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The Village People
The Economic Times (Brand Equity) - 14 Jan 2004

NIDHI NATH SRINIVAS

They say if at first you do succeed, try something harder. For ITC, it is the only way to live. After its ambitious e-choupal project which involves connecting 100,000 small villages to one Internet-based network, the cigarettes and hotels conglomerate now wants to enter the no man’s land of bricks-and-mortar rural retailing. No more simply buying soya, shrimps, wheat and coffee from VSAT-savvy growers. ITC wants to sell to them too.

As chairman YC Deveshwar summarises it: "ITC wants to create a high-quality low-cost fulfilment channel for rural India." The plan may seem overly ambitious but Deveshwar is not backing down. "The e-choupal was the first step in the last mile towards complete backward integration. But it’s also the first mile on a new information highway around which multiple suppliers and buyers can converge. It is transformational in its implications and can make a huge contribution towards rural well-being," he says.

No other company is ready yet to invest in a multi-store chain selling a variety of items under one roof to Indian villages, so why is ITC going into overdrive? Says Deveshwar, "We have created a market. Now we are going to reap it. We are creating an entry barrier for everyone else."

Two way traffic

These lofty ambitions have not come easy or cheap. It has taken ITC three years and Rs 80 crore to journey this far down the dusty roads of rural marketing. Combining information technology, focused interaction, and eager villagers looking for income opportunities, the company has created a complex three-tier structure for selling.

Establishing the first two tiers was the easy bit. The last — and also the most visible — is the new tier ITC is now adding to get farmers to go ‘shopping’ outside their villages. The idea germinated when ITC realised that every time ‘sanchalaks’ — the local point man in ITC-speak — and farmers visit its soybean factories in MP to sell their produce, they also have the opportunity to spend their freshly earned cash.

Encouraged by its image as a fair and reliable buyer of farm produce, ITC decided to invest in 5-acre malls, costing between Rs 3-5 crore each, across 15 states. The first five — four in Madhya Pradesh and one in UP — will be inaugurated by March 2004, says S Sivakumar, chief executive of ITC’s International Business Division and the mastermind behind e-choupal.

ITC wants to use these malls for products like bikes, tractors, clothing, cement, steel, diesel and financial products. To keep its own investment to the minimum, ITC is encouraging the ‘samyojak’ — a local broker or middleman co-opted by ITC — to pick up equity and manage these shops as part-owners. Assisted by four ITC salesmen, the samyojaks will assess demand, ensure just-in-time delivery, manage customer service and keep accounts.

ITC claims that the model’s uniqueness lies in the fact that it works equally well for ITC as the buyer of farm produce and ITC as the seller of desirables. "Because it is a fundamentally profitable business model, it has the ability to be scaled up," says Sivakumar.

Even experts in retailing are giving it the thumbs-up, at least for now. Says Anil Rajpal, manager at KSA Technopak, "It is definitely a pioneering venture because no other Indian company has yet entered rural retailing with the all-under-one-roof concept."

But simply building a mall is not enough to bring in customers. So ITC is trying to position itself with farmers as the much-needed alternative to the network of local dealers or wholesalers, peddling over-priced products of suspect quality. Village grocers will get delivery at their doorstep, minus the hassle of quality checks.

For companies finding it hard to reach out more than once in six months to customers in small villages, ITC is offering a ready-made channel for niche advertising, micro-marketing and distribution. It is just as attractive for companies who want to provide customer service minus the cost. Eicher, for instance, will be training sanchalaks in motorcycle repair and maintenance in their village itself. Pesticide and seed companies will be training them on proper usage. ITC will also be selling its e-choupal data to interested food and beverage companies.

Impressed by the potential of the enterprise and ITC’s own confidence, 55 companies have already signed up for pilot projects in different states. Says PS Dravid, president, JK Genetics Seeds, "We are using e-choupal as an additional marketing channel because of its proximity to farmers and the accurate information it generates about farmer preferences. This allows us to position the right quantities at the right time."

