Villgro Stores: Innovating Last Mile Product Dissemination to Rural India By Diana Jue, MIT; Ashutosh Sinha, Villgro; and Suresh Shanmugam, Villgro

Transcription

1 Villgro Stores: Innovating Last Mile Product Dissemination to Rural India By Diana Jue, MIT; Ashutosh Sinha, Villgro; and Suresh Shanmugam, Villgro Rural India s Last Mile Challenge Approximately 700 million people live in over 600,000 villages throughout India. 1 Since management professor C.K. Prahalad identified the fortune at the bottom of the pyramid, 2 these populations have become target customers for new products and services. Many offerings already exist, but there are costly challenges to disseminating them into rural India, including scattered populations, poor physical and economic infrastructure, and users lack of trust. An innovative, scalable model of product testing, marketing, sales, and distribution is greatly needed. Striving to revamp dissemination is Villgro Store, a for profit enterprise that is building a chain of decentralized, brick and mortar stores and uses village level entrepreneurs to disseminate new technologies in rural Tamil Nadu state. Villgro Store s operating principles are improving the affordability and accessibility of products and increasing user engagement. The company envisions the enhancement of rural lives through the adoption of beneficial innovations. 3 1 Rural Marketing Congress India Prahalad, CK The Fortune at the Bottom of the Pyramid. Upper Saddle River NJ: Wharton School Pub. 3 Villgro Stores.

2 Building Villgro Stores Villgro Stores began as Samrhuddi, a project administered by Villgro, a social business incubator. Villgro Innovation Marketing Private Limited, the company s official name, was registered in Villgro Stores flagship field office is located in Gobi, Erode District. Currently, 10 Villgro Stores are located within 15 km of the office. Each Villgro Store has 3 staff and 5 to 6 village level entrepreneurs (VLEs). These VLEs source products from Villgro Stores and extend them into rural areas that are within 8 km of the store. Villgro Store employees run field testing and trials, live demonstrations, awareness raising campaigns, and productpromoting village level meetings. Most of Villgro Stores 45 offerings are agricultural, but others fall in the categories of animal husbandry (e.g. animal feed), energy (e.g. biomass cookstoves), water, and personal care (e.g. affordable reading glasses). Compared with other village level merchants of agricultural products, Villgro Stores are advantageous to rural users because they: 1. Only sell new and innovative products. The agricultural products are organic instead of chemical based, and other products are designed for extreme affordability and livelihood improvement. 2. Utilize a network of village level entrepreneurs to reach the furthest customers. VLEs are the lynchpins of the Villgro Store distribution channel, and they make products accessible by bringing products to farmers. 3. Do not just sell but involve users in the dissemination process. Farmers participate in developing Villgro Stores product portfolio, awareness raising campaigns, and training sessions. Their feedback affects how products evolve. Step 1: Problem and Product Identification through Co Development Villgro Stores works with User Center Innovation Development (UCID, another program under Villgro), to identify and validate new technologies before introducing them to stores. This step protects farmers economic interests and supports Villgro Stores marketing. Farmers are involved with the co development of Villgro Stores portfolio through problem definition, field testing, and feedback. Villgro Stores stays up to date with farmers about their agricultural problems, household and farming needs, and purchasing power and habits. UCID intervenes by searching for appropriate, affordable, and environmentally sustainable products through agricultural exhibitions, print media, and the Internet. Once a product is discovered, UCID selects 2

