1. Watch This Soap Opera in Rural India
by Saumya Roy
A slip-up by HUL gives a boost to rivals in the hinterland
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N
o, it’s not a 1990s David Dhawan directed comedy hit film starring Govinda. Godrej No. 1. is
a hit though, from the stables of Godrej Consumer Products Ltd. It claimed the number three
spot in the toilet soap category for the quarter ended June 2009, eating into market leader
Hindustan Unilever’s (HUL) market share.
No. 1 grew at 24 percent for the quarter ended June 2009; it increased its market share (by
volume) to 6.45 percent from 5.76 percent in June 2008, says the company citing data from
marketing research firm ACNielsen. The rise in percentage terms may not be a lot, but in the
fast moving consumer goods sector, even a 0.5 percentage point rise is huge.
It is now the third highest selling soap behind
Lifebuoy and Lux. Lifebuoy and Lux, both HUL
products and market leaders, saw market share
decline by almost 2 percent to 16 and 15.4 percent
respectively in the same period. HUL declined to
comment for this article.
An analyst with a domestic brokerage says HUL
has also lost share to other fast growing soaps
including Wipro Consumer’s Santoor and Dettol
soaps.
Image: Minal Shetty
Santoor also stakes claim to the number three
spot. The ACNielsen figures show Godrej No. 1 in the number three slot, but only in terms of
volume. Since it is a discount brand, it falls to number five in terms of value. Santoor and
Dettol take the third and fourth spots on that table.
According to Wipro, which also cited ACNielsen data, Santoor grew at 17 percent for the
quarter ended June 2009 and 22 percent in 2008-09. While both Santoor and Godrej No. 1
have grown at a fast clip and taken share from HUL, Godrej No. 1 is among the newer
entrants in this space, having been relaunched in 1998 while Santoor was launched in 1984.
Inching Ahead
No. 1 has gained market share but it is more due to HUL’s bad judgement in assessing
consumer sentiment. No. 1’s growth figures have come from rural areas. During the peak of
the slowdown last year, rural buying was largely unaffected even as urban figures dropped.
But rural areas are sensitive to price changes. Prices of palm oil, a key ingredient in soap,
started rising and HUL imposed steep price hikes. Godrej waited and increased prices slowly
and at a much lower rate than HUL.
“HUL took price hikes when people were getting more price conscious,” says Anand Shah,

