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Project Shakti – A Win Win Situation
“Our partnership with HUL offers the rural entrepreneur a profitable business model while operating i-Shakti kiosks. Also, low cost delivery and customized products will result in higher benefit through enhanced economic gains for the rural consumers.”
~ Mr. Nachiket More
Executive Director, Wholesale Banking Group
“There’s incredible potential in rural markets. That’s where the growth will come from.”
~ Sharat Dhall, Hindustan Lever’s director of new ventures and marketing services
Sankaramma, the leader of the local Kanaka Durga self-help Group (SHG) belongs to K. Thimmapuram village’s Muddaner Mandal in the Kadapa district of Andhra Pradesh. The village has 350 households with a total population of 1200. Sankaramma’s 5 hectares of agricultural land was not sufficient for six member family due to severe drought in the region. She started a business in April 2003 with the Hindustan Unilever Ltd. By 2005, she had a regular monthly turnover of Rs.10,000 per month. Initially she sold door to door, but thereafter the customers started visiting her home for products. She sees Project Shakti as a mean for the bright futures of her children. Project Shakti also enabled her to provide mid-day meals at the primary school in her village. Today, Sankaramma has become a key development figure in her village.
Usha Sarvatai, a mother of 2, traveled 32 km everyday to work. Her husband’s income was not sufficient for the two children and their old parents. But the long distance and the odd timings of the job forced Usha to quit the job. Then she got a call from the Government dept. to attend a meeting, convened by Project Shakti. Usha became a Shakti Amma and started a new venture. In a short span the good relationships she developed with the villagers helped her do good business. She says, “I am happy fulfilling my family’s requirements and people give me a lot of respect today.” And she is now very eager to grow her business in the years to come.
The list does not end here. Hindustan Lever Ltd., a subsidiary of Unilever is counting on thousands of women like Sankaramma and Usha Sarvatai to sell its products to the rural consumers it couldn’t reach before. By 2005, around 13,000 poor women were selling the company’s products in 50,000 villages in India’s 12 states and contributed for 15% of the company’s rural sales in those states . The women typically earned between $16 and $22 per month , often doubling their household income which was used to educate their children. Overall, around 30% of Hindustan Lever’s revenue came from the rural markets in India
Started in the late 2000, Project Shakti had enabled Hindustan Lever to access 80,000 of India’s 638,000 villages . Hindustan Lever’s director of new ventures proudly expressed, “At the end of the day, we’re in business. But if by doing business we can do something positive, it’s a great win-win model.” Hindustan Lever was not the only company recognizing the vast marketing potential in rural India. With the saturation of urban market, the companies started reengineering their businesses and products to target rural consumers who are poor but are rich in aspirations fueled by the media and other forces.
Unilever in India: Business and Growth
Unilever was the world’s largest Fast Moving Consumer Goods (FMCG) company with a worldwide revenue of $55 billion in 2005 . It’s Indian subsidiary, the Hindustan Unilever Limited (HUL) was the country’s largest FMCG company with combined volumes of about 4 million tonnes and revenues near about $2.43 billion . HUL’s major brands included Lifebuoy, Lux, Surf Excel, Rin, Wheel, Fair & Lovely, Pond’s, Sunsilk, Clinic, Pepsodent, Close-up, Lakme, Brooke Bond, Kissan, Knorr-Annapurna, Kwality Wall’s etc. These were manufactured over 40 factories across the country .
In 1931, Unilever set up its first Indian subsidiary, Hindustan Vanaspati Manufacturing Company . Thereafter the Lever Brothers India Limited and United Traders Limited were established in 1933 and 1935 respectively. In November 1956, these three companies merged and form HUL. Unilever’s share in HUL was 51.55% in 2005 and the remaining of the shareholding was distributed among about 380,000 individual shareholders and financial institutions. A foray of acquisitions followed thereafter . In 1984, the Brooke Bond joined the Unilever fold. Lipton was acquired in 1972 and Ponds in 1986 . HUL was following a growth strategy of diversification always in line with Indian opinions and aspirations.
