Executives sitting in plush offices in Mumbai and New Delhi have long recognized that to build real sales volumes they have to reach outside the big cities. In several categories, rural India already accounts for the lion’s share. According to MART, a New Delhi-based research organization that offers rural solutions to the corporate world, rural India buys 46% of all soft drinks sold, 49% of motorcycles and 59% of cigarettes. This trend is not limited just to utilitarian products: 11% of rural women use lipstick.
“No consumer goods company today can afford to forget that the rural market is a very big part of the Indian consumer market. You can’t build a presence for a brand in India unless you have a strategy for reaching the villages,” says Jagmohan Singh Raju, a professor of marketing at Wharton.
Several European multinational firms—and a few US firms—have been making inroads into rural India for years. Companies such as Unilever, Phillips and Nestle have long been known to India’s rustic dukaandaars, or merchants. Raju believes that the drive to gain access to rural retailers is, in some ways, as critical as the one to reach consumers.
“If you look at rural retail in India, the outlet size is very small. Merchants will often stock just one brand in a category; they do not have the resources to stock multiple brands. They will stock the brand that sells the most.”
Over the coming months, the battle for rural wallets will include not just European and US multinationals, but also fast-growing Indian companies. A retail initiative by the $22.6 billion Reliance Industries is a case in point: The Mukesh Ambani-led group plans to spend $5.5 billion over the next few years to create a farm-to-storefront infrastructure for a pan-India retail network.
India’s Budget: And the winners are ... agriculture, education and infrastructure
Was India’s annual Budget, which was announced on 28 February, a missed opportunity in terms of measures to boost investment and remove policy bottlenecks? Those who wanted finance minister P. Chidambaram to continue aggressively with policy reforms probably thought so. Others, worried about an overheated business environment, may have been relieved that he did not try to stimulate an economy already growing at more than 8%. While Chidambaram tinkered with taxes, reforms in banking, insurance and FDI policies did not get much attention. In contrast, education, agriculture and infrastructure got significant support.
The Budget, coming as it did on the heels of a global stock sell-off, upset investors because it increased the dividend distribution tax from 12.5% to 15%. Meanwhile, the corporate tax rate continues to push 40%.
How does the Indian government’s approach toward managing the economy compare with that of its fast-growing neighbour, China? Wharton marketing professor and China expert Z. John Zhang finds India’s effectively stiffer tax regime counter-intuitive in the current context. “Normally, as the economy grows you don’t increase the rate,” he says. “The Chinese experience has been to lower the tax rate.” With India’s latest Budget, a common observation is that Chidambaram has taken the economy’s growth for granted and thinks that it needs no further prodding, at least for now.
Hedge funds escape regulation: Should investors be worried?
When the Lilliputians came upon the sleeping Gulliver, they didn’t know if he was friendly or hostile, but he was so big it seemed prudent to tie him down. Should the 9,000 US hedge funds—the secretive investment pools controlling $1.4 trillion in assets—be treated the same way?
The President’s Working Group on Financial Markets doesn’t think so. In a late-February report, the group, chaired by treasury secretary Henry M. Paulson, urged vigilance, but concluded that new regulations are not needed. The freewheeling world of hedge funds and their cousins, private equity and venture capital, have for now escaped the tightened oversight imposed on publicly-traded companies after Enron and WorldCom.
Was this the right decision? For the most part, it was, say several Wharton professors who have studied hedge funds and other so-called private pools of capital. “These private pools may help keep markets from overshooting (when prices rise), and they may provide floors (when prices fall),” says Wharton finance professor Richard J. Herring. “It’s very secretive,” adds Wharton finance professor Richard Marston. “Even a fairly wealthy client won’t necessarily find out about the hedge-fund strategy.” If regulators forced hedge funds to disclose their holdings, “that would be the end of some of these strategies”, he predicts.
Why software business models of the future probably won’t come in a box
Microsoft’s Vista operating system should give the company a revenue stream that will run for years, but that doesn’t mean the company can rest on its laurels. Experts at Wharton say the 30 January launch of the consumer versions of Microsoft’s flagship software may be among the last of its kind—a product sold for a flat fee in a shrink-wrapped box.
Traditionally, Microsoft and most other software companies deliver software primarily by licensing shrink-wrapped products sold through retail channels or in arrangements with hardware vendors. While several different pricing schemes for software licensing exist, customers typically pay a flat fee for perpetual use.
But new models of software pricing and distribution are becoming increasingly popular. “Open source” software relies on voluntary programmers to build applications that can be distributed freely. Ad supported software includes Web-based applications that are free as well, but they generate revenue through advertisements. Also on the increase: “on-demand” software, with customers renting software applications when they need them and paying for only what they use.
Which model is most likely to win? Kartik Hosanagar, an operations and information management professor at Wharton, suggests that a hybrid business model—consisting of parts of traditional licensing, on-demand, ad supported and even open source—will emerge in the software industry. “The only certainty is that the Internet will have a big impact” on whatever that winning model is, he says.
Send your comments to indiaknowledge @livemint.com