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P. Balakrishna
B. Sidharth

To succeed in the Indian market for both products and services, foreign companies have come to realise that it is necessary to make the products affordable, address the right segment, widen their offerings and adapt their product to Indian needs, and to promote community rather than individual usage.

FOREIGN companies that entered India lured by visions of a "250-million strong middle-class market" are beginning to realise two key characteristics of the Indian market: India is a low-income market and while it might have millions of consumers, each individually consumes little. Many foreign companies selling branded consumer products and services have been compelled to alter their strategies in line with these two characteristics.

To succeed in the Indian market for both products and services, foreign companies have come to realise that it is necessary to make the products affordable, address the right segment, widen their offerings and adapt their product to Indian needs, and to promote community rather than individual usage.

Make the product affordable: Foreign companies are beginning to realise that affordability of a product holds the key to increasing consumption. The experience of several foreign firms underlines the importance of the price factor. The most striking use of price as a weapon to increase sales has been demonstrated by Mr Kabir Mulchandani of Baron International. Through deep discounts and slashing prices of color TVs, he was able to increase sales several fold, first for Akai and later for Aiwa.

Like many MNCs, Coca-Cola and PepsiCo failed to realise that product prices needed to be affordable if the Indian market had to be expanded. Low-margin and high-volumes is the most successful business model for India as has been successfully demonstrated by Hindustan Lever. Instead, both Pepsi and Coca-Cola raised prices and, what is worse, introduced the 300 ml bottle which made the product even more expensive. Of course, the high price was blamed on India's excise duty structure. Coca-Cola and Pepsi did not realise how price-sensitive cola consumption is in India. In 1999, both Pepsi and Coke raised prices by a rupee in May, only to see sales slipped badly during the year.

Wisdom finally dawned in 2002. Coca-Cola and Pepsi realised that an affordable price point can drive huge volumes and expand distribution in virgin markets.. Last year, Pepsi and Coca-Cola re-introduced the 200 ml bottle and reduced prices to Rs 5 for a 200 ml bottle, Rs 7 for 300 ml bottle (from Rs 10), Rs 40 for a 2 litre bottle. Coca-Cola's growth strategy now centres around the affordable 200 ml returnable glass bottle at Rs 5.

Product can also be made affordable by innovative packaging. A smart marketer of the Chik shampoos increased his sales several-fold by offering shampoos in Re 1 sachets. This set off a stampede and products ranging from chewing tobacco to shampoo and cosmetic lotions are available in sachets. Even direct marketer, Amway, whose personal and home-care products are considered expensive because of the large bottle size, has been exploring the option of offering shampoos in sachets.

Pre-paid cards have done for the cellular phone market what sachets did for the shampoo market. Faced with a stagnant market, cellular operators launched the prepaid card. It reduced the entry barrier where there were no rentals or security deposits. Further, there was no billing problem for the customer and no bad debts for the operator. Prepaids have driven the rapid increase of the subscriber base of cellular phones to over 11 million. The cellular phone has become so affordable that more cellular phones are now being added then fixed phones!

Address the right market segment: Most foreign companies entering India end up addressing only the high-priced premium segment. Instead of focussing on large volumes by attacking the belly of the market, they fall prey to the temptation of skimming the market, settling for small volumes but large margins. This was the strategy of Lacoste, Levis, Reebok, Adidas, Benetton , several car makers and all the private operators of cellular mobile services. Not surprisingly, all of them have tended to price themselves out of the low-income market.

The most striking example of the need to choose the right market segment is afforded by the differing fortunes of two car makers — Hyundai Motor and Ford Motor. Both were late entrants in India's already crowded car market and chose to set up their plants near Chennai. In 2001-02 Hyundai sold 87,822 cars raking in revenues of Rs 3,403 crore and net profit of Rs 210 crore. In contrast, Ford Motors sold just 15,131 cars and its accumulated losses has wiped out its net worth. The main reason is that while Hyundai began by daring to take on the well-entrenched Maruti Udyog in the small car segment and thereby aim at large volumes, most foreign car-makers, including Ford, were content to launch products for the miniscule mid-segment (1,200-1,800 cc) and were thereby condemned to small volumes and high costs.

