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?
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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 ranabhardari@gmail.com
Written on 8.7.2012.
