All roads lead to success, this statement aptly captures the world’s view on India for the next two to three decades. With the unique combination of a large working population, stable political environment, and access to capital, India is poised to be the next rising power and fastest-growing large economy for the next 2 decades.
Companies worldwide have their eyes set on the Indian consumer market as domestic consumption will account for 59.7% of the total GDP explaining the billions of dollars being poured into the Indian economy by foreign investors and multinational companies alike. In respect of Indian FMCG industry the market is projected to grow at a CAGR (compound annual growth rate) of 14.9% from USD 110 billion in 2020 to USD 220 billion in 2025.. Indian companies too are gearing up to secure their share of the growing Indian consumer market by investing heavily in capacity expansion, launches of new products and large investments in marketing and advertisement to create a positive consumer perception of their brand.
But what would all these efforts yield if your product is unable to reach the consumer/end user. Your distribution channel is the bridge between you and your consumers/end users and without a robust network of distributor channels, all your efforts are in vain. The Fast-Moving Consumer Goods (FMCG) sector in India is characterized by a vast network of retail outlets spread across urban and rural areas. Achieving an extensive reach to these diverse markets is critical for FMCG companies, and a robust distribution network is at the heart of this strategy. FMCG majors like Dabur and Britannia attribute a significant portion of their sales, approximately 35%, to the wholesale market, emphasising the vital role distributors play in driving sales and ensuring market penetration.
India’s retail landscape predominantly comprises local Kirana stores, accounting for a substantial 80% of FMCG sales. Given this reality, it becomes evident that establishing and maintaining a strong distribution network is essential to ensuring a consistent supply of orders from the distributors to these retail outlets. The retail presence being widespread and diverse necessitates a well-organized distribution system to meet the demands effectively. In recent years, there has been a notable rise in e-commerce in the FMCG sector, albeit still contributing less than 10% to the overall sales. While e-commerce’s contribution is experiencing rapid growth in double digits, the traditional trade, including distributors, remains the bedrock of the FMCG business. The unique characteristics of the Indian market make traditional retail an irreplaceable part of the industry.
A well-managed distributor network enhances the efficiency of the supply chain. Distributors can streamline the distribution process, reduce logistical challenges, and optimize inventory management. This efficiency ensures timely deliveries and minimizes disruptions in the supply chain, promoting consumer satisfaction.
Ensuring a Robust Supply Chain
Conducting due diligence on distributors is crucial for FMCG companies to maintain a robust supply chain and avoid disruptions. There are several reasons for conducting due diligence in this sector :
- Closure of Distributorships:
According to a report by the Confederation of Indian Industry (CII), an estimated 10-15% of distributorships in India close down every year. This translates to approximately 10,000 to 15,000 distributorships shutting down annually. Amid this volatility, assessing the financial stability of your distributor becomes paramount. Evaluating the financial stability of a distributor is essential to ensure that they can manage operations effectively and fulfil their commitments.
- Fraud and Malpractice:
Counterfeiting remains a significant challenge in the FMCG sector, with fake consumer goods growing at an alarming rate. A study by advisory firm KPMG and the Federation of Indian Chambers of Commerce and Industry (FICCI) revealed that counterfeit and smuggled products now constitute over a fifth of the FMCG market. The economic loss due to counterfeiting amounts to a staggering Rs 27,500 crore. Checking the legal history of a distributor helps to identify any past unethical or unlawful behavior.
- Market Perception:
Assessing a distributor’s reputation through reference checks unveils their interactions and relationships with retailers. Insights gained illuminate their professionalism, reliability, and ethics in business dealings. Making informed decisions based on these perceptions is fundamental for a fruitful partnership.
- Non-Compliance:
Compliance with legal and industry standards is essential for any distributorship. Non-compliance can lead to legal issues and tarnish the reputation of the manufacturer. Conducting due diligence helps in verifying the compliance status of a distributor, ensuring that they adhere to all relevant laws and regulations.
- Conflict of Interest:
In the FMCG industry, distributors frequently face conflicts of interest due to their non-exclusive arrangements. This can lead them to promote competing products alongside yours, impacting your product’s visibility and success. Thus, vigilance in assessing the on-ground operations of these distributors is crucial to ensure your product is being marketed effectively and prioritized amidst a potentially competitive array of offerings.
- Business Intelligence:
When a product is unavailable in the market, an organization can experience detrimental consequences, such as lost revenue and a decline in customer trust. Customers, deprived of their preferred product, may opt for alternatives, shifting their loyalty to competing brands. Understanding how a distributor effectively manages inventory is crucial, ensuring consistent product availability and maintaining customer satisfaction . To achieve market leadership, manufacturers must meticulously evaluate potential distributor partners to ensure alignment with their organizational goals and objectives. BI helps in analyzing a distributor’s strategic vision, goals, and enables proactive decision-making, optimizing inventory management processes and reducing instances of product shortages. Manufacturers can then assess whether the dealership’s objectives align with their own.
Conclusion:
The resilience of the organizational distributor channel will be the deciding factor between the Companies that will carve out a larger share of the growing Indian consumer market and those that will relinquish their existing share.