Beermakers in China and other developing markets saw their seasoned global brands go flat in the face of scrappy local rivals. What these companies learned the hard way is that the 86% markets behave differently from the 14% markets of developed nations. In this article adapted from their book ‘The 86% Solution’, Vijay Mahajan and Kamini Banga describe how companies reached parts of developing markets virtually inaccessible by traditional distribution systems through innovative distribution systems such as bicycles, hole-in-the-wall stores and boreholers and took the market to the people.
Beermakers in China and other developing markets saw their seasoned global brands go flat in the face of scrappy local rivals. What these companies learned the hard way is that the 86% markets behave differently from the 14% markets of developed nations. In this article adapted from their book ‘The 86% Solution’, Vijay Mahajan and Kamini Banga describe how companies reached parts of developing markets virtually inaccessible by traditional distribution systems through innovative distribution systems such as bicycles, hole-in-the-wall stores and boreholers and took the market to the people.
An independent marketing consultant and Managing Director of Dimensions Consultancy, Banga’s clients have included Cadbury, Philips, Johnson & Johnson, Coca-Cola and many others. During a three years stint in London, she worked with the Harris Research Centre as a consultant on ethnic issues for companies including British Airways and the BBC.
K watne knocks on the door of a warehouse in Accra, Ghana. He is a “boreholer” taking Unilever products to a set of remote villages several hours from the capital. After speaking with a manager, Kwame fills a backpack with small packets of shampoos, soaps, toothpaste, and other items. He then heads to the bus station. As he waits, he notes with some pride that a television in the bus terminal is showing advertising for his products. This makes his work easier. He rides the bus for two hours into the rural interior of the country. Kwame then walks a half hour to the central village where he lives, stopping along the way to offer his wares to small villages and huts. He reaches the central village in time for an Ashanti religious festival and market day. Kwame spreads his shampoo, toothpaste, and other products on a blanket among traditional foods, cloth, and jewelry. As the streets fill up with jostling crowds, he thinks about how far he is from the sophisticated streets of Accra. Yet, with his products spread out in front of him, he also feels so near.
Companies in developing markets are connected to customers by long and winding roads, if there are roads at all. Ghana is a country with a per capita GNI (gross national income) of about $300, and yet through boreholers and other innovations, Unilever has been able to build a multimillion dollar business there. Ghana has a poorly developed retail network, often consisting of small stores, if there are stores at all. Without clear and easy routes to customers, companies need to find innovative methods, including boreholers such as Kwame, to take the market to the people.
Founded in 1945 in Mexico City by Lorenzo Servitje, Bimbo Bakeries has become one of the world’s largest bakeries with one of the most extensive distribution networks on the American continent. To deliver its fresh bread and other products daily to 690,000 points of sale in many countries in Latin America, the United States and even the Czech Republic, it deploys a fleet of 26,000 vehicles. They travel a distance daily that is equivalent to circling the globe 39 times. This fleet is more than a fourth the size of the global UPS fleet (88,000).
Yet many of Bimbo’s products in Mexico still go to small family stores, called tiendas de la esquinas, often housed in rooms within the family home. Bimbo uses sophisticated satellite tracking and handhelds to monitor inventory at individual stores. Every week a statistics report from every store ensures the right product flows into the store. There are four sets of statistics, for ordinary days, holidays, summer, and winter. (Bread consumption is higher in the winter because it is usually served with hot chocolate.)
Its distribution network has helped Bimbo, named for the bear featured in the company logo, become the largest food company in Mexico. The bakery business and related companies of Grupo Bimbo employ more than 60,000 people with annual sales of over $4bn in 2003. Since the mid 1980s, Bimbo has continued to expand throughout Latin America and followed the emigrating Hispanic population into the US. Grupo Bimbo began importing products to the US in the 1970s. In 1998, the company acquired Mrs Baird’s Bakeries. Today Bimbo Bakeries USA, with headquarters in Fort Worth, Texas, operates seventeen plants in California, Texas, and Ohio, with more than 5,300 employees.
