Problems in Taping Rural Markets – Channel Management

Organizing an effective distribution channel is the second major task in rural marketing. This task too is beset with many unique problems.

Problems in Channel Management

a. Multiple tiers, higher costs and administrative problems

In the first place, the distribution chain in the rural context require large no. of tiers, compared with the urban context. The long distances to be covered from the product points and the scattered locations of the consuming households cause this situation. At the minimum, the distribution chain in the rural context needs the village level shopkeeper, the mandi level distributor and the wholesaler/ stockists in the wholesalers / stockists in the town. And on top of them, it involves the manufacturer own warehouses/ branches office operations at selected centers in the marketing territory. Such multiple tiers and scattered outfits push up costs and make channel management a major problem area.

b. Scope for manufacturers own outlets limited; greater dependence

The scope for manufacturers direct outlets such as showrooms or depots is quite limited in the rural market unlike in the urban context. It becomes expensive as well as unmanageable. Dependence of the firm on the intermediaries is very much enhanced in the rural context as direct outlets are often ruled out. But controlling such a vast network of intermediaries is a difficult task. Control is almost indirect. And because of these factors the firm has to be more careful while selecting the channel members in the rural context.

c. Non availability of dealers

In addition, there is the problem of availability of dealers. Many firms find that availability of suitable dealers is limited. Even if the firm is willing to start from scratch and try out rank newcomers, the choice of candidates is really limited.

d. Poor viability of the retail outlets

Moreover, sales outlets in the rural market at the retail level suffer from poor viability. A familiar paradox in rural distribution is that the manufacturers incurs additional expenses on distribution and still the retail outlets find that the business is not remunerative to them. The scattered nature of the market and the multiplicity of the tiers in the chain use up the additional funds the manufacturer is prepared to part with. And no additional remuneration accrues to any of the groups. Moreover, the business volume is not adequate enough to sustain the profitability of all the groups and the retail tier is the worst sufferer.

e. Inadequate bank facilities

Distribution in rural markets is also handicapped due to lack of adequate banking and credit facilities. Rural outlets need banking support for the three important purposes:

  • To facilitate remittances to principals and to get fast replenishments of stocks.
  • To receive supplies through bank
  • To facilitate securing credit from banks

As banking facilities are inadequate in the rural areas, the rural dealers are handicapped in all these aspects. It is estimated that there is only one bank branch for every fifty villages.

Analysis shows that many companies hesitate to venture into rural markets largely because of the problems on the distribution front. They find it uneconomic to operate outlets in rural areas as in their perception, cost of selling, cost of transportation, cost of sub – distribution and cost of servicing the outlets are all very high in the rural market.

Possible Approaches for Effective Channel Management in the Rural Context

Taking due note of the difficulties, let us see how a firm can go about these tasks.

The Existing Market Structure

It has been estimated that the Indian rural market is composed of 22,000 primary rural markets and 20 lakh retail sales outlets of which nearly one lakh are fair price shops of the Public Distribution System (PDS). One retail shop serves on an average 60 to 70 families in the rural areas. The structure involves stock points in feeder towns to service these retail outlets at the village level. The stock points belong to either the manufacturer or the marketer / distributor for the area. In either case, the stock point in the feeder town is the key to rural distribution.

The Available Channel Choices

Today, the channel types that are available in the rural markets are as follows:

  • The private shops
  • The co operative societies
  • The Fair Price Shops (FPS), (co operatives or private), of the PDS
  • The village shandy or weekly market

Out of the above, the cooperative societies are mainly concerned with the distribution of agricultural inputs and the FPS with the distribution of essential commodities consumed by the common man. The ‘village shandy’ is a widely used channel of the rural market.  But its role in marketing branded products is somewhat limited.

The Private Village Shops

For a large variety of consumer products, the private shops are the main channel in the rural markets; they are also the cheapest and the most convenient channel to align with. As such, we shall examine in some detail how the private village shops are utilised by the business firms in their rural distribution effort.

