International Business Environment

and Global Strategy

Dr. Sushil Vachani

ITC’s Strategy for Rural India1

One of the companies that has made significant inroads into rural India is ITC. The company
was set up in 1910 and was called the Imperial Tobacco Company in its early years. It
witnessed several identity shifts over the years and has been known as ITC Limited since
2001.

Over the years, ITC diversified into multiple businesses spanning branded fast
moving consumer goods (FMCG), paperboards and packaging, agribusiness, hotels and
information technology. In 2014-15, ITC had revenues of 5.8 billion (excluding excise duties
collected), profit before tax of $2.2 billion and profit after tax of $1.5 billion. (See the
financial statements in Exhibit 1 at the back of this case study.) Its revenue grew by 9.7%
over the previous year. Growth was fueled by an 11.3% rise in non-cigarette FMCG products,
8.1% in agricultural business and 8.7% in cigarettes.

Cigarettes contributed significantly to ITC’s profits, though they faced tremendous

competition from crude tobacco substitutes manufactured by India’s informal sector, whose
products do not attract taxes as high as those levied on cigarettes, and also from products
made by firms that evaded taxes.

ITC saw great promise in its non-cigarette, branded FMCG products, which included
staples, biscuits, confectionery, juices, personal care products like soap, apparel, stationery,
incense sticks and safety matches. These products accounted for nearly $1.5 billion in
revenue in 2014-15.

Agri-commodities
Over the years, ITC’s agri-business division set up a valuable supply chain with deep
connections in rural India. This provided an important source of competitive advantage. The
division bought commodities for use in production of its branded food products, as well as for
export.

Procurement system The traditional structure for commodity procurement put

India’s numerous small farmers at a great disadvantage. Farmers sold their produce at a state-
regulated wholesale market called a mandi. Small farmers lacked bargaining power. They did
not have correct information on prevailing prices in different markets, and when offered a
price for their own produce at the mandi, they could not judge if it was a fair price. Also, the
price was dependent on a number of factors such as the moisture content and the extent to

1
© Sushil Vachani, 2007-16. This case draws on an earlier case written by the author: “ITC in Rural India”
published in 2009 by Ivey Management Services, case number 9B09M036. For more information on ITC and its
agricultural division, visit: www.itcportal.com and www.itcabd.com.
© Dr. Sushil Vachani. All Rights Reserved. This document has been authored by Dr. Sushil
Vachani and is permitted for use only within the course "International Business Environment and
Global Strategy" delivered in the online course format by IIM Bangalore. No part of this
document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored
in a retrieval system or transmitted in any form or by any means – electronic, mechanical,
photocopying, recording or otherwise – without the prior permission of the author.
 International Business Environment
and Global Strategy
Dr. Sushil Vachani

which seeds were broken, and the buyers were sometimes able to fool farmers into accepting
a price lower than they deserved. Farmers were diffident about questioning the weighing
system and worried about being cheated. Farmers were also not assured of timely payment.

ITC introduced an innovative procurement system that bypassed the traditional system and
empowered farmers with information, while providing them with higher income and also
reducing its own purchase cost. It appointed an entrepreneur in the village who operated a
kiosk with a computer provided by ITC, to access real-time information on commodity
prices, weather conditions and best practices that was shared with farmers. The information
was provided from ITC’s e-Choupal website. This entrepreneur was called a sanchalak and
the kiosk, e-Choupal. (Choupal was the Hindi word for village gathering place.)

The kiosk provided information on the previous day’s prices at ITC’s procurement
center and at several markets in the state, as well as prices on international markets, which
could serve as precursors for local prices. ITC also published the price it would offer for
different commodities at its procurement center the next day, so that farmers could decide
whether they wanted to bring their produce there for sale. If farmers decided to sell their
produce to ITC, the sanchalak examined the produce and quoted a price that they could get
the following day at ITC’s warehouse, which was usually located within 20 miles of the
village.

Since villages had erratic electric supply and internet connectivity, ITC installed a
solar panel and satellite dish to ensure uninterrupted operation of the kiosk. ITC used its e-
Choupal procurement system to buy a range of agri-commodities like wheat and soya.

ITC’s innovative hub-and-spoke procurement model had essentially separated out the
four important constituent elements of the traditional model that were previously centralized
at the mandi. Now, two of the elements, price discovery and initial quality assessment,
occurred at the spokes of the system, which were the villages. The other two, product
delivery and payment of cash, happened at the hub, which was ITC’s warehouse.

In contrast to the traditional mandi, ITC’s warehouse was clean and comfortable, with
toilet facilities and provision for food and clean drinking water. The company used electronic
weighing systems to reassure farmers they were not being cheated. Farmers got cash for their
product on the spot, rather than deferred payment. If prices had risen at neighboring markets
since the previous evening, ITC matched those prices so that the farmers did not lose out.
More importantly, farmers were treated as customers.