Retail distribution networks in Mexico continue to develop. Wal-Mart, known as Walmex in Mexico, is growing rapidly, with 2004 sales of more than $11.8bn in more than 690 stores in 71 cities. Led by Oxxo and 7-Eleven, Mexico had more than 6,000 convenience stores by early 2005, with annual sales of more than $2.5bn. While the retail distribution networks in
countries such as Mexico, China, and India are developing rapidly, they are still highly fragmented; particularly the farther one travels from the major centers. These fragmented distribution networks and poorly developed distribution systems require innovative solutions.
complex distribution
Distribution systems in the developing world are not pretty. The cities are dotted with networks of small neighborhood stores such as the tiendas de la esquinas of Mexico. Distribution to small villages is even more complicated. More than half of India’s villages are inaccessible by motor vehicle. This means that there are no express mail trucks-no trucks at all-no trains, no cars. This makes traditional approaches to distribution in these villages much more expensive than in developed areas, often greater than the revenue from product sales. Hindustan Lever estimated that the cost per contact of promoting a product in the countryside is four to five times higher than in the cities. Even the best conventional distribution systems have been unable to penetrate beyond about one sixth of India’s rural villages.
So why bother trying to connect with these rural markets? They are where most of the population can be found. Some 70% of India’s population lives in its more than 600,000 villages, and about 90% of these villages have populations of less than 2,000 (and 42% have populations of a mere 500 or less). Thirty five cities in India have populations of greater than one million. Middle class and wealthy households have quickly increased in smaller cities such as Vijayawada, Nagpur, and Ahmedabad. This expanding market is why KFC and Pizza Hut restaurants, Reebok International, Bacardi, Ford, Nokia, and other companies are pushing deeper into India’s second tier cities. In China, two thirds of the population, some 800 million people, live in rural areas, and companies are increasingly looking to small cities and villages for opportunities. Companies that focus only on large cities such as Mumbai or Beijing are ignoring most of the people in the market.
While traditional mechanisms for distribution may be either unavailable or too expensive, companies such as Bimbo and Unilever are finding rich opportunities by using innovative approaches to solve ‘last-mile’ challenges. Developing markets have their own distribution networks, but they might look nothing like the sophisticated distribution systems of developed markets. Rural villagers have social networks that can facilitate market building. Although the channels may not be as efficient as selling through a major retail chain, with the right strategies, these channels can create a way to reach the many diffused consumers in developing markets.
strategies for taking the market to the people
How can companies take the market to the people? Managers need to rethink and redesign their value chains to meet the distinctive demands of developing markets. While every market has particular features that need to be addressed, common characteristics across the 86% markets shape go-to-market strategies.
strategy 01 position for the paanwallas: small shops called paanwallas are crammed into virtually every nook and cranny of Indian cities, similar to the sari-sari stores in the Philippines or the tiendas de la esquinas of Mexico. ‘Paan’ means ‘after lunch or dinner’. These small stores started out by selling betelnuts, cigarettes, and other products that might be purchased on a walk after dinner. These shops now account for about one third of the six million retail outlets in the nation. And while local and global chain stores and malls are growing rapidly, they contributed to just 3% of India’s total retail revenues in 2004. The sari-sari stores in the Philippines account for nearly 90% of the nation’s retail outlets and grew more than 11% in 2003. These small stores in different parts of the world have long hours and a presence in almost every corner of the country. Shop owners have strong relationships with their local community, and they even offer informal credit to customers. This creates intense loyalty from customers who frequent the shops at least once a day.
The importance of paanwallas in local commerce has led to the addition of other frequently replenished products such as bread and soft drinks, cell phones, batteries, detergents, and shampoos. As companies have recognized the importance of these outlets, fierce competition has resulted for the limited shelf space in the 8-by-10-foot stores. Although Pepsi markets through just 50,000 of the roughly two million paanwalla shops in India, this channel accounts for more than 10% of the company’s total sales. This is an ideal place for taking everyday products such as cigarettes and soda to India’s growing lower middle class segment.
Similarly, in China, most distribution is handled through tiny stores. In Ningbo, for example, on China’s eastern coast, a network of 6,000 tiny independent street corner shops account for 90% of beer distribution. The local KK brand, with a distribution system designed to quickly deliver cases of beer to these independent distribution points, controls 90% of the market. The local brands fly off the shelves of these small shops while a few neglected bottles from global power brands sit past their expiration dates.
strategy 02 create multiple levels of distribution: companies often set up multiple levels of distribution to reach different parts of the market. For example, Hindustan Lever in India set up several programs to progressively extend its reach from urban centers. It first established a program called ‘ Indirect Coverage’ in the late 1960s, targeting retailers in accessible villages close to urban markets. Since Hindustan Lever was the only one targeting these markets, village retailers had to travel to urban areas if they wanted to purchase competitors’ products, giving Hindustan Lever a substantial advantage.
