FMCG Distribution Network
Posted July 16, 2011on:
The typical chain for a grocer store FMCG product will be:
Manufacturing plant -> Company Ware House -> Regional Ware House -> Regional Stockist or Depot -> Super Stockist or Depot -> Stockist/Depot -> Distributor -> Retailer
Main Godown -> C&F Agents/Super Stockists -> Distributors as per the territories -> Wholesalers/Retailers
So, the retailers either buy from the distributor or they buy from the local wholesaler. Each has its own advantages and disadvantages. Distributor provides you with better servicing, replacement of spoilt products, credit facility of 2 weeks, etc. On the other hand, the wholesaler will give you more margins, but no credit facilities, and you don’t have compulsion of storing a set of SKUs, etc.
The inventory is under the ownership of the company only until it reaches the distributors by the C&F agents. The stockists are responsible to distribute to the retailers. Each stockist may serve around 500-1000 retailers in a proximity. Also, all the stockists are not the same in their storage. Every stockist may have his own set of categories which he can store the best, like a stockist can store rice, sugar, tea powder, biscuits, and snacks. Some may be specialists in handling premium products, and some in frozen foods. The company generally categorizes the stockists based on their specialty and allocates different super-stockists. For example, HUL categorizes them as U1 and U2 stockists, where U1 is general products and U2 stockists handle only premium products. The distribution network for premium products is different from that of discount and popular as they require much deeper distribution penetration unlike the premium products. Company categorizes based on their storage capacities where company has some standards that every stockist and distributor should have 2 months and 3 weeks of stock.
The stockists appoint salesman who take the orders from the retailers, and the delivery is made on a van. Each stockist may have 6-10 vans, and 10-12 people for the delivery process. The link between the manufacturer and the stockist is maintained by the manufacturer’s employees Area Sales Manager, Territory Sales Manager, Activation Manager, and the Re-Stockist Salesman (RSSM) manages all the distribution, purchases, labor management, and supervises the delivery process.Every month the sales targets are set by the company to all its salesforce – TSM, ASM, Sales InCharge, etc. and they handle all the relations with the distributor and sometimes push the stock onto the distributor to meet their sales targets. Companies try to motivate the channel partners with workshops about business & marketing, good warehouse practices, and a lot of other incentives. They follow a strict rating mechanism with all its channel partners and evaluate them continuously on a set of parameters.
Internally, all the sales is reported at the ASM level and then it is aggregated in a bottom-up approach. Typically, a distributor receives a margin of about 6-8% and the retailer receives a margin in the range of 9-15%. There are also many trade schemes that run throughout the year. But, these numbers change from channel to channel as per the terms of negotiation. A kirana (general/grocer) store might sell about Rs.5000 to Rs.60,000 or more per day depending on various parameters such as the location, size of the store, SKUs stocked, number of salesman etc. Typically, the FMCG manufacturer has a gross margin of about 40-50%.
Sales Representatives <– Territory Sales Exec <– Area Sales Exec <– Territory Sales Manager <– Area Sales Manager
Among distributors, we have two kinds of distributors. Some of the distributors deal in products of your company exclusively, whereas some distributors specialize in categories e.g. cooking oil. These distributors don’t have the time and resources to focus on your own brand among many brands (especially if it is a new brand). So, the company appoints its own sales representatives who visit various routes and beats every day; they do 1 beat in one day and 6 beats on 6 days. Each route should have 40 stores atleast. These sales reps visit the stores and take the orders from them and then they report those orders to the corresponding distributor. This way we create and aggregate all the demand for a brand and help the distributor cater to that area effectively. Both the sales representatives and territory sales execs do the same job. TSEs are more experienced (~2 years) in doing this job. Sales Representatives visit one beat once a week. For example, they will visit Ameerpet area in Hyderabad on Wednesday every week and take the demand. This way each area is serviced regularly. Then, we have the ASE who is responsible for certain districts say Mehboobnagar and some other district. The TSM is responsible ASE sales at a higher level and they also manage the counter sales and the trader sales to big bazaars such as Begum Bazaar. ASM co-ordinates everything at a state level and the ASM along with TSM co-ordinates directly with all the traders and manages sales to the traders too.
Once the distributor receives the stock, it is up to him on how he manages the business. For example, the distributor bought some stock of oil at Rs.50 and now it is up to him about what he will do with that stock. He may sell it at any price that he deems right for his business. Let’s say the brand is not moving much, then he may sell it at lower price to get rid of the stock. Similarly, he may sell it to one retailer at 55 rupees and to another retailer at 53 rupees. It all depends what he deems profitable or appropriate for his business situation.
The sales from the company to the distributor are called primary sales and the sales from the distributor to the retailer are called secondary sales. Similarly, the schemes provided by the company to the distributor are called primary schemes and the schemes provided by distributor to the retailer are called secondary schemes. It is not very common for distributors to make their own schemes to the retailers. They generally pass on the schemes from the company to the retailer. For example, say a retailer scheme would be: if you buy two cartons of cooking oil, then you will get a one gm silver coin.
Distribution and credit
Distribution has a huge relation with credit period. Distributors get stock from the company on credit terms, some provide a credit period for 21 days and some 30 days etc. Similarly, distributors offer credit period to retailers. This is very tricky because if the distributor gives the stock on credit for some fraudsters, then he will run out of business by next week. For example, say a distributor met a retailer who is ready to take 50,000 rupees stock. The distributor might be very happy. But, after two weeks when he comes he finds that the shop is not there. The shop owner might have sold that stock in trading market for 20,000 rupees cash. Or when the distributor goes for collections, he would say I don’t have any money to give you. So, the distributor is in a problem. It is almost like lending. You have to be very careful whom you are lending to. The same thing happens from the company to the distributor level too. If you have an association with a bad distributor, then he may take your stock but not give you money on time. Both the company (to the distributor) and the distributor (to the retailer) are very careful about whom they are dealing with and their credit history. This is why distribution is linked with credit and is very risky if not done carefully.
Distribution push and Consumer pull (demand)
Some brands which are very powerful do operate on cash basis. You may think why would distributors encourage cash. Because they don’t have an option. If there is a lot of consumer pull for a brand, then even if the brand gives thin margins (they gain on volumes) the retailers want to stock the brand and thereby the distributors are forced to stock the brand. In such cases, the profit is gained from the volumes. This is why consumer pull is very important for a brand. If consumers ask for a brand, then retailers get worried and they immediately start stocking the brand. This is where advertising and other brand building activities help in creating the consumer pull for the brand and make it less dependent on distributor and retailer push.
Though each company has its own distribution strategy and flow, most of the companies follow the above distribution framework.