Srijan_FMCG the Weak Links in the Marketing of SJMSOM IIT Bombay_Novitas

8/8/2019 Srijan_FMCG the Weak Links in the Marketing of SJMSOM IIT Bombay_Novitas

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Submitted BySanjoe Tom JoseAditi GulatiSJMSOM, IIT

Bombay

FMCG: The Weak Links in the

Team Novitas



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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Srijan_FMCG the Weak Links in the Marketing of SJMSOM IIT Bombay_Novitas

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