Month: March 2021

Management Notes

Independent Branches and Foreign Branches

indiafreenotesby indiafreenotes2

Independent Branches

Independent Branches are those which make purchases from outside, get goods from Head Office, supply goods to Head Office and fix the selling price by itself Thus an independent Branch enjoys a good amount of freedom like an American Son.

Characteristics of an Independent Branch:

  1. Independent Branch keeps a complete set of books. Such Branch gets goods from Head Office and from outside parties. It has its own Bank Account. Thus, the Branch keeps frill system of accounting.
  2. It prepares its own Trial Balance, Trading and Profit and Loss Account and Balance Sheet. Copies of these statements are sent to Head Office for incorporating in the Head Office Books.
  3. The books contain an Account called “Head Office Account” or “Head Office Current Account” which is credited with everything received from the Head Office and debited with everything sent to Head Office. That is, all transactions relating to Head Office are recorded in this Account. The Head Office Current Account is thus a Proprietorship Account (i.e. Capital Account).

In-spite of the independent status, the Branch cannot function without resources, and the resources, specially at the initial stage, are provided by the Head Office. Thus, the investments made by the Head Office seen from the Head Office Account are a personal Account in nature.

Similarly, the Head Office in its books opens an Account “Branch Current” Account, which is also a running account between the Branch and the Head Office and incorporates all the transactions between Branch and the Head Office.

A special feature is that the Head Office Current Account in the books of Branch and Branch Current Account in the books of Head Office are maintained on a reciprocal basis.

The balance of these Accounts on any date will be equal to the difference between the assets and liabilities at the Branch on that date. The Branch Current Account in the Head Office books and Head Office Current Account in the Branch books show the same but opposite balance on a particular date.

  1. There may be inter-branch transactions. That is, goods transferred by one Branch to another Branch of the same Head Office. Such entries have been explained later.
  2. On receipt of the accounts and statements by the Head Office, the Head Office reconciles the balances, which is shown in Head Office Account in the Branch books with the Branch Account in Head Office books. Differences are reconciled. This is dealt with separately.
Accounting entries, in the book of Branch, for normal Transactions
1 Purchases made at branch Purchase Account

  To cash/Creditors Account

 Dr.
2 Sales affected at Branch Cash/Creditors Account

  To Sales Account

 Dr.
3 Payment of expenses at Branch Expanses Account

   To cash Account

 Dr.
4 Any income received at Branch Cash/Bank Account

   To concerned income Account

 Dr.
  1. For goods supplied by head office to branch:

Branch book:

Goods supplied by head office A/C………Dr.

To Head office A/C

(Being receipt of goods)

Head office book:

Branch A/C…………..Dr.

To goods supplied to branch A/C

(Being goods sent to branch)

  1. For cash remitted by head office to branch:

Branch book:

Cash A/C…………..Dr.

To head office A/C

( Being cash received)

Head office book:

Branch A/C ……………..Dr.

To cash A/C

(Being cash sent to branch)

  1. For goods returned by branch:

Branch book:

Head office A/C…………Dr.

To goods supplied to head office A/C

(Being goods return to head office)

Head office book:

Goods supplied from branch A/C…………Dr.

To Branch A/C

(Being goods returned from branch)

  1. For cash remitted by branch to head office:

Branch book:

Head office A/C………….Dr.

To cash

(Being cash sent to head office)

Head office book:

Cash A/C……………..Dr.

To Branch A/C

(Being cash received from branch)

  1. For assets purchased by branch on behalf of head office:

Branch book:

Head office A/C ………………Dr.

To cash A/C

(Being purchase of assets)

Head office book:

Branch assets A/C………….Dr.

To branch A/C

(Being assets purchased by branch)

  1. For depreciation charged:

Branch book:

Depreciation A/C ……………Dr.

To Head office A/C

(Being depreciation on branch fixed assets)

Head Office book:

Branch A/C……………….Dr.

To branch assets A/C

(Being depreciation of branch fixed assets)

  1. For expenses incurred by head office

Branch book

Expenses A/C…………..Dr.

To head office A/C

(Being expenses incurred by head office)

Head office book:

Branch A/C………………….Dr.

To profit and loss A/C

(Being expenses incurred for branch)

Foreign Branches

Foreign branches are independent branches which are operating in foreign countries.

Accounting in respect of Foreign Branches:

Accounting in respect of foreign branches is done in the books of the branch as well as in the books of the Head Office.

Accounting at Branch:

As the foreign branch is an independent branch, it keeps a complete set of books on the double entry system, prepares all the necessary accounts including the account of the Head Office, prepares its own trial balance, Trading and Profit and Loss Account and Balance Sheet. In short, the accounting procedure adopted at a foreign branch is exactly the same as that adopted at an independent domestic branch.

Accounting at the Head Office:

The trial balance received by the Head Office from the foreign branch is in foreign currency. Therefore, before incorporating the items in the trial balance of the foreign branch, the Head Office is required to convert the various items in the trial balance into the currency of the Head Office. Thereafter, it has to incorporate the items in the Converted Branch Trial Balance in its books, prepare the Branch Trading and Profit and Loss account and Balance Sheet and Branch Account.

Rates at which the items in the trial balance of a foreign branch should be converted:

It is true that the items in the trial balance of a foreign branch should be converted into the currency of the Head Office. But the question is at what rates the various items in the trial balance of a foreign branch should be converted. The following points should be borne in mind while converting the items in the Trial Balance of a foreign branch:

  1. If the rate of exchange is not subject to wide and frequent fluctuations, all the items in the trial balance (other than remittances and Head Office Account) can be converted at a fixed rate of exchange.
  2. If the rate of exchange is subject to wide and frequent fluctuations, then, different rates should be adopted for different items. They are:
  3. Opening stock should be converted at the opening rate of exchange (i.e, the rate of exchange prevailing at the beginning of the accounting year).
  4. Closing stock should be converted at the closing rate of exchange (i.e., the rate of exchange prevailing on the last day of the accounting year).
  5. All the other revenue items (i.e., expenses and incomes, except depreciation on fixed assets and reserve for bad debts, should be converted at the average rate for the year. (In this context, it may be noted that according to the recommendation of the Institute of Chartered Accountants, in the year in which the local currency is devalued, the revenue items should be converted at the closing rate, and not at the average rate.)

