A "symbiotic relationship" is how Sanjeev Chadha, chairman and CEO of PepsiCo India, describes the work that the food and beverage multinational undertakes with thousands of farmers across India. "We help them with progressive farming techniques and they are of huge benefit to us in securing a reliable supply chain," he says. Some observers would call what Pepsi is doing corporate social responsibility (CSR); others more cynically might say it's simply another example of multinational corporations (MNCs) trying to figure out how to make inroads in India's challenging, but potentially lucrative rural market.
Whatever the words used by executives like Chadha for such initiatives, it is impossible to discuss multinational strategies in rural India without mentioning CSR. In its various forms, it is a critical part of their rural growth plans, often out of sheer necessity. Filling the gaps left by government, MNCs have built roads in rural India that help them deliver their goods, provided education and health care for communities whose workforces they rely upon, and implemented environmental programs to protect precious natural resources needed to keep supply chains running smoothly.
"In some cases, I am sure CSR activities are mostly rhetoric," says Harbir Singh, Wharton management professor and co-author of a new book titled, The India Way: How India's Top Business Leaders Are Revolutionizing Management. "But CSR is more legitimate in India than in the U.S., where infrastructure has been built and government is seen as addressing societal development agendas."
![[Villager]](https://lh3.googleusercontent.com/blogger_img_proxy/AEn0k_vgmsXmD4yruDHQDKg32v9K5kXDcVgUzLqo7L1R9a1fq00L7I0pG4OHn1JA39Gs1895_bXG4Nlo4RuT9L6EADYrIw9nlXG0QAvbO2MNdLvyLau33Koyj-ADr3Koj30jGKLkzGmxHoVFwZ8jRrKzmazR=s0-d)
AFP/Getty ImagesFile photo of a villager drinking a soda in Madhuranthagam village, some 75 kms south of Madras, April 23, 2004. AFP/Getty Images
Yet now there's a shift in how MNCs look at their entire rural India investments beyond CSR. With growth drying up in developed markets and their center of gravity shifting to emerging markets, MNC businesses in India are under pressure to prove that their rural strategies aren't just about doing well from a CSR perspective. They also need to show head office that these strategies are doing well from a business perspective. In short, the strategies must start delivering top- and bottom-line results.
After years of false starts, missed opportunities and flawed strategies, a number of MNCs' India businesses are getting close. Others already are there and are ramping up their rural investments. None can take that fine balance between doing good and doing business for granted, as Nokia, Coca-Cola and Max New York Life -- among the companies profiled in this special report -- show. And it's for that reason that at PepsiCo India, "our rural agenda has been driven by purpose and now is moving into performance," says Chadha.
Spending Power
For many MNCs, there's a lot more riding on their rural India performance than there once was as India's growth story spreads to the heartland. Two-thirds of the country's one billion consumers live in rural India, where almost half of the national income is generated. A report by Technopak Consultants and the Confederation of Indian Industries, a trade body, estimates that the country's rural consumer market generated US$425 billion of revenue, up from US$266 billion the previous year.
The big reason for the growth is that India's rural consumers are steadily gaining more spending power. The number of rural households earning less than US$760 a year is down from 65% to 24% since 1993, while those with an income of US$1,525 have more than doubled from 22% to 46%. Combine these factors with improved roads and other infrastructure in rural India to help products reach their markets, and it's easy to see rural India's attraction.
The Wall Street Journal and India Knowledge@Wharton present a special report on Multinational Corporations and Rural India. This reader resource combines specially-commissioned material with recent articles and more from our archives. Click here to read all.
"We are finally beginning to see that rural India has cash and is able to spend at the same time," says Vijay Govindarajan, professor of international business at Tuck School of Business at Dartmouth College in New Hampshire, who is also the chief innovation consultant for General Electric. "This is a remarkable combination for companies."
But any company coming to India for the first time that thinks it will be easy to take advantage of that combination is mistaken. Rural India is hugely complex, not least because of its diverse pace of development. As a recent study from IMRB International, a research company in Mumbai, notes, some markets are big but not as affluent as other markets (Uttar, Bihar Pradesh) while some are affluent but not very large (Himachal Pradesh, Goa). Experts also say that strategies need to take into account the vast number of languages and cultural differences across India's hinterland, while keeping strategies highly flexible and adaptable.
It can mean developing products and services tailored specifically to the rural market. When LG entered India in the mid-1990s, numerous brands were vying for shelf space with hardly anything to distinguish them from competitors. The South Korean company developed two color television sets for the rural market, Sampoorna (which means "complete" in Hindi) and Cine Plus. At US$65 and US$107 respectively, the sets were priced slightly higher than the black-and-white televisions that other manufacturers were selling in rural markets and that had become obsolete in urban homes. LG was also the first to offer gaming with its cut-price TVs and menus in English and Hindi. Now LG has refrigerators, washing machines and microwave ovens targeted at price-sensitive consumers sold from hundreds of retail and distributor outlets across the hinterland, with rural markets contributing 40% of its revenue.
Much also depends on the sector and products sold. In fast-moving consumer goods, for example, MNC products are capturing a sizable portion of rural consumer spending in a number of areas, with year-on-year increases in rural spending in 2009 on MNC shampoos (70%), washing powder (60%) and toothpaste (112%), say researchers at IMRB. What's more, they say, the average spending on these products is growing faster in rural than in urban markets.