The economic and political development in the 1990s had marked an inflexion in HUL’s and the Group’s growth curve. Economic liberalization permitted the company to explore every single product and opportunity segment, without any constraints on production capacity. On the other hand, deregulation allowed alliances, mergers and acquisitions. In 1993, HUL merged with the Tata Oil Mills Company (TOMCO) 1993 . In 1995, HUL formed a 50:50 joint venture with another Tata company, Lakme Limited .
The company had also made a string of mergers, acquisitions and alliances in the Foods and Beverages sector. Some of these were the acquisition of Kothari General Foods (1992), Kissan (1993), Dollops Icecream business from Cadbury India (1993), Modern Foods (2002), Cooked Shrimp and Pasteurised Crabmeat business of the Amalgam Group of Companies (2003) .
With 12.2% of the world population residing in the villages of India, the country’s rural FMCG market had a huge potential . The Indian FMCG sector was the fourth largest sector in the economy with a market size of $13.1 billion . The sector was expected to grow by over 60% by 2010. In 2005-2006 the urban India accounted for 66% of total FMCG consumption, with rural India accounting for the remaining 34% . However, rural India accounted for more than 40% consumption in major FMCG categories such as personal care, fabric care, and hot beverages . The Bid FMCG companies such as HLL, Nirma and ITC joined the foray to tap the huge potential.
In the 1990s, a local Indian firm, Nirma Ltd. started providing detergents to the rural poor at the lowest cost. The company had created a business system with a new product formulation, low-cost manufacturing, wide distribution channel, special packaging and value pricing. After a decade, Nirma became one of the largest branded detergent makers with a 38% market share and 121% return on its capital employed .
In 2002, ITC set up a network of internet-based kiosks, e-choupals, to help the farmers in their procurement process. The initiative began with the soya growers in Madhya Pradesh and then expanded to cotton, tobacco, shrimp etc. Starting with six e-choupals in June 2000, ITC’s Internet-based, rural initiative had linked 6,000 Indian villages with around 1,200 e-choupals by 2002. The setting up of each e-choupal entails an investment of Rs 1-3 lakh .The objectives behind e-choupals was to allow single place procurement and purchase point, allowing farmers to sell their products directly to ITC on the basis of updated current prices prevailing in the market. This eliminated middlemen and thus helped ITC to cut its costs.
In 2007, around 34% of the FMCG products sales came from rural areas . The number of households that used FMCG products in rural India had grown from 13.6 crore in 2004 to 14.3 crore in 2007 . This growth was achieved on an average 1.8% year-on-year growth in the number of households, which use at least one FMCG product. However, the growth in penetration level for the entire FMCG products was not same. According to one study by a market research firm IMRB, the monthly consumption of detergents and toilet soaps remained largely stagnant with a 92% penetration, but that of liquid shampoos grew from 68% in 2004 to 83% in 2007 . These figures revealed a shift towards higher-value products among the rural market, from toothpowder to toothpaste or from unbranded to branded products. According to the senior project director of IMRB International, Manoj K Menon, “One of the most significant changes, includes growing preference towards branded products. For example, in the food and beverages segment, penetration of branded atta has gone up year-on-year by 8 per cent and branded salt by 3 per cent. The penetration of unbranded atta has decreased by 1 per cent and salt by 3 per cent.”
The HLL Marketing Effort: Transition to Rural Market
HUL’s competitive advantage generated from three sources. First it’s strong well established brands, second, its local manufacturing capacity and supply chain and third its vast sales and distribution system. It was soon felt that HUL’s sales and distribution system which had protected it from competitors would be soon replicated by its rivals and to maintain its edge, the company had to increase its reach beyond the urban markets. So far the operations of HUL included more than 2,000 suppliers and associates. The distribution network, consisted of 4,000 stockists, covering 6.3 million retail outlets reaching the entire urban population, and about 250 million rural consumers .
