Box 4.3 Serving the poor profitably: A private-sector approach to poverty
BOX 4.3 SERVING THE POOR PROFITABLY: A PRIVATE-SECTOR APPROACH TO POVERTY
The 4 billion people who live in relative poverty are a potentially huge market. In the aggregate, their purchasing power is substantial, even if their individual means are limited. Increasingly, innovative companies are finding ways to serve these customers—meeting their basic needs and empowering them through access to information, access to credit, expanded consumer choice, and other benefits. These are not philanthropic endeavors; they are market-driven and intended to be profitable. Indeed, to be sustainable and scalable, they must be profitable. The hallmark of these private-sector approaches to poverty is close attention to the real needs and social and environmental circumstances of the intended customers. In many cases, new products or services are cocreated with the communities for which they are intended.
An example of these poor-focused business models is the e-Choupal system deployed in rural farming areas in several Indian states by ITC, one of India's leading private companies with interests in agribusiness, packaged foods, and a range of other products. The e-Choupal system was designed to address inefficiencies in grain purchasing in the government-mandated marketplaces known as mandis . In the mandi system, traders who act as purchasing agents for buyers control market information and are well-positioned to exploit both farmers and buyers through practices that sustain system-wide inefficiencies. Farmers have only an approximate idea of price trends and have to accept the price offered them at auctions on the day they bring their grain to market (Annamalai and Rao 2003:1, 8-9).
The approach of ITC has been to place computers with Internet access in farming villages, carefully selecting a respected local farmer as its host. Each e-Choupal(choupal means gathering place in Hindi) is located so that it can serve 6-10 villages, or about 600 farmers. An e-Choupal costs between US$3,000 and $6,000 to set up, and about US$100 per year to maintain. Using the system costs farmers nothing, but the host farmer, called a sanchalak ,incurs some operating costs and is obligated by a public oath to serve the entire community. The sanchalak benefits from increased prestige and a commission paid for all e-Choupal transactions (Annamalai and Rao 2003:1, 11).
Farmers can use the computer to access daily closing prices on local mandis , as well as to track global price trends or find information about new farming techniques. They also use the e-Choupal to order seeds, fertilizer, and consumer goods from ITC or its partners, at prices lower than those available from village traders. At harvest time, ITC offers to buy crops directly from any farmer at the previous day's market closing price; if the farmer accepts, he transports his crop to an ITC processing center, where the crop is weighed electronically and assessed for quality. The farmer is then paid for the crop and given a transport fee. In this way, the e-Choupal system bypasses the government-mandated trading mandis (Annamalai and Rao 2003:1, 13-14).
Compared to the mandi system, farmers benefit from more accurate weighing, faster processing time, prompt payment, and access to a wide range of price and market information. Farmers selling directly to ITC through an e-Choupal typically receive a price about US$6 per ton higher for their crops, as well as lower prices for inputs and other goods, and a sense of empowerment. At the same time, ITC benefits from net procurement costs that are about 2.5 percent lower (it saves the commission fee and part of the transport costs it would otherwise pay to traders who serve as its buying agents at the mandi) and it has more direct control over the quality of what it buys.
The e-Choupal system also provides direct access to the farmer and to information about conditions on the ground, allowing the company to improve its planning and build relationships with farmers that increase its security of supply. The company reports that it recovers its equipment costs from an e-Choupal in the first year of operation and that the venture as a whole is profitable. As of late 2004, e-Choupal services reached more than 3.5 million farmers in over 30,000 villages, and the system is expanding rapidly (e-Choupal 2005).
What began as an effort to re-engineer the procurement process for cropping systems has also created a highly profitable distribution and product-design channel for the company—an e-commerce platform that is also a low-cost fulfillment system focused on the needs of rural India. Advocates for the e- Choupal system say that it has acted as a catalyst for rural transformation, helping to alleviate isolation, create more transparency for farmers, and improve their productivity and incomes. The increased system efficiencies and potential for improving crop quality also contribute to making Indian agriculture more competitive.
Although many farmers are happy with the e-Choupal system, not everyone has benefited from it. Since its success draws business away from the traditional mandis ,many of the workers at the mandi exchanges have been severely affected. Laborers who used to weigh and bag the produce at the mandis have suffered from the drop in volume. Vendors at the informal bazaars that grew up around the mandis have also lost business as traffic has been diverted to the new ITC processing facilities. In the long run, these workers may be reemployed at the ITC exchanges, but in the short term many traditional mandi players have lost income (Annamalai and Rao 2003:25-26).
In spite of these transition costs, the e-Choupal experience and others like it are building confidence that private-sector actions can contribute substantially both to poverty alleviation and to sustainable commercialization of ecosystem services.
References
Annamalai, K., and S. Rao. 2003. What Works: ITC’s e-Choupal and Profitable Rural Transformation.Washington, DC: World Resources Institute (WRI). Online at http://www.digitaldividend.org/pdf/echoupal_case.pdf.
e-Choupal. 2005. e-Choupal Website. ITC Ltd. Online at http://www.echoupal.com/.