Depreciation on fixed assets should be converted at the same rate at which the converted fixed asset is converted

  1. Fixed assets should be taken at the same figure at which they (i.e., branch fixed asset) appear in the books of Head Office.

If that figure is not given, the fixed assets should be converted at the rate of exchange prevailing on the date on which the fixed assets were acquired. If that rate is not given, then, the fixed assets should be converted at the opening rate of exchange.

If additions to fixed assets are made on various dates, average date of exchange for the period should be adopted.

  1. Fixed liabilities should be converted at the rate of exchange prevailing on the date on which they were contracted. If that rate is not given, then, they should be converted at the opening rate of exchange.
  2. All current assets and current liabilities should be converted at the closing rate of exchange.
  3. Remittances appearing in the branch trial balance are converted at the actual rates at which they were effected. If they are not given, they should be converted, i.e., taken, at the same figure at which they appear in the Head Office books.
  4. Head Office account is converted, i.e., taken at the same figure at which Branch Account appears in the Head Office books,
  5. Goods received from Head Office should be converted, i.e., taken, at the same figure at which goods sent to branch appear in the head office books. If that figure is not given, then, the goods received from Head Office should be converted at the average rate of exchange, as it is a revenue item.

However, it should be noted that the converted Trial Balance, generally, does not tally. This is because the different items in the branch trial balance are converted at different rates. The difference in tial balance is taken as Difference in Exchange and is entered in the Profit and Loss Account, either on the debit side or on the credit side.depending upon its nature, if the difference is small. On the other hand, if the difference is fairly large, it is taken as Exchange Fluctuations Account or Exchange Suspense Account and is shown in the Balance Sheet either as an asset or as a liability, depending upon the nature, and is carried forward to be set off against future differences.

After having converted the Branch Trial Balance into head office currency, the Head Office will incorporte the items in the branch trial balance in its books and prepare the Branch Trading and Profit and Loss Account and Balance Sheet and the Combined Trading and Profit and Loss Account and the Balance Sheet, as required.

Management Notes

Meaning and Features of Debtors System, Stock and Debtors System

indiafreenotesby indiafreenotes4

The head office (HO) uses various accounting systems to record and maintain financial data for its branches. The choice of system depends on the branch’s size, autonomy, and the nature of its operations. Two commonly used systems are the Debtors System and the Stock and Debtors System.

1. Debtors System

Debtors System is a simplified method of accounting used for branches that do not maintain complete records. It is typically used for dependent branches where all major financial decisions, stock management, and financial record-keeping are controlled by the head office. Under this system, the head office maintains a single account called the Branch Account in its books to record all transactions related to the branch.

This system helps the head office monitor branch performance without requiring complex financial reporting or maintenance of detailed records by the branch.

Features of Debtors System

  1. Centralized Accounting
    • The branch does not maintain separate books of accounts.
    • All transactions related to the branch are recorded in a single Branch Account maintained at the head office.
  2. Simplified Record-Keeping
    • The branch is only responsible for maintaining basic records, such as sales and cash receipts, and submitting periodic reports to the head office.
  3. Recording Transactions
    • The head office records transactions like goods sent to the branch, cash received, expenses incurred, and stock adjustments in the Branch Account.
    • The balance of the Branch Account reflects the branch’s financial position.
  4. Profit or Loss Determination
    • The head office determines the branch’s profit or loss by reconciling the Branch Account at the end of the accounting period.
    • For example, if the total credit (incomes) exceeds the total debit (expenses), the branch is profitable.
  5. Control by Head Office
    • Since the branch does not maintain complete records, the head office exercises strict control over its operations.
  6. Suitable for Dependent Branches
    • This system is ideal for smaller branches where financial independence is not practical.
  7. Ease of Consolidation
    • Consolidating branch accounts with the head office accounts is straightforward as all data is already centralized.
  8. Examples of Transactions

Goods sent to the branch, cash collected from branch sales, branch expenses paid by the HO, and closing stock at the branch.

Advantages of Debtors System

  • Simple to implement and maintain.
  • Suitable for small operations with low transaction volumes.
  • Ensures centralized control by the head office.

2. Stock and Debtors System

Stock and Debtors System is a more detailed approach to accounting, suitable for branches that maintain some records but do not maintain a full set of financial accounts. Under this system, the head office maintains separate ledger accounts for stock, branch debtors, branch expenses, and branch incomes.

This method provides greater insight into the branch’s financial activities, making it particularly useful for larger branches with significant transactions but partial autonomy.

Features of Stock and Debtors System

  1. Detailed Record-Keeping

    • Unlike the Debtors System, the head office maintains several accounts for a branch, such as:
      • Branch Stock Account: To track goods sent and received.
      • Branch Debtors Account: To record credit sales and collections.
      • Branch Expenses Account: For expenses incurred at the branch.
      • Branch Adjustment Account: To reconcile profit or loss.

  2. Stock Valuation

    • Stock is tracked separately, and the valuation is adjusted for opening stock, closing stock, goods sent, and goods returned.

  3. Credit Sales Monitoring

    • The system tracks branch debtors to monitor outstanding receivables and ensure timely collections.

  4. Profit or Loss Calculation

    • The head office determines profit or loss for the branch by reconciling the stock account, debtor account, and expense account with branch incomes.

  5. Separate Accounts for Each Branch

    • For organizations with multiple branches, separate accounts are maintained for each branch under this system.

  6. Control Over Inventory

    • This system provides greater control over branch stock by monitoring stock levels, movement, and shrinkage.

  7. Focus on Accountability

    • The branch is accountable for maintaining accurate records of sales, debtors, and stock movement.

  8. Examples of Transactions

Recording goods sent to branch at cost or invoice price, credit sales at the branch, expenses paid locally, and closing stock adjustments.

