Innovative Distribution Channels Of Fmcg In India

1.   Innovative Channels are being experimented with by F.M.C.G.   Majors? Please discuss their role in future?

In recent years the various innovative channels that are being experimented by FMCG majors in India are: Partnering with Self Help Groups in Rural India.� Internet based Rural Kiosks/Hubs� Direct Selling�We will discuss in detail each of these channels in terms of their current reach and its future growth potential and the role they play in the future of the FMCG distribution.Partnering with Self Help Groups in Rural IndiaAs Hindustan Unilever Limited (HUL) sought to reach rural markets, they faced two hurdles. The first was size: rural markets were scattered over large areas, and per capita consumption rates were low. Thus, while the aggregate rural potential was massive, the potential of each of the 638,000 scattered markets was very low. The second was reach: rural markets were not connected to urban centers and road connectivity

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was poor. Even when feasible, accessing remote markets meant additional costs.

HUL found an innovative solution. Hindustan Lever partnered with micro-credit recipients by offering them opportunities for micro-enterprise. Thus Project Shakti was born. A member of a Self Help Group (SHG) in each of the chosen villages was appointed a Shakti entrepreneur. As Shakti brand endorsers known as Shakti Ammas they borrowed money from their � �respective SHGs and with that capital purchased HUL products to sell in their villages. The Shakti brand endorsers are underprivileged rural women trained to manage businesses, to communicate the benefits of the brands and to effectively engage with consumers. Partnerships with NGOs and support from state governments facilitate these efforts of training.

Now there is a network of 35,000 entrepreneurs reaching 100 million rural consumers in 100,000 villages. This effort makes a lot of business sense: it means a significant increase in penetration and market shares for HUL...

Management Science II Dr. S.Bharadwaj

Indian Institute of Technology Madras

MODULE 1Distribution And Channel ManagementAgenda• Background• Marketing Channels• Functions of Marketing Channels• Types of Channels• Factors affecting Channel Decisions• Channel Conflict• Summary

Background• Distribution is a key external resource• Logistics, Distribution and Channels Management are the less visibleside of marketing• the less “sexier” side when compared to something like advertising• Nevertheless, it is as important, if not more• India has millions of outlets• Poor roads• Distributing in Rural India is very, very hard• Still, has to be done• HLL is excellent at this• The Post Office is good too• SBI is very strong here• Not so the PDS• Plus the increase in malls and large stores is a very big change inthe making• It is also very difficult• imagine you are Nike1Management Science II Dr. S.BharadwajIndian Institute of Technology Madras• you produce your shoes in Indonesia/China• you have to make your product available in Russia, India,Latin America, Europe, USA - in short, the whole world• It is thus mindblowingly complex• More so in India, why?

Marketing Channels• The Network of partners in the value chain that cooperate to bringproducts from producers to ultimate consumers• Imagine Nike again• All those who help in bringing shoes to the consumer from thefactories (or is it sweatshops ?) in Indonesia are the channelmembers (except transporters)• These include wholesalers, retailers, agents, brokers etc• They are called intermediaries, middlemen, dealers, resellers ordistributors• However, the prevailing view is that channel members are more

than just middlemen• They are comrade-in-arms• They are marketer’s first customers and partners; they add value tothe marketer’s offer• What are some functions that channel members perform?2Management Science II Dr. S.BharadwajIndian Institute of Technology Madras

Functions of Channel MembersMaking Products Available• This is the most obvious and first function• Retailers are critical here• As also wholesalers in rural marketsInformation• Retailers are a great source of information• Why is this so?• What makes the retailer good here?• The retailer is closest to the consumer• Hence knows more than you, the marketer• Which models are liked? Which models are moving fast, slowand so on?• Also very useful for certain institutional purchases like hotels fortilesPromotion• Channel members also indulge in sales promotion and advertising• Deals, flyers, cooperative advertising Transfer of Title• If ITC sells 100 packets of Aashirwad aata to Nilgiris, the title is nowtransferred• Ownership is transferred

Physical possession• Thus “your” goods are now possessed by Nilgiris• Imagine what would happen if retailers did not take physicalpossession?

