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Submitted BySanjoe Tom JoseAditi GulatiSJMSOM, IIT
Bombay
FMCG: The Weak Links in the
Team Novitas
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Executive Summary
Distribution an integral part of FMCG business. Increasing focus on TIER II & rural
customers make it all the more important. Indian companies like Marico, Dabur and
Nirma who are niche players are falling behind MNCs like HUL & P&G in the strength
of their distribution system. Now to move ahead with their expansion plans they need to
generate an additional distribution advantage. The major challenges they are facing today
are inefficient logistics management, pressure on operating margin, negotiation, difficult
credit cycles, developing competitive sales force, turnover ratio and matching the
marketing budgets of MNCs. The modern day approaches like using data mining to gain
competitive advantage, collaboration with third parties for logistics, distribution system
sharing models, SCM & CRM modules, credit management plans, e-commerce, and
dynamic allocation of source factories etc. can help them to innovate the way they
address their problems achieve excellence.
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Introduction
FMCG industry in any country maintains the longest supply chain across industries. And
when the country is as big and diverse as India the complexity of distribution system
becomes beyond imagination of laymen. There exist as many as 6 levels of intermediaries
in the distribution system before a typical personal care product reaches consumer. And
as the market expands day by day from Tier I cities to Tier II, Tier III & rural India the
challenge before FMCG companies to scale up their supply chain to meet the ever
increasing demand from affluent middle class and rural India increase exponentially.
The Bunty Syndrome & the Dhoni Effect 1
The increased consumption growth in untapped urban towns and rural markets ensure
that the share of relevant consumers being added in these markets is much higher than the
traditional FMCG focus areas. These small towns & villages are attractive in terms of
their purchasing power, time they spent watching television or reading newspaper, and
product consumption pattern. Logistics has traditionally been the big challenge for
marketing beyond metros, especially in Tier III and Tier IV towns and rural India. Recentinvestments and developments in infrastructure and connectivity have brought marketers
into closer contact with key urban towns, the rest of urban India and rural areas. The
movement of organized retail into smaller towns has made things easier and more cost-
effective for marketers. Media reach has increased significantly. Rising disposable
incomes, easier access to credit and improved retail infrastructure all means that no
FMCG company in India can afford to ignore them.
1 An Increasingly Affluent Middle India Is Harder to Ignore: India Knowledge@Wharton
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The Niche Players
When it comes to marketing their products and making it available in the market in the
right quantities and in the right time big multinationals like HUL, ITC & P&G always
gain over Indian niche players like Nirma, Dabur & CavinKare. This is simply because
these niche players don’t really have a wide network of sales agents and other force
which is required to take up multiple challenges like distributor negotiation, channel
partner motivation and inventory management. This aspect is rather taken over by
distributors, wholesalers and retailer whose margins on these products actually double the
end customer price.
The advantage of multinationals didn’t come into existence from nothing. These were
judiciously crafted through strategic initiatives like Project Shakthi, e-Choupal and
millions of rupees spent on marketing. Their deep pockets, aggressiveness and belief in
volumes naturally lead to these. Although the niche players are successful in their own
terms the call for expansion from astronomically growing demand is something they
cannot afford to ignore. Many of them have come up with international expansion plans
but the call near home is always more rewarding and at times more challenging. Through
this paper we will try to analyse the challenges they are facing in terms of distribution
system and recommend measures they can undertake to overcome them.
The Challenge2
In FMCG industry traditionally the goods move from factories to warehouses and then
from warehouses to distributors. Distributors in turn sell the same to wholesalers or
stockiest who will finally sell it to the retailers in the market. The closer distribution gets
to the village, the more basic it's still likely to be: When goods reach the countryside they
are often transferred to people on bicycles, motorcycles, or bullock carts. Traditional
2 ANALYSIS & EVALUATION OF DISTRIBUTION CHANNELS IN VARIOUS SECTORS, Bee Management Consultancy
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retailers are still the dominant sales channel in many categories. E-commerce and direct
mail are still largely a phenomenon of the big cities.