2. consumer products analyst at domestic brokerage, Angel Broking. “That is when consumers
started to shift.” No. 1 increased its market share in rural areas to 6.7 percent from 5 percent a
year ago. It has gone from having 38 percent sales in rural areas to 50 percent now.
Analysts say No. 1’s success didn’t come from the firm’s actions, but Godrej disagrees. “It
was a stressful time for us,” says Godrej Consumer’s managing director, Dalip Sehgal. “We
asked ourselves ‘do we fiddle with price or quality’ but then decided to maintain our
position.”
They drove home the advantage that they had been handed. Once consumers started trying
out Godrej No. 1, the brand managers used a combination of clear mass market, rural
positioning and a rapid increase in distribution to cement the gains. The company sharply
increased its rural distribution network. No. 1 ads now appear only on Doordarshan because it
is cheaper and ubiquitous in the areas where they want to be. Spending only on Doordarshan
also means that Godrej No. 1’s ad to sales ratio is just 1 percent compared to the industry
figure of around 8 to 10 percent.
Godrej is using the critical mass it now has to push its basket of products, market in states
where it is less popular and introduce new variants that compete with more expensive soaps.
Currently Godrej No. 1 and its hair dye make for more than three-fourths of the company’s
sales.
No. 1 was traditionally popular in Punjab and Haryana but not known in other states. It has
doubled distribution in Uttar Pradesh in the last two years to compete with large competitors.
The Godrej group re-branding campaign also helped. “The company is now being presented
very differently and more professionally,” says Pradeep Lokhande, who runs Rural Relations,
a rural marketing consulting company. “The shopkeeper is the biggest influencer in the rural
area and Godrej now has good relations with rural shopkeepers because they now have a
basket of products including hair dye and soaps to offer.”
But No. 1 is not alone in its success. Wipro has also worked with micro finance institutions to
promote its soaps in rural areas. “The rural economy has been doing very well because of the
high minimum support prices and we concentrated there,” says Anil Chugh, vice president
for sales and marketing at Wipro Consumer and Care and Lighting. Santoor is now one-and-
a-half times as big in rural areas as it is in urban.
Meanwhile, HUL wants to regain lost ground. With palm oil prices stabilising, HUL has
moved to correct prices over the last quarter. It increased pack sizes and reduced prices by up
to 15 percent in some soaps. But that will take time to yield results. SBI Capital Market Pritee
Panchal says, “It will not be easy for them to gain back share. It [any gains in market share]
may come more from regional players than from players like Godrej who are quite aggressive
now.”
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3. Hindustan Unilever’s Bharat Darshan
by Samar Srivastava
The new consumers in India’s villages are ambitious and demanding just like their urban
counterparts. And Hindustan Unilever is responding to the change with a distribution
overhaul
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S
oon after he assumed his new role two years
ago, Hemant Bakshi realised he had an
interesting problem on his hands. As
Hindustan Unilever’s executive director in
charge of customer development, Bakshi
had to find a solution that had eluded the
company for nearly 25 years. It had taken
more than seven decades for Hindustan
Unilever’s famous distribution juggernaut to
directly reach a million outlets across the
country. But for the next two and a half
decades, Bakshi’s senior colleagues simply
couldn’t find a viable way to expand its
direct distribution model.
So when HUL chairman Harish Manwani
announced on the sidelines of its annual
general meeting in July that the company
was in the midst of trebling its rural
coverage over two years, it set the cat among
Image: Alok Brahmbhatt the pigeons. This increase in rural coverage
INCREDIBLE HUL Hemat Bakshi is bringing will be a big leap, “and to my mind, will be
a new understanding of the rural consumer a huge driver of future growth,” Manwani
had said. “While competitors are closing gaps, we have to continuously create new gaps.” So
had HUL stumbled upon a new magic formula all of a sudden that would help it crack open
the large rural opportunity?
Not really. All that Bakshi’s team did was to question something that Lever managers had
believed over decades. All along, HUL had operated on a basic hypothesis: Rural markets
were at a different stage of evolution from urban markets. As a result, consumers were given
limited variety of stock — mostly the mass market and discount brands — and that too in
small pack sizes or sachets. That ensured that HUL distributors were able to keep costs low,
rotate their stock and reach even villages with a population of 5,000 people. This way, HUL’s
distribution machine pushed deeper into the hinterland, till the cost-benefit ratio began to
work against the company. At one stage, it found it difficult to expand into villages with less
than 5,000 people.
It isn’t as if HUL’s brands didn’t find their way to the 637,000-odd villages in the country.
Thanks to the remarkably efficient network of wholesale traders, it invariably did. But then,

4. so did hundreds of other competitive brands. And from time to time, they used higher trade
margins to snatch away HUL’s business.
There was another issue: availability of credit. Pradeep Kashyap, CEO of rural marketing
consultancy MART, says he’s seen several instances of shopkeepers offering low-priced
brands (other than HUL), if they knew they had to sell on credit to, say, a low income farmer.
On the other hand, when a rich farmer came along, a bar of Lux soap automatically comes
out of the bottom shelf. “It is crucial for a company to offer credit to shopkeepers. And this
can be done only by direct distribution,” says Kashyap. Sales through the wholesale channel
are seldom done on the basis of credit.
So, here’s the moot point: Just how did Bakshi’s team take the big leap forward?
The Way It Was
In the past, HUL had relied on its network of 2,700 redistribution stockists and sub-stockists
to supply products to stores in large villages. For smaller villages with a population of less
than 5,000, its products were sold through wholesalers. Shopkeepers from these villages
would travel to these wholesalers and to pick up their supplies as and when it suited them.
Sometimes wholesalers known as star sellers would hire a van and do some distribution on
their own. At best, the distribution in these villages was patchy and the company had no
strategy on whom to cover and whom to leave out.
In the late 1990s, HUL took its first tentative step to expand rural distribution. Through
Project Streamline, it created a hub and spoke system and appointed sub-dealers who had the
opportunity to serve villages in their vicinity. While the model served the company well,
HUL had little or no control over the distribution chain. Smaller regional brands would come
along, offer better markups and sell goods on credit and take away a significant portion of
business in a short span. Significantly, the shopkeeper who stocked HUL products felt no
loyalty to the company and could switch sides overnight.
Starting 2001, it began expanding its reach through Project Shakti, where it used women
entrepreneurs in distant villages to stock and sell its brands. Today, it has a vibrant network
of 40,000 women entrepreneurs. But Project Shakti was also the last round of expansion in
distribution that the company undertook.
With revenues from Project Shakti doubling every two years, Lever knew the next significant
opportunity was in rural India. But to get in on the action, it had to fix distribution first.