3 experienced farmers to test new products on control and test plots. UCID then captures data like crop height or yield to demonstrate or debunk a new technology s effectiveness. The results are relayed to suppliers as feedback, and successful products are incorporated into Villgro Stores portfolio. Step 2: Promotion and Marketing through Information An obstacle to selling new technologies is convincing users that they are worthwhile investments. Farmers are wary of products that could reduce crop yields. The UCID trial process provides two unique forms of information for farmers: 1) quantitative data demonstrating the benefit of organic products and 2) testimonials from respected local farmers. Additionally, Villgro Stores staff and VLEs explain the economic benefits to farmers. In the long run, the price of organic products is lower than the price of chemical products, but the price seems higher because of the higher upfront investment. For example, Nemate Gro, an organic fertilizer that protects crops from pests and disease, seems relatively costly at 375 rupees ($8.25) for a 15 kg bag. However, when applied for a year, the cost of cultivation is lower because Nemate Gro reduces inorganic inputs by 25% and pesticide costs by 75%. Gaining a customer s faith is difficult, but Villgro Stores is prepared to validate their products through data and endorsements and will spend considerable face time with potential consumers. Over time, selling proven products in a personal way under the Villgro Stores brand builds trust, recognition, and identity. Step 3: Sales and Distribution through Village Level Entrepreneurs Villgro Stores 40 village level entrepreneurs (and counting) are so important that they are called sales and change agents. Compared with traditional distributors who sell from stores in town, VLEs are advantageous because they have a personal connection with customers, know farming, bring products to users, and provide services like training. VLEs bear the real economic risks of going the last mile. They purchase products from decentralized Villgro Stores, store them on their own premises, and slowly distribute them to their 60 to 100 customers. If farmers fail to pay, VLEs shoulder the burden. An average VLE sells about 40,000 rupees (~$885) of products each month. He is paid through a monthly profit sharing model, profiting about 2,000 to 3,000 rupees (~$44 to ~$66). 3

4 Step 4: Scale Up and Replication Rural distributors typically fail to extend their products beyond a limited geographical area. Now in expansion mode, Villgro Stores plans to replicate its network of stores and VLEs in Salem, Namakkal, Karur, and Coimbatoire. Each of these regions will have about 10 stores, eventually managed by new field offices. Disseminating New Technologies for the Better Since January 2007, the Villgro Stores model has sold 20 million rupees (~$441,000) of products and has reached about 5,000 customers. Each month, Villgro Stores VLEs are selling over 1.4 million rupees (~$31,000) of innovative, livelihood enhancing products. Villgro Stores inclusive method of portfolio codevelopment and participation generates data about new products and rural users. With its ambitious expansion plan, Villgro Stores may be a much needed last mile solution to disseminating products into India s hinterland. 4

5 Inside a typical Villgro Store. 5

6 UNIT ECONOMICS Level Indicative gross margin Cost (Rs/month) Sales required to break even (Rs/month) No of months to break even Village Level Entrepreneur 7%-9% 500 7,500 1 Store 12-14% 30, , Business Unit* (managing 40 stores) 500, Corporate Office (managing 1 business unit of 70 stores) 500, Notes: Rs = Indian rupees (INR), 1 USD = ~46 INR, * A profit center that can manage stores REVENUE, INCOME, AND CASH FLOW All figures are in Rs million Gross Revenue* , , , , , Revenue from other lines Value Added Tax/Excise ** Net Revenue , , , , , Cost of Goods Sold*** Gross Income (Trading Margin) Gross income from other lines SG&A EBITDA (14.86) (49.88) (56.77) (65.03) Depreciation EBT (14.93) (50.74) (59.59) (68.08) Loss Carried Forward - (14.93) (65.67) (125.25) (193.33) (169.00) (43.87) - Taxable Income Tax Net Income (14.93) (50.74) (59.59) (68.08) Cash Flow (15.23) (54.15) (70.85) (80.24) Cash Flow (without Tax) (15.23) (54.15) (70.85) (80.24) Notes: * Revenue after VLE commission, ** If any, to be recovered from customer, *** Not calculated separately because trading margin is calculated Abbreviations: SG&A = Selling, General, and Administrative, EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization, EBT = Earnings Before Tax Internal Rate of Return 31.12% Internal Rate of Return (without Tax) 38.74% Rs million Net Present Value 4.56 Net Present Value (without Tax) Hurdle Rate 30.00%