Financing• Now that Nilgiris owns it, they need to finance the inventory• Inventory always has carrying costs3Management Science II Dr. S.BharadwajIndian Institute of Technology Madras

Risk Taking• Now the onus is on Nilgiris to sell• What if they are unable to sell?• They are stuck with the product• Hence perishables always carry a large margin e.g. vegetables• What are some other risks?• What if a kid breaks some bottles of jam in the store and nobodynotices?• What if there is a sudden cyclone and no one shops?• What about loss due to pilferage and theft?• This is a very big problem internationally since people get a kick outof this

• Hence, Walmart says “RFID or else, bye”• Hence, several risks are assumed and you need to be thankfulNegotiation• When does the retailer help here?• In case of institutional purchases again• Think of the hotel-tile example• Repeated follow-up and negotiation is done here by the retailer

Value-Added Services• Like servicing cars, bikes• Like home delivery• Important in a country like India• Thus, several functions are performed by the channel member• Hence, more than merely a “dealer”• Hence, relationship marketing is very important4Management Science II Dr. S.BharadwajIndian Institute of Technology Madras• Maintaining a good relationship is therefore highly important• Especially for the value-added services

Types Of Channel MembersAgents/Brokers• Channel partners that match marketers with wholesalers or inorganization markets, with customers• They are very important for international marketing, for exports• Think of the success of Ebay, Placement Consultants, Onlinedating/Matrimonial sites• In a way, all are brokersWholesalers• A wholesaler is someone who primarily sells to other retailers• Also may retail on own• Typically, buys in bulk• Very important in rural India• Companies think of him a necessary evilRetailer• The most visible face of the distribution system• India has the largest number of retailers in the world• Hence, the reluctance of the Govt in allowing FDI here – fear ofunemployment

Value-added reseller• channel partners that buy products from marketers, add valueby modifying or enhancing value, then reselling them• Example would be?5Management Science II Dr. S.BharadwajIndian Institute of Technology Madras

Types of Channel Members• Vehicle dealer adds several accessories• Used car dealers make the car new once more

Four Channels Through which marketers can reachcustomersManufacturer Manufacturer Manufacturer ManufacturerAgentWholesaler WholesalerRetailer Retailer RetailerCustomer Customer Customer Customer

Some Other Forms• For Example, Multilevel Marketing - this is followed by companieslike Amway, Tupperware• Here, Amway sells to independent distributors, who sell to stillothers and so on• There is a sort of a “chain effect”• Marketers are free to use more than one channel, they can usemultiple forms of channels• This is called Dual Distribution or Hybrid Distribution• this involves the use of more than type of channel to sell todifferent customer segments• the furniture industry6Management Science II Dr. S.BharadwajIndian Institute of Technology Madras• think of Michelin selling tires to Ford and to you - differentchannels• Sometimes, even to the same types of customers, differentchannels are used• for example, Coke is available in stores, movie theaters, videorentals and through vending machines• Then there are Strategic Channel Alliances• The use of another marketer’s channel arrangement to reach endcustomers• In the International market, this is common• Spic Fine Chemicals used Union Carbide’s

Types of Distribution• Exclusive Distribution• a channel design through which products are marketedthrough a few carefully selected partners• luxury products, premium brands• Armani suits, Louis Vutton,• the idea is create exclusivity• if it is available everywhere, what is so exclusive about yourproduct?• Factors Affecting Channel Decisions• What are some factors affecting channel decisions like• What type of channels do we have ? Online or offline?• A retailer only ? A wholesaler, then retailer and so on ? Channellength?• What affects these decisions ? What are the criteria influencing

these decisions?7Management Science II Dr. S.BharadwajIndian Institute of Technology Madras

Type of Product• industrial products will have a different type of distribution from aconsumer product• a consumer durable will have a different type of distribution from anFMCG product• product positioning too will affect type of channel• premium products will have a shorter channel

Type of Customer• the same product when sold to an end or organizational customerwill have different channels• for instance, computers will be sold direct to organizations butthrough resellers to end customers

Market Environment• While in Rome, do what the Romans do• do what is the industry norm• if books are sold through exclusive book stores, do the same• however, this also gives an opportunity to differentiate yourself• Amazon.com going online• Level of risk involved in high, hindsight is always 20/20

Internal Considerations• do I have enough money to add another channel member ?• is it compatible with my other businesses ?• will any change cause more problems than solutions ?• for example, IBM, Compaq threatened by Dell8Management Science II Dr. S.BharadwajIndian Institute of Technology Madras• Is it compatible with my business model e.g. Dell in Chinathese internal considerations have a bearing on type of channel

