Insight: Companies forge lean business models to tap rural India

By Lyndee Prickitt

SITAPUR, India (Reuters) - Carrying two worn bags full of toothbrushes and toothpaste, Raj Verma rides his battered bicycle around villages in India's northern state of Uttar Pradesh, leaving fresh supplies of Colgate products at the small shops he visits.

For centuries, Indians cleaned their teeth with a piece of bark from the Neem tree, known for its antiseptic properties. While most urban Indians have long used toothpaste, many of the 700 million rural Indians still brush with a Neem twig or their fingers. While that represents an obvious opportunity for toothpaste brands, the marketing and distribution methods to reach those remote customers are not so clear.

Enter blue-sky thinking Indian style. India has pioneered the science of breaking up complex products or business models into their most basic forms and then rebuilding them in the most economic manner possible to tap the bottom of a market.

They call it frugal engineering.

The term was coined by Carlos Ghosn, the chief executive of Renault <RENA.PA> and Nissan <7201.T>, to describe the automotive engineering that went into Tata Motors' <TAMO.NS> Nano, a small car that retails for just $2,000 in India.

Tata itself sometimes refers to its low-cost innovations as "Gandhian engineering" in honor of India's independence leader Mahatma Gandhi, a renowned proponent of self-sufficiency.

Over the past few years, India has gained a reputation for creating a wide range of products sturdy enough to handle its demanding environment, easy enough for a wide range of people to use -- and most importantly, affordable -- from solar-powered ATM bank machines to a detergent requiring little water.

But getting these mean, lean products to consumers is not as easy as distributing them in the developed world.

Anil Gupta should know. He started the Honey Bee Network (http://www.sristi.org/hbnew/index.php)

to support India's grassroots innovators and is an advisor to the National Innovation Council. He can rattle off a list of fantastic bricolage inventions, from an amphibious bicycle to a washing-cum-exercise-machine, that had no chance in the market.

"Innovators are not necessarily good entrepreneurs," he noted.

This is where big corporations have the advantage. Domestic and multinational companies based in India are taking that frugally motivated mindset and applying it to their entire business models.

SACHET MARKETING

One of the earliest and most simple business process innovations was started by a south Indian health and beauty company, Velvette, in the 1980s. Keen to reach Indians who aspired to use shampoo but could not afford to buy a bottle of it, Velvette began putting small quantities, enough for one or two washes, into plastic sachets.

The idea spread. Multinationals such as Unilever and Procter & Gamble <PG.N>, which distributes Colgate products, adopted it. Now in small shops throughout India you can find streams of sachets dangling from crowded shelves and filled with anything from detergent and cough syrup to potato chips and mobile phone minutes.

"The aspiration for these products was there, but consumer 'money in the pocket' to afford a large cash outlay was not there. So success at the lower cash-out lay in these sachets," said Geetu Verma, Executive Director of Innovation with Pepsico <PEP.N> India, which sells small packets of its sports drink powder.

Sachets worked in markets where people were familiar with the products. But 10 years ago when Hindustan Unilever Ltd <HUVR.BO> wanted to reach people in "media blackout zones" where its commercials weren't seen and its products unknown, it had to think of an entirely new marketing method.

Who better to promote its personal and home hygiene products but women looking to increase their household income?

"This is a great way to talk to consumers in those areas," said K. Adarsh, HUL's Head of Customer Marketing.

PEOPLE POWER

In a project called Shakti Amma (empowered woman) that started in 2002, HUL tapped an existing network of women's micro-financing groups, in which women get loans to buy something that can help them earn an income. In this case, the usual cow or weaving loom was replaced with R20,000 worth of HUL shampoos, detergents.

"Shakti entrepreneurs go from home to home talking about relevant brand benefits -- like hygiene and healthcare -- of our products," Adarsh said.

They sell products not only to households but also small village shops and kiosks -- often the front room of a family home -- becoming a marketing and distribution tool in one go. Today 45,000 shakti ammas push HUL products in India.

Last year, the company decided to diversify the network and include husbands and sons in the distribution process.

