Future of Indian Distribution - Huge Disruption Ahead

Indian companies, specially FMCG companies today are staring at a major disruption in their distribution model. Other than some basic technology interventions to track primary (sales from the FMCG company to their Distributors), and in some cases, secondary sales (sales from the Distributor to the Retailers), very little changed over the decades. Products go from brands’ manufacturing facilities to their Distribution Center (DC), on to C&F agents in each state, on to the hundreds of Distributors (DB) in that state, and finally on to the retailers, where consumers/shoppers purchase them. The primary reason for the lack of change is the more or less static retail environment we have seen –close to 90% of retail even today is dominated by mom & pop outlets, or what we call GENERAL TRADE (GT) in India, this was as high as 98% till a decade or so ago.

Looking at the evolution of FMCG Distribution in India since 1950, we can categorize it in the following categories:

Distribution 1.0: (1950 to 1980)

This is traditional distribution model as explained above, and very little changed in the model.

Distribution 2.0: (1980 – 2000)

This was the period of small tweaks, where a) Company Sales reps were transferred to the Distributor for better supervision and management, called Distributor Sales Reps (DBSRs). Moreover, some leading companies starting to divide the sales teams into category teams, still primarily serving the General Trade, to focus on each category & SKU. b) We also saw leading FMCG companies adopt technology to track primary sales at both the distributor and branch level.

Distribution 3.0: (2000 – 2018)

This has been the period of major changes, with

1. Wider adoption of technology to track inventory & sales (primary and secondary) through the implementation of Dealer Management Systems (DMS) and Sales Force Automation (SFA)
2. Launch and rapid growth of Modern Trade (MT) from 2000 onward, followed by e-commerce in the last five years.
3. FMCG companies outsourcing their Sales Reps to third parties to reduce complexity for GT coverage, while also deploying Sales promoters in-store to engage with end consumers / shoppers to improve the shopping experience.
4. GST roll out in 2017, which for the first time allowed manufacturers to view India as ‘One Market’ and adapt their distribution networks accordingly, doing away with the C&F agents and consolidating distributors

Today, however, the time tested FMCG Distribution model is seeing massive disruption, and this is likely to continue if we go by what has happened in other emerging markets like Central Eastern Europe, Russia, SE Asia & China. On the demand side, a lot of new retail channels are emerging that are disrupting “Where” and “How” shoppers are shopping. We have seen the growth of modern trade in the last decade, e-comm/online retail in the last 5 years, and now hyper local delivery models like “Click & Collect”, etc. As shoppers move to an “Omni” mode of shopping, expecting the products to be present “when” and “where” they shop, FMCG companies will need to adapt their distribution models to enable this.

On the supply side, factors like changing aspirations of distributors, changing role of modern trade as a distributor, increasing complexity of FMCG business due to increasing categories and skills, increasing competition for shelf space in GT, rise of private labels, and the rise of new distribution “aggregators”, are impacting the traditional distribution model.

Thus, distributor churn is increasing rapidly, and as per our research, this can range from 15-30% annually. It is also becoming increasing difficult to replace exiting distributors as the distributor community continues to shrink. This is likely to have a major impact on brands’ ability to increase (or even maintain their direct distribution or coverage.)

In addition, Sales Force turnover (across all levels, and especially at the field sales level) is also increasing, and our research shows that it can be as high as 30-40%, annually. This is due to stiff competition from new age business like e-comm delivery, food-tech companies, mobile phone retail, electronics and apparel retail (single and multi-brand outlets), QSRs, jewellery chains, MT chains, etc. This is making it very challenging for FMCG companies to recruit and retain salespeople, putting further pressure on their model and margins.

Finally, increasing channel conflict on pricing, discounts, and range between GT, e-comm and MT is increasing pricing and margin pressure on FMCG companies as they juggle their volume growth ambitions with prices and margins, while trying to build their “Omni” channel presence. While the end consumer may be benefitting in this conflict through lower prices, the pressure on margins across the value chain continues to grow.

Distribution 4.0 - Reimagining FMCG Distribution for 2030:

So, what could FMCG companies do as they plan for the next decade? If we fast forward to 2030, the overall retail in India is expected to double to $1.5 trillion from today’s $700bn, and while it is difficult to predict how large each retail channel will be, we can expect GT’s share in overall retail, though still dominant, to come down to 50% (from today’s 85-90%). In addition, many of GT / Kiranas in Metros and Tier 1 & 2 cities are expected to upgrade to look and feel more like MT, a trend that is already prevalent. MT will continue to grow and could have a share of 25-30% by 2030, driven by its expansion into Tier 1, 2 and 3 cities with different formats and sizes. E-comm could easily account for 15-20% of total retail by 2030 (our research shows that it accounts for almost 50% of retail in China today) driven by higher smartphone and internet penetration, growth of digital & mobile payments, and expanding logistics infrastructure.

So, given these changes in retail, how should FMCG companies plan their distribution for 2030. Two scenarios are likely to emerge:

Scenario one - with the distributor community shrinking, and the need for scale, technology, higher margins, speed, along with a need for better trained sales force, many brands are likely to move to larger distributors who have a multi-state or even national footprint. This is similar to what has happened in other developing countries, as well as in categories like aerated beverages market in India, where there are one or two distributors covering the entire market. This will shift the balance of power between brands and distributors, and is likely to call for a strategic partnership between them, with more negotiated Terms of Trade, Joint Business Planning, etc, to drive scale.

The second scenario, which is more likely, will be the game changer. It will require FMCG companies to give up the ownership of the distribution model, and partner with multiple players for the best market coverage between urban and rural markets, focusing their own efforts on marketing, branding and in-store merchandising to create best-in-class shopper experience ( “retailtainment”). In this scenario, they are likely to partner with aggregators, e-comm delivery companies, rural distribution companies, and distribution arms of modern trade to drive coverage.

Aggregators present a one-stop-solution for GT/Kiranas, by not only providing the entire basket of products, but also enabling them through sales training, technology (they provide them with Apps and Tablets to order online every day, doing away with the need for sales people), credit terms and financing options, and even investment to improve in-store merchandising and look & feel of the store. This is likely to make the day-to-day lives of the Kirana owners much simpler, as they can focus their time on selling, rather than having to deal with hundreds of salespeople for orders, payments, new product listings, inventory management.

While modern trade continues to be a big retail channel for selling FMCG products, it is also emerging as a major competitor to FMCG distribution, as most large B2B retailers have established their own sales and distribution networks to sell into General Trade/Kiranas, Horeca, Supermarkets, etc. This is starting to cause a major channel conflict between traditional Distributors and MT distribution arms, and while brands may benefit in the short term due to increased sales, the long-term impact is expected to further disrupt the distribution network. In addition, MT’s growing strength of distributing to the GT channel is likely to also allow them to sell more of their private label products through that channel, directly competing with established FMCG brands and creating a bigger fight for shelf space in GT.

Even though this may seem disruptive, it is likely to emerge as the most efficient model in the coming years, where disaggregation will lead to “disowning” a large part of the distribution network, and lead to partnering with regional and national players to enable the most efficient and lowest ‘cost to serve’ distribution model for FMCG brands across all channels. This will allow brands to focus on creating the ‘pull’ and in-store customer/shopper experience (In China, approx. 25% of FMCG business is distributed by Aggregators) that consumers will demand in 2030, and let the partners do the distribution.

Source:  Mr. Rajat Wahi,  Brand Equity : Economic Times  July’ 2019