The cellular mobile operators made the cardinal mistake of promoting call phones as a lifestyle product for the status conscious and charging obscenely high airtime rates of Rs 16.80 per minute. Not surprisingly, there were few subscribers and the operators were compelled to beg the government to relieve them of their licence fee commitments.

The operators soon realised that their strategy was myopic and changed tack. As competition grew with the introduction of the third and fourth operator in each circle, they were compelled to slash airtime rates to below Rs 4 per minute. As the cellular phone was repositioned as a consumer utility product and, through the use of pre-paid cards and wider coverage, a new set of Indians was brought into the user net. The number of subscribers rose dramatically in 2000, doubling from 1.6 million to 3.2 million and it has now crossed 11 million.

Widen the product offerings: Foreign firms have been compelled to recognise that while the potential of the Indian market may be enormous, it is often not for the company's traditional product. Thus, to realise the market's potential, the company would have to cater to Indian needs by widening its offerings and developing or modifying products to suit the Indian consumer.

Coca-Cola began its Indian innings with an exclusive focus on carbonated soft drinks. It took it some time to realise that its competition was not Pepsi — its traditional rival in other markets — but water, tea, coffee and fruit juice. Finding that the market for carbonated soft-drinks was not growing fast enough, the company has been compelled to widen its product range to non-alcoholic commercial beverages.

The company now wants to become a complete beverage company and has been churning out a series of new products. Taking advantage of its vast distribution reach, it entered the packaged water business with Kinley and met with unexpected success — Kinley is now the largest packaged water brand. Next, it launched Sunfil powder nationally. In November 2002, it launched its ready-to-drink Georgia brand of tea and coffee through vending machines.

Not surprisingly, Pepsi has also followed a similar strategy. It introduced its Acquafina branded bottled water and several new drinks. Some MNCs have even been compelled to introduce products that they do not sell elsewhere in the world. Kellogg's provides the most striking example.

It was among the first foreign companies to enter the Indian market, following the liberalisation of foreign investment in 1991. It set up a wholly-owned subsidiary and invested in a greenfield manufacturing plant for cereals. However, despite a concerted market development programme, sales of its rice-and wheat-based flakes was disappointing. In 1996, it launched Chocos and Frosties pre-sweetened flakes.

However, to expand its market, in August 1998, it made a radical departure and launched Chocos breakfast cereal biscuit — in volume terms biscuits constitute on of the largest convenience food categories in India.

For Kellogg's, this was the first foray into the biscuit segment. Since then it has added other products — Cheezit Crackers, Keebler, Cookies and Special K Cereal.

Kellogg's is not alone. Reebok was compelled to introduce a shoe without frills suitable for just walking or jogging (not many people in India require air cushioned shoes for special sports). Reebok had to offer shoes in dark colours, including black, as buyers in India shied away from white shoes as they easily got discoloured with dirt.

Promote community usage: Foreign companies are only now beginning to realise that to increase usage of a product or service, the consumer need not own it and only needs to have access to it. The first success story in the privatisation of telecommunication services is payphones, because it did not require users to have a phone but easy access to it.

India now has over 45 million phones but the average revenue per direct exchange line is around Rs 6,000-7,000 per annum. On the other hand, payphones are used intensively and the average revenue per payphone exceeds Rs 30,000 per annum.

While thousands of payphone operators have benefitted form this, Zip Telecom has tapped into this business opportunity. Zip manages about 13,000-ranchised Zip Fone payphones in Maharashtra and Madhya Pradesh, apart from Delhi.

An Indian entrepreneur, Dr Bindeshawari Pathak, has made a success of community pay toilets that are operated and maintained for a fee. In a country where most public services come free, the public pays for using the toilets.

(P. Balakrishna is a consultant and writes for The Economist Intelligence Unit, of The Economist Group. B. Sidharth is a student of IIM, Calcutta. They can be contacted at pbalakrishna@rediffmail.com)

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