5. A NEW LINK IN THE CHAIN ‘Shaktiman’ Sarat Ku Mohanty of Barisana village in Orissa
is now part of HUL’s rural push. Here, he is shown packing the products for the day, leaving
his home on a sales trip and selling to local shops.
Changes on the Horizon
While the new plan was being formulated, Bakshi was on a market visit to a village in Orissa.
In his earlier sales and marketing roles, he’d spent many days traveling to far off places and
figured he should allow four hours for the 250-kilometre journey. But thanks to a four-lane
road, he reached there barely two and a half hours later. It was the same story across the
country. The road infrastructure has improved dramatically across the country, making it
easier to access remote villages.
The next realisation was no less dramatic: That the buying habits of rural consumers had
changed. Many of these consumers actually aspired to buy the same products they saw the
city people using. During retail audits, it was seen that even premium fairness creams and
shampoos were being stocked. Shopkeepers were figuring out a way to source such products
from the wholesale chain or nearby large towns. “When you go there, you see the kind of
products customers want they are very different from our expectations of them,” says Bakshi.
Television had played a crucial role in this transformation. With 22 million TV sets in rural
areas, consumers watched the same programmes and ads that their counterparts in cities
watched.
In sum, it meant the old theory of building a rural portfolio made no sense. It simply wasn’t
aspirational. HUL had been supplying only about 100 stock keeping units (An SKU is a
specific product with a unique size and type) to wholesalers in rural areas. Clearly, that
wasn’t enough. The company set about getting its redistribution stockists to start offering as
many as 250 SKUs to stores in villages with a population of over 5,000.

6. The larger assortment of products brought about its own set of challenges. Stockists in
smaller towns often couldn’t handle the extra complexity. Almost all were family-run with no
desire to invest in technology. HUL had two choices. It could either come up with a new
model for rural distribution or adapt its existing model with minor tweaks. It chose the latter.
First, it went about pouring over digital maps for each of the 637,000 villages in the country
to look at how far its distribution already took it and where it could reach with additional
investment and smarter route planning. Earlier, local sales representatives had sat with the
distributor to make that decision. Often a carrot and stick approach was used to get them to
go into unprofitable areas.
Today, the decision to expand can be done centrally from the HQ. The company makes use of
‘geo-tagging’ to understand how far villages are from the nearest highway and how long it
would take the nearest distributor to reach them. Plans can now be made in a more
methodical manner. A former HUL executive director says that mapping tools have improved
significantly since the implementation of Project Shakti, allowing the company to make more
informed decisions to expand reach.
Bakshi talks about a village in Uttar Pradesh near Garh Mukhteshwar that wasn’t being
serviced by a distributor. Shopkeepers there depended on a nearby wholesale market to stock
up. The distributor didn’t go to that village as that would have meant a long detour across a
river. Using maps, HUL came up with a more efficient route for the distributor allowing him
to service this village as well.
The maps have enhanced HUL’s ability to reach out to far-off villages, subject to the quality
of roads. For instance, distributors can easily travel 40 kilometres off the main highway in
Tamil Nadu while in U.P. and Bihar, 15 kilometres is as far as they’ll go.
But spread your network too thin and the distributor’s profitability will go for a toss. This is
where another crucial advantage of direct distribution comes in. With the company — and
not the wholesaler — controlling what the shopkeeper buys, it is possible to manage the
product mix and push more higher-margin products into the market. The added profitability
can then be used to get distributors to push deeper into distributing products and also invest in
technology.
This is also where the company has differentiated between urban and rural distributors. In
urban areas, HUL often partners with its distributors to help them raise capital and maintain
their business. Expansion in the larger towns is less important than functioning efficiently as
most urban markets are witnessing saturation in demand. Distributors on their part are
expected to replenish supplies in stores as and when the shopkeeper asks them to do so. Stock
levels for urban distributors are kept at one or two days only.
In essence they’ve moved from selling to servicing their customers, the shopkeepers. With
their cost of capital coming down, the markups the company offers them have also fallen
from the earlier 5 percent to 2-2.5 percent. HUL has also moved to reduce the number of
distributors in urban areas. In a city like Mumbai, the number of distributors has reduced
from over a 100 to five.

