Despite the importance of distribution, not many brands have truly
unlocked the potential that this leg of the value chain has to offer
By Viswanath P
Anyone who has worked in the fast-moving consumer goods (FMCG) or pharma sectors in India knows the importance of distribution. In a country of 10+ million retail outlets, distribution plays a critical role in not just making products reach the point of sale but also in extending credit, expanding retail reach, on-ground sales and carrying market feedback. Despite the importance that distribution plays in India, not many brands have truly unlocked the potential that this leg of the value chain has to offer.
Distribution is still a big business
The need for a robust distribution channel becomes evident when we realise the structure of the Indian retail landscape. Indian retailing is dominated by the unorganized brick-and-mortar channel that accounts for 84% of the market. Even with the online channel projected to nearly double its share, the unorganized brick-and-mortar channel will still account for 76% of the market. Currently, food and grocery accounts for 66% of the overall retail market, followed by fashion retail, including apparel, jewellery, watches and accessories, accounting for 16% of the total share. Within organised Indian retail, the penetration of jewelleryand watches (26%), food and grocery (23%) and apparel and accessories (20%) is strong.
Given the above structure, the role played by traditional distributors is not being eliminated. As businesses focus on improving their omni-channel capabilities, trying to get more consumer data and capturing secondary and tertiary sales information, the next few years will see an increased focus on distribution efficiencies.
This segment still needs to go up the maturity curve
Many brands improved their distribution channel efficiency through digital interventions in the last 15 years. From taking orders on notebooks to now real-time booking on the sales representative’s handheld, this channel has improved by heaps and bounds. However, the journey of maturity of managing and using this channel to accelerate sales is still ongoing. Distributors still face multiple challenges in managing their own operations. On the principles side, we see brands coming with bigger product portfolios and channel- specific products. Such transition in the product portfolio impacts the distributor revenues and hence their profitability. Moreover, rapidly changing promotions and sales schemes put pressure on reconciliations. We see the growth of modern retailers, who tend to have another operating model with the brands altogether. Ultimately, distributors also face the challenge of attrition in their workforce driven by the growth of different consumer-facing businesses (quick service restaurants (QSRs), malls, e-commerce and others). The transformation we saw in the recent past has focused on quicker capture of transactions, real-time relay of information and minimising loss of data by digital capture at first instance. Some of the brands have used this data to refine their ways of working, focusing on areas such as better sales and operations planning, tighter inventory control in the channel, better pricing and promotions, and above all, trying to get more sales per distributor.
Going forward, we will see many brands use this underlying data to usher in greater efficiencies to protest their market share as well as their margins. Distributors can act as strategic front- end eyes and ears of the principle, and if the principle can add more strength to the distribution system, it can potentially become the biggest competitive advance for a brand.
Levers that help realise distributor efficiencies
Businesses need to appreciate that distributor efficiencies can only be extracted if areas beyond distributors are improved.
Almost every consumer-facing business today has multiple channels
to reach consumers. In this context, the first lever that businesses need to focus on is how they will manage the multi-channel route to consumers and mitigate channel conflicts. Businesses should focus on having clear channel strategies and guidelines to avoid channel conflicts. Brands today deal with conflicts in terms of trade amongst modern trade (MT), online trade and general trade (GT). Organising this area is a definite step towards distribution efficiency.
The second lever is reworking the sales team operating model. In many categories, the consumer is channel agnostic. It is very common for consumers to research online, compare features and prices and maybe decide the channel to buy from at the point of the store. Hence brands will need to review the traditional operating models for their sales teams. A distributor’s key performance indicator (KPI) can no longer be only offline sales, especially when consumers from that territory are going online to compare products. Distribution and retail (further downstream) need to become a key part of the customer journey and act as the high points to drive what we call ‘the moment of truth’ for the customer.
The third lever is the demand generation and demand fulfillment processes. As businesses deal with multiple channels and new and more aware sets of consumers, they need to upgrade the entire sales fulfillment process. Lost sales is a key KPI not monitored or even captured by various brands. However, this should be included and monitored regularly to improve distribution efficiencies and add accuracy to forecasts.
The fourth lever is the people lever, both within the business and of the distributors. With gig employment on the increase, businesses will need to look at innovative ways of managing a fleet on the street workforce. Sales- force KPIs will need to be revisited given that an offline sale today is not just a result of offline promotions but influenced perhaps by the social media posts of the business as well. Front-end for their sales teams. A distributor’s key performance indicator (KPI) can no longer be only offline sales, especially when consumers from that people can act as assets or liabilities
– the productivity is not just sales per head but the amount of sustainability of business being driven by each of the workers. The spirit of entrepreneurship should be driven by incentivising them appropriately via well-defined KPIs beyond just sales quotas.
The last and fifth lever to improve distributor efficiency is to digitise and use data for decision-making. With distributor management applications becoming a mainstay, businesses today have access to data from the markets. Businesses will need to capture relevant non-quantified data along with quantified data to make business sense. Using this data for sales governance and for difficult decisions on product portfolio, production priorities and pricing is critical for taking distributor efficiencies to the next level. This also adds confidence in achieving the promised return on investment (ROI) for the distributor, which ideally should beat the average ROI offered by open market finance instruments – 24% ROI is a good target to have, which can only be achieved (and monitored) if data is utilised appropriately.
Basis the experience, Grant Thornton Bharat estimates that a holistic distributor / sales transformation programme yields an upside of 10-20% across channels. In cases where the dealership management system (DMS) is integrated with customer relationship management (CRM) and other product portfolio applications, businesses can see an upside of 15-20% coming in from process efficiencies.
Viswanath P is partner at Grant Thorton Bharat LLP
Grant Thornton Bharat means Grant Thornton Advisory Private Limited, the sole member firm of Grant Thornton International Limited in India, and those legal entities which are its related parties as defined by the Companies Act, 2013, including Grant Thornton Bharat LLP (formerly Grant Thornton India LLP)