In the 1990s, the company launched its next wave of rural distribution through an initiative dubbed ‘Streamline’. The company appointed rural distributors who, in turn, appointed ‘star sellers’ in neighboring villages. A star seller would use local transport vehicles such as motorcycles, rickshaws, jeeps, or even bullock carts to take products to retailers in smaller villages. Streamline thus expanded the company’s reach in India to markets that were previously considered inaccessible.
Still, much of rural India remained out of reach of this distribution system, with almost 500,000 Indian villages still untapped. Hindustan Lever then launched a new program to penetrate more deeply into these rural markets. ‘Project Shakti’, rolled out in 2000, is based on a direct-to-home model organized around self help groups-groups of 10-15 underprivileged rural women set up by the government or non governmental organizations (NGOs). Through Project Shakti, a Sanskrit word that means ‘power’, these women become brand ambassadors in ‘media-dark’ rural villages, communicating the benefits of brand and category use. This personal communication and distribution channel is particularly effective in an environment that is largely untouched by electronic media and has high rates of illiteracy.
India has more than one million self help groups, and their numbers are growing rapidly. These groups have access to microcredit, but with little opportunity for microenterprise, because few business opportunities exist. Project Shakti promoted local development while allowing Hindustan Lever to penetrate into smaller villages in India. By 2005, the company’s goal was to have more than 25,000 trained “Shakti Entrepreneurs” covering over 100,000 villages and touching the lives of 100 million rural consumers. This would double the company’s reach in rural India.
strategy 03 use distribution bubbles to find customers when they are there: in contrast to permanent retail outlets in developed markets, developing market distribution, particularly in rural areas, is often through temporary channels such as carnivals and market days, or vans that roll into a village and create a market. These are like bubbles that appear on the surface of a lake for a moment and then disappear. Companies need to be astute in finding and capitalizing on them to be where the market is when it is there. For example, every year, indigenous Berbers of North Africa stream out of the mountains for an annual three day festival near Imilchil in Morocco. The festival draws Berbers from throughout the region for three days of frenetic trading as the self sufficient mountain people stock up on staples. For this market, there may be one shot every year.
In Ghana, Unilever built multiple levels of distribution as it did in India (as discussed earlier). But after creating a network of key distributors and subdistributors that allowed it to reach 80 % of the country’s rural retail outlets, Unilever turned its attention to less permanent and less formal channels. In 2003, Unilever added rural sales representatives (boreholers) to distribute products to remote villages with rotational markets (market days) that are difficult to put into coverage plans. These boreholers also engaged in direct selling and sampling to customers. In Ghana, where consumer purchasing power was diminishing, Unilever’s business continued to grow in volume and profit.
In Indian villages, companies set up tables in the markets, playing Bollywood film music to attract crowds and offering education about the products. They also use less frequent carnivals, such as the melas in India, to sell products and raise awareness. While the developed world may concentrate on distribution through stores, the developing world has a much more complex and fluid structure. Companies need to adapt to this structure to find the markets where and when they appear. These festivals are usually held around major religious holy days, which often vary from region to region within a given country. Carnivals such as the “melas” in India offer opportunities for marketing and distribution for companies that know how to use them.
strategy 04 take the bank out of the branch: foreign banks in India are restricted by law to a limited number of branches in a few cities. So Citibank created Citibank Suvidha, a bank without branches (suvidha means “facility”). Since customers cannot come to a branch, the bank goes to customers’ homes. Citibank uses vans and a network of 9,000 direct selling agents in five cities, called Citi Friends, to promote its credit cards, loans, and other services through visits to customers’ homes. While home visits reduce the need for branches and other physical infrastructure for the banks, customers see this personal attention as a status symbol. The bank also has a network of automatic teller machines in Bangalore, but these ATMs are more like virtual branches, with security guards and hostesses who help new users operate the standalone ATMs. The low overhead of the branchless bank has allowed minimum deposits to be reduced from Rs10,000 for a typical bank to just Rs1,000. From one ‘branch’ in Bangalore, the bank has grown to serve 600,000 clients in the city and a total of one million clients across India. Drawing on Citibanks skill in retail lending, the bank has also become a major force in providing small loans. In rural villages in India, microlender BASIX has set up simplified ATMs with a local host to help villagers use this local “branch.”
