The spectacular economic growth of India’s tier-one cities, like Delhi, Mumbai and Bangalore, has stolen the limelight from the quieter economic transformation going on in the countryside. As recently as 1995, 90% of India’s rural population was considered

“deprived,” according to McKinsey Global Institute definitions. By 2005, that fraction had fallen to 65%, and by 2025 it may be less than 30%. Not surprisingly, then, consumption is rising, too (see Exhibit 1).

Rural customers will account for nearly two-fifths of total consumption in 2025, and more than half in some important categories, such as food, beverages and tobacco. And that may understate matters: Many rural consumers travel to towns and cities to make purchases.

And there are real advantages to doing business in rural India. There is typically less competition than in urban areas, so rural markets are often dominated by the top two or three brands in a category. As a result, prices tend to be higher, and more stable, than elsewhere.

With all this in mind, we have identified four key principles for companies to succeed in cracking the rural Indian market.

1. Shape retail channels to maintain low cost to serve: The key is to work with local retailers to devise ways to supply local markets efficiently—and inexpensively.

Reducing minimum order quantities, for example, can help local stores cut inventory costs, making it possible for them to stock additional brands. Innovative approaches to logistics can cut service costs. Farmers make frequent visits to regional market centers (mandis) in order to sell their produce, for example. Their vehicles can

How to win in India’s rural markets

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26,383

16,701

9,688

6,0934,498

1985 1995

3.9%

2025F

5.1%

2015F2005E

Aggregate rural consumptionbillion, Indian rupees, 2000

Source: McKinsey Global Institute Consumer Demand Model

2.7x

96 90

65

46

29

0 0000

Strivers

4 1 1571

1985

0

Deprived

100%

Seekers

2025F

32

47

3

Aspirers

Global2906

11875

820

2005E1995

682

2015F

790

48

16

Share of rural population by income class%, millions

Exhibit 1:India’s rising rural consumer class

By Nitin Kundra and Rohit Razdan

provide a low-cost transport solution to bring goods back to their home village. One major consumer-goods company has systematically networked with rural wholesalers, who purchase products and then take care of supplying smaller villages themselves—sometimes by bicycle or even rickshaw. This has helped the company to extend its reach, at little extra cost, to tens of thousands of villages not served by roads.

Service companies, too, can re-think delivery methods. One Indian bank has created a hub-and-spoke structure with full-service bank branches being the hubs and Internet kiosks serving as spokes at the village level. (The automated kiosk is an example of how technology can be harnessed to create low-cost operations for rural consumers.) Appropriately enough, a motorcycle manufacturer used a similar strategy to deliver after-purchase service. The company named a single dealer to be the hub of an entire district; that dealer then appointed sub-dealers (the “spokes”).

The most advanced companies use geographical analysis tools to identify the white spaces on the maps that their networks do not reach, then

take deliberate steps to fill those gaps. Companies can also identify specific pockets of demand being filled in nearby urban centers, then open retail counters in villages to coax rural consumers to buy these goods closer to home.

2. Become the preferred brand: Creating good relationships with local retailers is crucial to win in rural markets. To do this, companies can give more of the value chain to rural retailers, perhaps by allowing some of them to handle the local transportation of goods. Alternatively, some companies have collaborated to give local retailers a more appealing bundle of products and services with which to tempt their customers. A major consumer-goods company, for example, tied up with a leading telecom company to ensure that retailers have other products to sell as well and to earn a minimum profitability.

Given the strong cascading effect of a brand’s share in urban centers on the nearby rural areas, it is crucial to have a strong presence in the entire cluster. Successful companies do this by creating strong distributors or dealers in nearby urban areas. Automotive companies may give regional dealers in smaller towns exclusive access to the regional sales and

service business, for example, allowing them to build a local network while holding down inventory and equipment costs.

3. Develop marketing approaches suited for rural customers: In important ways, rural customers are different. For a start, credit is more limited. Then there is the fact that almost half of rural income comes directly, and another 10% to 30% indirectly, from agriculture. Rural customers also rely more heavily on the advice of family members or influential neighbors on what to buy. But they are aspirational, too; they like brands and trade up as their incomes rise—and because there are fewer brands sold in rural areas, being the most valued one carries an extra premium.

The most effective rural campaigns focus on creating absolute demand, not simply winning market share. A toothpaste company did this by providing samples to schools and colleges, effectively targeting the youth who are often an important part of decision-making process in rural areas. It obviously makes sense to time marketing campaigns to coincide with the end of the local harvest, when purchasing power is highest.

Finally, working at the village level requires connecting with the community. This does not have to be expensive. Putting up advertising at major junctions; painting murals at gathering places like wells and water holes; running product demonstrations at local gatherings; and publicizing the use of products by high-profile or influential individuals—these are all good, inexpensive ways to build stature and awareness. To address the lack of credit in many rural areas, companies can connect with micro-finance groups; down the line, it is possible that these and similar groups can also become product distributors.

Agricultural rich

Agricultural poor Labour Service

Artisans / business Share of sales

Rural economic centers

Able villages

Deprived villages

30% 13% 20% 20% 15%

68%

23%

10%

Share of income 100%

INDICATIVE

Source: Government of India, Mckinsey Global Institute

Exhibit 2:Dimensions of rural India

4. Pick your spots: The companies with the best rural networks are pragmatic, patient and strategic. They focus first on locations with the highest growth potential and the lowest cost to serve, then use these as a base from which to reach out into more remote locations. There are more than 120,000 different rural settlements in southwest India, for example, but it’s not really necessary to

go into each and every pinpoint on a map. One building-products company found that 10% of villages accounted for 90% of sales. Census and MGI data support that impression. Reaching only those villages with electricity and 3,000 or more people—those that we prefer calling “regional economic centers” and “able villages”—will take companies a long way toward creating a useful footprint in rural India.

http://csi.mckinsey.com

Nitin Kundra is an associate in McKinsey’s Delhi office. Rohit Razdan is an associate principal in Singapore.