E-Choupal and Project Shakti are locked in a fascinating race to pry open India's rural heartland. Their approaches are a study in contrast.

Indrajit Gupta & M. Rajshekhar

Women entrepreneurs of HLL's Project Shakti hawking products near Jaipur, Rajasthan.

The real India, they say, lives in the villages - 638,365 villages, to be precise. This is where the fortunes of many of India's biggest corporations are likely to be shaped.

Yet, very often, miles away in corporate boardrooms, rural India still remains an abstract concept. Most senior executives would rather sit through the periodic rural marketing workshop in five-star hotels than deal with the heat and dust of the marketplace. As a result, for much of India Inc., rural India remains the last frontier.

That's why the story of ITC's e-Choupal and HLL's Project Shakti is significant. For the uninitiated, Project Shakti is HLL's smart way to use self-help groups to directly cater to 1 million homes every month in villages where traditional distribution systems cannot hope to enter. E-Choupal is ITC's much-feted business model to build a trading platform with rural India that already touches 3 million farmers.

Hidden in these details lies an untold story: of how these two projects have brought two of India's biggest marketers face-to-face in a fascinating battle to pry open India's rural markets. The two approaches are a study in contrast. This isn't a typical corporate battle where there is a winner and a loser. The two companies have to still prove that the models are sustainable and scalable. But what are the real stakes?

Intellectual leadership, we think. To be India's most respected consumer product company - a position HLL held for over five decades and ITC is now threatening.

Over the years, HLL has defined what competitive marketing is all about. Its distribution system has been the envy of every other marketing organisation in the country. Lever House in downtown Mumbai has been Corporate India's unofficial University of CEOs, making it one of the most powerful corporate alumni networks in the country.

A farmer who sells to ITC's e-Choupal in Hardoi, Uttar Pradesh

Through the 1980s, ITC perhaps had the stature to challenge HLL. Its distribution muscle and brand portfolio was no less formidable. Also, being a quintessential entrepreneurial firm, it prided itself on the ability to spot new business opportunities, often choosing a path at variance with its majority shareholder, BAT.

The 1990s were particularly trying for ITC. Some of its diversification ran into trouble. K.L. Chugh, then the CEO, was dragged to prison for violation of foreign exchange rules. BAT waged a determined battle to wrest control of the company. Some of ITC's best managers, like Chandu Mishra and Feroze Vevaina, left the company. By the time Y.C. Deveshwar was brought back from Air-India as chairman in 1996, ITC desperately needed a new dose of leadership.

The 1980s and 1990s were HLL's golden years. But the dream run had come to an end by the end of the two decades. As the giant organisation huffed to squeeze out even an ounce of growth, the halo around it began to dim.

It was left to chairman Vindi Banga to bring the focus back on sustainable growth. He chose to shrink the company's spread of business to the branded packaged goods, and within that, to just 30 power brands.

Today, after five years of struggle, Banga is still at pains to convince both the market and his own employees that a new Lever is set to rise. Project Shakti could show the world that the new Lever is unfettered by its growing integration with Unilever and it isn't afraid of risks - trying out unconventional approaches and continuing to invest in the future.

At ITC, after almost a decade at the helm, Deveshwar has more than accomplished his task of straightening out things. If there is one thing he would want more than ever at Virginia House, ITC's corporate headquarters in Kolkata, it is to leave his stamp on the company's future. Many of the non-tobacco businesses, like hotels and paperboards, that are now raking in cash were seeded before his tenure. In late 1999, almost through serendipity, he hit upon e-Choupal. This was his Big Idea. And Deveshwar believes if it works, it would overtake ITC's cigarette business in size by 2010.

Given his run-in with BAT, Deveshwar tends to hate multinationals. He looks upon HLL as an example of a corporation that lost its way in India since it began to toe the Unilever line. He spares no punches. In the 2003 Infocomm conference in Kolkata organised by Businessworld, Deveshwar and Banga shared a stage. While talking about e-Choupal, much to Banga's chagrin, Deveshwar suggested the model could help solve HLL's topline growth problem.

In HLL's conservative book, ITC's profligate ways are an anathema. It would prefer to ignore ITC. Inside Lever House, senior managers believe the e-Choupal model was rolled out with great haste to curry favour with the government of the day. But that hasn't stopped it from appointing a consultant to keep tabs on the e-Choupal rollout.