India’s Kotak Bank has taken this one step further, offering free home delivery and pickup of cash (in amounts as small as Rs5,000 or about $115) to its standard savings customers. This is a service most banks offer to only their high-net-worth clients, but it makes sense in a country with a low penetration of banks and credit cards. Space is tight, branches are hard to establish, labor is relatively cheap, and population density is high. This changes the business model for banking, which has been focused on establishing good retail locations. A delivery service means that location is less important.
strategy 05 develop on-the-ground insights: while distribution in every developing market is complicated, each market is complex in its own way. By understanding and adapting to local regulations and conditions, Aramex International grew from two small offices in Jordan and New York in 1982 to a nearly $200mn global full service transportation and logistics company with 3,400 employees in 125 offices in 37 countries in 2004. “The Middle East is 22 countries, and each country has its own laws, own way of doing things, and own strategy toward the private sector,” said Fadi Ghandour, CEO, Aramex. In Tunisia, for example, all deliveries have to be made through the postal service, so the only way to do business there is to contract with the post office. Some countries have special courier taxes, and others have restrictions on foreign ownership.
Local knowledge and staff are crucial to understanding these complex local regulations and systems. Aramex sets up operations based on a federated model with local CEOs. “The people who work for us are from the region,” Ghandour said. “Some of these obstacles may worry Western investors, but the people there grew up in the region, and they understand how to do business there, regardless of the political risk. They do not find the civil war in Lebanon or Iraq invading Kuwait as a risk from a physical perspective. These are the sons and daughters of these countries. These are their homes.” Aramex was among the first companies to enter Iraq after the US led invasion in 2003, just ten days after the invasion ended.
“We trained people in Jordan before the war, and the minute it ended and we were able to establish trucking service, we could operate immediately,” Ghandour said. “There already is some business in Iraq, and we are committed to the market. There are five million people in Baghdad, and they are not sitting at home doing nothing.”
Aramex found that there was an advantage to the complexity and instability of many of these markets because it created an initial entry barrier for rivals.
strategy 06 create distribution systems from scratch: British born engineer Nancy Abeiderrahmane created a new distribution system, based on grass roots networks, to build a supply chain for Africa’s first camel’s milk dairy in the West-African nation of Mauritania. Before the dairy was created in 1989, camel’s milk was sold at the roadside from buckets. In the hot climate, milk spoiled rapidly. Although the milk was a staple of nomadic herdsmen, health concerns and the rising urban population led to an increasing dependence on imported ultra-pasteurized, long life cow’s milk. The nation was importing more than 50,000 tons of sterilized and powdered milk from Europe each year. Camel’s milk offered benefits over cow’s milk, including increased potassium, iron, magnesium, and vitamin C, and low cholesterol. It is less allergenic and good for diabetes. What was lacking was an effective system for collection, pasteurization, and distribution.
Abeiderrahmane’s Tiviski Dairy and its delivery system have made camel’s milk a healthy drink for city dwellers while providing valuable income to nomadic herdsmen. The system begins with a network of suppliers who collect camel’s milk from camps and villages each morning and deliver it to a plant outside the Mauritanian capital of Nouakchott. The milk is pasteurized, packaged, chilled, and shipped the same morning, using a fleet of vans that deliver the product to the countless corner shops in the region. Cartons of milk are regularly air freighted to the city of Nouadhibou in the north, are taken by road to the town of Rosso in the south, and are even shipped by boat to neigh-boring Senegal. Success, however, ultimately depends on the city’s small corner grocery stores having electricity to keep the pasteurized milk cool.
Tiviskis sales more than tripled between 1993 and 2002, when production reached 20,000 liters per day (before a severe drought hit the sector). The dairy’s expanded product line, particularly cheese, offered a platform for further growth. A German importer offered to buy the entire camel cheese production from the company, but the export production of this ‘camelbert’ cheese was blocked by European Union regulations. These regulations, designed for more traditional cow and goat products, do not specifically cover camel’s milk. If it hadn’t been stopped by these regulatory hurdles, the successful business in this small African nation could have provided a platform for moving into the developed markets of Europe.
