FMCG distribution system in a flux

In the little shop outside my office building sits Ranjeet. He sells cigarettes, sweets and an assortment of snacks including biscuits and cookies. I often replenish my office supplies with purchases from Ranjeet. Sometimes he runs out of my favourite cookie and his excuse is, “Market jaane ke liye time nahin mila, Saab! (I did not have the time to go to the market).”

Ranjeet belongs to the tribe of small retailers who are too small to be serviced by any company or any authorised distributor of a company. He has to do his weekly purchases from the wholesale market. In a sense he is the lowest in the totem pole of FMCG distribution. And the big news is that this totem pole is getting a reboot.

India is often referred to as a country of shopkeepers. For a population of 1.38 billion, we have around 12 million shops; a large percentage of them sell packaged consumer products like soap and biscuits.

How do companies reach their products to these 10-plus million shops? Servicing shops like Ranjeet’s is well-nigh impossible. Just the cost of delivery will eat up all the profits from the sale. The credit for setting up a robust FMCG distribution in the country goes to Hindustan Lever (HLL, now Hindustan Unilever or HUL), the early pioneer. It is to their credit they realised that India will be a country of kirana stores and they need to be serviced cost effectively so that consumer demand can be met. Many decades ago they set up an elaborate system of redistribution stockists (RS). These RSs were served by the company depots, which soon gave way to carrying & forwarding (C&F) agents. 

Some estimates put that today Hindustan Lever has over 5,000 RSs and 40 C&F agents.

The job is not as simple as appointing someone as a redistribution stockist. HUL teams had to train the RS on how to serve the market to the extent they even monitored the ROI of redistribution stockists. Stories abound on how HUL area sales managers used to sit with an RS to figure out how much his ROI was. If it was too low, what costs should he cut in order to improve the ROI. And if it was too high, how he needed to invest more in the business, maybe with one more three-wheeler or one more sales rep.

Generations of RSs have grown up working and learning from HLL/HUL teams. Other companies learnt from HLL and set up their own system of stockists and resellers. A pioneering Indian company like Swastik Industries (part of Sarabhai Enterprises) even set up the country’s first retail panel through its arm, Operations Research Group. The reports one remembers reviewing in the mid 1970s used to communicate market shares as well as what was known as STR (stock turnover ratio). A fast-moving brand like Lux may have an STR (at a retail level) of 14 days and a slow-moving brand like Mysore Sandal may have a STR of 60 days. In simple language, this meant that an average retailer carried enough Lux to service two weeks’ demand.

HUL and other FMCG companies trained their RSs to understand stocking at retail level, how overstocking or “stuffing” can have a bad impact, how much credit to give in the market, what to watch out for etc.

Can every retailer, even a small one like Ranjeet, be serviced by an RS? Not really. Fortunately, with the growth of FMCG marketing, there was also a growth in what was a traditional business, that of the wholesaler. Each town has a wholesale market where small retailers like Ranjeet and retailers from rural hinterlands go to buy their weekly stocks. It is rumoured that some of these wholesalers work on wafer thin margins. At one time it was said that a Lipton tea wholesaler’s margin was the wooden box in which the tea was packed. Maybe that was just a rumour, but it is well known that wholesalers operate on very slim margins. Some reports say that there are probably 330,000 wholesalers in India. In comparison, company authorised redistribution stockists number around 15,000.

Digital technology and flow of capital is set to disrupt the system that has served FMCG brands and consumers well. Remember that in developed countries supermarkets command higher margins from manufacturers than what our RS, wholesaler and retailers command.

First, wholesalers are being disrupted by organised wholesalers like Metro Cash & Carry. Ranjeet can go and buy all that he needs in one visit. Then there are B2B merchants like Udaan who serve retailers at their doorstep. Supermarket chains are expanding their reach and post-pandemic, they will become a bigger force. Finally, e-commerce is making rapid strides into the FMCG space to the extent that some FMCG companies are today finding almost 8 per cent of their sales coming from e-commerce platforms.

The pandemic has probably hastened some of these changes; retailers like Ranjeet would like to be serviced at their doorstep. If the offer is better, a bigger retailer may be willing to abandon their trusted RS; who will say no to an extra margin of 3 per cent?

Large companies that set up the complex distribution system in the country are today faced with the challenge of handling a many-headed monster. They may know that the future may lie in organised wholesale, in services like the information-powered Reliance JioMart and Udaan, but they cannot abandon their trusted RSs. So they are doing their bit to carry them along. It will not be unreasonable to guess that in the coming years we will see consolidation across the board in FMCG, just as it has happened in pharma distribution. Till then we will see FMCG marketers singing and dancing to many different tunes.

The writer is an independent brand coach and founder Brand-Building.com; he can be reached at ambimgp@brand-building.com