7. Image: Viviane Moos/Corbis
In contrast, rural areas are still in the growth mode and distributors are expected to actively
push shopkeepers to stock HUL soaps, shampoos and detergents. Pushing products and
grabbing store space is still very much the name of the game. Promotion through
merchandising and display will play a key role. Add to that the higher cost of raising capital
for smaller outfits and the company still offers them healthy markups of 5 percent. Most
distributors make about 2-2.5 percent on the goods sold. They usually have two weeks’ worth
of stock with shopkeepers and one week’s worth of inventory, which allows them to turn
them over 17 times a year leading to a return of at least 34 percent. This takes care of their
cost of capital as well as allowing them to invest in technology. (The company declined to
comment on the return on investment for rural distributors).
On their part, distributors are expected to offer the same terms of trade to village shops as the
company offers in larger towns. Goods are sold at the same 3 percent markup and no money
has to be put upfront as when they were buying directly from the wholesale channel.
In addition to improved maps, HUL is also making use of wireless technology to get real time
information on demand patterns and trends. Distributor sales teams have been given handheld
devices. In other places, mobile phone applications are used to key in this data, which is then
automatically uploaded. Experts, however, say that the jury is still out on how effectively
these devices work on the field.
HUL can now get almost real-time information on consumer behavior and demand patterns,
instead of having to rely on its distributors for such data. Bakshi claims he has information
coming from a shop in Thane and a village in Orissa almost at the same time. One way to use
this would be to craft marketing campaigns for products that are popular in certain regions
and districts of the country.

8. A spike in demand during festivals can also be addressed more effectively. HUL already
knows that buying patterns in a village with a population of 1,500 in Tamil Nadu are similar
to those of a village in Bihar with a population of 3,000 due to the disparity in income levels.
Better demand forecasting has allowed HUL to increase sales in rural stores that have direct
coverage by a third, according to AC Nielsen.
Lastly, the company hopes to improve its product mix and increase sales of higher margin
soaps and detergents. With smaller pack sizes, the company has seen that consumers who can
afford more expensive brands tend to shift over.
The Last Mile Challenge
In villages where direct distribution would not be cost-effective, HUL is also making use of
its well-developed network via Project Shakti. The 40,000 women, or Shaktiammas, make
about Rs. 1,000 a month by selling company products to other women as well as shops in
their village. (People familiar with the numbers say HUL makes Rs. 500-600 crore a year
with this segment growing by 50 percent.)

9. Infographic: Hemal Sheth
In expanding its reach to villages with a population of below 2,000, HUL decided to make
use of the men folk in Shakthiammas’ families. This will allow it to service an additional
200,000 villages taking the total to 500,000 villages. Each Shaktimaan is given products to
sell as well as a sturdy bicycle to take to villages within a 5-kilometre radius. Only 20,000 top
performing Shaktiammas have been given the option of having their men folk work with
them. The number of products or SKUs they carry is restricted to about 50. HUL had initially
estimated it could add about 300,000 stores through this route but has already received
suggestions on 400,000 stores that can be added.
Not everyone is convinced that the model is sustainable. K.S. Ramesh, former head of
Cavincare, says that the increased volumes are unlikely to make up for the increased cost of
distribution. He points to other companies like P&G that use superior marketing to create a
pull in the market which forces shopkeepers to go out and stock their models. “The model is
probably been forced from the West where there are far fewer outlets and so 100 percent
reach is absolutely necessary,” he says.
Then again, the products being supplied to rural markets are for the time being low margin
ones. They’re often sold in small sachets which add to the cost of distribution and reduce
margins to 10-12 percent as against the 12-14 percent norm. “I have a tough time
understanding how the economics of that will work. Products don’t have the kinds of margins
needed to justify the travel time,” says Hemant Kalbag, a partner at A.T. Kearney who has
worked on distribution models.
There is no straight way to assess the economics of this rural push that is designed to bring in
500,000 new outlets under HUL’s rural coverage, taking the total number to 750,000. Bakshi
says there are several models in play. For instance, there could be a stockist who has to make
a small diversion to service a village; or employ people for an extra day to service a village.
In either situation the costs would be vastly different. But HUL works on a model where the
focus is on keeping the total business of the stockist profitable.
“We’re doing the same pioneering work which we did 50-60 years back. And what we did 60
years ago is paying off for us even today. We created brands that remain popular. Consumers
are coming into these categories for the first time. This would create the next competitive
advantage and a legacy for many years to come,” says Bakshi.
This article appeared in Forbes India Magazine of 24 September, 2010
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