Advantages of Stock and Debtors System

  • Provides a detailed picture of branch operations.
  • Tracks stock movement and debtor balances effectively.
  • Helps in monitoring branch performance more accurately.
Management Notes

Meaning of Head Office, Branch

indiafreenotesby indiafreenotes2

It is the primary aim of all business enterprises to increase their volume of sales. For this purpose, many firms open their shops in different parts of the locality/country. (The parent establishment is known as ‘Head Office’ and its offshoots are termed as ‘Branch’.)

Besides, if branches are opened, particularly in developed regions, both the local consumers and the firms are benefited.

Practically, it is an extension of an existing firm. It should be remembered that a branch has its separate existence but does not possess any separate legal entity. That is why, it is said that it is nearly an extension and a profit centre of an existing firm. Needless to say that all activities of the branches are controlled by the Head Office.

According to Sec. 2 (a) of the Companies Act, 1958, a branch (office) is defined as:

(a) Any establishment described as a branch by the Company, or,

(b) Any establishment carrying on either the same or substantially the same activity as that carried on by the head office of the company, or

(c) Any establishment engaged in any production, processing or manufacture, but does not include any establishment specified in any order made by the Central Govt., u/s-8.

As the foreign branch is an independent branch, it keeps a complete set of books on the double entry system, prepares all the necessary accounts including the account of the Head Office, prepares its own trial balance, Trading and Profit and Loss Account and Balance Sheet. In short, the accounting procedure adopted at a foreign branch is exactly the same as that adopted at an independent domestic branch.

Accounting at the Head Office:

The trial balance received by the Head Office from the foreign branch is in foreign currency. Therefore, before incorporating the items in the trial balance of the foreign branch, the Head Office is required to convert the various items in the trial balance into the currency of the Head Office. Thereafter, it has to incorporate the items in the Converted Branch Trial Balance in its books, prepare the Branch Trading and Profit and Loss account and Balance Sheet and Branch Account.

Management Notes

Methods of ascertainment of Profit or Loss of Branch under Debtors System

indiafreenotesby indiafreenotes1

In accounting, when a business has multiple branches, it often becomes necessary to determine the profit or loss earned by each branch individually. This process helps in performance evaluation, resource allocation, and managerial control. One of the commonly used systems for branch accounting is the Debtors System, also known as the Single Entry System. This system is particularly suited for dependent branches, where the Head Office (H.O.) maintains all the major records, and the branch maintains minimal or no accounting books.

Under the Debtors System, the Head Office sends goods to the branch at cost or invoice price and receives periodic reports from the branch about sales, cash received, stock levels, expenses incurred, and customer accounts. The Head Office maintains a Branch Account, which is a nominal account used to determine the profit or loss of the branch. The branch itself does not prepare a full set of accounts.

The Debtors System is simple and cost-effective for small and dependent branches, especially when full accounting infrastructure is not feasible at the branch level.

Branch Account and Its Purpose:

Branch Account maintained by the Head Office serves two main purposes:

  1. To record all transactions relating to the branch.

  2. To ascertain the profit or loss made by the branch.

It resembles a combined Trading and Profit & Loss Account, and includes all relevant inflows and outflows. The difference between the debit and credit side represents either net profit (credit > debit) or net loss (Debit > Credit) of the branch.

Items Generally Debited to Branch Account:

  1. Opening Balance of Branch Assets:

    • Cash in hand at branch

    • Stock at branch

    • Debtors

    • Furniture and fixtures (if any)

  2. Goods Sent to Branch:

    • At cost or invoice price

    • Sometimes includes adjustments for load if invoiced above cost

  3. Cash Sent to Branch:

    • For expenses like rent, salaries, utilities, etc.

  4. Expenses Incurred by H.O. on Behalf of Branch:

    • Insurance, advertising, and other centralized costs.

Items Generally Credited to Branch Account

  1. Cash Sales and Cash Received from Debtors:

    • Represents income generated by the branch

  2. Closing Balances of Branch Assets:

    • Stock at branch

    • Debtors

    • Cash in hand

    • Fixed assets (if any)

  3. Goods Returned by Branch to H.O.:

    • At cost or invoice price

  4. Any Discounts Received or Allowances

Adjustments in Debtors System

While maintaining the Branch Account, certain adjustments may be required:

  1. Goods sent to Branch at Invoice Price:

    • If goods are sent at an invoice price above cost, the excess (called “loading”) must be adjusted to correctly ascertain profit.

    • For example, if goods worth ₹1,00,000 are sent at invoice price including 25% markup, the loading (₹25,000) must be removed.

  2. Abnormal Losses:

    • Losses due to fire, theft, or damage must be accounted for separately.

  3. Normal Loss:

    • Usually ignored if not material.

  4. Outstanding Expenses or Prepaid Expenses:

    • Adjustments made to reflect true expense of the accounting period.

  5. Depreciation on Branch Assets:

    • Deducted to determine true profit.

illustration (Simplified Example)

Let’s assume the following details for a branch:

Particulars Amount (₹)
Opening Stock 30,000
Opening Debtors 20,000
Cash Sent for Expenses 10,000
Goods Sent to Branch (Invoice Price) 1,00,000
Cash Sales 40,000
Credit Sales 80,000
Cash Received from Debtors 60,000
Closing Stock 25,000
Closing Debtors 40,000
Expenses Incurred by H.O. 5,000

Now, we prepare the Branch Account to determine profit:

Branch Account

Dr. ₹ Cr. ₹
Opening Stock 30,000 Cash Sales 40,000
Opening Debtors 20,000 Cash from Debtors 60,000
Goods Sent to Branch 1,00,000 Closing Stock 25,000
Cash Sent for Expenses 10,000 Closing Debtors 40,000
Expenses by H.O. 5,000 Loading on Closing Stock (25%) 5,000
– – Loading on Goods Sent (25% of 1,00,000) 20,000
Profit (Balancing Figure) 20,000 – –
Total 1,85,000 Total 1,85,000

Advantages of Debtors System:

  • Simple and cost-effective for small branches

  • Controlled centrally by Head Office

  • Easy to track performance of each branch

  • Helps in centralized decision-making

Limitations of Debtors System:

  • Suitable only for dependent branches

  • Limited information for decision-making at branch level

  • Adjustments for loading and losses can be complex

  • Cannot be used for independent branches with full autonomy

Management Notes

Problems on preparation of Branch A/c in the books of Head Office under Cost Price Method and Invoice Price Method

indiafreenotesby indiafreenotes0

Atif & Co. of Delhi consigned 100 units of goods, costing $100 per unit, to their agent Gupta & Co. in Mumbai at a proforma invoice of 20% on cost. Atif & Co. paid the following expenses:

  • Loading charges: $100
  • Freight: $200
  • Insurance: $300

Gupta & Co. took delivery of goods and, on the same day, they sent a bank draft of $5,000 to Atif & Co. as advance against consignment.