Typically, the goods produced in each of the HUL’s 40 factories were sent to a depot with the help of a carrying and forwarding agent (CFA). The company had its depot in every state of the country. The CFA was a third party and got servicing fee for stock and delivery of the products. In each town, there was a redistribution stockist (RS) who took the goods from the CFA and sell them to retail outlets. By the late 1990s, the HUL management realized certain problems with the existing sales model. First, the model was not viable for small towns with small population and small business. HUL found it expensive to appoint one stockist exclusively for each town. Secondly, the retail revolution in the country changes the pattern the customers shop. Large retail self service shops were established. In the response of these problems, HUL redesigned its sales and distribution channel and the new system was known as ‘diamond model’ in the company. At the top end of the diamond, there were the self service retail stores which constituted 10% of the total FMCG market. The middle, fatter part of the diamond represented the profit-center based sales team. In the bottom of the pyramid was the rural marketing and distribution which accounted for 20% of the business .
Almost three-fourth of the total 1.2 billion Indian population resided in the rural areas and majority of them had a very low per capita income (around 44% of that of urban India) . Urban market had reached the saturation point, thus changing focus on rural India. In comparison to just 5,161 towns in India there are 6,38,365 villages in India [Exhibit I]. Moreover, more than 70% of India’s population lived in villages and made a big market for the FMCG industry because of increasing disposal incomes and awareness level.
Distribution of Villages in India
Source: Kash Rangan, Sehgal Dalip et. Al., “Global Poverty: Business Approaches and Solutions”, http://www.hbs.edu/socialenterprise/pdf/3-Rangan&Rajan-Presentation.pdf
When HLL shifted to the rural India, it faced many problems. In contrast with a low per capita income comparative to the urban citizens, there were some areas with enough money but their awareness level and consumerism was very low. Secondly, rural FMCG demand was depended upon agricultural situation which was again depended upon monsoon. Transportation was also a major hindrance. Many of the rural areas were not connected by rail transport. The Kacha roads were unserviceable during the monsoon and interior villages get isolated. Besides transportation, there was a problem of distribution and communication facilities such as telephone, fax and internet. Moreover, the lives in rural areas were still governed by ethnicity and traditions and people did not simply get used to new practices. For example, even rich and educated class of farmers does not wear jeans or branded shoes. The buying decisions in villages were slow and delayed. They wanted to give a trial and buy only after being satisfied. And, finally the poor illiterate villagers viewed experience more important than formal education and they valued sales people who could provide practical solutions to their problems.
HLL approached the rural market with two criteria – the accessibility and viability [Exhibit II]. Around 40% of the accessible rural market had high business potential. To service this segment, HLL appointed a common stockist who was responsible for all outlets and all business within his particular town. In the 25% of the accessible markets with low business potential, HLL assigned a retail stokist who was responsible to access all the villages at least once in a fortnight and send stocks to those markets. This enables HLL to influence the retailers stocks and quantities sold through credit extension and trade discounts. HLL launched this Indirect coverage (IDC) in 1960s.
To cater the needs of the inaccessible market with high business potential HLL initiated a Streamline initiative in 1997. HLL appointed rural distributors and Star Sellers. The star seller purchased goods from rural distributors and distributed them to retailers in small villages using the local mean of transport. In this way around 35% of the inaccessible rural market came under the control of HLL. But a still untapped market – the inaccessible but low business potential market was left outside. The size of this untapped market was estimated to be around 500,000 villages with a population over 500 million . At this stage, Project Shakti was conceived.