Legal Considerations• a manufacturer cannot insist that they sell their own products only(unless in case of a franchisee)• a manufacturer cannot tie the sale of certain goods to certain others• “you buy 100 crates of Vanilla Coke, if you want 500 crates ofCoke”• I am sure, though, that this is happening• Cost and Profit Considerations• a low profit margin, high volume company will have many channelmembers• a high profit margin, low volume member will have only a fewmembers

Channel Conflict• This is defined as tension/clashes between channel members as aresult of perceived unfairness

• vertical conflict arises when there is a clash of interests betweenmembers at 2 different levels (like wholesaler and retailer)• horizontal conflict is between members at the same level - RetailerA Vs. Retailer B• conflict can be caused by unfair manufacturer policies, a few“rotten” apples, partisanship etc• conflict can be potentially dangerous and can snowball• McDonald’s franchisees for instance; if care is not taken, thegrumbles might become a roar• however, a little conflict is good• manufacturers must be fair9Management Science II Dr. S.BharadwajIndian Institute of Technology Madras

Summary• Distribution is highly important• Especially in consumer products• More so in countries such as ours• Managing channels is part of a salesperson’s job• Conflict must never be allowed to get out of hand10Management Science II Dr. S.BharadwajIndian Institute of Technology MadrasFilename: Distribution and Channel ManagementDirectory: C:\Documents and Settings\User 1\Desktop\managementscienceII\Mang_Sci2\MO 1Template: C:\Documents and Settings\User 1\ApplicationData\Microsoft\Templates\Normal.dotTitle: Distribution and Channel ManagementSubject:Author: ShobaKeywords:Comments:Creation Date: 6/8/2006 7:11:00 PMChange Number: 5Last Saved On: 12/14/2006 11:30:00 AMLast Saved By: User 1Total Editing Time: 24 MinutesLast Printed On: 12/14/2006 11:30:00 AMAs of Last Complete PrintingNumber of Pages: 10Number of Words: 1,606 (approx.)Number of Characters: 7,808 (approx.)11

1 Published in Outlook BusinessFebruary 6, 2010

Cracking the Cost To ServeConundrum in Rural MarketsIndia’s rural growth storyRural India is home to around 790 millionconsumers. Total rural income at US$220 billionconstituted 43% of total national income in 2004-05.It is expected to increase to around US $425 billionby 2010-11, a CAGR of 12% making it a compellingmarket for companies to be present in.The rural growth story in India keeps getting bigger.Farm income in rural India has risen steadily on theback of robust agricultural growth and higherprocurement prices. Government initiatives like theNational Rural Employment Guarantee Scheme(NREGS) have reduced unemployment andincreased wages for rural labor. All these factors puttogether have fuelled rapid income growth in ruralIndia offering attractive opportunities for companiesto augment growth across categories likeautomobiles, telecom,financial services, FMCG andconsumer durables. Theimpact of the deficientmonsoon in 2009 wouldhave a marginal impact onrural income with outputdecline being substantiallyoffset by a combination offurther increase in minimumsupport prices and largeroutlays under NREGS. Witha normal monsoon expectednext year, rural incomes willagain move upwards.Problems of rural reachWhile rural potential seems to be well recognized,why is it that few companies have been able to taprural opportunity in a significant manner? Thecommonly quoted problems with regard to ruralIndia revolve around cost of directly serving thesemarkets and inadequate control in rural marketoperations.High cost of reach is caused by lack of adequatethroughput which pushes up per unit cost ofdistribution in traditional models. This is due to thenature of rural markets – widely dispersed and thinlypopulated, low per capita spends and high demandseasonality.In-direct models usually throw up control issues for

a company over the channel. In the wholesaledistribution channel typically adopted by mostcompanies, the company has little knowledge of themultiple intermediaries that buy from thewholesaler. Thus, it is very difficult for the companyto influence the retail point-of-sale in terms of SKUsto carry or POSmerchandising to bedisplayed.Current FMCG ruraldistributionDifferent FMCG companiesare at various levels ofdirect rural marketcoverage. For example HULwhich has the largest reachdirectly serves ~100,000 outof 600,000 villages in thecountry. Godrej Consumer Products reaches 17-18,000 villages, while most other players have a farsmaller reach.The current rural distribution structure followed bymost FMCG companies involves a super-stockist andmultiple sub-stockists between the company’scarrying & forwarding agent and the village retailRural India offers attractive growth opportunities across a number of consumer product categories.However, rural market distribution continues to be plagued by problems of limited reach and high costto serve. Companies need to develop out-of-the box approaches to profitably serve rural markets ifthey wish to solve the cost to serve conundrum say Pankaj Gupta (Practice Head – Consumer &Retail) and Raghavendra Rao of Tata Strategic Management Group.2 Published in Outlook BusinessFebruary 6, 2010outlet. The super-stockist is generally based at adistrict HQ/ tehsil and services a number of substockists.The sub-stockist is typically based out of atehsil/ large village and services a cluster of villages.The typical margin outgo in this structure, betweena super-stockist and sub-stockist is ~7-9%, inclusiveof transportation subsidies. This compares adverselywith urban distribution margin of 4~5% andhighlights why companies are hesitant to growcurrent models of rural distribution.Innovations in Rural DistributionA few leading FMCG companies have establishednew rural distribution models. HUL Project Shakti,Tata Tea Gaon Chalo and ITC e-choupal are someexamples of new models being adopted in India.These models have a very different set ofintermediaries between the company and the ruralconsumer as compared with traditional models.These intermediaries could be NGOs, self-helpgroups or rural entrepreneurs.For a completely breakthrough performance,companies will need to think out-of-the-box for

