S. Sivakumar, CEO of ITC’s agri-business division, shares insights on selling to the rural Indian consumer
In a recent interview with Forbes, Stuart L. Hart (an American academic, writer, theorist and founder of Enterprise for a Sustainable World), who advocated the concept of ‘fortune at the bottom of the pyramid’ with C.K. Prahlad, indicated that the time has come for companies operating at the base of the pyramid (BoP) to upgrade their business models to BoP Version 2.0. In other words, instead of just developing affordable products and distributing them through existing channels (often NGOs), the author emphasised that companies should co-create with local communities and build sustainable, innovative and long-lasting products. That’s exactly what S. Sivakumar, the CEO of ITC’s agri-business division and the man behind e-Choupal relates to personally.
It’s no secret that ITC’s agri-business division has been relying on this model, for over a decade now, to support the company’s triple bottomline approach; that of doing good to the society and environment while improving its own profitability.
Take the case of e-Choupal; ITC had a clear vision when it designed e-Choupal in 2000. It intended to provide a competitive agri-sourcing mechanism for ITC’s packaged food business and to co-create an efficient channel for farmers to sell their produce and also to access crop-related information. Today, the initiative has empowered four million farmers across 40,000 villages and is a key element of the supply chain for ITC’s biscuits and snacks division.
Similarly, the company’s social and farm forestry innovation has created employment opportunities for 63 million people and greened 1,40,000 hectares, while its watershed projects and animal husbandry initiatives have enriched large tracts of rural communities.
As Sivakumar points out, while this model has resulted in the total shareholder returns increasing by an annual compound rate of 25.6 per cent per annum in the last fifteen years, the company still faces limitations due to the slow pace of reforms in the agricultural sector.
In this interview with The Smart CEO, Sivakumar talks about how the Indian agricultural sector has evolved over the years, the key growth drivers and challenges it poses to ITC’s agri-business division and the impact of this on the overall group’s business. He also touches upon key lessons that companies should keep in mind, when foraying into rural markets.
What are the growth drivers for ITC’s agri-business division (ABD), today?
Our primary external growth driver is the rapidly changing Indian consumer. As you know, India has successfully transitioned out of an era of food shortages, with the help of giant strides taken by Indian agriculture over the years. With growing awareness and increasing per capita incomes, today’s consumers are seeking better quality and more variety in their food products. They prefer products that offer convenience while buying and using.
The second growth driver is food safety, which is another area of serious concern. Much like the way agricultural production system responded to the growing demand in the past, there is an opportunity for the agri-business system to respond and deliver these requirements to the consumer. The third growth driver is the fast-expanding rural market. In the last decade, supported by the increasing commodity prices and focused government interventions, rural GDP has grown 30 per cent faster than the urban GDP. Higher incomes are naturally raising the aspirations of rural people for a better quality of life. The agri-sourcing infrastructure built by ITC in rural India is equally well placed to serve these rural consumers through marketing services, retailing, and distribution businesses.
Besides adding value through conventional processing and packaging, today’s agri-businesses can also explore a number of additional sources of value creation, such as, building and managing supply chains that preserve produce identity, tightly integrating agri-production systems to improve productivity and align quality to consumer needs and, effectively managing production and price risks through insurance products and commodity exchanges.
What challenges does the division face?
The most crucial challenge we face today is the slow pace of reforms in the agricultural sector. In states where the Agricultural Produce Marketing Act has not reformed, we cannot engage with the farmer directly. Similarly, whenever the Essential Commodities Act has been imposed, we cannot buy and stock volumes beyond a stipulated limit, rendering the infrastructure unviable and the curbs on futures and options through Forward Contracts Regulation Act makes price-risk management impossible.
Where does ITC ABD fit into the overall scheme of things for the group?
Firstly, ABD supports ITC’s branded packaged foods business by preserving the identity and product integrity of the agricultural raw material, by ensuring traceability along the supply chain, thus creating an important means to differentiate the branded food products.
Secondly, through its agricultural extension work consisting of Choupal Pradarshan Khets and Farmers’ Field Schools, ABD provides an assured supply of sufficient quantities of raw material, with a variety of desirable properties; another key requirement for branded food products.
Thirdly, ABD provides an important window for ITC’s FMCG products into rural markets. For instance, Choupal Haats, the round-the-year village level activities, communicate the values and benefits of brands, through interactive games and competitions. This results in direct consumer engagement and sampling of products. On the other hand, Choupal Mahotsav is a larger format event with three-day festivities and celebrations held at the Integrated Farmer Facility Centres (Choupal Saagar) of ITC. The Choupal Saagar also houses modern format retail stores.
Lastly, ABD also provides a unique platform to execute several rural initiatives that are integral to ITC’s triple bottomline philosophy. Besides efficiently linking millions of farmers to markets through its socially inclusive value chains, to enhance the agricultural productivity, ITC adopts a sustainable intensification model to conserve soil nutrients, moisture and other natural resources. This is besides helping farmers expand their rainwater harvesting potential individually and collectively.
What factors does a company have to take into consideration when determining which products have to be extended to rural markets? How can it strike a balance between price and profitability?
Three types of products have higher chances of success in rural markets. Products that help improve incomes of the rural producers (information, knowledge, production inputs, credit, risk management solutions), products that make up for the lack of infrastructure in rural India (solar energy-based products, wireless communication, personal transportation like two wheelers and SUVs) and the products that meet the aspirations of rural people in terms of a better quality of life (personal care products, entertainment).
If the value perceived by the consumer is high, price is not a constraint. Notwithstanding this position, since the level of incomes are low, strategies such as single-serve packs, low-cost delivery systems and scale economies will help in balancing low unit price with profitability in rural markets.
ITC has worked with the rural consumer for a while now. How has consumer behaviour evolved over the years in rural India? What are the most visible changes to rural consumer behaviour?
With higher incomes and better penetration of media, the rural consumer’s aspirations have increased. Real brands are finding their way into rural homes, instead of spurious look-alikes. With access to education and improvement in road connectivity, women are coming out a lot more and are influencing purchase and usage decisions. It is heartening to see the improving sales of drudgery-reducing products such as washing machines, gas stoves and other kitchen appliances.
5 LESSONS TO BUILD A SUSTAINABLE BoP BUSINESS
- It is imperative to immerse oneself and develop first-hand insights on rural consumers and be able to tailor-make relevant products and services.
- Plan for the long haul and commit the necessary resources. To conserve resources, it makes sense to go regional before a national scale-up.
- Co-opt local influencers and leverage word-of-mouth techniques to reach the consumers, considering inadequate media penetration.
- For the same reason, rely a lot more on localised below-the-line promotion activities, as opposed to above-the-line mass media.
- Cognise for the heterogeneity in the rural markets, rather than a ‘one-size-fits-all’ approach.