HLL’s Approach to Rural Market
Low Business Potential High Business Potential
Accessible Markets Indirect Coverage (25%) Direct Coverage (40%)
Inaccessible Markets Space for Shakti Streamline (35%)
Source: V. Kasturi Rangan Rohithari Rajan, “Unilever in India: Hindustan Lever’s Project Shakti–Marketing FMCG to the Rural”, http://www.caseplace.org/d.asp?d=244 – 27k
HLL soon realized that although it was enjoying a greater penetration in the rural market when compared with its competitor such as Nirma and ITC, its direct reach was restricted to only 16% . The FMCG giant was desperate to increase this share. HUL saw its dream fulfillment in the vast Indian rural market. The company was already engaged in rural development with the launch of the Integrated Rural Development Programme in 1976 in the Etah district of Uttar Pradesh. This program was in tandem with HUL’s dairy operations and covered 500 villages in Etah. Subsequently, the company introduced similar programs in adjacent villages. These activities mainly aimed at training farmers, animal husbandry, generating alternative income, health & hygiene and infrastructure development. The main issue in rural development was to create income-generating prospects for the poor villagers. Such initiatives, linked with the company’s core business, became successful and sustainable and proved to be mutually beneficial to both the company ant its rural customers. However, much remained to be done. Project Shakti was conceived.
Following the pioneering work carried out by Grameen Bank of Bangladesh , Self Help Groups (SHGs) of rural women were formed by several institutions, NGOs and government bodies in villages across India. This group of usually 15 members contributed a small amount of money to a common pool and then offered a micro-credit to a member of the group to invest in a commonly approved economic activity. Partnering with these SHGs, HLL started its Project Shakti in Nalgonda district of Andhra Pradesh in 50 villages in the year 2000. The social side of the Project Shakti was that it was aimed to create income-generating capabilities for underprivileged rural women, by providing a sustainable micro enterprise opportunity, and to improve rural living standards through health and hygiene awareness. Most SHG women viewed Project Shakti as a powerful business proposition and are keen participants in it. There after it was extended in other states with the total strength of over 40,000 Shakti Entrepreneurs.
HLL offered a wide range of products to the SHGs, which were relevant to rural customers. HUL invested significantly in resources who work with the women on the field and provide them with on-the-job training and support. HUL provided the necessary training to these groups on the basics of enterprise management, which the women need to manage their enterprises. For the SHG women, this translated into a much-needed, sustainable income contributing towards better living and prosperity. Armed with micro-credit, women from SHGs become direct-to-home distributors in rural markets [Exhibit III].
Structure of HLL’s Market Reach in India
Source: Kash Rangan, Sehgal Dalip et. Al., “Global Poverty: Business Approaches and Solutions”, http://www.hbs.edu/socialenterprise/pdf/3-Rangan&Rajan-Presentation.pdf
Shakti: How it works
In general, a member from a SHG was selected as a Shakti entrepreneur, commonly referred as ‘Shakti Amma’ received stocks from the HLL rural distributor. After trained by the company, the Shakti entrepreneur then sold those goods directly to consumers and retailers in the village. Each Shakti entrepreneur usually serviced 6-10 villages in the population strata of 1,000-2,000 people with 4-5 major brands of HLL – Lifebuoy, Wheel, Pepsodent, Annapurna salt and Clinic Plus. Apart from these, other brands included Lux, Ponds, Nihar and 3 Roses tea. The Shakti entrepreneurs were given HLL products on a `cash and carry basis.’ However, the local self-help groups or banks provided them micro credit wherever required. According to Dalip Sehgal, Executive Director, New Ventures & Marketing Services, HLL Project Shakti was adding up to 15% of HLL sales in rural Andhra Pradesh. He further asserted that given the largeness of the country and backwardness of its women, Project Shakti-like endeavor would place everybody in a win-win situation.
I-Shakti: Crossing the Border
Encouraged by the goodwill and success of Project Shakti, in August 2003, HLL launched an Internet-based rural information service, called I-Shakti, in Andhra Pradesh, in association with the Andhra Pradesh Government’s Rajiv Internet Village Programme. I-Shakti was an IT-based rural information service to provide vital information to the rural people in fields like agriculture, education, vocational training, health, hygiene and the like [Exhibit IV]. The objective behind the i-Shakti model was to give need based demand driven information and services in the villages.
The i-Shakti kiosk was operated by the Shakti Entrepreneur. This was expected to strengthen their relationship with their customers. HUL expected that this would improve the productivity of the rural community and unlock economic and social progress.