But while everyone agrees that ITC’s rural retailing model is brilliant in theory, the crucial question is whether it will work in practice. After all, a rural customer base is not just the number of villages multiplied by their population. The economic health of the area is a major factor — unless malls are located in high-income agricultural corridors, profits are likely to be distant.

More importantly, everything hinges on the probity and enterprise of the sanchalaks ITC selects. Ultimately, it is this last mile connectivity where ITC is most vulnerable. Given that the sanchalak is not an ITC employee, it might be difficult to exercise control over him. ITC is also assuming that if you have their hearts and minds, wallets will follow. But that may not necessarily be true. "When it comes to once-in-a-while purchases like motorcycles, tractors and even steel, villagers don’t mind going to the nearest big town to shop around. ITC will be offering just a couple of brands of each item and is unlikely to be the first stop for these purchases," say industry watchers. Another problem that ITC could face is that while farmers may come in to sell their produce, for eight months of the year, that won’t happen. Plus, given its fixed costs, there is the additional anxiety of generating adequate volumes. Lastly, for suppliers there is the issue of flexibility in pricing and the danger of alienating existing distribution. A company wholesaler or dealer can offer spot discounts or create an attractive package for a loyal customer or reel in new buyers. ITC malls will have no such flexibility.

But the company is confident its formula will work. "We are telling our suppliers not to get caught in the dealer’s game of higher and higher discounts," says marketing head, Shailendra Tyagi. Experts say the hurdle of customer choice can be overcome with significantly superior customer service. "ITC offers trust and service to villagers which could compensate for lack of choice," says Rajpal of KSA Technopak.

Meanwhile, what about ITC’s shareholders? The company is reluctant to talk numbers yet. ITC is prepared for a long gestation period, says chairman Deveshwar. "There is no crystal ball. I’m simultaneously patient and impatient. I know it will take a while before results show. But I’m also impatient to see its transformational impact on rural well-being," he points out.

According to Sivakumar, ITC is expecting a four-year pay-back period. "Though the venture as a whole may take a while to become profitable, individual stores will definitely break even faster," he says.

But market analysts are not so sanguine. After all it is impossible to ignore the fate of ITC’s recent forays into segments like clothing, greeting cards, and foods. "ITC has no strength in retailing and this is another questionable move by the company," say analysts at a leading brokerage house.

Deveshwar, however, believes that as it did with paper, ITC will once again prove the Cassandras wrong. "We are quite clear it is a worthwhile venture. It also has the potential to reward shareholders for their trust," he says. Who knows, it could be a runaway success like Wills cigarettes, or a flop like its ready-to-eat meals. But success or failure, one thing is certain, if it’s to do with ITC, either would be equally spectacular.

Two Tiers Down

Today, ITC’s first contact with consumers is at the village level, where the ‘sanchalak’ – the local point man in ITC-speak – aggregates demand for products through orders placed by his neighbours. The sanchalak then emails the order to ITC, and the items are either picked up by the sanchalak at the ITC warehousing hub, or delivered by the samyojak – a local broker or middleman co-opted by ITC – to the villages.

The sanchalak then collects cash payments from his neighbours and remits them to ITC. Seed and fertilisers of companies like JK Genetics, Mahyco and BASF, to name a few, are being sold in this way.

"To avoid clogging up our channels with too many or irrelevant agri-inputs, ITC chooses from the range being offered by these companies. So in MP we are selling seeds of wheat, soya, hybrid rice and vegetables only," says Shailendra Tyagi, head of marketing in ITC’s International Business Division.

The second tier does not involve any prior orders. Instead, the sanchalak buys products based on estimated demand and stocks them in his home. They are later sold to both the local grocer and village households. Products sold this way are again procurred by either sanchalak pickup or samyojak delivery. This system is most effective for consumer goods such as salt, matchboxes, soyabean oil, and confectionery items. So ITC brands like Aashirvaad salt and atta, Candyman and Minto confectionery, and Aim matchboxes are all being sold through this route and both the company and the sanchalak earn a fee from any sales.