Understanding Indian Distribution Models
Distribution is the backbone of Indian market - feeding its massive retail system spanning across length and breadth of the country. Estimated to be $ 714 billion (2019) - Indian retail market is expected to grow at 10% CAGR to reach US$ 1.2 trillion by 2025. Unlike developed markets, over 70% of Indian b2b distribution market is in unorganized sector, having its own dynamics peculiar to Indian social and cultural ethos. Understanding this market, its players, their respective roles and overall market dynamics is vital for success of any brand.
Indian Distribution Model
A specific feature of Indian distribution model is presence of many intermediaries - almost too many in certain cases. A study by McKinsey and CII (Faida Study in 1995) found presence of 7 to 11 intermediaries in agro distribution channels. These intermediaries bring costs and benefits in varying degrees. The wholesaler model, for instance—in which large, powerful wholesalers buy products from manufacturers and sell them to the retailers that they finance — gives producers little control over the distribution channel but provides considerable reach. In contrast, under the distributor model, the distributor acts as an extension of the manufacturer and operates exclusively within a specified territory. Other distribution channels involve dealers, who operate as both wholesalers and retailers and are served directly by the manufacturer. Still others involve various stockists and sub-stockists. All these intermediaries can add complexity when they wear two hats at once, as they often do. A distributor selling to retailers in one territory, for example, might have a retail presence of its own in the same or a different territory.
For manufacturers, its a trade off between degree of market control and depth of reach while selecting right distribution model or its mix. Following is a description of various intermediaries and their respective roles. The role descriptions are as per my interactions with hundreds of manufacturers and distribution partners over last few years and may not match exactly with textbook definitions.
C and F means carrying and forwarding agent. Its essentially 3rd party logistics service wherein manufacturing companies outsource its transportation, logistics, warehousing, distribution and fulfillment services for a particular region. C&F agent acts as aggregators for the company, receiving goods from company warehouse to its own godown and then delivering it to all distributors within its specified territory. To give an example, let's say a company X is based in Punjab and has 50 distributors in a state, say MP. In the absence of any aggregator, the company will have to send shipments to each of its 50 distributors in various cities of MP (e.g. Jabalpore, Indore, Bhopal etc.) from its warehouse in Punjab. More the number of distributors in the state, higher will be the transport cost for the company, making the product more costly and consequently less competitive.
Instead, the company may appoint a C&F Agent for the state and transport all the goods to C&F Agent's godown. Next, the company instructs C&F Agent about delivery schedule and the later does necessary logistics and transportation task. The company does not pay the C&F Agent any fixed remuneration but a percentage of value of total goods handled. This way, the company keeps general warehousing, logistics and transportation cost at the minimum.
C&F Agents also helped in compliance during the VAT era when every state had specific VAT and other state-specific duties. Having warehouse in a state and delivering to distributors within the same state helped companies cut paperwork and other compliance work, otherwise necessary in inter-state transport. However, with introduction of GST this state-specific compliance requirements are no longer required, making manufacturers free to go for larger warehousing and distribution system.
Commission for C&F Agents : 2% to 8% depending upon product and volume
Super Stockist is a kind of C&F agency where scale of operation is much lower compared to C&F Agent. One may say a mini version of C&F Agency generally used for smaller markets where scale of operation is too small for a C&F Agent. However there is one major difference between C&F Agent and Super Stockist. While the former is focused completely on logistics and transportation the later also does some sales, marketing and other activities in addition to logistics and transportation. Small and Medium companies prefer Super Stockists for smaller markets as they are more amenable and cost effective.
Commission for Super Stockist : 6% - 8% depending upon product and volume
Wholesaler purchases in bulk, from either distributor or manufacturer and resells the same through his/her own sales channel. Bulk purchase ensures lower buying price and consequently a margin on reselling in smaller packages at higher than buying price.
The most distinguishing feature of a wholesaler is 'independence'. A wholesaler decides which product to buy, at what price and when and where to sell. He can change products, markets, prices as per requirements and is under on obligation to manufacturer/brand owner. A manufacturer/brand loses all contacts with its product after selling it to wholesaler.
Normally wholesalers operate from their shops or premises. Wholesale markets can be found in almost every city. In Delhi, Sadar Bazaar is a famous wholesale market, as also Gandhi Market for apparel. In Kolkata, BurraBazaar is a famous wholesale market.
A distributor is a kind of wholesaler with important difference, they are extension of manufacturer/ brand. In addition to fulfilling retailer orders, they work in close association with manufacturer, keeping the manufacturer aware of market trend, sales performance, market feedback etc. A distributor is also a valuable companion of the manufacturer in executing brand marketing, sales promotion and other tasks as per manufacturer's marketing policy. Unlike wholesaler, distributor remains beholden to a company and its products and has to work as per company's sales strategy.
Distributorship is generally given for a fixed market. Manufacturer normally ensures no competition in that market by giving the distributor exclusive access. Distributor, in return can not sell a competitor's product and has to safeguard manufacturer's interest.
Commission for Distributors : 8% - 20% depending upon product and volume
Dealer is a dignified retailer. A special kind of retailer having close relationship with manufacturer/ brand. Dealers buy directly from manufacturer and sell to consumers directly through its retail counter. For this, dealers have necessary sales infrastructure like godown, shop, showroom, retail chain etc. Unlike distributors, dealers are found to be selling competing products from same showroom, though it may depend upon brand's dealership policy. Dealerships are usually given for branded products and require significant investment to start with.
Retailers are shops or outlets from where consumers purchase products. They are the last element in distribution channel and direct interface to consumers. Retailer could be local grocery shop or retail chain like Big Bazaar or even an e-commerce store. The sellers in Amazon or Flipkart are in essence retailers.
Retailers enjoy maximum commission as volume is low ranging from 15% to 30%
Franchise is a way of marketing employed by well known brands. In this model, a franchisor licenses its know-how, procedures, intellectual property, use of its business model, brand, and rights to sell its branded products and services to an individual or organization. Selling becomes responsibility of the franchise. Brand owner or franchisor invests significant amount on marketing and brand building while franchise uses the brand equity to sell the product or service in local market. Its a win-win situation as brand owner can quickly capture market without spending large sums on sales and distribution while franchise can considerably reduce business risks by investing in a product already established in the market. Not all products or services can be marketed through franchise model. Only branded and well established product/services can be successful through franchise route.
Distribution channel is essential for growing sales and achieving success in market. Its proper understanding and use can lead to faster growth of any business. Introduction of GST has made the job of building distribution channel far less difficult than any time in the past. Coupled with valuable online resources available today - ability to build pan-India sales and distribution channel is now within easy reach of today's entrepreneurs.