ITC’s system eliminated the middlemen and saved on transport and labor, resulting in
substantial savings for farmers and the company. The sanchalak earned a commission for
enabling the procurement from the village. In addition to helping procure commodities, the
sanchalak helped sell FMCG products made by ITC and others to customers in the village.
© Dr. Sushil Vachani. All Rights Reserved. This document has been authored by Dr. Sushil
Vachani and is permitted for use only within the course "International Business Environment and
Global Strategy" delivered in the online course format by IIM Bangalore. No part of this
document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored
in a retrieval system or transmitted in any form or by any means – electronic, mechanical,
photocopying, recording or otherwise – without the prior permission of the author.
 International Business Environment
and Global Strategy
Dr. Sushil Vachani

This role has since evolved, and now the sanchalak is involved in facilitating marketing
rather than sales.

In 2014-15, ITC sourced nearly 2 million metric tons of a range of agri-commodities

through its procurement system, for sale in India and abroad. These included wheat, rice,
soya, potato, processed fruits, coffee and shrimp.

Saagar mini-malls ITC decided to leverage its warehouse network in rural India in
2004, by setting up mini-malls to serve rural markets. These stores sold products and services
ranging from FMCG to soil testing, repairs, health and banking services. These mini-malls
were called “Choupal Saagars”. The company set up partnerships with leading service
providers, such as banks, as needed.

ITC invested about $1.5 million on each Saagar, which occupied around seven acres
of land. In addition to the warehouse, the Saagar was designed to have a hypermarket, farmer
training facility, fuel station, and a food court or bank.

The Saagars were built on a highway close to a small town with a population of
100,000, so that it could serve customers from the town as well as 100 or more villages
nearby. Customers came from the town to the Saagar as it offered attractive prices,
sometimes at steep discounts to prices of comparable products in town stores. ITC created
special brands for the Saagars so that it could have differential pricing in different markets.
The Saagars also earned revenue by providing space for other companies to sell services.

ITC chose to convert procurement hubs into Saagars, only if there was sufficient
promise of business by way of procurement and sale of merchandise. Typically Saagars were
placed in the midst of about 40 e-Choupals.

ITC maintained a central group to support its network of sanchalaks, procurement

warehouses and Saagars. The support included IT services, negotiations with suppliers,
development of government relations and training.

The future of ITC’s rural business

Around 2007, there were changes in government policies that made it less attractive
for ITC to continue expansion of its Saagar network and the number plateaued at 24.
However, the e-Choupal platform continued to evolve by enabling services related to soil &
moisture conservation, supplementary income, and rural marketing (Choupal Haats). The
Chief Executive of ITC’s Agri Division, S. Sivakumar feels that laws, such as the
Agricultural Produce Market Committee (APMC) Act, the Essential Commodities Act and
© Dr. Sushil Vachani. All Rights Reserved. This document has been authored by Dr. Sushil
Vachani and is permitted for use only within the course "International Business Environment and
Global Strategy" delivered in the online course format by IIM Bangalore. No part of this
document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored
in a retrieval system or transmitted in any form or by any means – electronic, mechanical,
photocopying, recording or otherwise – without the prior permission of the author.
 International Business Environment
and Global Strategy
Dr. Sushil Vachani

Forward Contract Regulation Act need to be fully aligned to the changing market
requirements and serve the interests of rural India. The company though continues to
innovate by transforming its e-Choupal network to provide more offerings including digital
services.

© Dr. Sushil Vachani. All Rights Reserved. This document has been authored by Dr. Sushil
Vachani and is permitted for use only within the course "International Business Environment and
Global Strategy" delivered in the online course format by IIM Bangalore. No part of this
document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored
in a retrieval system or transmitted in any form or by any means – electronic, mechanical,
photocopying, recording or otherwise – without the prior permission of the author.
 International Business Environment
and Global Strategy
Dr. Sushil Vachani

Exhibit 1: ITC – Financial Statements ($ million)

Profit & Loss Account, 2014-15 Balance Sheet (as at March 31, 2015)
Gross Revenue 8062 ASSETS
Less excise duty 2221 Fixed assets 2607
Net revenue 5841 Non-current investments 390
Other income 247 Other non-current assets 241
Net Revenue 6088 Current assets 3833

Expenditure Total Assets 7071

Cost of materials consumed 2348
Employee benefit expenses 285 LIABILITIES
Finance costs 9 Stockholders funds
Depreciation 154 Capital 128
Other expenses 1053 Reserves & surplus 4789
Cost of goods sold 3849 Total stockholders funds 4917

Profit before tax (PBT) 2240

Tax provision 702
Profit after tax (PAT) 1538 Non-current liabilities 284

Current liabilities 1869

Profit for the year 1538 Total liabilities 7071

Source: Computed from ITC Financial Reports. Some numbers do not add up owing to rounding up or down.

© Dr. Sushil Vachani. All Rights Reserved. This document has been authored by Dr. Sushil
Vachani and is permitted for use only within the course "International Business Environment and
Global Strategy" delivered in the online course format by IIM Bangalore. No part of this
document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored
in a retrieval system or transmitted in any form or by any means – electronic, mechanical,
photocopying, recording or otherwise – without the prior permission of the author.