A snapshot of the ‘i-Shakti’ website
Source: “HUL Shakti-Changing lives in rural India.”, http://www.hllshakti.com/sbcms/temp1.asp?pid=46802256 – 41k
I-Shakti was based on an interactive discussion technology developed & patented by the Unilever Corporate Research Team, U.K. The system enabled an in-depth understanding of each user needs and thereby improved the quality of services offered to them. The APonline , had tied up with i-Shakti to launch various services. Moreover, through i-shakti, the ICICI Bank and HUL jointly provided various financial products and services such as life and general insurance, investment products (Equity, Mutual Funds, Bonds), ICICI Bank Pure Gold (gold coins), Personal Credit, Rural Savings Accounts and Remittances to the rural customer.
Redefinition Rural Distribution: Changing Lives
Having successful in Nalgonda, in 2003 HLL planned to broaden Shakti to a 100 districts in Madhya Pradesh, Gujarat and UP. There were other plans such as to allow other companies (except HLL’s competitors) such as Nippo, TVS Motor for mopeds, insurance companies for LIC policies to get onto the Shakti network to sell their stocks. Sehgal was looking proud when he announced, “We wanted to first stabilise the project before we can look at other companies. It requires somebody with scale and size to build a platform and then invite other companies onto this platform.” He further emphasized that Shakti was creating a win-win partnership between HLL and its consumers.
There were about 4.36 lakh women SHGs in AP with almost 58.29 lakh poor women. AP alone had about half of the SHGs of the country. By 2005 the SHGs had mobolised Rs 1500 crore had mobilised as corpus. The rural women organised themselves into `thrift and credit’ groups with a saving of Re.1 a day which created a fund of more than Rs 800 crore. While the savings was there among the SHGs, there was no channel of investment. HLL tapped this huge overlooked network to launch Project Shakti. HLL has able tp provide a window of prospect to invest and earn.
The impact of HLL was not all of a sudden. HLL witnessed 15% incremental sales from the villages of AP, which accounted 50% of the total sales of HLL products in AP. Market analysts were perceiving a huge potential in the rural foray of HLL. Nikhil Vora, Sr. Vice President of research group ASK Raymond James believed that if there was one company that could take on the onus of developing the rural markets, it was HLL. He further continued, “HLL contributes 20 per cent of the total FMCG business in the country. So, clearly, the onus is on HLL to grow the market. Returns may not happen in the next five years, but a lot of consumer understanding and insights comes from an exercise like Project Shakti, which in turn can lead to product innovation.”
HLL acknowledged that for Project Shakti to be successful for the company’s rural penetration, dealers and communicators must be well trained. It was unclear how dealers would perform in an expanded infrastructure. Although HLL’s rural initiatives incurred huge costs to the company, it was expected that with the monsoon revival and greater rural incomes could decline the payback period for projects like Shakti. Moreover, the decreasing brand loyalty among urban consumers rural market had become an imperative. According to the Concurs K.N. Siva Subramanian, Sr. Vice President, Franklin Templeton India Ltd, “The (HLL) management had recognized the impending saturation of the urban markets some time back and launched aggressive plans to capture the rural markets. However, a slowdown in the agricultural sector resulted in rural incomes remaining flat and affecting sales. We believe that by targeting lower price points and further expanding the distribution network, companies can tap the potential of rural markets. Initiatives like Project Shakti will help them in establishing and consolidating their base in rural markets.”
HLL would have to determine whether Project Shakti could be repeatable in other countries. The Indian family structure and village interaction provide a unique diffusion mechanism that is an effective vehicle for Shakti. Whether this model could be successfully implemented in other countries must be further explored. Moreover, it need to find out whether the Project Shakti or e-choupal like initiatives could be increased. There was no doubt that the regional brands, or even larger FMCG companies, did not have the kind of distribution reach that HLL had established and in the long run, that could prove a winner for HLL.
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