Nestle India digs deeper in the rural market, aims to grow business

The company's new-found enthusiasm for the hinterlands is founded on its appetite for growth

After staging a graceful comeback from the 2015 Maggi contamination crisis, food and beverages giant Nestle India has set another ambitious target for itself. With its business growing by double digits for the past three years, the company has decided to grow its rural footprint in the next three years at least by a third. If the last time the challenge was to keep its business afloat, this time it is to sustain the growth momentum it had set for itself.

With growth in its familiar den — the urban market — slowing, Nestle has placed its bet on the vast hinterlands, which, it now believes, is the market for growth. While growing presence in India’s villages has been on the priority list of all leading multinationals for well over a decade, the Swiss major’s change in tact is relatively new.

In a market in which its global peers, such as Hindustan Unilever (HUL), Coca-Cola and PepsiCo, have been expanding rural distribution since the early 2000s, Nestle has put all its focus on urban households. Even Indian fast moving consumer goods majors such as ITC, Dabur and Britannia have remained well ahead of the Maggi maker. ITC, the largest FMCG firm by total revenue, had initiated a massive rural expansion plan in mid-2000s and today caters to close to 100,000 villages. Rural markets account for 40 per cent of ayurveda-based FMCG player Dabur and 37 per cent for HUL.

Nestle India, in comparison, gets a little less than a fourth of its sales from the market. According to an analysis by Edelweiss Securities, the share of rural contribution to the top line “is among the lowest” for Nestle, when compared to the other FMCG players in the local market.

The firm is not prepared to ignore the potential of the rural market anymore, as Suresh Narayanan, chairman and managing director, revealed in a recent post-earnings call. Though Nestle has grown its rural reach significantly in the past three years, it now aims to grow it further. According to Narayanan, it plans to grow its presence to 120,000 villages by 2024. That is, any village with a population of more than 5,000, he said.

The change in its business strategy is evident from the fact that in 2017, amid its recovery from the infamous “Maggi crisis”, Narayanan was still banking on its decades-old business plan. In spite of faltering volumes, Nestle’s bet was securely placed on “purely premium offerings”. Citing independent studies, Narayanan told Business Standard, Nestle was penetrating the hundreds of newer towns to grow volumes.

According to analysts, after spending over a century in the country, shedding its legacy was only a pragmatic decision to stoke growth after suffering poor volume growth for close to a decade.

According to Narayanan, Nestle has already set the ball in motion. From 1,000 villages at the end of 2016, Nestle’s rural reach grew to 89,000 villages before the pandemic disrupted the expansion programme in early 2020. Revenue share from rural geographies has grown as well. In 2016, Nestle used to get less than 10 per cent from rural geographies compared to close to 25 per cent now.

The Edelweiss report said in the past 18 months, the number of villages under its fold has nearly doubled. “A year ago, Nestle covered 30,000–40,000 villages but it has strengthened its rural distribution and now covers 90,000 villages. Distribution hubs have increased from 4,000 to 15,000. In 2017, Nestle had 9,000 distribution points, which now count 12,000-plus,” it noted. The company has also tweaked its portfolio to stay relevant to those markets. Nestle has a total reach of close to 5 million outlets. Nestle communicates and markets Maggi relevantly in rural areas to drive penetration. In terms of distribution, the company is increasing the number of access points using data and analytics, analysts at Edelweiss further said.

Narayanan said Nestle’s rural bet will be supported by all means. Apart from expansion of the distribution network, the firm is ready to tweak its portfolio to suit the rural customers — a large base that it never took seriously while developing products. 

“The work is on, in terms of renovating and innovating some products that we will be putting out in semi-urban and rural markets. In terms of activation, consumer sampling and all will be a big part of what the company does. Through the route to market models, which signifies different supply models and different channels of distribution, we will look at wholesale and non-wholesale related to access to smaller markets,” he said.

Nestle has already realigned its cluster model to better cater to the rural households. “Cluster-based models are central to the company, and it is recalibrating the same for the post-pandemic world. Nestle has also added more decentralisation to it, by moving a lot of the decision-making to factories and sales locations. The company has invested a lot in analytics and calls it MIDAS (multi-disciplinary analytic system). This is helping in terms of granular data and sharpening plans. The company’s automation is high and data is now available real time,” Edelweiss noted.

Though it had initiated the change in 2018, Nestle seems to have learned a few lessons from the pandemic as well. It still gets over a third of its sales from metros and tier-1 towns, but Narayanan has taken note of the performance that the deeper markets have shown recently. “Rural and semi-urban are areas to watch out for their continued resilience over a period of time,” he said.

Edelweiss’ estimates endorse the view. Since the lockdown has rattled the economy, the rural market is growing at a much faster rate than the urban. While in July-September, the rural FMCG market grew by 1.7 per cent, compared to 0.7 per cent in urban areas, in October-December, rural growth stood at 12.1 per cent — way ahead of the 5.9 per cent growth registered in larger towns.