Gupta & Co. forwarded an account sales revealing that 75 units were sold @ $140 per unit. Their expenses in respect of the consignment were as follows:

  • Unloading charges: $75
  • Carriage: $25
  • Godown rent: $60

Gupta & Co. was allowed a commission of 10% on gross sale proceeds.

Required: Prepare journal eateries and draw up consignment account in the books of Atif & Co.

Solution

  • Journal entries in the books of Atif & Co:

  • Consignment to Mumbai account

Notice that the loading on goods sent on consignment has been credited and the loading on closing stock has been been debited to the Consignment to Mumbai Account. This action removes the excess price that was added to the original cost of goods and is necessary to calculate the correct profit on consignment.

Working note 1: Calculation of stock on consignment:

Working note 2: Calculation of excess price or loading on goods sent:

The goods were consigned at cost plus 20%. The cost of 100 units @ $100 is $10,000 and the excess price or loading can be computed as follows:

= ($12,000/120) × 20
= $2,000

or

100 units × $20
= $2,000

Working note 3: Calculation of excess price or loading on closing stock:

= (1,800/120) × 20
= $300

Or

15 units × $20
= $300

Management Notes

Wholesale Branch System and Final Account System

indiafreenotesby indiafreenotes1

Wholesale Branch System

Under this system, the goods are invoiced at the wholesale price to a retail branch. Opening stock and closing stock of branch will be shown at the wholesale price and unrealized profits in closing stock will be debited as stock reserve to profit and loss account of head office. Similarly, the stock reserve of opening stock will be credited to profit and loss account of head office.

There are many producers, now-a-days, who have their own retail shop (Branch). It deals in both retail and wholesale transactions. The profit rates earned by Branches differ between the retail sale and wholesale. Here, it is necessary to account the additional profit made by a Branch through retail trading over the wholesale trading. Wholesale price is always less than retail price.

For instance, the cost of a product is Rs 100, the wholesale price is Rs 140 and the retail price is Rs 160. If the Branch sells the product, the profit will be Rs 60; but the real profit earned by the Branch is Rs 20 (Rs 160 – 140), which is the contribution of Branch. The profit of Rs 40 (Rs 140 – Rs 100) would have been made by the Head Office by selling on wholesale basis to others.

Under this situation, to find out the real profit earned by a Branch, the Head Office charges the Branch with wholesale price. This facili­tates the Head Office to know the retail profit earned by a Branch. In other words, the difference between the wholesale price and selling price is the pure profit on retailing.

The Head Office sends the goods to Branch at wholesale price and in case all the goods have been sold, there is no problem. If not, the unsold goods lying with the Branch will be at invoice price and in such case adjustment for the unrealized profit of the Head Office Trading Account must be made through Branch Stock Reserve Account in order to find out true profit of the concern as a whole.

Ascertain the profit that you consider as having been earned by the Delhi Branch of Jaipur Industries Ltd. from the following:

(a) For Branch Trading:

(i) Branch Trading account is debited with the opening Stock at invoice price (i.e., wholesale price) and is credited with the Closing Stock at invoice price (i.e., wholesale price).

(ii) Branch Trading Account is debited with the goods sent to Branch at invoice price (i.e., wholesale price) and is credited with the retail price of goods sold.

(b) For Head Office Trading:

The Head Office Trading Account will be debited with opening stock, purchase of goods and the same is credited with Goods sent to Branch at invoice price, direct sales (at wholesale price) and along with the Closing Stock (at Cost).

If there is any closing stock in the hand of Branch, a Stock Reserve Account is to be opened by debiting Profit & Loss Account and crediting Stock Reserve Account. In the case of opening stock, the entry will be reversed.

At Cost Price/Invoice Price Basis (i.e.):

Where Branch Trading and Profit and Loss Account are Opened:

Branch Trading and Profit and Loss Account method is an alternative approach for ascertaining Branch Gross Profit and Net Profit. Branch Trading Account is debited by crediting Opening Stock; Goods sent to Branch etc. and is credited by debiting sales and closing stock.

The difference between the two sides represents Gross Profit or Gross Loss which will ultimately be transferred to Branch Profit and Loss Account Similarly, Branch Profit and Loss Account is debited by crediting all branch expenses account and is credited by debiting all branch incomes account, i.e., the principles of closing entries are to be followed.

The difference between the two sides of Branch P & L A/C represents Net Profit or Net Loss which will be transferred to General Profit and Loss Account.

University of Mumbai BMS Notes

Channels in Rural communication, Developing effective communication

indiafreenotesby indiafreenotes0

Promotion mix decision is very important especially for a low involvement product category like FMCG. It is not only the cost factor, but the dependence of overall results on this decision makes the in-depth analysis very important. The right promotion tool needs to be identified and then only marketer can dream of any success in a complex rural market of India.

To communicate effectively with rural audiences, it is important to understand the aspirations, fears and hopes of the rural customers, in relation to each product category, before developing a communication package. The organisation may have a national strategy but it has to act locally. They have to develop special creative strategy aimed at homogeneous rural segments, which may be quite different from urban market communication.

A well-known brand of shampoo which entered the Rajasthan market some decades ago with a creative commercial that showed a beautiful model featuring bouncing hair, the product bombed. Post-research showed that it was considered indecent for a girl to show off her hair and the audience refused to connect with the brand.

Though rural communication is so vital in rural marketing, it is being given a step-motherly treatment by most organisations resulting in their getting inadequate results from the efforts. This clearly indicates poor understanding of rural marketing in general and the role of rural communication, in particular, in building brands in rural India.

