Monday, March 9, 2009

LongTail and The Indian FMCGs


The theory of the Long Tail is that our culture and economy is increasingly shifting away from a focus on a relatively small number of "hits" (mainstream products and markets) at the head of the demand curve and toward 
a huge number of niches in the tail. As the costs of production and distribution fall, especially online, there is now less need to lump products and consumers into one-size-fits-all containers. In an era without the constraints of physical shelf space and other bottlenecks of distribution, narrowly-target goods and services can be as economically attractive as mainstream fare. 
    One example of this is the theory's predictions that demand for products *not* available in traditional bricks and mortar stores are potentially as big as for those that are. But the same is true for video not available on broadcast TV on any given day, and songs not played on radio. In other words, the potential aggregate size of the many small markets in goods that don't individually sell well enough for traditional retail and broadcast distributio
n may rival that of the existing large market in goods that do cross that economic bar. 
Traditional retail economics dictate that stores only stock the likely hits,because shelf space is expensive. But online retailers (from Amazon to iTunes) can stock virtually everything, and the numbers of available niche 
products outnumber the hits by several orders of magnitude. Those millions of niches are the Long Tail, which had been largely neglected until recently in favor of the Short Head of hits. 
       When consumers are offered infinite choice, the true shape of demand is revealed. And it turns out to be less hit-centric than we thought. People gravitate towards niches because they satisfy narrow interests better, and in one aspect of our life or another we all have some narrow interest (whether we think of it that way or not). 
    Our research project has attempted to quantify the Long Tail in three ways, comparing data from online and offline retailers in music, movies, and books. 
   1. What's the size of the Long Tail (defined as inventory typically not available offline?    2. How does the availability of so many niche products change the shape of demand? Does it shift it away from hits? 
   3. What tools and techniques drive that shift, and which are most 
   effective? 
   
The Long Tail article (and the subsequent book) is about the big-picture consequence of this: how our economy and culture is shifting from mass markets to million of niches. It chronicles the effect of the technologies that have made it easier for consumers to find and buy niche products, thanks to the "infinite shelf-space effect"--the new distribution mechanisms, from digital downloading to peer-to-peer markets, which break through the bottlenecks of broadcast and traditional bricks and mortar retail.    
In a recent report jointly published by Mckinsey and HUL. The report talked about "FMCG sector in recession and its future"...One of the most important findings was the fact that the rural India is growing at the much faster rate compared to urban India. The growth of rural India provided FMCG sector with the cushion which made them grow at 15-20% YoY basis even in these recessionary times. Today with I-banks struggling to survive, IT sector relying on ruthless cost cutting as its only way to survive, FMCG sector is showing promising growth...

With the understanding of longtail in mind, we'll find that in modern times we just cannot ignore the demand of rural India. Though they belong to the bottom most strata of the pyramid, yet they have immense potential if aggregated properly. A modern day business needs to have such cushions for survival even in the bad times.




By: Shakti Pandey & Prashant Gupta
( Symbiosis Institute of International Business )

1 comment:

Fast Moving Consumer Goods said...

Very nice article. You have explained long tail theory very well. The indian FMCG i.e Fast Moving Consumer Goods sector is the fourth largest in the economy. It’s the quality, promotion and innovation of products which can drive many sectors.