Distribution in India:
Distribution in India is broadly fragmented but the only thing that is reassuring is that the distributors are operating their business with low operating costs. This is a major advantage of the Indian distribution system. A brand can reach the consumer by giving 4-6% margin by taking the distribution channel which is very less when compared with the distribution margin in developed countries. National FMCG brands are paying 4% margin to distributors and ~1.5% to 2% to C&F&SS, thus it is almost a funnel of ~ 6-8%.
Small-2 distributors manage 4-5 brands with their small infra catering to 300-500 retailers and investing 10-15 lakhs with an annual ROI of 18-24%. This is the acronym for most grocery distributors. For ease of understanding, I am categorizing Grocery (Kirana) which includes food and non-food products i.e. FMCG segment including staples.
Traditional distribution in India flow:
The distribution of fmcg in India is more or less organized but it still 98% of the funnel is channelized by the small distributors. As per the nature of Products & brands I have categorized distribution channels into three categories.
Classification of Distributors
1. Organised & Centralised
2. Organised & Decentralised
3. Un-organised & Decentralised
Organized & Centralised:
FMCG companies in India are working in a very organized manner and with their strong system, they are doing last mile delivery through the systematic distribution system. Many established brands have robust distribution systems in their operational areas and are doing last mile deliveries through proper inbuilt systems. They have dedicated Distributors who are completing the supply chain for the state or a large area. India still needs such an organized and centralized platform for distribution but few companies like Procter & Gamble (P&G) are working.
P&G employs a large distributor that directly caters to thousands of retailers without any sub-distribution, thus it is centralized. Developed markets like UAE, Singapore, UK and USA, and Europe have organized and centralized distribution systems. A single company is facilitating last-mile distribution for various brands, but in India, we don't have much context to demonstrate that a single brand has one centralized distributor who has access to thousands of retailers at the state level over a large area. Why centralized distribution could not pace up in the ecosystem, there is fear of monopoly. In such an arrangement, there is dependence on the single stake of the brand which sometimes becomes counterproductive if the distributor is not performing or there is some kind of rigidity, so most of the brands do not entertain centralization of the distribution system. This is a major constraint, so a single identity distributor could not gain popularity in the Indian retail sector, especially in Kirana.
Organized & Decentralised
In this range of distribution, brands appoint C&F or through company depots to appoint larger distributors, city-wise, considering the larger area. Sometimes in big cities like Delhi, Bangalore, Mumbai, and Jaipur they appoint more than one distributor, or in some cases one distributor caters to two or three cities, which varies depending on the business volume of the distributors. Hindustan Unilever (HUL) is following such a philosophy. An HUL distributor generally serves over 3000 retailers in a city which is a large number. In the case of HUL, the supply chains up to the C&F/Company depot is well organized but decentralized at the distributor level. It is a passive system but why not gain popularity in India? This question is valid. Again the strategy depends on the philosophy of the brand and how they want to reach the retailers. Decentralization of the distribution system has its advantages. If we take the example of Jaipur city. There are more than 10000 Kirana Stores in Jaipur District which are catered by 450+ Distributors carrying more than 350 Brand Companies (Local, Regional, and National Level Brands). So why other brands are not following this stream? Still, they don’t want to create a monopoly or do not want to depend on their supply chain on a few distributors.
Un-organized & Decentralised
Distributors tend to be unorganized, not because of systems or processes, but because of their working style and infrastructure. A distributor generally serves 4-5 brands. Each brand has its own system and procedures and everyone has to follow the same for their endeavor. There are many distributors who have more than 5 brands. They have to work on different technology stakes and follow the procedures as per the brand. The sales team of the brand interacts with him regularly and he has to entertain them. He arranges their visits to retailers, he is the one who distributes POP content and works on various IT stacks. All brands have their thesis so they have to go with it. Carries their inventory, sales, and outstanding i.e. credit in the market. 98 percent of distributors fall in this category.
Why decentralized? This is the potential for brands to centralize or decentralize distribution. The brand is of the view that centralized distribution will not work and they do not have the appetite to reach out to a large network or at times they do not want to depend on a single distributor. 90% of the brands in FMCG employ more than 3 distributors in a large city (ie the size of the city in terms of population 1mn).
Now the question comes that when the brands are getting organized, their C&F system is operated then how is the distributor disorganized?
Just take a picture, it will be more convincing and self-explanatory:
In the above chart, a distributor is holding four brands. So it has to deal with all the four brands in its area and serve 500 retailers or more or less. He has a small warehouse, two or three manpower inside the warehouse /accounts, one or two vehicles, and two/three salespersons. Everyone is managing the show together with a small infra. On daily basis, the ASMs and their SOs (Sales Officers) of the four brands visit their office and discuss with them the sales targets, market visits, promotions, etc., and MIS. His salesman goes to the market. Some are taking sales orders manually and others are on their Mob applications. All four brands have their own IT tools which the distributor has to use and accordingly provide the secondary sales data to the respective brands. This is how his daily routine works and he manages it slowly in a very unorganized way.