Last August, a coin dropped: ITC's market capitalisation nudged ahead of HLL's for the first time ever. That's not all. This year, through its choupals, ITC is planning to launch a slew of personal care products - shampoos, detergents, soaps and hair oils - pitting it head-on against HLL.

But this story goes well beyond the grand ambitions of two corporate giants. Today, more than ever before, industry associations and corporate boards are looking at setting new agendas that combine wealth creation with deeper social change. It isn't about corporate social responsibility. Ever since management guru C.K. Prahalad began preaching with evangelical zeal, corporate imagination has been fired by the possibility of fortunes at the bottom of the pyramid.

Who will show the way?

Sujatamma, an entrepreneur attached to Project Shakti in the Nalgonda district of Andhra Pradesh

Think of a person who deliberates with care, stays focused, and is frugal. Now imagine another person who is more of a maverick, not averse to changing course - but he can be a tad extravagant. If you had to pick one of them to head a new venture in a difficult and unknown terrain, who would you choose?

We aren't giving away the answer just yet. But the story of ITC's e-Choupal and HLL's Project Shakti could give you enough clues. After a slow start, Project Shakti today covers 60,000 villages across 12 states. It provides livelihood to 13,500 Shakti dealers, almost all of them poor women. By this year-end, it will have another 11,500 women entrepreneurs hawking Lever products to village folk. The project now contributes a little more than Rs 100 crore to the Lever topline, and is yet to break even. By the next year-end, HLL believes Shakti's contribution could double and the project could achieve cash break-even.

Then there's ITC's e-Choupal. It's the second largest agri products exporter from India. Thanks to its 5,050 choupals across six states, the company sources agri products worth almost Rs 850 crore from 31 lakh farmers. By 2010, it plans to extend coverage to 1.1 crore farmers across 1 lakh villages in 15 states. But ITC is now looking beyond mere procurement - it has begun using its network of choupals and warehouses for a two-way trading process that takes products and services to the farmers. By next March, it hopes to build 30 Choupal Sagars, its large rural shopping complexes replete with supermarket, petrol pump, bank, healthcare and training facilities, and more.

Shakti and e-Choupal are clearly chasing two different goals. But why are two companies that sighted the same opportunity responding to it so differently? Perhaps it has to do with their corporate genes.

The contrast between the two was evident from the start. If HLL was measured in its approach, ITC was somewhat serendipitous. In 1999, as a part of Project Millennium, HLL invited suggestions from employees on how it could keep growing. Ideas that came in were put into several buckets. One of them was loosely termed as 'rural'. Someone suggested looking at alternative channels such as the one used by Grameen Bank in Bangladesh. There, the micro-credit body had boosted savings among poor women through self-help groups (SHGs), and then helped them convert those savings into micro-enterprises.

It was an idea whose time had come. The SHG movement had been gathering momentum in India. At the same time, despite being the largest consumer product marketer, HLL's much-admired distribution machinery was directly servicing less than a fifth of India's villages. This was the fallout of uneconomical last-mile logistics. The business generated by retailers in these half a million villages was less than that incurred by the company to service them. That meant Lever could not reach out to nearly 87 per cent of India's villages, which have a population of 2,000 or less.

Farmers at ITC's hub in Hardoi being briefed about insurance. Notice the Philips ad - the company is riding the e-Choupal network to sell its own wares

Retailers in these villages relied on the wholesale channel - easily one of the most cost-effective mass distribution systems. So products did get through, but only fast-moving brands like Life-buoy. Without a direct distribution system in place, Lever knew that only a handful of its brands would reach rural shop shelves. Could a new delivery channel be developed around SHGs? It was an idea no one had tried before.

In contrast, e-Choupal was the child of desperate brainstorming. In 1999, ITC was on the verge of closing its international business division (IBD). S. Sivakumar, CEO of IBD, decided to give it one last try. While sourcing soya in Madhya Pradesh, the IBD team used to see farmers lug their produce in trailers to the local mandi. Then, ITC would buy the produce from the mandi and bring it to its processing hub. Not only did ITC end up paying each intermediary at the mandi, but the farmers also got cheated at the mandi. The insight for the e-Choupal idea came from a need to re-engineer this supply chain so that both the farmer and ITC gained.