strengthening their rural distribution based on leversthat fractionalize fixed costs or make them variable.Approach 1 : Dedicated Rural EntrepreneurA flexible and lean-structure linking a super-stockistto village retail outlets can be established in theform of a Rural Entrepreneur (RE). The RE is anindividual who being a local is well versed with thegeography of villages to be serviced. The RE shouldown a two-wheeler and have a minimum level ofeducation (preferably graduation or, alternatively,higher secondary).The RE would cover multiple village clusters locatedwithin a radius of ~30-40 km from the super-stockistusing the two-wheeler. The company would havepreviously covered these villages through multiplesub-stockists. Sales calls and delivery would bemade to all villages in the area thereby increasingreach to villages not currently covered. Moreimportantly, as the RE does not incur administrativeexpenses – rent, salary, electricity etc. and earns asemi-variable income, he could lower the cost ofreach.The economics would depend on the nature ofproduct being distributed and the brand pull. Theproduct should not be bulky and should becompatible for two-wheeler transportation. Ouranalysis suggests that the economics of thearrangement can work well for products with avalue-volume ratio of greater than Rs.75 per kg.With a monthly sales of Rs. 1 lakh per RE, the modelcan bring down the cost of rural distribution by 1-1.2% of sales.Approach 2: Distributor consolidation forurban and rural marketsAn alternate approach is to consolidate an urbandistributor and super-stockist & sub-stockist into asingle entity who services retail outlets. The marketscovered by the entity include the local town and aset of villages around the town. This arrangementcan offer advantages of savings in administrativecosts and lower inventory requirements, resulting ina lower margin outgo of ~0.7% for the company forrural distribution.Approach 3: Consolidated Distribution withtele-order bookingRural tele-density in India currently at ~16% isexpected to rise exponentially over the next fewyears driven by increased mobile penetration. Thistrend can be used to un-bundle the traditionalorder-booking role of the salesman. This idea entailscollection of orders from rural retail outlets over aphone and subsequent servicing of the marketthrough an order delivery system.Use of newapproach inselectgeographiesContinuation oftraditional

approachesHigh potential forusage of newapproach(e.g Telecom,home/ personalcare)Moderate potentialfor usage of newapproach(e.g. Brandedstaples, smalldurables)Rural SalesPotentialHighLowValue (Price)/Volume(Weight) RatioLow High3 Published in Outlook BusinessFebruary 6, 2010This arrangement can provide savings intransportation costs since there is better utilizationof vehicle space as compared to a ready stocksystem. Another head of savings is in manpowercosts – with orders being tele-booked, the salesmanvisit frequency can be sharply reduced. An existingstaff can be utilized to make tele-calls at a muchsmaller addition tocost. This model canfurther reduce themargin outgo by~1.3-1.5% for ruraldistribution.The attractivenessof this approach willneed to beevaluated againstthe limitations thatmay emerge. First ofall, orders collectedwould be almost entirely off-take led limiting theelement of push. Secondly, with a reduced visitfrequency of the salesman, relationshipmanagementwith outlets may be compromised.Approach 4: Distributor choice based onunutilized reverse logistics potentialAnother non-traditional form of cooperation for ruraldistribution could be to partner low-margin, highreachplayers in rural markets. The dairy industry isone such option. Dairy vehicles go empty to rurallocations and come back filled, exactly opposite tohow rural FMCG distribution is run. There is potentialfor distribution synergy between FMCG and dairyplayers.For this arrangement to work, the FMCG distributorcan be based at locations where the dairy vehiclesoriginate from (typically a district HQ/ tehsil). Retailoutlets in collection centre locations can be serviced