Like Colgate's Raj Verma who rides his trusty bicycle around Sitapur district (named after Lord Ram's wife Sita), 'shakti maan' (empowered man), ride from village to village. They cover much more ground than the women, who do not like to travel outside their villages on their own. That has added an additional 23,000 rural shakti distributors, helping HUL triple their rural reach in 2010.

The program is now being used in Bangladesh and Sri Lanka.

Pradeep Kashyap, founder and CEO of MART, a rural market consultancy company, helped HUL create Project Shakti. He has worked with many multinationals, including Colgate <CL.N> and Dupont, which are keen to tap India's growing middle income families. If companies want to succeed in an emerging market, they must link up with India's vast social networks to reach remote customers, he said.

"In a country like India, or any developing economy, the physical infrastructure is weak, but the social infrastructure is very strong," Kashyap said. "Unlike in the west, where the physical infrastructure is very good -- the roads, the electricity -- but the social infrastructure doesn't need to be strong. So we have to leverage on our social infrastructure."

India's historical tradition of swadeshi (self-reliance) has provided a social incubator for today's frugal engineering and business innovation. Mahatma Gandhi adopted swadeshi as an economic strategy in the independence movement, boycotting British products in favor of Indian-made products and production techniques.

NUCLEAR FAMILY

For many multinationals, doing business in India means being the first to set up new distribution networks that developed countries take for granted.

General Electric <GE.N> has 4,000 employees at its research and design facility in Bangalore, many of them products originally designed in the West and being re-engineered for new uses in the India market.

One of them is a lightweight ECG machine that can fit in the backpack of a traveling doctor. It can take 500 readings on a single battery charge and costs only a tenth that of a standard ECG machine.

When GE Healthcare wanted to sell PET-CT cancer diagnosis machines, it met an unexpected roadblock. Cancer treatment was a relatively undeveloped area of healthcare. India had no national network to make the isotopes necessary for the procedure, never mind transporting them across poorly connected states.

First GE had to lobby the government for permission to make isotopes in their cyclotron machines. Then it had to get airlines and hospitals on board to create an efficient distribution method to transport the isotopes -- which have a limited shelf life -- all over India.

But it paid off. GE Healthcare has sold 45 PET-CT scanners, each costing about $1.5 million, and nine cyclotrons at $2.5 million each, and expects the market for nuclear medicine procedures in India to grow at a rate of 15-20 percent a year from 10 percent now. "When you look at adversity, the mother of that is opportunity," said V Raja, GE Healthcare CEO. "When you (have) that mindset, invariably you'll find a way for your product to reach your customer."

WALKING ON SUNSHINE

Harish Hande took that mindset and the sachet marketing model and applied it to sunshine.

Upon returning to India after getting an engineering doctorate from the University of Massachusetts, he set up a company in the mid-1990s that sells small solar panels to India's vast rural poor, most of whom had little hope of getting on the congested power grid.

The panels only provided enough electricity to light four lamps for four hours a day and each unit cost around R8000 ($173) -- a lot to ask from customers who typically make R3000 month.

For his idea to work, Hande had to become part solar evangelist and part financial broker, as he pounded the pavements to find banks willing to provide long-term financing to people with no bank accounts, no credit history and, sometimes, no fixed abode.

It took four and a half years to get a system in place. But it paid off. His company SELCO now reaches half a million people and provides electricity to 120,000 households.

"SELCO was created to destroy three myths: the poor cannot afford technology, the poor cannot maintain technology and you can't run a commercial venture while trying to meet social objectives," Hande said in his solar-lit Bangalore office.

"I believe in the democratisation of energy. The poor shouldn't have to depend on power plants and politicians," said Hande, who won the 2011 Magsaysay award -- Asia's equivalent of the Nobel Prize -- for his work.

Hande has also found a way to sell even smaller quantities of green power. He is encouraging customers to use the solar panels to charge dozens of large batteries a day, load them on a cart and push their way through town, renting them out to street hawkers who use them to light up their stalls at night.

"You've created an entrepreneur to do that -- that's job creation -- and he takes a loan from the bank and does it," Hande said. "So it's a win-win situation for the financial institution, for the entrepreneur, for the street vendors replacing kerosene. I've not even talked of the environmental effects, right? The added benefit of it is the climate change."

($1 = 47.46 Indian rupees)

(Editing by Bill Tarrant)