At the annual planning meet in 1999, Sivakumar presented an alternative business plan which made a bet that information and communications technologies would help source agri commodities efficiently. At first glance, it wasn't a simple idea to grasp. But Deveshwar, his chief financial officer and his IT head spent several hours reviewing the plan with Sivakumar, before giving him the go-ahead to experiment. That's how e-Choupal was born - as a last-gasp effort to save a business.

During the next phase, the two companies began designing the basic business model. And that's when their approaches started diverging. In late 2000, HLL despatched a bright, young manager, K.T.H. Srinivas, to Nalgonda, a sleepy district near Hyderabad where average incomes were as low as Rs 650-1,000. The company also outsourced almost all the groundwork to partners like Mart, a rural marketing consultancy. They negotiated with state governments, local micro-credit organisations, and SHGs. ITC, on the other hand, did the spade-work itself and decided to test its model at the large soya producing belt in Madhya Pradesh.

The results, too, were remarkably different: HLL ended up with a model that followed a linear, hierarchical approach, while ITC chose a more unconventional and complex format. The roles of the key participants in the two models were sharply different. HLL entered Nalgonda with a simple plan - to sell through SHGs. It would train their members in selling. Sell them its merchandise. And then, the members would recoup their investments by selling to their fellow villagers, and possibly to 3-4 nearby villages. In the first phase, it started with 100 Shakti Ammas, as the women members of the SHGs came to be known in Andhra Pradesh.

ITC also went for a local representative. It would appoint a farmer as the sanchalak for a clutch of villages. By making a local the face of the company, ITC could easily build credibility. An Internet kiosk - with a PC, a VSAT connection and a printer - would be set up at the sanchalak's home. Everyday, ITC would transmit the prevailing mandi prices and the price at which it would buy soya at its nearby processing hub to the sanchalak via the Internet. Instead of being forced to travel all the way to the mandi for finding out the price, the farmers now had a choice: sell their produce to the mandi or ITC, or hold till prices improved.

So, at ITC, the sanchalak was the critical person who would have to figure out what the community needed. But how was he an active participant? Well, he would not make any money disseminating all the information. He would make money only when there were transactions. This ensured that the sanchalak would keep ITC on its toes. He would say: "Unless you deliver value in my village, I won't make any money."

To ensure that these ideas spread from sanchalak to sanchalak, ITC organised regular community gatherings. In contrast, HLL had no formal mechanism for spotting ideas from ground up. The only occasion when these could come up was at its quarterly sales review meetings at Lever House.

ITC was also testing the robustness of its sourcing business by running small pilots in three different parts of the country, in commodities as diverse as coffee, aqua and soya. To make it work, the company's employees sometimes had to even beef up the local telecom infrastructure on their own.

The two firms had different comfort levels with uncertainty. The HLL board wanted to see the proof of a concept that would be sustainable and scalable across India. So, for two years, the new business team at Nalgonda fine-tuned the model to reach those goals. In contrast, the team at ITC was willing to roll out a model once they felt they had gotten 60 per cent of it right. So, while ITC was going though the paces of failure and success, HLL stayed in Nalgonda.

The Nalgonda project's beginning was unnerving. Half of the 100 women who signed up quit in the first six months. Most were not used to running businesses. A former HLL employee who worked on the Nalgonda pilot remembers, the women were unwilling to sell to their fellow villagers at a profit.

Six months down the line, the company sharpened its hiring strategy. At first, Shakti had attracted lots of women, who were keen but couldn't commit enough time. So HLL began to screen them out. It also decided, says Dalip Sehgal, executive director in charge of new ventures at HLL, that handholding in the first three months was important. "If we pulled them through the first three months, they would stay on," he says. In those three months, the groups needed to see some money being made. That convinced them that the model worked.

HLL also realised that villagers had a minimum desired income. The minimum daily wage in the area was Rs 50. If a woman got work for half a month, it would have to add up to Rs 750. If the business got anything less than that, it was not worth their while.