The demand for FMCG goods is highly volatile and depends on various factors. Ensuring
availability of right amount of your products at the right time in the market is daunting
task for any company. Largely supply of FMCG goods takes place on a daily basis in
fixed quotas or as per demand from retailers. Requirements are anticipated on basis of
real-time demand and past performance of that particular region at a specific period of
year. Since it’s a volume game, manufacturers make all possible efforts to boost sales and
promote their distributors to earn more and more orders from the retailers and
wholesalers. A close check needs to be maintained on the flow of the products on a daily,
weekly, fortnightly and monthly basis to determine the trend in the business and flow of
products and consumption. This activity also helps to find out drawbacks of the
distribution system, if any, and rectify them within time.
Typically when you are a niche player you will not be having the infrastructure setup
similar to multi-segmented MNC. You could be lacking in terms of sales force, support
staff, marketing budget and market monitoring mechanism. In FMCG business sales
people are needed to identify the best distributors and work closely with them to make
sure that products are displayed properly and pricing practices are followed. Controlling
product placement and pricing will also involve working with local retailers – which
probably won't be easy. Retailers are very powerful and they are pretty tough to deal
with. If they feel you are heavily dependent on them they charge back a lot of things to
you.
In many cases retailers simply rent store space to a vendor and let the manufacturer
supply its own sales people. This practice began as a way for local manufacturers of new
products to break into stores, but the stores have extended the model to national level
players. This can be challenging to niche players, who frequently have strict headcount
limits. Although the new sales people are often contract workers employed through an
external agency companies face a huge managerial challenge as they try to expand from
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an organization that may have been only three small offices in the largest cities to a
multi-tiered structure with thousands of employees. Finding and training capable people
is not always easy given that turnover in these fast-growing markets is also likely to be
high.
Another aspect of being a niche player is that, when you don’t have infrastructure
capabilities like a typical MNC judging media effectiveness beyond metros becomes
difficult. Also as small towns have traditionally been price-sensitive and volume-driven,
niche players have relied on price promotions over advertising spending. But with rise in
affluence level of these markets a realignment of media spends toward small-town India
is the need of the day for niche players.
The Way Forward
Increasing competition and the low penetration of IT also implies that the scope for
change is immense and imminent. A good sales force can do a much better job
introducing new features in a product and cross-selling. Such a force can also act as an
important source of market data, since sales people can be used to collect consumer and
competitor information right in the store.
An anticipated growth of third-party logistics providers will likely add more efficiency.
Logistics management software offered by leading software developers which is growing
more widely available can bring better visibility on customer off-takes (though an
absence of cash registers and the accompanying regulatory discipline to avoid tax evasion
stand in the way of automated data updation). Companies have started to reduce the
number of wholesalers (and at times, distributors) so as to increase the reach andconsequently the returns to each wholesaler. This also induces them to invest in new
productivity enhancing technology and effective managerial practices. Introduction of
more efficient transport technology and mobile communication has the potential of
changing the logistics practices in the industry.
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Introducing CRM systems with features like customized cards for distributors and trade
networks, sales territory management with various analytical tools for sales analysis with
regard to specific territory, distributor, product type and a number of FMCG-producing
company-specific reports help to create a partner network (distributors and trade
network) and to control retail outlet sales. Both of these tasks are extremely important
and closely connected with each other as having efficiently operating product sales
channels the company can give its customers access to its products in a large number of
trade outlets and high product demand will strengthen wholesale and retail sellers’
interest in the promoted products. Some FMCG companies have started focusing on
automating distribution at wholesale distributors end also. Sharing of supply chain
systems among themselves, development of integrated logistics hubs and free trade and
warehousing zones are measures which can help these companies to compete with the
MNCs.
Growth of modern trade is gradually increasing day by day with the entry of MNC
retailers in these emerging markets, which will put pressure on the margins of FMCG
companies. But on the other hand, they provide great opportunity for driving business
growths. Due to the tightening liquidity squeeze, many companies are trying to de-risk
their credit exposure to modern trade retailers by implementing measures like shorter and
more frequent delivery cycles, delivery against cash payments and shorter duration credit
policies.
While doing all these, companies have to realize one thing. Their objective should not be
to try to beat your competitor. The objective should be profitability. In view of all the
damage that occurs by focusing on market share, companies would be better off not
measuring it. Indian Telecom sector is the biggest example.
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