Compounding the problem of rural distribution is the fact that infrastructure in villages and small towns is in shambles. A visit to villages across the country entails journeys through awful roads and power not being available for long stretches of time, while transportation of goods is yet another problem.
That is why, completely different models of distribution have to be designed. Engineers trained in supply chain logistics either fail or are unable to understand the complexities of rural distribution.
Though the market size is large, rural markets pose great challenges that are almost insurmountable in many cases. Companies face problems of reaching populations that are scattered over large areas, have difficult terrains and are connected by dirt roads. There is no reliable transport service—in any case the order sizes are too small to send by commercial transport.
It is also not economical to hire people to serve these markets and managers are often unwilling to live in villages. Companies selling expensive products like white goods face challenges not only in setting up distribution channels but also in establishing service centres. Getting payments poses further challenges.
Due to these severe shortcomings, rural distribution can prove be a nightmare. In urban areas, distribution can be efficient. Companies can achieve economies of scale in transportation, storage and dealer management by aggregating demand. Large volumes make it economical for salesmen to cover markets and for wholesalers to invest in their fleet of vehicles. The problems of distributing to villages are summed up below.
Logistical Challenges:
Apart from infrastructural shortcomings, rural distribution remains a grim challenge. Kumar (2012) shows that there are several problems that the logistics manager faces. Markets are scattered and their small size makes it difficult to send goods in economic quantities. It is also not economic to employ salesmen as they can visit only one or two villages a day. In states where distances are less, the salesmen have to tour the countryside on foot.
Companies also face another problem in rural markets that of poverty and low purchasing power. Many rural areas consist of few moneyed land owners and a large number of contract labourers, who by definition are poor. Small farmers are poor and often indebted because of fragmented land holdings. There are a few non-agricultural jobs but these are not well paying. The result is that a large percentage of population is poor or middle class.
Small-scale industries and local manufacturers fill in where companies cannot reach. Rural economy in India is dominated by unbranded, cheap goods made by small manufacturers.
The main challenges in rural distribution are as follows:
1. Scattered Markets:
Rural markets are scattered over large areas. In some states, villages are close to one another but in others they are separated by large distances. The population density figures show how the population is scattered over large distances.
Rural demographics show why a uniform rural marketing strategy does not work. The Census 2011 figures show that the population of 1.2 billion is spread over 3,287,240 sq. km in 35 states/union territories, 640 districts, 5,924 sub-districts, 7,935 towns, and 640,867 villages. The rural population of 834 million represents 68.8 percent of the total population. The break-up of rural population is given in Table 6.4.
However, this population is spread across a wide area with huge variations in density. Density of population, which is defined as number of persons per sq. km, is 382 persons in Census 2011 as compared to 325 persons in Census 2001. The density varies from as high as 11,297 persons in NCT Delhi to as low as 17 persons in Arunachal Pradesh.
Table 6.5 shows the population densities across states. Of the 640,867 villages (Census 2011), 236,004 have a population of fewer than 500, while 3,976 have a population of 10,000 or more. Such wide variations explain why a uniform distribution strategy for the country does not quite work. Companies have to devise strategies specific to geographical areas.
Reaching these scattered villages would be one thing, but the difficult terrain also poses difficulties in building supply chains. In the hill states, roads to villages are narrow dirt tracks, while in Rajasthan, rural folk have to travel long distances over sand tracks to reach the villages. Villages in these states are poorly connected by transport services. Even in developed states like Delhi, Chandigarh or Gujarat, some villages remain poorly connected, even though they are not far from the capital cities. Over two lakh villages with population of less than 500 people do not have a retail shop.
2. Low Purchasing Power:
Even where density is higher, limited purchasing power in the majority of the population make the size of the market for many goods much smaller than it looks. The gap is filled by small traders and salesmen by supplying low quality, unbranded goods or counterfeit products. Branded goods, which are higher priced than local goods, find it difficult in areas where purchasing power is limited.
The poverty line shows the percentage of people who are poor. The RBI estimated that 21.9 percent of India’s population was below the official poverty limit in 2012. In 2013, the Planning Commission estimated that 25.7 percent of people in rural areas and 13.7 percent of people in urban areas were BPL. These estimates were based on the level prescribed by the Suresh Tendulkar committee, which was pegged at Rs. 22.42 per person per day in rural areas and Rs. 28.65 in urban areas. However, it was felt that this was too low a figure to measure poverty.
Using the purchasing power parity as a basis for measuring poverty, the World Bank (2014) estimated that as of 2014, 58 percent of the total population were living on less than US$3.10 per day. This indicates that there is a large number of people living just above the line of deprivation as mentioned by the World Bank or the Planning Commission.
Taking the World Bank figures, we can assume that more than half of the population is either below the poverty line or are barely surviving at low incomes. With such low levels of purchasing power, companies selling in rural markets have the task of finding purchasing power and of generating volumes in the goods they sell. With such a low customer base, venturing into rural areas is unprofitable for many companies.
3. Low Volumes Per Market:
Since demand from villages is low, companies can neither have economical modes of transport nor is it feasible for them to assign salesmen to cover these areas. Economies of scale are thus ruled out. Even if supply chains are created, they are not economical because demand is seasonal as most buying happens during the harvest season. Seasonal variations like weather, droughts and floods too affect demand.
According to Census 2011 data, there were a total of 640,867 villages. Table 6.5 shows that 30 of the 35 states/union territories have a population density of less than 1999 people per sq. km. It is estimated that 46 percent of the population resides in villages with population of less than 1,999 people. That is, almost three lakh villages offer a very limited market size of a small population cluster.
