Distributors plan dharna against FMCG ‘practices’- August 10, 2007Posted by Ramnath Rangaswamy in Business, Consumer Goods, Emerging Markets, Indian Economy, Retailing.
The agitation by FMCG distributors against ‘discriminatory practices” of FMCG companies is partly justified.
The reason they are justified is because, according to the AKDA [ All Kerala Distributors a Association], FMCG companies are giving “undue terms and favours” to large retail chains.
What is not justified is AKDA’s demand that FMCG companies not “bypass” the distributors and sell products directly to the large retail chains. FMCG companies can and should constantly endeavour to reduce the supply chain costs. If supply directly to the large retail chains reduces costs, it should be done.
This is a classic channel conflict. The issues pointed out by the FMCG distributors is not unexpected. Whenever large retail chains enter a market or country FMCG companies face similar issues.
It could have been anticipated by all the FMCG companies as large retail chains entered India. In typical Indian fashion, the FMCG companies have not been proactive in addressing the potential channel conflict but will wait till the situation gets out out of hand to start acting.
What should the FMCG companies do now?
The FMCG companies should follow some basic principles. These principles will ensure that channel conflicts are minimized. The principles are;
- price to all retailers big or small, should be the same [ Retailer Landed Price should be the same]
- discounts/fees should be based on activity and performance [ cash discounts, display fees, should be the same]
- discounts and fees should be transparent [ the activity and performance standards should be made known to all retailers]
Same Retailer Landed Price
Whatever be the distribution channel, the landed cost at the retailer- small or large retail chains- should be the same. Some large retailers would have their own warehouses/ Distribution Centers (DCs). When the distributor supplies to the warehouses/DCs the landed price to the retailer would be Retailer Landed Price – a discount for transporting the stocks to each store. Needless to say, the discount for transporting the stocks to each store., should be based on costs. Attached below is a schematic diagram showing the distribution channel and the costs/discounts.
Discounts and Fees based on activities
Currently FMCG companies give a flat 5% margin to distributors. This 5% margin covers the cost of distribution and factors in a profit for the distributor. The FMCG companies now need to breakdown this 5% margin, that distributors have been getting for years together and has become a norm for the FMCG industry in India, by activity [ x% for distribution, y% for bad debts, z% for cost of capital etc.] This breakdown should be based on actual data, with a large sample size and across geographies. It would be good to appoint external consultants to do the calculations and help in explaining to the distributors.
Discounts and Fees should be transparent
The companies give money for displays and promotions. This together with discounts for logistics efficiencies [ full truck, efficient ordering] constitute ‘back margins’. The money for displays, promotions, efficient logistics should be based on a fixed, transparent criteria and should be cost justified. Any retailer who meets the criteria should be given the money and discount. FMCG companies will tailor the display and promotions and efficient logistics criteria to ‘suit’ large retail chains.
FMCG companies should remember that 95% of the business is with small stores. Yes, business with large retail chains is growing at fast clip and 2010 they will constitute 10% of the business. But small retail stores will constitute bulk of the business.
FMCG companies will have to bite the bullet and create a level playing field, else channel conflicts can only increase.
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Distributors plan dharna against FMCG ‘practices’