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.

Distributor: Key to success in FMCG Distribution

This is a Guest Post by Kandarp Patel who works with a leading FMCG brand in the Sales and Marketing function.

In architecture jargon, keystone is the one which locks the other stones into their positions. That makes it structurally very important. If we apply the analogy to FMCG distribution channel, the Distributor is the keystone. He is called by various nomenclatures like Distributor, redistributors, dealer, wholesale dealer etc…but broadly defined and generally acceptable definition of the distributor is ‘A person or a firm who links the manufacturer/marketing company with the retailers.’ He is the one who purchases from the manufacturing company in bulk quantity and re-distribute it in small quantities to retailers. Let’s look at the position of the distributor in the whole distribution channel first and then define the role played by the distributor.

Role of Distributor: FMCG distributor generally has exclusive rights of distributing all products or a set of products in a defined geographical territory. In the given territory, he will be responsible for the redistribution of the products, retail penetration and market coverage. Sometimes, distributor is also appointed to serve a particular clientele base like hotels, canteens, restaurants etc. Traditionally a distributor is treated like a trader in the distribution channel. But now many organizations have started seeing distributors playing much bigger role. Following are some of the functions a distributor plays in modern FMCG channel.

• Basic role of distributor is to purchase/stock products in bulk from the manufacture and sell/distribute them to retailers in smaller quantity.
• Distributor takes orders from the retailers and institutions and ensures timely and quality delivery of products.
• Distributor maintains stock of the products to absorb the supply fluctuation from manufacturer.
• Distributor provides required financing for allowing credit to the retail market.
• Distributor is the person who will provide ground level data on demand estimation for the products.
• Distributor expands the retail universe (by opening new outlets) as well as the retail penetration of various products.
• Distributor takes up field level marketing activities like H2H promotions, inshop promotions etc.
• Distributor helps in minimizing consumer complaints and resolving them.

This basically clarifies the broad role of the distributor in modern FMCG channel. We will see the functions and daily routine of a typical distributor in the next part to finally derive the criteria for selection of a good FMCG distributor.