Though companies have total advertising annual spends amounting to Rs. 1,00,000 crores, rural advertising budgets are minuscule. The rural advertising budget of companies is generally between Rs. 6 crores and Rs. 15 crores. Though it does not seem enough but Rs. 10 crores spent in rural market in the villages achieve the same ‘visibility’ as Rs. 50 crores in the towns and cities.

Thus, when it comes to promotions in rural markets, most of the companies are only doing some short-term sales-oriented below the line activities without laying any emphasis on how the core message of the brand is communicated to the rural masses. Most of them use the same communication package, which they are already using to target urban audiences.

Doing just a van campaign, once in a blue moon, is not rural marketing in true sense. To dub a film from one language to another using the same characters relevant to one region can have only limited effect. For sustained results it is important to plan an integrated campaign covering both mass media and below the line activities.

Integrated rural campaigns of Philip’s Consumer Electronics Division, ACC’s Suraksha Cement and Shriram Transport Finance have proved this point. It is very important to invest in developing the specific and right communication package aimed at the rural audience, if an organisation expects to build a brand, in the rural market.

Some of the promotional strategies for the rural markets, which can be adopted by different organisations, are classified here below:

(i) Education Instead of Promotion:

The basic premise for communicating a promotional message for rural market is that it has to be essentially an educational message. This education provider in interactive, interesting and entertaining format brings better results. Rural consumers’ needs not only to be told the benefits delivered by a brand convincingly but also how the benefits outweigh cost that he is going to incur.

The important thing to be considered is that the benefits that have to be projected in the rural areas should be in accordance with the needs and lifestyle of the rural consumer. If the benefits, which are highlighted in the urban areas, are presented to the rural consumers they may not produce desired results all the time.

The rural buyers who are entering the market for the first time for many product categories need to be guided with regard to usage and benefits of products also. Therefore, demonstration becomes very important in the rural market. When benefits of brands like Chik for shampoo, Colgate for toothpaste and toothpowder were demonstrated, there was creation of a huge market, which did not exist earlier altogether. If they had just relied on ten seconds commercial on the mass media then the results might not have been the same in the rural market.

(ii) Customization of the Promotional Message:

Tricky, clever, gimmicky or even suggestive advertising does not work with the rural audience. All flicks using expensive computer graphics without human elements go over the head of rural audience. The communication targeted at the rural audience must address the specific problems, needs, aspirations and the hopes of the rural folks.

Slice of life stories having characters that rural consumer can identify with will help create a greater empathy and understanding. Using aspirational urban looking model but using simple and direct communication which is not complicated, works well with the rural audience. The anchors conducting demonstration in rural areas needs to be trained to speak in the local language or dialect during the road shows so that they can connect better with the audience.

(iii) Regionalization of Advertisement:

The first step in the development of any communication package is the in-depth study of the mindset of consumers of each region and for each product category. Perceptions, traditions and values vary from state to state and in some cases from a region to region within a state.

MRF, while marketing bullock cart tires found glaring differences between western UP and eastern UP with regard to requirement of cart tires. While bullock carts in western UP were smaller with a single buffalo, in eastern UP there were bigger vehicles pulled by two bullocks. In western UP the villagers spoke Hindustani whereas in eastern UP they spoke Bhojpuri. To develop the communication packages these facts had to be kept into consideration.

Unique promotions need to be designed as what work in north may not in the south. At times even dubbing the commercials in local linguistics may not work. Emami had Madhuri Dixit and Amitabh Bachchan as brand ambassadors but for Andhra Pradesh, it signed Chiranjeevi for the same. When Phillips was developing rural campaign for their radio for rural Tamil Nadu, they developed the punch line Enga Veetu Superstar meaning; ‘The superstar of my home’ based on Tamil superstar Rajnikant.

But when campaign was to be developed for Andhra Pradesh punch line developed was Maa Inty Mega Star-that is, ‘mega star of my home’, reflecting, Chiranjeevi, the most popular cinestar of Andhra Pradesh. Had they used the word ‘superstar’ it would have meant Late N.T. Rama Rao, the superstar of Andhra Pradesh but not the current one.

In order to build the association with the promotion, Philips used photograph of village’s own girl – to sell transistors, TV’s, so that the rural audience of a region can relate to it and perceives that the product meant for them.

The regionalization of advertising campaigns by many leading multinational companies indicates a healthy trend for the advertising business. Few clients are looking at developing special advertisements for rural markets. The success of ‘Thanda Matlab, Coca Cola’ campaign, which was aimed at the rural market, is a case in point. The marketer therefore needs to specify region, use specific media and then develop, ‘regional messages’.

(iv) Understanding Role of Mass Media:

Mass media with its known and perceived to be efficient cost per contact is the most favorite medium to spread the promotional message. The benefit of mass media is its huge reach and the easy tracking comparison with other below the line promotional activities.

TV is the most preferred mass media a significant part of the budget of rural marketing companies goes to TV because no other medium has that wide a reach across the country. According to the National Readership Survey, the print media reaches about 23 per cent of rural consumers in India, while 36 per cent have access to TV. The reach of cinema stands at approximate 26 per cent.

The mass media reaches about 57 per cent of the rural population, although, the reach of television rural India is high. Frequent power-cuts restrict viewing time considerably. Two out of five Indians were unreachable by mass media.

Rural India has a very high ownership of transistor radios and as these run on batteries, radio; can once again be expected to become a popular medium for reaching rural masses.

Mass media is too glamorous, interpersonal and unreliable in contrast with the familiar performance of traditional artist whom the villager could not only see and hear, but even touch. Television also does not distinguish between urban and rural. For marketers who use mass media like TV, this becomes a big challenge, as television does not distinguish between urban and rural audiences. There can be a common TV commercial for both urban and rural audience particularly for FMCG products provided the communication is not gimmicky or suggestive and is easy to comprehend.

(v) Outdoor Media Options:

Large numbers of outdoor media options are available with the media planner to lake the message to the rural market. Different options can be selected based on the demographic profile of the population of a region. Available infrastructure of the post offices, weekly markets, exhibitions, public distribution system, cooperative societies and banks could help in strengthening the existing promotional efforts. A vast network of 1.38 lakh rural post offices and 22,000 primary health centres need to be tapped imaginatively for education and information.