The scattered population is a logistical nightmare for companies. Sending goods over long distances, in small lots, and then collecting payments, adds to huge costs. Sales efforts are also limited by low population of a village. It is also not economical to establish service centres in thinly populated rural areas. Such retailers keep items required by villagers including gas cylinders and mobile recharges, apart from other goods of daily use. They are serviced by salesmen carrying products in small quantities. Other companies employ local entrepreneurs, which helps them overcome the high costs of distribution.
4. Transportation:
Villages lack regular transport services. In many areas, only small vehicles can play, and sometimes not even those. Lack of regular services means that supply of goods to rural areas will remain limited. In villages connected only by one bus service, traders pay the bus conductor to send the goods to villages, where it is delivered to the retailer. Lack of roads, sporadic supply of electricity and lack of storage facilities pose great difficulties for managers.
The absence of investment in infrastructure, lack of planning and developmental norms, and the poor status of structures of governance in villages are hindrances in building distribution channels. Vehicles can barely move at 10 km/hr or less while supplying goods to villages.
5. Credit:
Since, the presence of banks and financial intermediaries in rural areas are limited—collecting payments, getting insurance for goods and warehouses also pose challenges. According to RBI figures, 41 percent of the population in India is unbanked, and 61 percent is unbanked in rural areas. Only 9.5 percent in rural areas has bank accounts. Of the rural population, 64 percent to 97 percent was estimated to be in the clutches of informal channels like local moneylenders.
Though the government has asked banks to open bank accounts under its scheme, the Jan Dhan Yojana, people in rural areas lack access to institutional credit and insurance, and fall prey to exploitative interest rates offered by agents and moneylenders. Farmers’ suicides across the country have brought such issues to the fore.
6. Electricity:
Despite an ambitious rural electrification programme, rural India suffers from lack of regular electricity supply. While 80 percent of Indian villages have at least an electricity line, just 52.5 percent of rural households have access to electricity. The overall electrification rate in India is 64.5 percent while 35.5 percent of the population still lives without access to electricity. Erratic electricity supply means that deep freezers and refrigerators cannot work.
For dealers of perishable food items and ice creams, it means that goods cannot be stored for long, or additional cost will have to be incurred to install generators. Farmers are also unable to process their produce and store it, which means that they have to sell the produce as soon as it is harvested. Building of cold chains entails huge investments in generators and facilities. In small towns and villages, power supply is erratic and unreliable. During harvest season, almost all electricity supply is diverted to farms. Products requiring stable temperatures to store get destroyed because of power cuts.
7. Roads:
Village roads are actually just dirt tracks. This means that companies have to budget for longer lead times and damages during transit. There are disruptions in supplies due to accidents and delays at various octroi checking points. Damages during transit are common. Bad roads thus add to cost which has to be passed on to the consumer. But when customers are asked to pay more than the price printed on the product, there is less acceptability.
In villages across the country, roads are dusty, pothole-ridden tracks. Vehicles often cannot go faster than 10 km/h on these roads. Villages are sparsely populated and populations in rural areas are scattered over large areas. Travel times are sometimes very large. Breakdowns of vehicles due to bad roads delay deliveries and add to costs. It is stated in a report by Ernst & Young and Retailers Association of India (2013) that the average truck speed in India is 20-40 km/hr compared to the speed of 60-80 km/hr in developed countries.
Another study (TCI-IIMC 2009) revealed that the average speed of trucks on Indian roads is about 20 km/hr, including all stoppages. The Planning Commission puts the National Highway network at 71,772 km, which comprises only 1.7 percent of the total length of roads, implying that majority of the roads are in poor shape. Reaching rural areas is a daunting task as the terrain is very difficult. Many villages remain cut off due to lack of roads and bridges. Goods have to be transported in cycles and carts, and sometimes through ropeways as vehicles cannot ply on such roads.
8. Warehousing:
Another problem in rural distribution is the lack of storage facilities. Usually goods have to be stored in homes. It is difficult for companies to find dealers who have warehousing facilities. Goods are stored that are not adequately protected from weather and pests. Spoilage rates are therefore high. Stores in villages cannot invest in modern display and inventory systems. Stocks are often subject to damage because of inadequate storage. Dealers complain that companies should take back damaged stocks which companies are often reluctant to do.
9. Bureaucracy:
A transporter has to get over numerable hurdles created by the bureaucracy. An army of traffic policemen and inspectors hinder movement of goods across the country. Goods are often held up because of restrictions of inter-state transportation, sales tax, central and state taxes, octroi, vehicle documents, road permits, and so on.
These problems are often sorted out with bribes, the cost of which is passed on to the consumer. The Planning Commission recognizes this and writes, “The system in vogue hinders rather than facilitates smooth flow of freight and passenger movement across the country and has thwarted the formation of single common market.”
10. Managerial Unwillingness:
City bred and educated managers and salesmen do not wish to live in villages and develop markets there. The lack of managerial talent means that rural markets remain neglected, even though there is large potential in such areas.
11. Communications:
The lack of Internet and broadband facilities in many parts of the country means that companies are unable to keep track of agents, salesmen and consumers. They are also unable to connect village distribution to their ERP systems.
These problems hinder supply of goods to rural markets and hence companies are unable to build supply chains. The problems work both ways—they also hinder supply of goods from rural areas. As a consequence, they are unable to get good prices for their produce, which in turn results in low demand for consumer products. In order to succeed, a company creating demand has to look at distribution from both sides.