The lure of rural markets for consumer firms which make home, personal care and food products has been evident in the past few years.
Urban markets have become a complex battleground, with competition increasing and brands multiplying, making the vastly spread out rural market appear more attractive than before.
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What is surprising marketeers in recent years has been the resilience of this market, growing even when farm growth disappointed. The September quarter GDP figures show agriculture has done much better than expected, lending more shine to the rural story.
In recent years, the rural market has given urban markets a run for their money in sales growth. In 2009, rural markets rose by 18% compared with the urban growth of 11%.
In a recent report, Nielsen Co. India, which provides data on consumer markets to companies and analysts, estimates the rural market for consumer non-durables to more than double every five years, and reach a level of $100 billion (Rs4.6 trillion) by 2025, compared with $8.8 billion at present (about one-third of the total market).
That’s a compounded annual growth rate of 18%, which should be music to the ears of consumer companies. Food companies are expected to benefit the most, as a large part of the growth is expected to be from consumption of packaged food products.
In categories such as skincare and premium biscuits, penetration in rural areas is almost equal to that in small towns and usage is rising at a higher rate than in small towns. For example, Nielsen’s data shows the rate at which instant noodles sales are growing in rural markets is 1.7 times the rate in urban markets.
And, it is not the mass products alone; Garnier’s 2-in-1 oil shampoo is growing faster in rural markets in the past six months, already contributing to about 10% of the product’s sales.
Firms have started rolling out rural strategies. While most already have some presence in the rural market, it needs to come right up in the list of priorities to take full advantage of the opportunity. Products need to be tailor-made for these markets, where consumers expect the same product, but in smaller sizes. Sales of Rs5 and Rs10 packs have doubled in rural markets.
Distribution is being revamped as the old structures may not be relevant. This is not easy given the widespread nature of these markets. But companies have no choice, given the competition from local and regional firms as well.
If firms get their act right, then rural markets have the potential to take their growth to a much higher level, although they may need to rework their profitability assumptions for these markets. Till the time a critical mass is achieved, margins may not be as healthy as in urban markets. But the winners will see their revenue and profits rise at a much faster rate than their competitors, which will reflect in their valuations as well.