According to a census of retail outlets carried out by the Operations Research Group(ORG), there are 2.02 million sales outlets in rural India, with a major chunk constituted by the private shops. In fact, the private village shops are seen to be one of the cheapest distribution channels in the world. This is quite striking, considering the many handicaps with which the village shopkeeper in India has to operate. He is forced to deal in a large number of products in order to make his operations viable. That means a larger inventory. The longer lead time for replenishments from the urban based production point enlarges the inventory holding further.  And as his sales are not uniform throughout the year, he has to carry the inventory over a longer period of time. All these factors lead to the blocking up of his capital. The scope of compensating for the higher costs through increased mark up is rather limited. He cannot add a higher mark up on many of the products he is handling simply because the consumer he is catering to cannot afford to pay a higher price.  Nor is he able to make up by increased turnover.  The average daily turnover of a rural shop is often less than Rs200. Even this level of turnover is generated only when he extends credit to his customers.  And he incurs additional expenses for the frequent trips he has to make to the supply points in the towns/market centres. But in spite of all these handicaps of low turnover, high inventory costs and inadequate marketing support from the principals, the village shopkeeper operates quite efficiently. He achieves this feat largely through his inborn ability for astute management of money and other inputs.  He also puts in hard work. He keeps his shop open for 14 hours a day compared to the 8 hours service provided by the urban shops. And he keeps his shop open for 365 days in the year with the support of his wife and children and ensures that he does not miss a single possible sale. In fact, it is mainly this human labour, the cost of which neither, gets accounted or paid for that makes the traditional private village shops of India one of the cheapest distribution channels in the world.

It is quite natural that firms seeking an effective presence in the rural market willingly embrace the private village shops as the major component of their distribution outfit.  And on their part, the village shops function as an effective bridge between the scattered rural consumers and the urban-based producers.

Organising one’s channel out of these private shops, however, requires assiduous efforts on the part of the firm. It has to select its outlets from out of existing shopkeepers or select a few freshers and appoint them as the outlets. The choices are usually confined to the following categories:-

  • Existing traditional private shops
  • Money lenders willing to branch off to trade
  • Land owners willing to branch off to trade
  • Educated Unemployed persons

The firm has to select personnel from among the above groups depending on the product line and other relevant factors and then train them and develop them into competent dealers.

Satellite Distribution

A concept that has come to be known as satellite distribution can be tried in developing a distribution channel in the rural market. Under this system, to start with, the firm appoints stockists in feeder towns. They take care of financing goods, warehousing of goods and sub- distribution of goods in the area covered by the feeder town. The firm also appoints a number of retailers in and around the feeder towns and attaches them to the stockists.  The firm supplies the goods to the stockists either on cash or on credit or on consignment basis.  The stockists take care of the sub-distribution job on the terms and conditions determined by the firm.

The sales volume of the retailers will vary depending on the potential of the area covered and the capacity of the dealer concerned.  Over a period of time, some retailers grow in terms of business turnover. If such retail points also happen to be transportation centres within the feeder town area, the firm elevates them as stockists. The area of operation of the original stockist shrinks in this process, but care is taken to see that his, volume of business does not shrink. This is achieved, in practice, on account of the growth in demand and deeper market penetration. If twenty retailers operate in the network of an original stockist, five or six of them get elevated over a period of time as stockists. Out of the retailers some remain attached to the original stockist and others are attached to the new stockists, depending on location, service convenience and other relevant factors. The process continues as long as the market keeps expanding just like the second-generation stockists, a set of third generation stockists get established in course of time. And at any point of time, enough retail points invariably hover around a particular stockist. Hence the name satellite distribution. The main advantage of this system is that it facilitates market penetration in the interiors of the rural market. However, the firm must ensure that in the process, the motivation of the earlier generation stockists is not destroyed due to overzealous and premature elevation of the retailers into stockists.

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