Also, when the project was test-launched, it was not clear if Project Shakti would work as a retail distribution model or a home-to-home one. According to the former idea , each village would have 2-3 retail outlets, so bet-ween five villages there would be about 10-15 outlets. Over time, HLL realised that a combination of the two approaches would work better. So the women, guided by the company representative (called rural sales promoters, or RSPs), would sell both door-to-door (at MRP) as well as to retailers (at a discount typically given out by distributors). They would pocket different margins for each different sale. The shopkeepers didn't feel threatened because these women weren't undercutting the MRP; also, the stocks would come to their doorstep.

The company gained too. Earlier, retailers used to stock only the faster moving items like Lifebuoy and Rexona; now, by going home to home, HLL could ensure that a larger range was stocked. Says Sahgal: "The whole building of the Pepsodent brand has happened through Shakti. Similarly, nobody had heard of iodised salt or Annapurna."

By the end of 2002, the company had a model that would work in villages with a population over 1,000. With that knowledge, it began scaling up. By the end of this year, the company will have 25,000 Shakti dealers. Says Sahgal: "Three years ago, we were present in 100,000 villages. By the end of 2005, we will be in another 100,000 villages. In another five years, we will be in another 100,000. This is perhaps the biggest increase in HLL's coverage in the last many decades."

Mind you, the first-phase rollouts for both firms were far from easy. Employees at both companies had to deal with the heat and dust of the hinterland, and they also had to bridge a cultural chasm if they were to build trust and commitment. This demanded enormous tenacity and sensitivity about local cultures. How did the two companies fare on this front?

It is interesting to study what happened when Project Shakti was being staffed. The initial response was muted. Managers weren't too keen to take it up.

This was paradoxical. The rural market would clearly be one of the biggest growth drivers for the company. Yet, not even one manager volunteered, says a manager from Lever's new ventures team. Most preferred to be in the stable mainstream businesses. (Even the top management had to weigh in to convince the managers. Srinivas later quit, and was replaced by Sharat Dhall, who is heading the project now.)

But then, Lever is no exception in this. Rajeev Narang, director at Erehwon, a boutique innovation firm, describes it as a typical phenomenon among managers in marketing firms. "Even though most managers know they need to be close to their markets, they'd much rather escape from the Third World to the First World," he says.

Interestingly, at ITC, a sales stint is seen as far more fulfilling - as an opportunity to get into the thick of the action. "I've known cases where brand managers have thrown a party to celebrate their movement back to sales," says an executive in an ad agency attached to ITC. There, the marketing folks didn't see themselves as the Brahmins in the organisation.

Consider Sivakumar. A 1983 topper from the Institute of Rural Management Anand, he had worked for the National Dairy Development Board's oilseeds cooperative. Coming from the trenches, his insights came from years of observing India's rural markets. Now, when the company began hiring for e-Choupal, it picked up graduates from the agricultural colleges, knowing that they would be less likely to shun rural India.

After Madhya Pradesh, ITC took e-Choupal to Uttar Pradesh. Now, it's opening 6-7 new choupals a day. But the process was anything but smooth when it began. As IBD, which runs e-Choupal, rushed to sign on new sanchalaks, it made many wrong calls. Says a former employee: "In the early days in Madhya Pradesh, as many as 60-80 per cent of the sanchalaks turned out to be marginal contributors." But he says the model was still profitable because the business done by successful sanchalaks was luckily high enough to support the rest.

S Sivakumar

ITC was aware of the problem, but felt this was simply the cost of locating the 20 percent sanchalaks who would work. Over time, ITC has figured out what makes for a good sanchalak. There were other problems, too. Thanks to the company's entrepreneurial style, managers' responsibilities could change fast. Unable to adapt to the often-unclear roles and targets, several managers left.

Economic upliftment doesn't follow political and social empowerment - it works the other way round, feels the head of ITC's e-Choupal project.

Along the way, Sivakumar had a breakthrough. By buying directly from the farmers, ITC was already improving farmers' incomes. Now, using the same infrastructure, ITC could sell a range of products and services to the same farmers. The idea to sell personal care products came from the sanchalaks, who noticed a growing demand for them.

This changed the essence of the model. It was no longer just about agri procurement, but about creating a trading platform for rural India. Now, says Sivakumar, with the procurement activities footing the infrastructure bill, anything else can just ride the network.

HLL has launched yet another programme, Vani, to increase awareness. It is promoting concepts like health and hygiene through public service demonstrations - which, in turn, is expected to increase demand for its personal care products. This is especially important, as the media doesn't reach a lot of these villages. However, the full benefits of Vani will kick in only when there is wider buy-in from all the brand teams. That has been missing so far.