Soap Operas
In the course of ramping up the performance of their rural strategies, MNCs are applying the lessons already learned. One of those lessons is that the benefits of a first-mover advantage are tough to hang on to as rural Indian consumers' tastes change rapidly, with questionable brand loyalty.
That applies even to a groundbreaker like Hindustan Unilever Ltd. (HUL), the country's largest consumer-products company owned by Anglo-Dutch Unilever. It made waves in the hinterland in 2001 when its Shakti Project enlisted self-help groups to develop a network of women -- largely from very low-income households -- into entrepreneurs, selling baskets of HUL products door to door. Today, 42,000 women earn a living by selling HUL products in more than 100,000 villages in 15 states. "India's rural narrative has been defined by HUL," notes Pradeep Lokhande, founder of Rural Relations, a Pune-based consumer-relationship management organization.
In the meantime, HUL has embraced other novel distribution strategies, such as selling products like its Sunsilk and Clinic shampoos in small, inexpensive packets for low-income Indians in the hinterland with little spare cash. Thanks to those efforts, the company has one of the most extensive distribution networks in the country, with 6.3 million retail outlets, including one million that it services directly. Rural India currently accounts for nearly half of HUL's revenue.
But HUL's lead regularly comes under threat. In December, for example, rival MNC Procter & Gamble launched Tide Naturals, which is a 30% cheaper version of its Tide detergent targeted at rural consumers -- a global first for the Cincinnati-based MNC. The launch was part of the parent company's "purpose-inspired growth strategy" to "touch and improve more consumers' lives in more parts of the world." Within weeks of its launch, Tide Naturals shook up India's US$8 billion detergent market by clinching a 0.6% share of the market, according to AC Nielsen.
HUL's response has been to turn to a local court to contest P&G's use of the word "naturals" to promote its new product. With neither side backing down, the case continues.
While other MNCs aren't necessarily going to be airing their competitive grievances in court, they can expect fast, nimble competitors to take them by surprise and grab market share if they don't stay close to their customers -- which is no small feat in a country like India, which has 642,000 villages, some with populations as low as 500.
'Uncharted Water'
Nowhere is that more evident than in mobile telephony. Mobile phone penetration in India jumped from 1.4 units per 100 people in 1995 to 51 units currently. In the 12 months to September 2009, the number of mobile subscribers increased 55% to 142 million, according to the Telecommunications Regulatory Authority of India.
Taking a lead in that growth has been Nokia, the US$55 billion Finnish mobile handset maker, which is one of the companies profiled in this special report. As part of a global emerging market focus since 2006, rural India now accounts for 40% of Nokia India's US$5 billion annual revenue. But it's a crowded business to be in. Along with Samsung, LG, Sony Ericsson and Motorola, there are a number of handset makers not only from China selling cut-price handsets, but also from India's home-grown companies that are chipping away at Nokia's market share lead with hand sets that are cheaper, more practical or both.
Now Nokia, like other handset makers, is branching out and forging alliances with various partners to offer mobile banking and other services along with its handsets. "It's uncharted water" -- as Gerald Faulhaber, a business and public policy professor at Wharton, puts it -- one in which "customers are pushing the companies and taking them out of the comfort zone."
Doing so successfully requires one thing: "listen to people," states Karishma Kiri, a Seattle-based strategy and product management consultant at The K2 Group, who was a director of Microsoft's Unlimited Potential initiative which provides computers, software and IT training in emerging markets. "A lot of companies tend not to listen to [what] rural consumers say they need."
That's not as clear-cut as MNCs might think. The jury is still out on the mobile services launched by news agency Reuters last year and other service providers to deliver agriculture information to farmers' mobile phone. According to Rural Relations' Lokhande, the demand hasn't been strong. "There's a perception mismatch between the farmers and the service provider," he notes. While the companies assert that the service is useful, affordable and personalized, many farmers figure they can get daily rates from their state agriculture marketing boards for two cents, or half the price.
In rural areas, finding the magic price points that don't eat into margins yet boost volume is an ongoing battle, with a lot hinging on distribution. "We have to build, and are building much deeper 'go-to-market' systems in rural India. They have to be extremely cost-efficient, much more so than they are in the urban areas," says PepsiCo's Chadha.
The US$43.2 billion MNC has been in India for more than 20 years and now claims to have overtaken Nestle as the top food and beverage company in the country. Overall, India has indeed been treating the company well, even during the downturn. India revenue at its drinks business grew 40% last year, while volume jumped 32%, well outpacing most other countries in PepsiCo's portfolio.
But it's not resting easy. Last year, it invested US$200 million -- the most ever in any single year -- as part of a US$500 million plan to expand its distribution infrastructure, while increasing R&D and adding four new plants to the 45 it already has in the country.
To make those investments pay off, rural India -- which currently accounts for 20% of PepsiCo India's business -- is taking center stage. "Over the next 10 years, I see rural India forming 40% to 50% of our national business, and in the future, growth will be powered by the rural areas," says Chadha.
Is that a long time to wait? "If any company wants [quick] financial results from the rural initiative, it is seriously mistaken," says Tuck's Govindarajan. "You have to look at the next decade and not the next quarter."
K2 Group's Kiri agrees. "The rural incubation work of multinationals is part of their business," she says. "But they need to be less focused on [year-on-year] success and spend more energy on building innovative solutions and business models for this segment. It's a long haul.
Another factor of concern to vendors is the potential for greater distribution center costs.
), which wanted to recover its dues amounting to Rs 40 crore.