Some of the available outdoor media are described below:

(a) Wall Paintings: They are an effective and economical medium for advertising in rural areas. They are silent but a speech or film comes to an end, but wall painting stays as long as the weather allows it to. Retailer normally welcomes paintings of their shops, walls, and name boards, because it makes the shop look cleaner and better.

(b) Video Vans: Video van concept started with the political parties who were not getting access on Doordarshan to have contact with the rural masses. The video van is one of the very effective means of reaching out physically to the rural consumers and providing them with touch and feel of product and the brand.

The promotion using these vans create a lot of word of mouth publicity for a brand in the region which is much more effective than the promotional campaign run on any mass media. The people who have experienced the benefit themselves are likely to talk about to many people who were not present. If conducted in a proper manner then the promotional campaign can be the regular discussion at choupal for many days.

These vans although have a very good potential to deliver the intended communication and demonstration, but are costly to hire and maintain. Considering the vast spread of the rural market, cost per contact can come to many times more than what the conventional mass media can achieve in the urban markets.

(vi) Unconventional Platforms to Promote Brands:

In order to communicate the message to vast multitude of rural population, marketers have to experiment also with unconventional media along with the traditional mass media options. Rural Market offers the opportunity to the media planner with a wide range of platforms that can be used to carry the message ‘to the target market residing in rural areas’. These platforms can be used as complementary to the mass media options.

Using these media, the marketer can provide touch and feel aspect with regard to their brands, which is very essential in rural areas where good number of consumers are living in media dark villages. In the area of communication, corporate marketers have perhaps failed to recognise that a rural consumer may be buying a particular brand or even the product categories itself (particularly durables) for the first time.

With hardly any key influencer within the village and few sources of information (since print and electronic media have limited reach), the rural consumer feels inhibited and ill equipped to buy confidently.

Hence, there is a strong need to build the reassurance and trust about product quality, service support and company credentials in the minds of rural consumers. This is best done through the face to face below the line touch, feel and talk mode at haats, melas and mandis.

This not only spreads the message amongst the audience at these platforms but it also creates word of mouth stories, which carry the message in the entire region. Some of the platforms available for brand promotion are presented below. The relevant platform according to the product categories can be selected for communicating with the rural audience.

University of Mumbai BMS Notes

Creating Advertisements for Rural Audiences

indiafreenotesby indiafreenotes1

Rural advertising is increasingly evident throughout the countryside. The majority of advertisements and hoardings are for fertilizers, hybrid seeds, diesel pumps and pesticides, not to men­tion the message of family planning. Once you selected a communication media, follow the steps:

Steps:

Step1: Try to develop an objective for the media/material. Here the objective means as to what the selected media/material is expected to achieve. Let us take an example. Suppose you have selected Flipcharts as your media for communicating a message about family planning measures to be adopted by the villagers. Your media objective will be “By using the flipcharts majority of the family planning workers will be able to more effectively describe various methods than they could without the mela.

Step2: You will have to identify as ta who will be using the media and when. For example, if we continue above example, you can say that family planning workers will be using it during their home visits.

Step3: You will have to decide about the time frame. Here a time frame is needed for three main activities:

i) Preparation of porotype

ii) Pre-testing

iii) Preparation production of final versions.

Step 4: It includes identification of persons responsible for each activity under medial material production.

Step 5: You may have to estimat6 cost(s) for media/material production, wherever applicable. The main areas to be taken into account while working out the cost include cost for:

a) Developing prototype

b) Pre-testing

c) Modification and production and

d) Distribution

University of Mumbai BMS Notes

Distribution Models of FMCG like HUL & ITC

indiafreenotesby indiafreenotes0

Low unit packs were there since long; only denomination is different now. The pioneers in this category were tea and coffee marketers. Brooke Bond pack was available earlier in 5 paise, later in 10 paise, 25 paise and 50 paise and then with inflation it became Rs. 1 pack. Now it is the time of Rs. 5 pack.

The current craze for Rs. 5 positioning could be because of Coke’s success in promoting the pouch strategy. Colas helped to highlight the price point to the consumer and their medium weight really threw open the gates for other manufacturers to come and ride piggyback on the Rs. 5 price point. And what is different from the past is that large numbers of product categories are now available in small packs and it has taken the shape of mega trends.

The small packs increase user base, usage occasion and can thus explode the market. The consumer base of soft drink increased from 16 crores in 2002 to 24 crores in 2004. A two-year period for which the Rs. 5-price point remained in force.

The Colas started it but host of other branded products are now realising the importance of being present at Rs. 5 price point. Ready availability of five rupees coin has been an advantage and many consumers are not worried as much about grammage as price. They are used to ask for Rs. 2 or Rs. 5 worth of commodity.

Some of the brands that HUL sells for Rs. 5 are Pond’s Talc, Pond’s Cold Cream, Rin, Taaza, Fair & Lovely and Lux. The price point also helps branded FMCGs, which are battling fakes from unorganized sector. Rs. 5 price point leads to growth in user base of brands and increased category penetration for those who have introduced such packs.

Rural marketing problem is essentially a distribution problem. This is evident from an empirical study that though rural consumers are aware of substitutes but they are compelled to accept the product available in nearby retail outlets. Rural marketing depends on getting the distribution and pricing right. Even expensive brands such as Close-up and Marie biscuits were doing well because of deeper distribution.

HUL, ITC, Wimco, Eveready, Dabur, Nirma, Britannia, Arvind Mills are some of the select organisations who have done a great job of rural penetration and have managed to tap the rural markets successfully. But regional players have a stronger presence than national companies in rural markets because of the region specific strategies.

There are few corporates who have started establishing separate verticals in terms of sales and marketing teams devoted lo rural market and also have started allotting special rural budgets (though proportionately very low). The emphasis for the present seems to be on distribution to ensure availability of their brand even in smaller markets. The marketer can adopt any of the strategies given below to make their products available to the rural world.

Sales-Women Network:

A unique way to extend availability in rural market may be distribution through saleswomen network. The women can go to different homes, when their husbands are away, establish confidence and personally sell to other ladies many FMCG products they may not be exposed to. HUL has very successfully employed this strategy through its Project Shakti and TTK group has also developed an integrated strategy to promote its Prestige brand through the network of self-employed saleswomen.

