C K Prahalad’s paradigm of targeting the fortune at the bottom of the pyramid makes for great anecdotes. But it's easier said than done. India is the ideal environment for “field experiments”. Secular growth has seen millions move up from abject poverty to lower-income and then from lower-income to middle-income level.
The sociologists and demographers have fierce, politically-loaded arguments about the percentage of poverty reduction. But it's clear that the base of the pyramid has grown much larger in absolute numerical terms.
FMCG and telecom service providers are among the biggest beneficiaries. Both are highly competitive industries. They have somewhat similar dynamics in terms of the importance of branding and positioning. Both industries also had to evolve new methods to reach the newly consuming classes and to find price points that worked.
Reaching this segment and being profitable is difficult on several levels. It often costs more to build the physical distribution channels, which may be non-existent. It requires creative thinking to find and push the right buttons in terms of advertising and brand-positioning. This is doubly difficult because marketing mavens very rarely come from the same background as this income segment and there can be a disconnect. The other side of the picture is that this segment is very price-sensitive and the margins are razor-thin.
Higher up the pyramid, the two-wheeler industry has also been reasonably successful, along with the white goods guys. Here, one of the additional issues is financing. We're talking about (relatively) big-ticket items where hire purchase helps to exponentially improve volumes and margins. But conventional due diligence for this population segment is a nightmare. It is a tight-rope walk balancing higher sales volumes versus higher default rates. Now, the housing industry is getting into the act. “Affordable housing” has become a catchphrase in the past two years. Due diligence on a loan becomes even tougher for mortgages because the value at risk is much more and the mortgage relationship is very long-term. Several of the bigger housing finance players have avoided the affordable zone until recently.
Among FMCGs targeting the base of the pyramid, Nirma is of course the staple B-School case-study. But in the last few years, Emami and Dabur have also been pretty impressive. In telecom, it's going to be very difficult to pick winners until the next phase of spectrum distribution, rollouts and schemes are in place.
Dewan Housing Finance has built a niche franchise in affordable housing. This is bound to be challenged by the big boys over the next 18 months. The demographics suggest that this is just the beginning. If GDP growth does hit double-digits, the lower end of the pyramid will get much larger.
The author is a technical and equity analyst