The debate over importing camel’s milk cheese into Europe highlights some of the differences in how developed and developing nations look at the world. Although the Tiviski Dairy uses European standards of production in its dairy, tests for pasteurization of cow’s milk don’t work for camel’s milk. EU regulators thus insisted that to ensure standards of hygiene, camels would need to be milked by machine. The Mauritanians saw this as a ludicrous proposition, given that the milk is drawn from small villages and nomadic herdsman. Even if the technical hurdles of mechanical milking could be overcome, camels can be temperamental, known to cut off their milk production if they object to the process.
strategy07 use existing networks creatively: great potential exists for using existing networks in creative ways. For example, low cost Indian airline Air Deccan developed a system for selling airline tickets through gas stations, bank ATMs, and mobile phones. This has allowed the airline to tap into a network of 6,000 HPCL gasoline stations, many of which already had Internet connections that facilitated the sales, and also a growing network of ATMs and cell phones. This has made it easier for customers, many of whom have never flown before, to purchase tickets using cash or credit.
South African beer distribution initially depended on backyard pubs called “shebeens” that offered their own moonshine brews served in old jam tins. Until 1962, black South Africans were prohibited from purchasing commercially brewed beer. When the prohibition was lifted, South African Breweries (SAB) used the local shebeens and other small outlets to build its business, providing almost all the beer sold through these outlets. SAB developed a network of drivers who could deliver products along rough rural roads, often setting up its former employees in their own trucking businesses. Leaving nothing to chance, the company also needed to make sure its rural distributors had refrigerators and even generators to keep the refrigerators running.
The company used such strategies to build its business one shebeen at a time through South Africa and other countries in the region. SAB ultimately acquired Miller Brewing Company in the US in 2002, becoming the second largest brewing company in the world (by volume). The company’s creative strategies allowed it to move from a small developing market to a business spanning forty countries, including a significant presence in China, India, many African nations, and other developing countries.
One of the most remarkable examples of the creative use of existing networks is the phenomenal “dabbawala system” of delivering lunches across Mumbai, India. It is probably the world’s most efficient lunch delivery system. A cooperative run by illiterate and semiliterate entrepreneurs, it uses railroads, cars, bicycles, and carriers on foot to collect 175,000 home cooked meals from workers’ homes and deliver them to their offices. The lunches in tiffin boxes, or “dabba,” are collected from homes between 7am and 9am and are delivered by train, bicycle, and foot to offices by 12:30 pm.
This 120 year old system uses an elegant “packet switching” system. Each metal carrier, called a tiffin box, has a code marked on it that directs it through a network of teams of deliverers, known as dabbawalas. The box often exchanges hands three or four times on the way to its destination. The system is nearly error-free, with an estimated one mistake for every eight million deliveries. And this remarkable journey costs just Rs150 to Rs300 (about $3.50 to $7) per month, depending on location and collection time. This demonstrates the possibilities for developing creative and flexible distribution systems using the existing infrastructure of rail, road, and sidewalk.
seeing opportunities that are off the grid
Since much of the population of the developing world is “off the grid,” the challenge is to connect companies to the market. Most of the opportunities in developing markets are in small cities or rural villages. To reach these diffused markets, companies have to rethink their approaches to distribution. Costs need to be streamlined, but this can often be done by applying information technology, wireless communications, and networks of small entrepreneurial distributors. Every dollar invested needs to be justified in value created for extremely cost-conscious end consumers.
Major retailers are expanding rapidly in the developing world, changing the competitive landscape. Wal-Mart had established forty stores in Chinese cities by 2004 and planned fifteen more in 2005, as many other global and domestic retailers moved in or expanded their positions in the market. In the long run, Wal-Mart, Tesco, Carrefour, and other global firms, as well as local chains, will continue to consolidate distribution channels, as they have done in developed markets. But in the near term, products will flow through many fragmented retail outlets and directly into rural villages. It is vital to understand these channels and how they can be used to connect to the market.
Companies need to recognize and take advantage of the idiosyncratic distribution systems that already exist in these markets. These systems may look nothing like those of developed countries. Companies may need to distribute through the small paanwalla stores, use innovative approaches such as the dabbawala lunch distribution system, or create systems from scratch.[/vc_column_text][/vc_column_inner][/vc_row_inner][/vc_column][/vc_row]