Converting Unorganised Sector Manufacturers into Distributors:

Small or tiny scale manufacturers are finding it difficult in the times of intense competition from domestic and international products. They have good knowledge of the territory and have good sales network, credibility and relationship with the retailers and consumers. Organisations like Exide are attempting to convert these small manufacturers in the unorganised sector in Punjab and Haryana to become their dealers.

This can prove to be good strategy as these manufacturers have the knowledge of the industry and the consumer behavior and it is likely that they will be more professional and financially strong to create the distribution network in the rural areas. Not only the organisation has a knowledgeable dealer but this also reduces the competition offered by that local brand.

Company’s Own Distribution Network:

Some of the organisations are feeling that distributors and wholesalers in the traditional distribution channel areas. These organisations are contemplating and pilot testing their own direct distribution network in order to promote their brands directly to the retailers and consumers in the rural areas.

Rasna Enterprises was building such network to promote its soft drink concentrate in rural areas of Uttar Pradesh, Rajasthan, Maharashtra, Gujarat and Tamil Nadu. This strategy provides to an organisation valuable learning’s about the rural marketing as they have the direct feel of the market. An organisation’s own effort brings in financial strength and aggressiveness. They also get valuable information with regard to selling to the rural retailer as well as the consumer.

Collaboration for Distribution:

Various organisations with comparatively lesser distribution reach can collaborate with organisations that already have achieved high penetration levels in rural areas.

Cost of setting up a huge retail network on one’s own has seen many casualties, the notable being P&G, which abandoned its plan to fight the likes of Lever in rural segment on its own. Instead, it is aiming to piggyback on Marico Industries. Procter & Gamble had tie-ups with Godrej, Marico Industries and now it is planning one with Nirma for distribution of Camay Soaps. Godrej Tea has tied up with Jyothi Lab to use its extensive distribution network that is not only deep but is also serviced quite frequently too.

These tie-ups are of immense benefit for both the organisation as one gets an immediate reach to millions of retail outlets and the other can leverage its distribution network over larger range of products and get better returns on existing networks. This provides them with better return on their sales effort and can invest even more for achieving even deeper penetration.

Even the smaller non-competing organisations can collaborate with each other to develop a joint distribution infrastructure. This will reduce the cost of distribution per organisation and thus can make the seemingly unviable operation financially viable. JK Dairy employed this strategy for distributing milk powder sachets. It took along three companies, which were not competing with its products for selling their products.

In the same rural market for sharing the van cost. A sachet sale of Rs. 500 per day that is 77 sachets daily covered all expenses and fetched some profit on account of sharing of expenses of distribution.

Delivery Vans:

Certainly, reaching out to 33 lakh retail outlets in rural areas is an uphill task. Company delivery vans which can serve two purposes; they can take the products to the customers in select rural areas and also enable the firm to establish direct contact with them and thereby provide an opportunity for promotion. However, only the bigwigs can adopt this channel.

The companies with relatively fewer resources can go in for syndicated distribution where a tie-up between non-competitive marketers can be established to facilitate distribution. In order to move products in rural areas in cost effective manner, the organisation and distributors can make use of rural makeshift transport vehicles known in different areas.

They are very cost effective as their acquiring cost is very low and is not a barrier. They are very rugged to handle the excessive wear and tear that happens on the rural roads. These vehicles are very popular in the rural areas of Uttar Pradesh, Haryana and Punjab and can be easily available to different organisations to transport their products in remote villages at a low cost. These vehicles were employed quite effectively by the rural sub-stockist of Coca Cola to distribute soft drinks in the rural market.

Targeting Larger Villages:

For FMCGs distribution becomes complex. The distributor in the towns needs to have a supply network of hundred plus outlets in 50 odd locations, which cover villages up to 200 plus population. There are only 85,000 larger villages out of more than 6,38,000 villages. But they have 40 per cent of the rural population and 60 per cent of total consumption.

Many of the established packaged goods companies reach more than 20 lakh retail outlets using trains, trucks, bullock drawn carts, camels, and bicycles and many companies claim to service each one of those Outlet once a week. As, only small percentage of consumables can reach the rural market automatically through the retailers and consumer coming to the town for the purchases.

This pain of reaching the rural consumer is worth taking as this direct contact with the retail in the rural world enables a closer relation with the trade, as retailer is a critical link in the overall chain for supplying products to the rural consumer. In a study, to measure the level of influence that the rural retailer has on the rural consumers, it was found that in about 35 purchase occasions, rural retailer was able to influence the sales to the rural consumers.

Therefore, rural retailer needs to be targeted effectively through various strategies so that he sides with the company’s products whenever he is in a position to do so.

Ensuring Reach and Visibility:

The rural marketing effort of the companies can be focused at growing the pie and not just fighting amongst themselves for the existing pie. Brands rarely fight with one another in the rural market, they just have to be present at the right place, ‘Joh Dikhta hai, woh Bikta hai’ (what is seen, sells) many of the brands are building stronger rural bases without much advertising support. The thing, which is critical, is to get the Stock Keeping Unit (SKU) right, as rural retailer cannot afford to keep many different SKUs.

In such an environment, being first on the shelf in the product category and developing a privilege relationship with the retailer is a source of competitive advantage to consumer good companies. And usually the brands that are first on the shelves become synonymous with product category and are difficult to dislodge, thereafter. For example Maggi noodles reached the rural shelves before anyone and remains the market leader ever since. The drive down the rugged countryside sans facilities is surely torturous but pains worth bearing.

Jobbers:

The army of mobile traders that go from house to house in rural India to sell a variety of FMCG products could be motivated, to convert some of them to sell company brands. These are high involvement, touch, feel and demonstration channels that offer greater possibility of convincing ill-informed rural consumers lacking confidence to buy.