None of the mainstream businesses of HLL are willing to invest sizeable amounts in supporting Vani yet. Apparently, category heads still prefer the traditional mass media. For them, a 30-second TV spot is still the only way to reach out. Shakti's business manager Dhall offers another explanation. "We had to first get sufficient scale for it to be meaningful to the brands," he says. Whatever the reason, the level of brand support is still minuscule.

What's more, at the latest review meeting with Harish Manwani, Unilever's new head for Asia, the Shakti team did not share the full financials, raising some doubts about its viability. But it did project a top-line of Rs 200 crore and a possible cash break-even by the end of 2006. BW has learnt that there is intense pressure on the new ventures team to show growth and returns on Shakti, especially because most other new ventures are still fledgling or have flopped. While mature businesses can withstand returns pressures better, they can be stifling for a fledgling business.

In January 2004, Shakti was rolled out in Uttar Pradesh. In June ,the targets were abruptly jacked up. RSPs had to get Shakti dealers to gross at least Rs 15,000 a month. But, says a former employee who launched Shakti in Uttar Pradesh: "The women in the state are not that empowered. They could not be expected to start going door to door within weeks of being selected." They missed the target by miles.

As sales through the women stayed low, panicking RSPs began signing on retailers as Shakti dealers, BW observed on ground. By the time one such RSP left, he had 60 'Shakti dealers' working under him - 44 of them were shopkeepers.

From his office in Hyderabad, Vijay Mahajan, head of Basix, a micro-credit institution, has had a ringside view of both these projects. IBD is headquartered in Hyderabad. Nalgonda is a couple of hours from the city. Both the companies, he says, were grappling with an inevitable challenge - the sheer lack of purchasing power in large parts of the country, or sheer poverty.

There were two options. One, it was possible to see this as a pure business problem. In that case, one could focus on lowering prices till affordability was achieved. But it was also possible to see it as a social problem. In which case, one would try to do something about the poverty itself.

This is perhaps where Shakti missed out. For one, Mahajan says he informally advised HLL to source castor oil from this region to boost local incomes. But the proposal went nowhere. Another plan of manufacturing low-cost detergents locally was similarly lost.

DALIP SEHGAL

The lives of Shakti dealers have changed for the better. One of them can now earn Rs 800-1,500 a month, says the head of HLL's new ventures team.

However, that doesn't detract from Shakti's transformation story. BW saw the impact in a visit to Nalgonda. The Shakti Ammas - many of whom had been below the poverty line - were now earning Rs 1,000-1,500 a month. Some were thinking of standing for local elections; nearly all were now sending their kids to the local English medium school. But by dealing with individual members rather than a whole SHG, HLL has widened the income disparity among the groups, says Mahajan. Normally, a company would pay the group, which might pass on a large salary to the members doing most of the work. But it would add the remaining revenue to its own corpus, which could then be borrowed by others. It's not clear why Lever chose not to follow the usual approach.

In the final reckoning, both companies have managed to create a chain that goes all the way down to village communities. The challenge now is to leverage this better. For doing that, the two companies may have to take a leaf or two out of the other's book.

ITC has moved beyond its original procurement model to embrace the opportunity in rural distribution. But that opportunity is much larger than the company has yet been able to grab. That's why it is scaling up its distribution business by letting other companies like Philips (bulbs), Marico (hair oils) and Duncan (tea) ride its network. Other ITC group companies - those into fast-moving consumer goods, foods and stationery - are preparing products tailor-made for the choupals. Also, sometime later this year, ITC will launch its own personal care brands. This has for long been Lever's core category, and the multinational is likely to respond aggressively to ITC's moves.

HLL's challenges are of another nature. It still has to improve the incomes of the Shakti entrepreneurs in order to retain their interest. To do that, it may need to widen its offerings - on its own or in partnership with other companies. It may also consider local manufacturing by these entrepreneurs, where they use ingredients supplied by Lever to make the final product. Above all, Lever would probably do well to allow its distributors to run the channel.

So let's face the opening question again. Who would you trust with a new business: the focused and frugal, or the non-conformist innovator? We've provided clues galore - now you decide.