for example; we have huge market for woollen garments in Northern India while the same product is redundant in other parts of the country. To be successful in this market, the company should have strong distribution network and be able to offer 'Value for Money' products based on the needs of the customers. Once brand is firmly established, it is very difficult to dislodge. Early movers in this category will have huge competitive advantage over others. There is a strong need to build reassurance and trust about product quality, service support, and company credentials in the mind of rural consumers. Bottom of Pyramid Population: 756 million1 Number of Households: 151.2 Million2 Annual Income: Upto Rs. 90,000 1. Rural Poor Population: 610 Million1 Number of Households: 122 Million Rural Poor represents the largest market for the products. The characteristics of this set of consumers are similar to the Rural MC. The only difference is the disposable income they have for consumption. So far the market has been completely neglected by the private sector. These consumers are still waiting to be served and don't have enough opportunities to consume the products which offer value to them. They are open to adoption of technology and entrepreneurship as proved by ITC's 'e-choupal' and HLL's 'Project Shakti'. These consumers require products which meet their functional requirements and serve their needs. They may not be educated but have plenty of common sense and survival skills. 1. Urban Poor Population: 146 Million1 Urban poor have marginally higher income than rural poor but cost of living in the city is high too. The difference comes in aspirations of urban consumer, because they are exposed to urban glitz. Urban poor are different from rural poor in terms of: More exposed to media and promotion More aspirational as they are exposed to urban rich and try to replicate them Various Challenges to BOP

Product Innovation: Companies have to realize that the solutions that work in MC will not work with BOP. Also product innovation should begin after deep understanding of the functionality and product gap of BOP. Modeling Innovations According to Infrastructure: BOP face poor infrastructure like irregular power supply, unsuitable water (hard water), bad roads, etc. Thus, products designed for BOP should adequately overcome harsh infrastructure realities. Deskilling Work and Process: Due to illiteracy, skill levels of BOP towards technology are low. Thus, solutions offered to BOP should be as deskilled and simplistic as possible. Analysis Both markets are lucrative enough for any company. But we need to compare these two markets. 1. Urban MC is segmented based on the age group, preference and income bracket, BOP class is segmented based region wise differenciation. Profitability is lower in BOP but volumes are high. On the contrary, due to segmentation profitability is high but volumes are low in MC. 2. Strong competition among the various global companies in MC urban segment. To have long term growth the company must have either of these as core strengths: * Product Leadership * Cost Leadership * Niche BOP markets are untapped. The initial entry to these markets is tough and needs investment for sustained period requiring companies to have deep pockets and commitment. But once any company enters the market and establishes its brand value, then returns are higher than that of MC as established by these simple statistics4: -

Sales ($ Million) Gross Margin (%) ROCE

Nirma 150 18 121

HLL-Wheel 100 18 93

HLL-Surf 180 25 22

BOP, especially rural, needs big trust and assurance about product quality, service and company credentials. If company is a first mover and establishes trust, it is difficult for subsequent companies to break. Thus, a first mover reaps more benefits in BOP than in MC. The problem is that never a sincere effort has been made by private sector to cater to them. Parameters on which Company Needs to Evaluate Itself Based on the Peculiarities of Each Market 1. Company strategy vis-à-vis approach towards risk: BOP is more a risk taking venture which, if successful to its expectation, can reap more benefits than for a company investing in MC. BOP may look too attractive on surface but companies may still be playing games in a dark room. Ground realties about BOP, like poor infrastructure, difficult distribution to be established, are tough tasks to overcome. Thus, if a company looks for assured returns than going for a risky approach, it should concentrate on MC and current brand portfolio rather than going BOP.

2. Growth opportunities in target sector: Product penetration of FMCG goods, consumer durables in MC are high. Growth rates in future due to segmentation and competition will be under strain. On the contrary, BOP offers high growth opportunity in these segments. Another such segment will be scooters. Gradually, MC market has shifted from scooters towards motorbikes. Clearly, BOP offers more opportunity in such segments than MC. Similarly, food retail at this moment doesn't offer any opportunity in BOP because of lack of affordability and BOP psyche to prefer homemade food. LG 'Sampoorna' is a famous example where BOP was tapped and affordable TV was made available. Thus, companies need to see whether its product portfolio matches the current or future requirement of the BOP. 3. Financial strength: Cost of capital, cash flow and financial stability are three major pillars of financial strength of a company. The BOP market needs sustainable investment at initial phase at least for few initial years to start giving returns. Huge investments are required to put necessary infrastructure, product innovation and for opening new channels of communication before the actual revenues start pouring. Thus, company should have deep pockets and financial muscle to enter into the BOP market. 4. Competition: MC markets today are very competitive and increasingly becoming more competitive with global players entering the arena. Gradually, market will become further consolidated with limited players existing in market with a definite USP associated with each. A company should carefully take note of competition and examine its position. If it finds that in coming scenario, it will not be competitive enough, then it should focus towards the untapped BOP market where not many players exist, and try to attain leadership there. 5. Distribution strength and geographical coverage: India is a vast country having 600,000 odd villages. But before getting bogged down by numbers, the company should identify the market for its products. For example, take the case of consumer durables, 90% of durables are purchased from the 2300 odd 20,000+ towns as per IMRB study. Direct supply up to 20,000+ population feeder towns should be enough as each distributor will have its own 100+ outlets in 50 odd locations, which can cover all villages up to 2000+ population category. These 85000 larger villages are home account for over 60% consumption. 6. Company culture: The culture of the organization is another important parameter needed to be evaluated before moving to BOP. Most of the organizations have so far limited themselves to urban MC. While managers are well geared to understand and satisfy the needs for urban MC, they are completely ignorant about the BOP. To work in a market efficiently and give some value products, we need managers who are well-versed with it and understand the consumer there. It holds true for the BOP market too. If a company's leaders and other senior marketing managers are uncomfortable understanding the gap and needs of their target customers, it's difficult for the company to grow in that segment. Thus, the decision to serve the market (MC/BOP) is also dependent on the fact whether the company's human resources are aligned and willing to work in that market or not. Whether a company has the right set of people with the skills required to serve the market also decides whether the company should concentrate on MC or BOP. 7. Innovation effectiveness: How comfortable is the R&D division of a company producing technologies which suit a particular market? Can Mercedes venture into a car R&D producing it for Rs..1 lac like Tata Motors? As been mentioned above, going BOP doesn't mean same solutions as that to MC at lower prices. BOP needs superior technology at affordable prices. Is the company's R&D capable of producing such solutions is the key. We may have Sony investing money on the next generation technology, but do they have the same skills required as that by LG when they made 'Sampoorna' range of TVs. Thus, a decision of which

market to cater to has to be mapped with the R&D strength of the company, and is decided which market a company is suitable for. Conclusion Under above circumstances where differences exist between equally lucrative markets and evaluation of both markets, we came to a conclusion that due to inherent differences in the competencies required for success in the two vastly different markets, there cannot be one answer, which is applicable to every company and every industry. Both markets are attractive to bring profits to company. Companies have to take a strategic decision to enter either of the markets, based on their core competencies and appetite for investment and risk.