What he does in this form:
1. Buy goods from different - 2 C&F locations or Brand depots
2. Working on different brands IT stacks
3. Various stakeholders viz Brand ASM / SO communicate with
4. Carrying Inventory of All Brands - Average 15 days
5. Manage All Logistics
6. Lend money to retailers as per the nature of the products, the average credit period is 21 days.
Is there any better solution we can provide to distributors or how we can make them organize?
In a developed world like Dubai, I have seen many large distributors doing direct-to-retail (DTR) carrying over 200 brands and 5000 SKUs, even more than 10000 Skus. If people are managing such a big show under one roof, then what is stopping us from doing the same thing in India? When a manufacturer introduces its brand in the market it has to first establish the distribution channel which is a time-consuming process. Once the distribution channel is in place, it struggles to place its product at the retailers again which is time taking process. Taking mind share of consumers, they have to go for various ATL/BTL activities which is again a time-consuming process. In doing so all their efforts go into establishing their brand in the focus market and it takes years to establish a name as a brand.
According to my market survey and analysis, I can see future prospects. The way new entrepreneurs are coming up with new ideas and going through the startup route, things will change dramatically after 2014. Many startups are trying to build horizontal distribution through technology-driven markets. They will have the principle of eliminating the middleman from the market and will do directly to retail. They will call it disruption but in my view, it will destroy the old values, and systems and wipe out maximum distributors from the ecosystem. Also, another concept will be Direct to Consumer (D2C) where brands will directly reach the consumer through e-commerce platforms. Again such a concept would hinder both the distributor and the retailer. But whatever the concept, if they are going to change the existing system they will only burn money. Grocery is not a technology business for retail. It is the physical movement of goods where physical activities are involved, so in my view technology will only empower or enable speed and enhance efficiencies and it will bring operational excellence in the system to the maximum extent possible.
I strongly believe in empowering the existing ecosystem. In one of my visions, I discussed with Mr. Sachin Bansal of Flipkart that they need technology to accelerate the market where they can hire existing distributors to do their last mile deliveries or they can go through retailers up to can reach. I started my project with the name of "Pragati” but somehow it was before time so I could not find investors. It was a blend of C&F and distributors and named it “syndication of distribution” a kind of aggregation that will give “speed to market” and will give a large portfolio of retailers. Just take an example to clarify the same.
Shree BSR is a manufacturer of wheat products and manufactures Wheat flour, whole wheat flour, semolina, toast, and flour cookies in its manufacturing unit. He offers all the products under the brand name "Bhardari". Earlier he was selling his produce in bulk packing to the mandis or wholesalers. With the emergence of technology and change in consumer behavior, the philosophy of wholesale has been changed to consumer packing and manufacturers have started offering smaller consumer packs as per the requirement of the consumers. It does so and offers its products in consumer packing. They planned the distribution and accordingly appointed three C&F and two company depot, 150 distributors in 3 States. Recruited Area Sales Manager, Sales Officers, and many other officers and started burning money in marketing, his OPEX increased accordingly but again this whole process takes years to reach the last mile. BSR started this process in 1998 and till writing this post he was struggling in his operational territories and regularly encountered new competitions. But, do you think we have so much time to wait in this technology age and fast-paced and changing landscape? No, if years ago it took 20 years for a product to come out & become a brand, but now it should take a maximum of five years to reach that level. The time is now for valuation; the value will create automatically. Increase footprint with speed, scale, and top line.
Now the question comes to mind that in this fast pace era how will we remove this gap of 15 years with our efforts and we think to establish a product in five years? Yes, it is possible but only with some innovative ideas and the right use of technology. The syndication of distribution as aggregation is going to do that.
How will this work? First, build a strong brand (Your company name) in the pilot city, build a strong IT stack, and start incorporating new brands or emerging brands. Recruit distributors and hire retailers under them. Take the example of Bangalore. Bangalore has more than 25000 retail stores in grocery. You can target to onboard 18000 retailers on your application, and assign 500/700 retailers under one distributor. This way you will have 35-40 distributors. Now you can add new brands with you and give 8-10 brands to each distributor. Brands will consider you as an organized C&F, they will stock their products in your distribution channel. You being an aggregator list all the products on your mobile application like Alibaba, Amazon in US and many others are doing in US and China.
You have retailers and distributors under your control, so just imagine how much power you would have. You can live with any brand in the Bangalore Kirana market maximum of two months. This will be the power of aggregation and technology. You will get many backend margins from your brand. Also once you have established all the brands in the funnel you can start working on their centralized marketing activities i.e. creating demand from consumers.
The aggregation of services is the future of Indian retail, especially grocery retail. Whether it is moving to B2B or B2C. Different terminology will be used in this section.
This kind of innovation will only lead to a boom in the market. Please share your thoughts with me and meet up for more brainstorming about the new developments ahead in the retail ecosystem.
I am available on +91-9968313005 (WhatsApp) email firstname.lastname@example.org
Written on 8.7.2012.