Q & A: FMCG Distribution


Some important questions were raised from my previous post. I am attempting to respond to them based on my observation and experience.

How do you think the process will change in case of a new product and a new company? Especially with regards to the terms of engagement?

Based on the product, the industry and the territory the company is operating in, the distribution process changes. Though the basic role of the distributor remains same, there are differences at various levels. We can think of following different scenario which provides for various levels of engagement from the distributor:

Old company, old product

Both company and product are old and known to the market. It has already made its own space in the retail space, so it does not require routine attention and intervention of the distributor. Distributor can focus on developmental activities.

Old company, new product

When a new product is launched by the company which is already out there in the market, the approach is different. Distributor needs to make retailers aware about the new product, salesman needs to be trained, and infrastructure needs to be arranged. As company is already selling its other products, retailers are already known to the company, already identified. This requires less effort on the part of distributor.

New company, new product

This is higher level of problem as compared to previous two cases, as both company and its product are new in the market. The distributor needs to identify relevant retailers, introduce the company and then introduce the product. This requires much more effort and engagement from the distributor.

We can add third dimension to this based on the distributor is new in the distribution business or an old hand already distributing other FMCG products. Distributor can exploit his relationship with retailers for the new company and new product.

 How do you track the performance of the distributor?

Performance of the distributor can be measured on following criteria.

  • Sales growth on previous year base (compare with expected sales in case of new product)
  • Retail penetration- retail universe covered
  • If product range is there, distribution of sales across the range
  • No. of stock out instances
  • Complaints/feedback received from retailers
  • Qualitative observation of the company officer concerned

Some punitive points should also be added in the performance measurement. Punitive points in the sense, failing to adhere to those criteria will bring negative points to performance. Regularity of delivery, quality of delivered product, training & behavior of the salesman can be added to this list.

Is it a good thing if a particular distributor is given 3 products to sell and he sells one extremely well but he does poorly in the other two? Do you restrict the flow of the better selling one by attaching a condition that you have to sell amount X of the other two to get further supply of the better selling product? Or do you rearrange incentives?

It is not desirable if distributor sales one product and ignores other. That product will die in that territory. We need to create various mechanisms by which all products receive due attention from the distributor. It can be changes in the margin structure, changes in the incentive structure etc.

Distributor as businessman would always like to sell fast moving products first and ignore the slow moving one. He would like to maximize his commission putting minimum efforts.

We can take commitment for the lower selling product ensuring distributor that he will be given better selling product as demanded. It’s the responsibility of the local officer responsible to see that all products get due attention based on the potential.

How are the commissions decided? Do we have information about the common range of commissions for different FMCG products?

Commission for distributors is decided based on following.

  • Investment and operating expenses of the distributor
  • Expected rate of return on investment
  • Margin/commission offered by competitors on same/similar products
  • RoI in other similar businesses
  • Expected sales volume of the product (for example, slow moving products have higher margin)

Apart from normal commission, various incentives are also given to the distributor to make him focus on a particular product or pack, to counter competitor’s move etc.

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One Comment

  1. Good answers to good the practical questions. But one combination need to be answered. New company with an old product. The issue where you already have distributors with very high margins and over it with a very low mc. Should you reduce margin or not . ROI is a great one with the current scenerio

    Reply

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