with dairy vehicles engaged in collection of milk. Asthe vehicle moves from the collection centre to thevillages, it can offload FMCG stocks along its route,which have been pre-booked by the FMCGsalesman. On its return journey the vehicle can pickup milk from the same villages. For the role played,the dairy transporter can be paid a small commissiontowards delivery charges at the outlets in addition tocompensation towards transportation.The advantages of the arrangement include areduction in the logistics cost for the distributorsince there is no empty return of vehicles. Also,since milk collection is a daily run, a suitably higherfrequency of servicing of retail outlets can beworked out. However, a number of potential issuesneed to be addressed to operationalize such anarrangement. These include suitable modifications tothe vehicle to permit use of collapsible packagingmaterial for milk,management oftransit time to avoidmilk spoilage andaligning stockdelivery timing withshop working hours.This model can lowerdelivery costsresulting in a lowermargin outgo of~1.2-1.4% for thecompany.Choice of approachMany approaches to serve rural markets can beevolved based on the principles of consolidation, delayeringand activity unbundling. The choice ofapproach will depend on the nature of product, itssales potential in rural markets and its value-volumeratio. Adoption of one or more of these approachesrequires an innovation mind-set within thecompanies themselves as none of these approachesare taught as best practice case studies in B-schoolsor on-the-job training in the company.Given the buoyant conditions, rural markets willcontinue to offer attractive opportunities for growth.Companies which do not initiate action on ruraldistribution are likely to miss out on the potentialwaiting to be tapped. However, only those who cancreate a profitable model through non-conventionaland alternate approaches are likely to succeed.Tata Strategic Management Group. No part of itmay be circulated or reproduced for distributionwithout prior written approval from Tata StrategicManagement Group.Current marginoutgoDedicated RE Consolidationwith tele-ordersConsolidationwith reverselogist icsConsolidationwith teleordersand reverselogist ics

1-1.2% 1.3-1.5% 1.2-1.4%2.2-2.5%Potential margin increase through various approaches

Tata Strategic Management Group is a leading management consulting firm in South Asia. Set up in1991, Tata Strategic has completed over 500 engagements with more than 100 Clients across countriesand industry sectors, addressing the business concerns of the top management. We enhance clientvalue by providing creative strategy advice, developing innovative solutions and partnering effectiveimplementation.BusinessOptimizationBusiness Portfolio ReviewCompetitive & Growth Strategy, Country/India Entry Strategy

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OrganizationEffectivenessPerformance & Talent ManagementDesign of Organization Structure & RolesCapability Assessment & Development

PerformanceImprovementIntegrated Cost Reduction, Profit enhancementBusiness Process Improvement; RightsizingLogistics, Channel & Supply Chain DesignBusiness Risk ManagementInput Cost OptimizationMarket Share improvement, Spend OptimizationNirmal, 18th Floor, Nariman Point, Mumbai 400021, Ind

Rural Income Dispersion NCAER

Projections Based on 7.2% GDP Growth26.044.6 61.420.2 5.6

1.62.75.8 22.48.3Destitutes Rs 16,000 & Below Total 100.0 100.0 Consuming Class Climbers Consumer Class Annual Income 1995-96 2006-07 Very Rich Above Rs 215,000 Rs 45,001- 215,000 Rs 22,001- 45,000 Aspirants Rs 16,001 - 22,000

Rural Housing Pattern

(percentage)

Source: Census of IndiaHouse Type198119912001Pucca22374141Semi-Pucca313636Kuccha3323

Distribution of Villages

Source: Census 2001 15.7 21.4 200-500 1,36,454 3.2 13.7 1001-2000 1,40,751 22.0 2001-5000 87,206 17% of villages account for 50% of rural population & 60% rural wealthHardly any shops

in these 2.3 lac villages Population No of villages % of total villages Less than 200 96,855 501-1000 1,56,737 24.6 5001-1000 20,363 Total no of villages 6,38,365 100.0

Issues In Rural Distribution Large

number of small marketsPoor road connectivityLarge number of intermediaries leading to higher costsLow density of shops per village and high variation in their concentrationInadequate banking and credit facilities for retailers, poor viability of outletsPoor storage system, leading to inadequate stocking of productsHighly credit-driven market and low investment

capacity of retailersDispersed population and tradeIssues In DistributionIssues In Distribution