Continuous Availability of the Brand:

Habitually rural consumers do not like change and are wary of it. Therefore, they want to stick to one particular brand. This acts as a big barrier for the new brands. But the non-availability of their favorite brand especially in the case of FMCGs creates an opportunity for trial of competitive bandit. It is less likely for rural consumer to move to another shop for purchasing their favorite brand, as shop loyalty in rural areas is, more important than the brand loyalty. This is the result of large number of factors like relationship, credit availability, etc.

The retailer also has immense influence and can make the consumer opt for another brand if the favourite brand of consumer is not available. This trial may not be for just one time and the loyalty can shift to another brand if it provides satisfying experience. In oral culture of the rural areas the news of satisfaction and dissatisfaction spreads very fast. There can be wider demands for the new brand as the promotion spreads through word of mouth publicity.

This might encourage the retailer to stock new brand and as he has to stock only limited number of brands, he will drop one of the brands, which he was carrying earlier. Then it becomes difficult for the once established brand to regain the previous like position. Therefore, the organisations need to make sure that their brands are available at the retailer’s shelves by servicing the rural retailer on a regular basis.

University of Mumbai BMS Notes

Distribution networks, ideal Distribution model for Rural market

indiafreenotesby indiafreenotes0

One of the ways would be using company delivery mass, which can serve two purposes it can take the products to the customers in every hook and corner of the market and it also enables the firm to establish direct contact with them and thereby facilitate sales promotion.

Project Shakti:

HLL has come out with a new distribution model with main objective to develop income-creating capabilities of underprivileged rural women by providing a sustainable enterprise opportunity and to improve rural living standards through health and hygiene awareness.

Typically, a woman from the Self Help Group is selected as a Shakti entrepreneur and receives stocks Lifebuoy, Wheel, Pepsodent, Annapurna salt, Clinic Plus, Ponds, LUX, Nihar, 3 Roses tea, etc. at her doorstep from the HLL rural distributor. She sells directly to consumers as well as to small merchants in the village.

Each Shakti entrepreneur services 6-10 villages in the population range of 1000-2000 people. With training and hand-holding by the company for the first three months, she begins her journey selling the products door-to-door. Normally the entrepreneur has a turnover of Rs.10,000 to Rs.25,000 per month and earns a profit of Rs.800 to Rs.2,000 a month.

Back-haul method for the distribution vehicles:

Organising a suitable back-hual method for distribution vehicles may prove to be an economic to transport the “urban goods” like soap, detergent, oil, cream, shampoo, tooth paste, and other daily necessary items for the rural consumers and in the return journey, the energy verticals will transport the fruit and vegetables etc. from rural areas to the nearest towns and cities for distribution among the urban consumers.

But this needs a well co-ordinated “VMS” distribution strategy in which the manufacturer, distributor/relation and the customers jointly make a strong distribution chain. Annual “melas” and “fairs” organized are quite popular and provide a very good platform for distribution because profit visits them to make several purchases. According to the Indian Market Research (IMRB) Burean, around 8000 such nulas and fairs are held in the rural India every year.

Rural markets have the practice of faxing specific days in a week as weekly market days, i.e., “Haats” when exchange of goods and services are carried out. This is another potential low cost distribution channel available for the marketers.

Also, every region consisting of several villages is generally served by one satellite town, formed as “Mandia” or Agri-markets where people prefer to go and buy from their commodities. The marketers using their feeder fown will be able to cover a large section of rural population.

The other distribution strategies for the rural population are as under:

  • The general insurance companies may promote their policies of health insurance, crop insurance and vehicle insurance through the existing co-operatives.
  • Marketers may arrange more number of wave-houses for storage and re-packaging into smaller pouches for which employing local villages will work profitable and popular.
  • All communication in the rural areas must be in the regional language and dialects.
  • Markets need to develop innovative packaging technology which would be economic, protective and improve shelf-life of goods.
  • In addition to focusing on targeted promotions and advertising, there is an urgent need to work on economical packaging, dual pricing and special size of PMCQ and household products.
  • Marketers need to place emphasis on retailers directly rather than depending on the wholesalers for distribution in the rural market as this has not proved to be very effective marketing channel.
  • Marketers targeting the rural market should be well aware about the seasonality of the business. Because the trade is seasonal, employment and disposable income can fluctuate arrange the villages during the year. This means that business should view market research data that relies on yearly aggregate statistics with caution.
  • Marketers must trade off the distribution cost with incremental market penetration.

Syndicate Distribution:

Companies selling non-competitive goods can join together and distribute the products through a common distribution channel. Example- P&G has made use of the distribution channel of Marico for selling their product.

Satellite Distribution:

In this system, the company appoints stockists in important towns. These stockists are responsible for placing orders with the company, receiving the stocks, sorting of stocks and supply the goods in small lots to the retailers and merchants situated in rural areas and in and around the towns.

The stockist is given 15-30 days’ credit by the company. Over a period of time, along with increase in business, some of the good retailers will be elevated as stockists. Therefore, many retailers hover around a particular stockist. The advantage of this system is it enables the organisation to penetrate interior markets. Example- Companies like Nestle, Marico, Eveready batteries have appointed stockists to service the village merchants and the merchants are met at fortnightly/monthly intervals through van operations.

Essential things for effective distribution

  • Focus on the local market is essential for a better grip on the situation. Since localized distribution hubs are supposed to cater a limited geography, they can work in a better way.
  • All the stakeholders should be provided with adequate training. Yes, it is very much required because everyone has to be on the same page when you address the needs of rural consumers. Align your customers, vendors, and employees before you derive and implement effective marketing strategies.
  • Tweak the product promotion and marketing tactics to the local needs. Since there is incredible diversity in cultures, traditions, and languages in rural India, the model has to be flexible and adaptive.
  • Your company should make effective use of technology to reach the masses. Yes, there are ways to unleash the immense potential by thinking out-of-the-box ways of reaching people. Companies like Vritti iMedia have proved it. They made outstanding use of bus stands to promote products and services. Audiowala Bus Stand is a brilliant example of creative thinking and innovation.
  • Service delivery is equally important. Marketing strategy shouldn’t be limited to promotion and distribution only. Rather, it should be equally efficient when it comes to delivering services.
  • Always remember that an emotional touch works excellently in the rural areas. Once the trust is developed in the product, it is important that you live up to it.
error: Content is protected !!